This morning the Board of Directors of Canadian company PotashCorp (POT) announced that they had rejected an unsolicited offer from giant Australian company BHP Billiton.
I’m not a shareholder of PotashCorp, but I can appreciate the Board of Directors rejecting the offer as I think PotashCorp is likely to be worth considerably more five years from now.
I wrote previously about how investors should take a cue from China and their aggressive quest to lock up oil reserves around the globe. The article is here:
The reason for investing in potash is very similar. In a recent interview with PostMedia News the president of PotashCorp explained why:
“There are a number of factors driving the demand these days ... The first one is grain prices have improved and with that comes improved fertilizer economics for the farmers, not only in North America but around the world.
The other thing that has added to the change is the system has been de-stocked. So during 2009, the farmers all de-stocked their inventories and inventories in the ground have been de-stocked, so there's a relatively low inventory throughout the system.
Finally, and most importantly I think, is the powerful fundamentals of an increase in world population that needs to eat. The economies of our summer growth markets in China and India are still very strong. The emerging middle class populations there are demanding more protein in their diets and hence they need more fertilizer to make more food to feed the cattle and the hogs and the chickens to improve their diets.
Over the last five years, with the exception of 2009, the market has been growing at about 3.5 per cent a year -- and even more than that in developing markets. So with a 50-million-tonne potash market out there, a three-per-cent growth rate, for example, is 1.5 million tonnes -- it's basically just about a new small mine every year required in the world to keep up to the existing growth that's out there. “
Potash is interesting not only because of the underlying demand story, but also because of clear limitations on supply. Potash production is limited to only 12 countries around the world. The vast majority of global production comes from 3 producing nations: Canada, Russia and Belarus.
Canada is the world's largest producer with the province of Saskatchewan hosting the country's epicenter of global potash production. And not surprisingly Canada offers three investing opportunities in the Potash sector with PotashCorp (POT), Agrium (AGU) and Mosaic (MOS).
Much like oil, potash is in a situation where you have a relentless increase in demand due to billions of people in developing countries improving their standard of living combined with supply that is going to be challenged going forward. Demand growth, plus supply challenges equals higher prices.
I’m working on a potential homerun investment in the potash sector. It is a tiny company controlled by a first class investor. Once I’m done with my due diligence I will present the opportunity to you.