Agrium Inc.

AGU : NYSE : US$90.05
Target: US$104.00

Agrium Inc. is a leading global producer and marketer of
agricultural nutrients, industrial products, specialty
fertilizers, and a major retail supplier of agricultural
products and services in North America, South America
and Australia.
All amounts in US$ unless otherwise noted

Agriculture — Fertilizer
Investment recommendation
Following a plant outage-plagued 2014 that significantly hurt EPS
potential in the current year, we feel the stability of Agrium’s base retail
segment and the growth in wholesale volumes and earnings bode well
for the company going forward. The strong EPS growth profile due to
substantial volume increases and an improvement in costs over the next
two years offers good value to shareholders. We estimate retail EBITDA
to improve by 9% in 2015, nitrogen wholesale to realize a 750kt (21%)
sales volume improvement (and lower opex costs), and a 900kt (76%)
improvement in potash sales volumes in 2015 as their expansion enters
service, which allows for a normalization of the original tonnage and
additional sales via the retail business for the expanded tonnage. All of
the various plant outages in 2014 created a trough earnings situation
that should materially correct itself in 2015. We then expect to see
further growth into 2016 via the Borger nitrogen expansion, the
continued ramp up of the Vanscoy potash expansion and via retail sales
Investment highlights

 Agrium reported adjusted Q2/14 EPS of US$4.31 versus our
estimate of US$4.15, consensus of US$4.11 and guidance of
US$3.85-4.35. Total gross margin was slightly above expectations at
US$1.60 billion versus our of US$1.56 billion estimate. Notably,
Retail gross profit was US$1.35 billion versus our US$1.31 billion
and Other gross profit was US$23 million versus our estimate of nil.
However, Nitrogen gross profit was weaker than expected at
US$137 million, versus our estimate of US$166 million, due in part
to lower volumes resulting from previously disclosed plant outages.
We continue to rate the shares of Agrium a BUY but have lowered our
target price to US$104 (from US$106 previously) based upon an 11.5x
multiple to our blended 2015E/2016E EPS.

MBAC Fertilizer Corp.

MBC : TSX : C$2.07
Target: C$3.55 

MBAC Fertilizer Corp. is a Canadian-domiciled development corporation focused on becoming a significant integrated fertilizer producer in Brazil. The company has ownership of assets within various regions of Brazil, but its immediate focus is on the development of the Itafos phosphate deposit in Goias state. Longer term, MBAC intends to produce phosphate from multiple locations across Brazil.
All amounts in C$ unless otherwise noted.

Investment recommendation
The net result of this press release to our model is favourable later in the decade as Santana ramps up to capacity in 2017E. The lowering of our capital expenditure estimate and of our operating cost assumption (albeit not to the company’s estimated levels) are net positives. However, given that our target price is based upon our 2015 EBITDA estimate and that our multiple takes into consideration the strong growth potential from additional forecast future production, our target price remains unchanged.
Investment highlights
The capital cost estimate is US$427 million (including a US$50 million contingency). There are some costs borne at the Itafos project (a US$323 million project) that would not be duplicated at the Santana project (a water dam, pre-planning/design for a doubling of output, etc), but other costs such as infrastructure to the site would be substantial (and hence why the overall cost was always expected to be higher at Santana). However, that is offset by a much higher grade and lower operating cost mine. The company expects to produce 500ktpa of SSP 0-19-0 product (which is a more valuable grade of product than what is being produced at Itafos (1-17-0) due to the much higher grade of the Santana ore body). Estimated operating cost per tonne at Santana in the BFS is US$113 versus our original estimate of US$140.
The reaction to the release was negative, not to the BFS, but to the lack of an update on Itafos, which is ramping to full operational capacity and should be at the desired level in Q4/13. We assume that the company will sell 50kt of SSP in 2013. We do highlight that every 25mt of sales only impacts our estimated cash balance by less than C$2 million. As a result, at this stage, we are more focused on the ramping up of the facility in Q4 than whether or not they meet or miss our sales estimate by 25kt in 2013, given how little an impact that is to their financial situation as estimated in our model. Further commentary on their financial position is discussed below and we believe funding is no longer a concern.
We continue to rate the shares of MBAC a BUY with a 12-month target price of C$3.55 based upon a 9.5x multiple to our 2015E EBITDA of C$80.9 million.

Agrium Inc.

Agriculture (Photo credit: thegreenpages)

AGU : NYSE : US$94.99
Target: US$118.00

Agrium Inc. is a leading global producer and marketer of agricultural nutrients, industrial products, specialty fertilizers, and a major retail supplier of agricultural products and services in North America, South America and Australia.

All amounts in US$ unless otherwise noted.

Investment recommendation
Although the mid-point of Agrium’s guidance was below expectations, we don’t believe the market agreed with consensus given the spring planting delays to date and as a result, we see the guidance as a only a slight negative. The slow progress of the US spring planting has impacted the company’s outlook for the second quarter but not by as much as it could have been, as the weather has turned for the better.

Given Agrium’s earnings growth potential over the next few years, its relatively less volatile earnings profile and its exposure to a wide array of agricultural product offerings, we believe the overall demand across the agriculture input market will allow the stock to be a relative outperformer in the sector. Monsanto remains our top pick due to its earnings growth, market share increases and new product offerings. We continue to rank Agrium as our second preferred equity to own. We would then follow that with Mosaic and Potash Corp (in that order). We remain with our neutral view on the potash producers, as we believe the potash market lacks sufficient catalysts regarding an upside surprise in industry volumes or pricing in 2013. However, we believe Mosaic offers opportunities for a significant amount of cash to be returned to shareholders in the near term.
Investment highlights
Agrium reported adjusted Q1/13 EPS of US$1.03 versus our and consensus estimate of US$1.08. Total gross margin was weaker than expected at US$716 million versus our expectation of US$791 million. Softer nitrogen gross profit (US$173 million versus our US$197 million) and a weaker retail segment (US$376 million versus US$413 million) were responsible for the discrepancy. Management guided Q2 EPS to a range of US$4.60-5.40. The company also announced an NCIB bid.
We continue to rate the shares of Agrium a BUY but have lowered our target price to US$118 from US$120, based upon a 12x multiple to our blended 2013E/2014E EPS.

Monsanto Company Target $ 121


MON : NYSE : US$104.51
Target: US$121.00

Monsanto is a leading global provider of seeds, biotechnology traits, and glyphosates. The company operates two segments: Seeds and Genomics and Agricultural Productivity. The seeds and genomics segment consists primarily of soybeans, corn, cotton, and vegetable seed brands, as well as biotechnology traits that help control weeds and insects. The agricultural productivity segment consists of crop protection, including glyphosates

Investment recommendation
Monsanto remains our top large cap equity to own: From an industry viewpoint, we continue to expect a large planting in both the US this spring and in Latin America next fall, which should set up the company for a strong F2013 and a positive start to F2014. We further believe that the concern farmers have had over sourcing the best seed this year as a result of last year’s drought-plagued crop should allow for an increase in margins. We believe Monsanto will be able to capitalize on these macro events more than its peers due to its yield leading products, both current and those in the pipeline, and the benefit that we should continue to see roll out in both North and South America through our forecast period. We expect the company to improve upon its market share, and going forward, we see no equal when it relates to the level of product launches the company should be able to introduce both in the near and medium term. We also believe the company has done a good job of diffusing a potential negative RR1 soybean event in Brazil next year through its disclosure, the removal of the related forecast earnings guidance from the current fiscal year (and next), and the proactive signing of farmers to the next generation product. As a result, we believe the company’s shares will continue to outperform its peers and the market in 2013.
Investment highlights
Monsanto reported adjusted Q2/F13 EPS of US$2.73 versus our estimate of US$2.38 and consensus of US$2.57. Gross margin was reported at US$3.07 billion, above our US$2.88 billion estimate (Figure 1). Operating costs were US$958 million versus our expectation at US$988 million. The company increased its ongoing F2013 EPS guidance to US$4.40-4.50 versus US$4.30-4.40 previously, our estimate of US$4.45, and consensus of US$4.57
We continue to rate the shares of Monsanto a BUY, but have increased our 12-month target price to US$121.00 from US$113.00 previously, based upon a 23.5x multiple to our blended F2014E EPS of US$5.16.

Agrium Q4 Report

Potash mining for fertilizer
Potash mining for fertilizer (Photo credit: Wikipedia)

AGU : TSX : $103.24
AGU : NYSE : US$101.10

Agrium traded lower after reporting relatively in-line Q4/12 results, EPS of US$2.16 versusprevious guidance of “slightly above US$2.00”.
The company did not offer Q1 or full-year guidance (historically, AGU only provides Q2 and Q4 guidance at the end of Q1 and
Q3 earnings, respectively).

Retail gross profit of US$509 million was lower than US$524-million estimate. Crop protection was better than expected at US$203 million (versus our US$168 million) due to better volumes and pricing as well as supplier rebate programs. Seed, merchandise  services and other was US$151 million versus Carpenter’s US$186 million due primarily to the pricing pressure associated with the livestock and wool segments within the Australian retail division.

Overall, the realized retail gross margin was 25.8%, in line with estimates. AGU’s nitrogen segment performed better than expected with a reported gross margin of US$326 million versus Carpenter’s estimated US$293 million. Volumes sold were in line with  estimates at 1.1mt but the average margin per tonne of US$290  In potash, gross margin of US$79 million was in line with US$78-million estimates as realized sales volumes of 341kt were in line with  estimates of 334kt and the average margin per tonne was in line at US$233 versus our US$235/t.

In phosphate, gross profit of US$47 million was lower than US$57 million estimates as a result of a lower margin per tonne (US$166 versus  estimates of US$199) resulting from higher operating costs.

We prefer the non-potash equities over the potash equities given expectation of a supportive agriculture macro environment and an expected near record U.S. planting this spring.

BHP Billiton Move Into Potash – A Billion Dollar Blunder

Former Billiton corporate logo.
Former Billiton corporate logo. (Photo credit: Wikipedia)

October 24

BHP Billiton  (BHP : NYSE : US$70.06), 

As BHP Billiton continues to move ahead with its massive Jansen potash mine in Saskatchewan, a Bay Street analyst has cautioned that building the mine is BHP’s worst option if it wants to diversify into potash.

The analyst noted, “We believe that the best decision for BHP is not to build or buy its way into the potash industry, and instead return cash to shareholders. However, we expect BHP will not go down this route.” He thinks that the economics of Jansen are not attractive. 

Using a US$450-per-tonne price, they project an internal rate of return (IRR) of only 10%, with the company needing a lofty US$600 per tonne to achieve a modest 12-15% IRR. The problem is that building Jansen could put pressure on prices, because it would bring more product into a market that is already well supplied right now.

The analyst believes that potash demand is adequately covered out to the mid-2020s without Jansen. And while they wrote that the decision to build Jansen can be justified by taking a much longer-term view and focusing on the period beyond 2025, they noted that is “inherently riskier” because of the forecasting challenges.

MBAC Fertilizer Corp. Buy Target $5.35

MBAC Fertilizer Corp.  MBC ( TSX)  $ 3.15

Sept. 14

Investment recommendation

Although preliminary in nature, the PEA highlights a robust project, the result of a very high grade REO deposit that is at surface and adjacent to existing infrastructure. Due to the risk surrounding the timeline and the financing of the project, we have applied a discount rate of 20% on Araxa. Given that the company will be looking to finance the Santana project in H2/13, estimated for initial production in 2015 at a cost of $445 million (our estimate), MBAC will likely require a financial partner for the Araxa project if it expects its timeline to be met. Initial discussions with potential financial partners (which consist of Japanese and Korean electronics companies – the end users of REOs) have identified several entities that are interested, but would prefer a further de-risking of the project through feasibility studies and pilot plant testing. To that end, given that MBAC intends to conclude both its pilot testing and PFS during Q2/13, followed by a bankable feasibility study expected by the end of 2013, we should be provided with greater clarity on financing options and better timelines and cost assumptions at that time. Given the metrics provided by the PEA, coupled with our own assumptions, and assuming a 20% discount rate on the Araxa project, our NAVPS estimate for the company increases by 15% as a result of the PEA release.

Investment highlights

Production planned fro Q1 2016 – increased capacity over time .

 PEA estimates Phase I CAPEX at US$406 million (which includes US$105 million in contingencies) with an additional US$214 million for the Phase II expansion (a sulphuric plant upgrade) for a total forecast CAPEX of US$620 million.


We continue to rate the shares of MBAC a BUY, but have increased our 12-month target price to C$5.35 from C$4.70, based on 1.0x our NAVPS estimate of C$5.37.