Agrium Q4 Report

Potash mining for fertilizer
Potash mining for fertilizer (Photo credit: Wikipedia)

AGU : TSX : $103.24
AGU : NYSE : US$101.10

Agrium traded lower after reporting relatively in-line Q4/12 results, EPS of US$2.16 versusprevious guidance of “slightly above US$2.00”.
The company did not offer Q1 or full-year guidance (historically, AGU only provides Q2 and Q4 guidance at the end of Q1 and
Q3 earnings, respectively).

Retail gross profit of US$509 million was lower than US$524-million estimate. Crop protection was better than expected at US$203 million (versus our US$168 million) due to better volumes and pricing as well as supplier rebate programs. Seed, merchandise  services and other was US$151 million versus Carpenter’s US$186 million due primarily to the pricing pressure associated with the livestock and wool segments within the Australian retail division.

Overall, the realized retail gross margin was 25.8%, in line with estimates. AGU’s nitrogen segment performed better than expected with a reported gross margin of US$326 million versus Carpenter’s estimated US$293 million. Volumes sold were in line with  estimates at 1.1mt but the average margin per tonne of US$290  In potash, gross margin of US$79 million was in line with US$78-million estimates as realized sales volumes of 341kt were in line with  estimates of 334kt and the average margin per tonne was in line at US$233 versus our US$235/t.

In phosphate, gross profit of US$47 million was lower than US$57 million estimates as a result of a lower margin per tonne (US$166 versus  estimates of US$199) resulting from higher operating costs.

We prefer the non-potash equities over the potash equities given expectation of a supportive agriculture macro environment and an expected near record U.S. planting this spring.


BHP Billiton Move Into Potash – A Billion Dollar Blunder

Former Billiton corporate logo.
Former Billiton corporate logo. (Photo credit: Wikipedia)

October 24

BHP Billiton  (BHP : NYSE : US$70.06), 

As BHP Billiton continues to move ahead with its massive Jansen potash mine in Saskatchewan, a Bay Street analyst has cautioned that building the mine is BHP’s worst option if it wants to diversify into potash.

The analyst noted, “We believe that the best decision for BHP is not to build or buy its way into the potash industry, and instead return cash to shareholders. However, we expect BHP will not go down this route.” He thinks that the economics of Jansen are not attractive. 

Using a US$450-per-tonne price, they project an internal rate of return (IRR) of only 10%, with the company needing a lofty US$600 per tonne to achieve a modest 12-15% IRR. The problem is that building Jansen could put pressure on prices, because it would bring more product into a market that is already well supplied right now.

The analyst believes that potash demand is adequately covered out to the mid-2020s without Jansen. And while they wrote that the decision to build Jansen can be justified by taking a much longer-term view and focusing on the period beyond 2025, they noted that is “inherently riskier” because of the forecasting challenges.