After Potash: 4 Fertilizer Takeover Targets - TheStreet

After Potash: 4 Fertilizer Takeover Targets

With BHP on the hunt for Potash, the fertilizer sector looks ripe for another blockbuster deal. Here's a look at four potential targets.
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(Updated to clarify and provide further information on Intrepid Potash's mining assets in New Mexico.)

NEW YORK (

TheStreet

) -- It stinks, it pollutes, it's been known to explode.

But it also makes a lot of people a lot of money, and suddenly it's blossomed into the single hottest sector in the equities-trading world, overtaking at least for the moment such big-city businesses as high-tech and high-finance.

Say it with us:

It's fertilizer!

After

BHP Billiton

(BHP) - Get Report

, which digs for everything from lead to diamonds, made its

takeover move for Potash Corp. of Saskatchewan

(POT)

, the consolidation fever that had already started to inhabit the body of the fertilizer sector broke into a full-fledged virus.

So what brought on this perfect storm (and -- we apologize -- mixed metaphor)?

For one thing, storms. Also

Russia's droughts,

and general global climactic havoc. Putting aside for a moment the "argument" concerning the veracity of the science of global warming, what all these epochal floods and soul-rendering heat waves mean in the short run is a spike in crop prices. Rising crop prices means richer farmers. Farmers with more money have been known to enlarge their fertilizer budgets.

Over the longer term, you don't need the

Farmers' Almanac

to tell you that any trend toward more severe weather (and more more-severe weather) will inevitably lead to a shift in the global crop supply-demand balance. Further, with the world population inevitably expanding, demand for food is only going to grow.

Thus, according to the many fervid industry true-believers, fertilizer is all but the key to avoiding the very collapse of civilization.

In the meantime, the companies that produce these substances are in serious play, M&A wise. (The bankers are certainly drooling; if a blockbuster BHP-Potash deal does go down, the pinstriped-set stands to book nearly $200 million in fees.)

As BHP's move makes clear, the interest in the fertilizer business is largely coming from outside the ag industry -- from the global mining conglomerates. That's because a consolidation trend that's at least 20 years old has left very few global players still in the game.

What companies remain have several things going for them that make mining giants salivate. Namely, scarcity value, especially when it comes to potash and phosphate. Very few high-quality potash and phosphate mines exist, and those that do have extremely long projected lifespans -- much longer than most metals mines, whether industrial or precious. Almost all of the potash produced in the world, for example, comes from only about 20 deposits. The most recent mine opened in 1987.

Furthermore, the experts say, demand for fertilizers isn't going anywhere but up, for all the reasons described above. Global players with high-quality fertilizer assets, therefore, are as ripe for plucking as heirloom tomatos in August (in the Northern Hemisphere, that is). "The top five or six in the world: they're all looking over their shoulders," says Terry Ortslan, who runs an independent research shop, in Montreal, covering the mining and fertilizer industries.

Here's a look at four fertilizer producers and the likelihood that each may become a takeover target, ala Potash.

No. 4 -- Agrium

Market Cap:

$10.8 billion

Forward P/E:

12.11 times 2011 estimates

Agrium

(AGU)

is 75% retailer and 25% producer. But that production or "wholesale" arm, which generated $4.7 billion in revenue in 2008 (the top of the market) and $3 billion in 2009 (the bottom) is juicy enough to perhaps attract some interest.

The company is diverse. Above and beyond its retail outlets, the company mines potash and phosphate and manufactures nitrogen. Its lone potash mine, a deposit first tapped 40 years ago in Saskatchewan of course, has an annual capacity of about 2 million metric tons. Phosphate mines in Ontario and Idaho can churn out about 1.2 million metric tons a year.

Agrium continues to explore for potash on its properties. According to the company, it has proven and probable reserves of some 124 million metric tons of potash.

Still, Agrium is an aggressive dealmaker itself. It tried, albeit unsuccessfully, to subsume

CF Industries

(CF) - Get Report

in the protracted takeover tango that ended earlier this year. Just last week, it

entered the fray for an Australian distributor

of crop nutrients,

AWB

, offering more than $1 billion for the company.

In the end, though, there are likely more obvious targets out there for a company hungry for fertilizer assets.

No. 3 -- CF Industries

Market Cap:

$6.4 billion

Forward P/E:

11.6 times 2011 estimates

CF Industries knows the drill. The company thwarted the persistent advances of Agrium by becoming an acquirer itself,

adding Terra Industries to its portfolio

in a $4.7 billion deal inked in March.

Terra was mostly a nitrogen player. But CF, founded in 1946, has always been a phosphate king, with its complex of mines in Central Florida, not so far from Tampa, the fertilizer port to the world. In 2009, CF sold more than 2 million tons of phosphate. (Its main phosphate production plant -- in the aptly named Plant City, Florida -- alone generates some 10% of the country's total phosphate capacity.)

As for the future: CF's Hardee complex in Florida contains proven and probable reserves of some 80 million tons, as of Dec. 31.

No. 2 -- Intrepid Potash

Market Cap:

$1.8 billion

Forward P/E:

19.2 times 2011 estimates

Unlike Potash Corp. or Agrium or others in Canada, Intrepid doesn't just own the sorts of mines with shafts that go thousands of feet into the ground, costing millions upon millions of dollars to develop.

Based in Denver, Intrepid's heart and soul lies a little further west, in the Carlsbad Caverns area of New Mexico and in the salt flats of Utah, from which the company draws a form of potash via evaporation -- a little like the culinary sea-salt

paludiers of Brittany

, except on an industrial scale.

Nearly three-quarters of the company's potash comes from conventional underground mines in New Mexico, and a kind of combined undergound-evaporation site, in the Moab area of Utah. (The company has an affinity for national parks, evidently.) All told, Intrepid has the capacity to produce about 900,000 tons of potash annually and 210,000 tons of something called langbeinite, a kind of potash relative.

The company, which went public in 2008, is trying to develop projects on its properties. Total proven and probable reserves stood at more than 100 million tons as of Dec. 31.

Compared to others, though, Intrepid's stock looks a little expensive. Also, its potash veins in New Mexico aren't quite the caliber of the Saskatchewan kind.

No. 1 -- Mosaic

Market Cap:

$25.4 billion

Forward P/E:

14.3 times 2011 estimates

It's no secret that Mosaic makes for an obvious takeover target.

The company is the second-largest potash producer in North America, behind Potash Corp., and the largest producer of phosphate in the world. Its potash mines, situated in those lush Saskatchewan potash districts, have peak annual capacity of 10.4 million metric tons. In its last fiscal year, Mosaic says it accounted for about 12% of all the potash produced globally.

The company's huge phosphate business has come under some pressure of late. In Florida, at its Fort Meade property, the company has faced environmental regulatory proceedings that have so far prevented the company to committing to an expansion plan.

To the eyes of a potential buyer, though, Perhaps Mosaic's strongest point is the sheer size of its reserves: proven and probable phosphate of 558 million metric tons, and potash of 1.9 billion.

In the end, it will come down to Cargill, Mosaic's parent, which spun off the fertilizer producer back in 2004 and still owns around 64% of its shares. Rumor has it that Brazil's Vale had talks with Mosaic last year about a deal.

And, indeed, investors have placed their bets on Mosaic being the next fertilizer giant to be officially targeted, pushing its shares up 11% since the Potash-BHP news came to light on Tuesday.

-- Written by Scott Eden in New York

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