RBC CAPITAL MARKETS GLOBAL MINING AND MATERIALS CONFERENCE HIGHLIGHTS, June 11 - 12, Four Seasons Hotel, Toronto
FERTILISER SEGMENT SUMMARY
• Expect Strong Fundamental Outlook to Continue. The presenting fertilizer companies were consistently bullish on the outlook for the fertilizer industry over the next 3-5 years. The robust outlook is backed by tight supply and demand pull driven by growing demand for food.
• PotashCorp - Not at the Peak. When discussing the current fertilizer pricing environment, PotashCorp indicated that fertilizer prices are far from peaking. The significant payback for farmers around the world from applying fertilizers could lead to even higher prices. With rising prices and capacity expansions, PotashCorp believes the next 5 years will be the greatest period of growth for the company in its history.
• Agrium - Earnings Growth and Multiple Expansion. Agrium's CFO suggests that the entire fertilizer sector may be undervalued. He expects earnings growth and multiple expansion to drive Agrium's valuation higher over time. Future growth opportunities for Agrium include further expansion of its retail operations and growing its potash operations.
Conference Highlights, in order of presentation
In Conversation with PotashCorp, Bill Doyle, President & Chief Executive Officer
• The next five years will be the greatest growth period in PotashCorp's history.
• Primary driver of higher grain prices is food demand and not biofuels. Only 5% of total grain production goes into biofuels and the remainder is for food demand. People understand the supply side of food but have difficulty with the demand side.
• Commodity index funds have also been blamed for higher grain prices but this explanation doesn't make sense because there's been no physical hoarding or ownership of grain by such funds.
• Crop yield growth has declined by half since the 1970s. One contributor has been a reduction in government-funded agricultural research.
• Capacity to improve food production and meet growing demand exists but there are no overnight solutions.
• Only 19% of food production costs are on farm costs (i.e., fertilizer, seed, etc.) and 81% are off farm costs (i.e., transportation, packaging, marketing, etc.)
• Potash prices have not peaked. PotashCorp is not seeing demand destruction at current fertilizer price levels. There is a significant payback from applying fertilizers. Corn offers the lowest return but it's still a $3 return for every dollar spent on fertilizer (6 for 1 for wheat in India and 7 for 1 for palm oil in Indonesia and Malaysia). Expect potash demand from Brazil, China and India to double over the next 15 to 20 years.
• Significant barriers to entry still exist to bring new greenfield potash mines into service. While there are no restrictions to joining Canpotex for producers with proven capacity, the actual cost of a conventional mine project could increase from $2.5 billion to $4-$5 billion when infrastructure is factored into the equation.
Hanfeng Evergreen Inc. - Madeline Yu, Chief Financial Officer
• Hanfeng is China's first commercial scale slow/controlled release fertilizer producer.
• Unlike in the U.S., approximately 50% of farm production costs in China are for fertilizer. Significant fertilizer inefficiency issues exist in China (particularly with respect to nitrogen fertilizer usage). Producers in China are motivated to reduce the quantity of fertilizer applied and increase yields. Hanfeng's slow/controlled release fertilizers can help producers meet their objectives.
• In China, conventional fertilizers need to be applied 4 to 5 times during the season. In comparison, slow release fertilizers need to be applied only once.
• Hanfeng is not subject to Chinese price controls.
Terra Industries - Joe Ewing, Vice President Investor Relations
• While grain use on a per capita basis should level out over time, rising global population will continue to drive grain demand higher over time.
• As a rule of thumb, corn production is generally more profitable than soybean at a bean-to-corn price ratio below 2.5x (e.g., with corn at $7/bu and soybean at $15/bu, growers have an economic incentive to plant corn as the bean-to-corn price ratio is at 2.1x).
• With reduced corn acreage and lower forecast yields this year, we should expect next year to be a huge year for corn.
• Use of nitrogen for emission scrubbing (Selective Catalytic Reduction applications) is growing. Environmental nitrogen applications represented approximately 5% of Terra's business last year and it is expected to grow to at least 10% of Terra's revenues by 2015.
• Ethanol production growth could level off or face a slight decline if the U.S. government changes its biofuels policy.
• A quick ramp-up of new nitrogen supply is unlikely as higher natural gas costs, increased construction costs and longer project development timelines are making nitrogen fertilizer projects more difficult to justify.
• China will account for almost 50% of all new ammonia capacity between 2008 and 2015. The urea market should remain tight through 2011 if China is not an exporter.
CF Industries - Dave Pruett, Senior Vice President, Operations
• Expect extremely low corn ending inventories in 2008/09 (projected 411 billion bushels in 2008/09 versus 1,283 billion bushels in 2007/08).
• With 100% self sufficiency in phosphate rock supply and 24 years of proven reserves, CF Industries has a significant advantage over non-integrated producers.
• Corn acres could move above 93 million acres in 2009/10. Strong upside for nitrogen fertilizer demand.
• High nitrogen demand on corn could be partially offset by lower demand on other crops/pasture.
• Phosphate demand growth in 2009 could be modest as there could be price resistance, particularly on acreage other than corn. There is some resistance already and higher prices have not made their way through the chain yet.
Intrepid Potash - Bob Jornayvaz, Chairman & CEO
• Most of the potash deposits in the world have already been discovered.
• The potash industry is deposit, equipment and technology constrained and not capital constrained.
• Over the last 25 years, 5 major facilities have been lost to water incursion. Aquifers above the potash deposit are not an issue for Intrepid.
• Intrepid believes the potash industry is operating at full capacity with an approximate effective capacity utilization rate of 93%. No inventory is being built up at this time.
• Intrepid has significant organic growth opportunities including potentially re-opening its North Mine.
In Conversation with Agrium - Bruce Waterman, Senior Vice President of Finance and CFO
• Over half of the increase in the upward revision to its Q2/08 guidance was associated with the retail business. The wholesale and advanced technology businesses are also performing better than expected.
• Construction on the Egyptian nitrogen project was halted on April 21, 2008 due to a political dispute between the central and local government on land use and whether the land should be used for tourism or Agrium's facility. There has been a lot of disinformation about the project regarding health concerns and permitting. Agrium needs the support of the government to manage public concerns. If it doesn't get the government support, continuing construction will be difficult. Agrium needs to resume work soon to keep its contractors.
• Future growth could come from coating plants in Europe or Asia, retail fertilizer acquisitions in the U.S. and Canada, a potash mine expansion and a new greenfield potash mine.
• The fertilizer cycle still looks good for the next 3 to 5 years.
• There have been some fertilizer volume reductions in the U.S. during the spring due to a strong fall application, fewer corn acres and some sticker shock (more for marginal farmers and for phosphate largely).
• The whole fertilizer sector may be undervalued as the market may not be fully pricing in the sector's current pricing capability.
• If Agrium proceeds with the new greenfield potash project, it would likely come into service around 2014. It is not unreasonable to take seven years to build a new greenfield potash mine (2 years for feasibility study and 5 years for construction). There is a long queue for equipment.
Selected potash & related stocks
* 12 month
Selected agromineral players
Gujarat State Fert.
Egyptian Fin & Ind
EID Parry India
* 12 month
Source: market data; table compiled by Barry Sergeant