Clean Money From a Dirty Business

Clean Money From a Dirty Business

I have followed Potash Corp. for several years but didn't quite realize how little I knew until the recent kerfuffle involving a Russian potash company named Uralkali breaking out of a cartel and flooding the market with supply. This unforeseen act caused commodity traders to freak out and stock traders to liquidate shares of all potash producers on fears of a crash in the commodity price.

If you look at a chart for Potash Corp. you'll see a massive plunge on July 30. You'll see similar drops in its competitors Mosaic Co. and Intrepid Potash . I think this knee-jerk reaction opens up the door for some real values in this space.

First off, for those who haven't already looked up Potash, it's a fertilizer that is rich in potassium. It's found underwater in various places across the globe. Canada has the largest known reserves, and within that Potash Corp. controls the largest amount of reserves.

Among the three listed above, Potash Corp. sticks out as the safest play on the potash trade. It has the highest net margins (38% as of the most recent filings) which, to me, signals it has the largest cushion to absorb price fluctuations while maintaining profitability. In addition to this Portash Corp's leverage ratio is extremely low. Potash Corp. has net debt of $3.4 billion as of the end of the second quarter. Its stated EBITDA for the first half of 2013 was just over $2 billion, implying a net-debt to EBITDA ratio of 82%. While there will likely be volatility in the price of potash due to the issues regarding Uralkali, Potash Corp is the best financial position to weather any potential storm and continue to deliver a healthy dividend and a $2 billion share buyback program, which represents about 5% of shares outstanding. In a recent report by Credit Suisse (on July 25), they maintained the stance that Potash Corp was well positioned to continue to grow capital returns due to declining capex.

Looking to the future, Potash Corp is 90% done with its capex program to expand its potash capacity to a world-leading 17.1 tonnes. From Potash Corp's Q3 Market Anaylsis, The International Fertilizer Industry Association (IFA) is projecting international potash capacity to actually fall due to delays and setbacks at other production facilities. The delays in building new potash capacity coupled with the rising demand for potash will certainly work in the favor of Potash Corp as it has the largest existing capacity.

Further, if you continue to slice and dice the data you'll see that Latin/South America is growing with Mexico leading the consumption growth as is North America. This represents great opportunities for Potash Corp to continue to grow within is own backyard.

Potash, like oil, is a global commodity that should be on an investors radar. Potash Corp. is the largest producer of the commodity and has the competitive advantage of both geography and political stability. While other companies such as BHP Billiton are looking to expand into this area, it would take tens of billions of dollars for a company to reach the scale and capacity of Potash Corp. Like any commodity there will be volatility and any potential investor should evaluate what that volatility will do to a portfolio as a whole. But, among its peers Potash Corp stands a head above. This company will continue to grow and be the world leader of this commodity.

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