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Vale SA May Bid For Mosaic - Let the Great Potash War Begin (MOS, POT, VALE)

Posted on | July 16, 2009 Time: 1:40 pm |

priceisright

do I hear $25 billion?....$28b?...

Bloomberg reports today that a Brazilian newspaper has hinted at a pending $25b bid by mining giant Vale S.A. (VALE) for The Mosaic Company (MOS), the world’s largest phoshate producer and #2 potash producer. This follows up on earlier reports that Australian miner BHP Billiton was interested in snapping up North American potash assets. Mosaic shares are up 12% today on the rumor/news, with the market cap now topping $22 billion.

You heard it here first, or if not first then I’ll settle for most bluntly - today’s news is just the opening salvo in an all-out agriculture bidding war that has likely just begun.

To the mega-miners, the attraction is obvious; getting into agricultural commodities is a great diversification play away from metals and ores; meanwhile potash, phosphate, and nitrogen-based nutrient/fertilizer pricing has held up infinitely better during the past 18 months than for any of the hard commodities (ex-gold).

North America = Good; China = ?

It also represents a strategy shift away from seeking alliances with Chinese firms that are increasingly resorting to…oh, I don’t know what term to use except “ungentlemanly” tactics, as evidenced by the recent detaining of 4 Rio Tinto employees by the Chinese government following a rebuff of Chinalco’s (Aluminum Corp. of China) offer to take a $19.5b stake in Rio. Oh wait, sorry - China claims the two events have nothing in common. I leave you to your own peanut gallery responses…

So the Australian and South American miners are looking westward & upward, and when they do they see agriculture firms throwing off massive amounts of cash flow, and have great secular trends at their back (for a clearer picture of this, check out my earlier commentary:

Potash Corp Slashes Q2 Estimates, But Group Holding Up Well (June 26);

Potash production cut 20%; Will Pricing Be Preserved? (Dec. ‘08);

Potash Pricing Quietly Holding Up Well, So Why Has Commentary Vanished? (November ‘08);

All Signs Point to a Bidding War

Mosaic, Potash Corp. of Saskatchewan (POT) and Agrium (AGU) - the three largest North American producers - all trade for less than 10x operating cash flow, and balance sheets are strong across the board. More importantly, there is an extremely limited global supply of the key nutrients, which help to increase crop yields in a world that has more people by the second - all of which want to, need to, will do anything to….EAT. Preferably proteins, which means more grains for feedstocks, which means the world’s arable land is quickly becoming just as valuable a resource as oil, water, and gold.

Small Premium Bids Need Not Apply

These next comments refer most specifically to Potash Corp. (the largest holding in the Secular Trends Model Portfolio), but they also apply to the smaller producers. These companies have been waiting decades for global appreciation of their products to reach the peak levels seen the past few years. They’ve suffered through long periods of capital-intensive investments and low margins in mines that take 5-7 years to develop…they will not sell out quietly. 10% or 20% premiums simply aren’t going to cut it, especially when all 3 major producers have seen their stock prices halved or more in past year. With Vale and BHP already in the mix, the next logical step is for a smaller miner to come in and bid for, say, Agrium (the smallest market cap of the three at $6.3 billion).

Mosaic is a natural target because it is majority-owned by Cargill, the world’s largest private company but a private one nonetheless. While their financials are harder to parse through, Cargill might be happy to get access to a capital windfall, as they don’t have the same freedom to access the public markets the way its “tickered” peers do. Also, Cargill is very focused on the agriculture sector as a whole, so they might be the most receptive to diversifying their business segments.

This Industry is Overdue for a Shakeup - and a Little Maturation

Potash Corp, on the other hand, may be the most stubborn. And I say that lovingly. They are in no need for cash, have tons of capacity sitting in wait, and are very keen to maximize their long-term value proposition. But I’d be happy to see a share multiple bump across the board, and also to see some impetus to break up the old-school exporting/marketing group Canpotex, which represents the needs of all three major firms. Potash Corp. may be receptive to a minority stakeholder, but only at substantial premium to current prices, which would still give investors some of their briefly held gains back from 2007-2008 runup.

Let the bidding begin…

Ryan Barnes

disclosure: author holds no personal stakes in the companies mentioned; Potash Corp (POT) is held in the Secular Trends Model.

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Category: Agriculture, Basic Materials, Fundamental Analysis
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