Buying Potash Corp (POT)

Potash Corp (POT) is merging with Agrium (AGU) imminently. This will create an awesome vertical structure for the new company as Agrium has a large retail network for the combined company’s products. The wholesale distribution of Agrium has the potential to really charge sales of the combined product line.

 

Potash Corp, which is a bit over 50% of the Canpotex fertilizer cartel (such a thing exists), adding Agrium which is 11% gives the combined company more pricing power, which is important in this trough for fertilizer prices. I would not be surprised to see the cartel end as Mosaic (MOS) the other member is a takeover target in my opinion now.

Very importantly, the companies are reporting that they will achieve cost synergies of about $500 million within two years of merger. I think that is very conservative. The economies of scale and ability to hold back on the least efficient production, as well as, jettison certain assets, makes a bigger number seem likely on cost savings. Time will tell, but I do not expect them to come up short.

A hidden asset of Potash is their investment portfolio. The asset I am most interested in is their 32% stake in Sociedad Química y Minera de Chile S.A. (SQM) the largest lithium producer in the world. You might remember I mentioned that it would be hard to make money on the growth of EVs because car manufacturing was so competitive. Well, here’s backdoor way to get invested in the energy storage. 

Here’s an interesting thing about lithium mining, it also turns out potash, the key fertilizer that Potash Corp is named after. With the merger with Agrium, I think we should expect to see more coordination with SQM and further capital savings at POT/AGU. This is the best play in the space.

But wait, there’s more. Arable farmland is shrinking globally, largely due to drought. On top of that, we keep breeding, meaning more feeding. That means that despite the current wave of food deflation, the long-term trend for food is more scarcity eventually. Replenishing farmland with fertilizers will become even more important years out. 

Here’s a little more background on potash the fertilizer. Vladimir Zernov at Seeking Alpha is pretty good as summarizing financial details.

Here’s the play, I am selling the September $17 puts with a limit order of 85¢ and putting a limit buy order in at $16.15. I’m splitting that up in two pieces, half and half, to make sure I get some POT either way. I like this stock long-term a lot and think it can triple or quadruple in the next decade while increasing its dividend.