Since my last report back in October 2007, when I highly touted and recommended agricultural equities, particularly Agrium (AGU), my fundamental point of view on this trend has not changed:“The word needs food."
The basis of my previous points in that article were to come to a new reality and realization that the “West” is not the only place that will have its steak (it has been for a long time); the people in new developing economies and countries are demanding lifestyle changes in the form of better living conditions, enjoyment of life, and the need for better food (it is not just the basic needs anymore - standards are continuing to adjust as the growth of the middle class outstrips supply).
These observations and beliefs bring me to Agrium (AGU), which I previously stated (in the October article) would experience unprecedented demand and growth, along with the other fertilizer equities.
In my opinion the growth and demand that is being driven is in no way a “bubble” as some have propagated in hopes of popularizing themselves as “today's Nostradomises." Some of these bubble theorists, or so called analysts, have been speculating bubbles for many years in these plays (one such foolish analyst, at a financial institution in Canada had been negative on Potash (POT) since it was at an adjusted price of about $30; imagine if you took their advice - you would have missed at least a 700 % upside, plus, what I believe is to come over the next several years), many in the bubble camp have never properly analyzed the middle class trends and demands being incurred in places such as China, India, Russia and South America, not including the rest of the industrialized world that is in need of resources to build strong economies. They simply are looking at charts and guessing at certain points, in hopes of being the first to call “their” so called top in these equities (these are perhaps calculated MBA superstars) .
The fundamental basis when building strong economies is that people work harder to maintain and develop a new level in their standards; the spin-off to the growth of the middle class is the enjoyment of the benefits for their effort, particularly their habits and necessities around the food they consume.
Specifically on Agrium: the company’s growth will be very positive for the next several years (as they recently indicated); the demand for fertilizer products is unprecedented today and will continue to have further growth and demand within the industry, with prices escalating due to the continued absorption and pressures from growing nations, as mentioned above.
My previous target on Agrium was that it would see $100 within 6-18 months. I now, based on research and my own opinion, as well as recent confirmations in growth, have to upgrade my longer term target; some may see this new adjustment as excessive and unjustified, but my basis is directed towards the logic of supply/demand, pricing power, as well as the recent integration of the retail operations in the United States (which Agrium has previously stated will have a definitive positive effect on earnings/cash flow going forward).
My new target on AGU (Agrium) is being set to reflect a supply/demand scenario for the industry as well as pricing power on several fronts, specific to AGU, as well as new drivers, particularly seed products that will potentially enhance their products and expand their portfolios; the new 12 month target is set at $160 (though aggressive for some, I believe this price will be realized and possibly exceeded. I am not going to get into the specifics around PE/Cash Flow ratios at this point, even though my basis and target has encompassed and been evaluated based on the potential PE and Cash Flow multiples, as well as current and future prospects for growth and sustainability).
There are always going to be some form of price shocks in all types of markets; the ultimate difference separating prosperous and growing nations from stagnate nations will be how these occurrences are integrated and absorbed into the economies. The low price environment for staples and possible other goods in some first world nations will be gone forever (my opinion). I believe we will have various ups and downs in market prices, though I think the lifestyle (when it comes to prices for staples) has been forever changed, and will continue to change/adapt as the population and developing nations grow.
Disclosure: I am definitely long and will continue to purchase AGU on an ongoing basis (dips, occurrences).
(Adds details; in U.S. dollars, unless noted)
TORONTO, June 12 (Reuters) - Agrium Inc's (AGU.TO: Quote, Profile, Research, Stock Buzz) potash output could rise by 150 percent to 5 million tonnes by the middle of the next decade, while small-size acquisitions are also likely down the road, company officials said on Thursday.
"We could go very well from a 2 million tonne producer to a 5 million tonne producer," Ron Wilkinson, head of the company's wholesale division, told investors at a presentation in Montreal.
The Calgary, Alberta-based company is looking at a $500 million expansion of its current Potash mine in Saskatchewan and is also planning on building a new mine, but has yet to decide exactly where it would build it.
The new mine would have capacity of about 2 million tonnes a year, with capital costs expected around $2.5 billion. Production would begin in 2014 or 2015 and hit its full stride by 2017, Agrium said.
Agrium, the smallest of the three main potash producers active in Canada, has benefited from a sharp rise in prices brought on by skyrocketing agricultural demand. Potash is used as a crop nutrient.
Agrium acquired agricultural retailer UAP Holding Corp in May for $2.7 billion, and bolt-on acquisitions are likely down the road, Chief Financial Officer Bruce Waterman said.
With strong cash flows -- cumulative flows were $1.1 billion in 2005-2007 -- Agrium would also consider giving cash back to shareholders if acquisitions or other investments don't pan out, he said.
Agrium reaps spoils of potash surge
From Thursday's Globe and Mail
June 11, 2008 at 8:12 PM EDT
Booming agriculture markets have lit a fire under fertilizer maker Agrium Inc., whose shares jumped above the $100 mark Wednesday after the company said it's going to make even more money this year than expected.
But the company has a dilemma. To take advantage of the explosion in demand for fertilizer, Agrium is planning a new potash mine in Saskatchewan, but it's going to have to wait five or six years before the project is up and running.
The lead time for building new mines is lengthy, chief financial officer Bruce Waterman told a mining conference in Toronto Wednesday. That's mainly because developers need to place orders way ahead of time to get mining equipment, and book the expert drillers to drive shafts into the ground. There are only a handful of firms worldwide with those kinds of skills.
As a result it'll likely be 2014 before the new mine is in production, Mr. Waterman said. “It sounds like a long time, but it does take a long time to get in the order queue for [mining equipment].”
Fortunately for Agrium, other potash mine developers are in the same boat. And because the lead times are so long, everyone in the business knows when more capacity is going to be coming on stream.
Meanwhile, fertilizer prices are not likely to slip in the short, or even medium-term, Mr. Waterman said. “The cycle looks really good for three to five years. We really don't see supply-demand [ratios] being anything but tight for the next few years.”
Agrium, like other Canadian firms in the fertilizer business, is riding the agricultural wave up the Toronto Stock Exchange. Potash Corp. of Saskatchewan is now the top weighted stock in the S&P/TSX composite index, outpacing EnCana and Research In Motion.
Agrium, though smaller, has moved into 26th place, ahead of giants in other sectors such as Telus Corp., Husky Energy Inc., Shoppers Drug Mart and Bombardier.
The market for fertilizer is so hot that Agrium now projects second quarter earnings of $2.80 to $3 a share, up sharply from previous projections of $1.92 to $2.22.
And that doesn't even count the contribution it will get from UAP Holdings Corp., the U.S. fertilizer and seed retailing giant Agrium bought last year. That $2.1-billion acquisition just closed in early May.
With the UAP acquisition, the company now has control of about 15 per cent of the U.S. market for the retail distribution of fertilizer to farmers. In Canada, there has been too much competition for Agrium to consider getting into the retail game, Mr. Waterman said, but things are going so well that the company is reconsidering its position.
“It's quite possible we'll expand into [Canadian retailing],” he said. “It's a market we know very well.”
While some farmers are suffering from the “sticker shock” of higher fertilizer prices, most don't see it as a big issue, Mr. Waterman said. With current prices for farm commodities so high, they can easily afford to pay more. The key to a farmer's success is to get more crop yield, so “it doesn't make any sense to cut back on fertilizer.”
There was some bad news from Agrium Wednesday. Its new nitrogen plant in Egypt is now on hold because of a fight between the national government and local politicians. While the company has the required permits for the $1.2-billion project, public concerns over environmental issues could prevent Agrium from continuing work on the plant, Mr. Waterman said.
Agrium Inc. has not enjoyed the same level of attention this year as Potash Corp. of Saskatchewan Inc., even though both produce that hotter-than-gold commodity, fertilizer. Agrium's shares are up 19 per cent this year, about half the increase of Potash Corp.'s shares.
Now, Agrium's lesser-status might be shifting: While the price of potash has been soaring in recent months, pricing is also on the rise for phosphate and nitrogen, helping Agrium top expectations in its first quarter results.
Paul D'Amico, an analyst at TD Securities, maintained his “buy” recommendation on Agrium . However, he raised his 12-month target on the shares to $125 (U.S.) from $98 previously – a 28 per cent bump and nearly 50 per cent higher than the current price of the shares. The upgrade makes him the most bullish analyst among those who follow the stock. The shares traded in New York at $83.76 on Monday morning, up 1.4 per cent. (The shares are listed in Toronto as well.)
Part of Mr. D'Amico's bullishness stems from higher commodity prices, but another part relates to Agrium's strong retail operations, which have performed far better than expected. “To be clear, better than expected pricing was evident in both nitrogen and phosphate, but retail's execution was a big positive,” he said in a note to clients.
Add it up, and he believes management's guidance on earnings is too conservative. He has raised his 2008 earnings estimates to $6.48 a share from $4.66 previously; he raised his 2009 estimates to $7.40 a share from $5.52. Right now, the shares trade at a slight premium, based on the company's earnings before interest, taxes, depreciation and amortization – but Mr. D'Amico believes the premium is justified.
“We speculate that a premium for AGU is reasonable versus its immediate peers given our view that investors look favourably upon AGU's increasing retail business influence in its earnings stability, and as such justifies a better valuation multiple, especially on a relative basis,” he saidMany analysts believe that we are still in the early stages of fertilizer shortages. As long as the government continues to support ethanol usage, stocks like Agrium could continue to move higher. Another key company in the sector is Potash (NYSE: POT), which has also seen a dramatic run-up in price.
Both Potash and Agrium have moved up nearly 200% since 2007, but Agrium still trade at a reasonable 20x earnings. In fact, given its substantial growth prospects, this P/E radio remains substantially below where it should be at. The PEG ratio (P/E to growth) is a more accurate measure of value and shows Agrium undervalued and Potash evenly valued at current prices.
In the end, many industry experts agree that Agrium and Potash have a lot of upside. However, there are some investors that are taking money off the table because of the previous run-up in the stock. This has created a buying opportunity that many investors may want to take advantage of before the next earnings announcement.
May 7 (Reuters) - Agrium Inc is plowing more money into its search for a new potash mine site amid record prices for the crop nutrient, the chief executive of the fertilizer producer and farm-products retailer said on Wednesday.
Agrium is examining a new development in Saskatchewan as it proceeds with with expansion of its current potash mine in the province, CEO Mike Wilson said.
"Our board just today approved additional capital to accelerate our look-forward on greenfield facilities," Wilson told shareholders at the company's annual meeting.
Potash prices have soared as farmers around the world try to capitalize on skyrocketing grain prices, which have caused food inflation in some countries and shortages in others.
Agrium, the smallest of three producers in Canada's potash belt, mines 2.05 million tonnes of the mineral from a Saskatchewan operation and has said it is considering expanding capacity there by a total of 800,000 tonnes.
That will likely cost $500 million, with one stage starting up in 2012 and a second a year later, he said.
A new mine producing 2 million tonnes could cost $2.5 billion, Wilson told reporters.
Earlier this year, Wilson said the company planned seismic tests on a greenfield potash mine site in the second half.
Agrium shares were up 35 Canadian cents at C$87.10 on the Toronto Stock Exchange on Wednesday.
Calgary-based Agrium, the world's third-largest nitrogen producer, has also bought several farm-retailing competitors to become the largest U.S. retailer of fertilizer, seed and chemicals.
This week, it closed its $2.7 billion takeover of Colorado-based UAP Holding Corp.
Wilson said the retail business provides stability amid cyclical swings in its commodity fertilizer sales.
With fertilizer and crop prices surging, the company is generating stacks of cash above a $1.7 billion kitty on its balance sheet earmarked for funding the UAP deal.
But Agrium will likely wait before jumping back into the acquisition market for retail assets, he said.
"From a big acquisition point of view, unless something fell in our laps, I think we need a year to digest (UAP)," he said. "We obviously look at small things all the time, and on the other front, we're always entertaining opportunities."
Agrium does not see world demand slowing down for fertilizer, but Wilson said producers will eventually boost supplies to ease the shortage.
"In theory, the cycle should last anywhere from four to six years and beyond. In practice, usually you wake up and there's a surprise," he said.
"But we keep looking over our shoulder and we don't see that. We think it's going to be an extensive cycle."
Meanwhile, Agrium's nitrogen operations are thriving, despite the recent run-up in natural gas, its raw feedstock, above $11 per million British thermal units.
Nitrogen prices have surged nearly $200 a tonne in the last three weeks, which, Wilson said, would be the equivalent of an $8 per mmBtu jump in gas price if that were the sole reason.
"So actually, margins are spreading," he said.
Agrium has hedged about 35 percent of its gas needs for the third quarter and 15 percent for the last quarter of 2008. ($1=$1.01 Canadian) (Additional reporting by Roberta Rampton; editing by Rob Wilson)
