Potash Corp. of Saskatchewan Inc. is an increasingly attractive takeover candidate as lower potash prices discourage large mining companies from starting their own mines.
"Potash's valuation should benefit from a takeover premium with diversified mining and various entities looking to enter the potash industry," said Jacob Bout, a CIBC World Markets analyst. "Potash Corp. is the crown jewel of the potash industry due to its collection of potash assets in a politically stable environment."
The company's shares have gained 7.5 per cent so far this year, but are 50 per cent below their 52-week high of $193. While the shares received a brief boost in the spring as rumours circulated about a possible takeover attempt by BHP Billiton, no offer was forthcoming.
The rumour also sparked conversations about whether the Canadian government would allow a foreign buyer to take a run at the Saskatoon-based company, which is the largest potash producer in the world. However, Mr. Bout said the odds of a foreign acquisition increased in early August after Canadian Finance Minister Jim Flaherty stated that "this country's foreign investment rules pose little hindrance to the growth of a Chinese presence" and that "over time, we will see more investment by Chinese businesses in Canada."
As prices raced toward $1,000 (U.S.) a tonne last year, analysts and industry representatives assured investors that higher prices were sustainable because they couldn't produce enough of the nutrient to meet the demand of the world's farmers. Amid the enthusiasm, about 75 so-called greenfield projects were announced - new mines intended to meet an exploding need.
Prices have scraped against $650 a tonne this year as demand was cut in half. Mr. Bout predicted yesterday in his annual review of the potash industry that the majority - if not all - of the 75 projects will be put on hold until demand returns.
"Given the number of [existing mine]expansions expected to come online over the next five to eight years, from a pure demand perspective future production from a large-scale greenfield potash project will likely not be necessary until post 2020," he said.
He suggested the potash market won't recover until 2011, as he cut his price target on Potash Corp. by $10 (Canadian) to $110, while leaving his "sector outperform" rating in place.
Analysts have been suggesting that demand would return in 2010, because farmers can skip a year and still get strong yields from their fields. But with a bumper crop this year, Mr. Bout said they may be inclined to go another season without the nutrient.
Upgrading an existing potash mine requires prices to remain above $500 (U.S.), while a new project requires prices up to $1,750 to justify construction. Experts said a new mine that produces about two million tonnes of potash would take about seven years to develop and would cost more than $2.5-billion.
The true cost is uncertain, Mr. Bout said, because a new project hasn't been started in decades.
The world's mines can currently produce about 53 million tonnes a year if running at full capacity - though most producers have cut shifts and temporarily shuttered mines to get through the slump. This year, only 43 million tonnes is expected to be sold into market.
While eight projects are considered to have advanced beyond the conceptual stage, only Brazil's Vale SA mine in Argentina and Canada's MagIndustries Corp.'s Republic of Congo mines are expected to proceed in the next year.
MagIndustries' mine is expected to cost $1.2-billion and yield 1.2 million tonnes of potash a year, provided the company can secure financing.
A Chinese company is studying MagIndustries' plans, said director of corporate development Richey Morrow, and has indicated it would be willing to invest $280-million in the company's shares. Discussions are ongoing, he said.
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