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Potash Talks Rebound, Pricing but Not BHP

Potash CFO Wayne Brownlee takes no takeover questions at an investor conference Wednesday, but says the potash business is on the mend.
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NEW YORK (TheStreet) -- The one thing banned from the agenda was the only thing anyone really wanted to talk about when Potash Corp. (POT) CFO Wayne Brownlee took the stage at an investor conference here on Wednesday.

"Today's presentation with Wayne will be focusing on the business fundamentals," said Elaine Yip, the fertilizers analyst at

Credit Suisse

(CS) - Get Credit Suisse Group AG Report

, when she introduced Brownlee. (Credit Suisse co-hosted the event.) "They will not be taking questions on

BHP's

(BHP) - Get BHP Group Ltd. Report

proposed

takeover of Potash Corp.

"

Some in the audience may have been tempted to disobey that directive. After all, the news Wednesday appeared to make the list of potential white knights for Potash somewhat shorter. The big state-controlled Chinese industrial conglomerate

Sinochem

, rumored to have had much interest in a

potential bid for Potash

, appeared to send up smoke signals suggesting that this was no longer the case. A high Sinochem official told the Chinese business magazine

Caijing

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that the industrial giant would be more interested in buying Potash's phosphate and nitrogen fertilizer businesses than the whole company, and that even a $10 billion investment in Potash was too much, and "not a good deal."

But the plot soon thickened when the online version of the

Caijing

story disappeared from the magazine's web site, suggesting that the remarks by the official didn't represent the views of Sinochem or the Chinese government. Then, Thursday morning, an

anonymously sourced story in Canada's Globe & Mail

reports that

Potash is busy trying to cobble together

a consortium of investors that could trump BHP's bid and take Potash private in a leveraged buyout.

Indeed, Potash

CEO Bill Doyle

has been publicly adamant that

serious interest from third parties exists

. So adamant, in fact, that observers feel Potash must have something up their sleeve. "Otherwise, they're not going to look pretty if nothing comes up," said Edlain Rodriguez, an analyst at Broadpoint Gleacher. "I just don't think it'll be anything that's credible enough to change the equation."

>>Potash vs. BHP: The Fertilizer War From A to Z

With this as the backdrop, CFO Brownlee went on to give his Potash stock-promotion presentation on Wednesday.

The salient points were two, one long term, the other short:

The Malthus Argument :

Thomas Malthus was a 19th century philosopher, scholar and man of the cloth who theorized on population growth. To simplify (perhaps overly so): people will multiply until such a time that their number will outstrip the available natural resources necessary to sustain them. And then: population shrinkage.

According to Potash's long-time argument -- what Bill Doyle has called the "simple truth" -- a good way to sustain one of those natural resources (that is, food) is for farmers in emerging nations to use more potash than they've used to date. Said Brownlee during his presentation, "Farmers in many developing regions have been only recently started to address the long-term under application of potash." The implication, of course, is that they will only use more of it as time goes on.

Rich Farmers:

With corn prices at nearly $5 a bushel, with grain prices elevated after a summer of extreme weather around the globe, farmers in North America are feeling good. Also, because they sowed their crops earlier than usual this past spring, planters will enjoy an early harvest. Thus, they'll have plenty of time this fall to pour nutrients onto their soils -- and buy a lot of potash in order to do so.

"The anecdotal information we're getting back from our customer base in the corn belt is, first of all, they're probably going to have record income this year," Brownlee said in response to a question from the audience. "That is showing up in a fair bit of enthusiasm and exuberance that we're seeing through our dealer network."

The signals are so promising, Brownlee went on to say later during the Q&A, that the "fundamentals are, we think, really in place of mirroring what happened in 2007 and 2008 right now."

That's quite a statement. Although it's no secret that the fall is stacking up to be

a moment of strong fertilizer demand

, the years Brownlee referenced were the absolute peak of the pre-financial-crisis boom, when roaring crop prices sent the cost of potash ballooning up to $1,000 a ton on the spot market.

Brownlee wasn't speaking about potash prices so much as underlying demand. The context of his remarks had to do with the hard-line on prices that the

potash industry and its cartels

took at the precipice of the last boom-bust cycle, unwilling to give an inch to farmers who were complaining about the sky-high cost of the fertilizer at a moment when the economy was clearly retracting and financial markets coming undone.

"We probably got into a period of time in 2008 where there was some overkill, to the extent that the farmers really became disengaged with the price of potash," Brownlee said. "So I think the question now will be ... whether the industry has learned some lessons about: there is a reasonable limit for what potash prices can be, but you've got to maintain ongoing farmer engagement on a sustainable basis."

-- Written by Scott Eden in New York

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>>Potash vs. BHP: The Fertilizer War From A to Z

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