Engineering News

Is China in the Market for POT?
September 12, 2010  

The Wall Street Journal reported last Wednesday that China’s demand for agricultural commodities extends to POT.

No, not that kind of pot… good grief!

A state-owned chemical company is apparently in cahoots with a Singapore sovereign wealth fund and is expected to make a competing bid for Potash Corp. (POT) which is currently being wooed by BHP Billiton Ltd..

A new bidder isn’t a huge surprise to the market and we noted three likely scenarios when BHP made their initial offer on August 17th:

  1. BHP would be forced to increase its offer
  2. Another suitor would make a better offer
  3. The BHP offer would shed light on the long-term value of POT

Our Strategic Intelligence Report which recommended a purchase of POT as well as two other fertilizer companies specifically discussed the rising Chinese demand for resources. Wednesday’s move only confirms just how desperate China is to secure the means of producing agriculture products for its surging population.

The Chinese state-owned chemical company Sinochem Corp. has approached Singapore’s state investment company, Temasek Holdings, to discuss the potential creation of a bidding consortium for Potash Corp. of Saskatchewan…

The move comes as companies from China—one of the world’s largest importers of the fertilizer potash—weigh their options to compete with a hostile, $39 billion takeover bid by BHP Billiton Ltd. amid continued efforts to sustain and expand the food supply of the world’s most populous country…

In a video posted on Potash’s website Tuesday, Chief Executive Bill Doylesaid the company was in talks with a variety of potential bidders, and was confident it would attract a higher offer than BHP’s $130-a-share offer. He also held out the prospect that Potash could do well without a merger partner…

Last week, the investment chief of Canadian pension fund Alberta Investment Management Corp. said he was approached by a Chinese-led consortium looking for a Canadian partner to make the deal less politically explosive in Canada. He declined to identify the consortium…

…any Chinese-led bid would have to overcome resistance from Saskatchewan’s government, which is worried that Chinese ownership could hurt prices and endanger revenue. Potash revenue accounted for 15% of the province’s budget as recently as 2008, though that is projected to drop to 2% this fiscal year because demand has dropped. The concern is that the Chinese desire is to maintain stable supply at low prices, which isn’t necessarily what an investor or a government [in Saskatchewan] would want.”

POT is trading marginally higher on light volume following the news. Our attractive entry in July when the stock broke out of a consolidation gave us plenty of flexibility to hold after the announcement. And taking half profits off the table has created an environment where we can have the patience to sit on this position while we wait for the dust to settle and the winning bid to be accepted.

Heck, if no bid is accepted, POT is still an attractive position based on the fundamental strength and the apparent “closet demand” that is now emerging as institutional and sovereign investors validate the demand for fertilizer resources.

Agruium, Inc. (AGU) and Mosaic Co. (MOS) are not quite as extended and may be better initial investments at this point. MOS in particularlooks interesting as it is breaking to a new recovery high after consolidating its gain for the last two weeks.

Watch for volume to pick up as the stock moves through resistance as a sign that institutional investors are building positions. The risk at this point is certainly greater than buying when the stock began it’s trek back in July, but new bids for Potash certainly help to fuel the expectations of rising long-term demand for the entire industry.

Source: Seeking Alpha

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