WhenPotashCorp rejected BHP Billiton's $39-billion offer for the company,it said the bid "grossly undervalued its business" and low-balled thefuture of the potash sector. And according to analysts at MackieResearch, PotashCorp's CEO Billy Doyle and company were correct.
"Thesecular argument for fertilizer demand growth is virtuallyunassailable," Mackie analyst Jaret Anderson writes in report on thepotash sector. "A growing global population, limited arable land and anincreasing preference for protein in China and India all require theworld find a way to produce more food on each hectare of land."
Potash companies, Anderson believes, are in a prime position to benefit from strong growth in the agricultural sector.
"Inour view, the investment opportunities in potash-levered companies areparticularly attractive due to the oligopolistic nature of the industry,the superior long-term margins the business has offered and the stronglong-term growth in potash demand (greater than that of both nitrogenand phosphate)," he said.
Potash is currently produced in only 12countries, with four companies in control of about 65 percent of supply.This gives organizations such as Canpotex -- the marketing organizationfor Canadian potash producers Agrium, PotashCorp and Mosaic --significant power when it comes to prices and margins.
Mackie suggests ways for investors to benefit from the strong growth opportunities of the potash sector:
- Look to companies that own potash resources still in the development stage. "Development-stage potash companies offer more leverage to tightening conditions in the potash market," Anderson says.
- Place bets on development properties in regions brimming with corporate buyers. "Own high-quality assets in the neighbourhood corporate buyers have shown a preference for, namely, Saskatchewan."
- Look for potash companies capable of capitalizing on Brazil's massive agriculture industry. "The country is dependent on foreign suppliers for 89% of its potash consumption. Any company that can successfully develop a potash project in Brazil is likely to benefit from significant freight advantages."
Mackie has also initiated coverage on six potash names:
- Allana Potash (AAA-T 1.11 -0.04 -3.48%): 'Speculative buy' rating with a $1.65 price target
- Ethiopian Potash (FED-X 0.67 0.03 4.69%): 'Speculative buy' rating with a $1.60 price target
- Karnalyte Resources (KRN-T 15.55 0.25 1.63%): 'Hold' rating with a $17.00 price target
- Rio Verde Minerals Development (RVD-T 0.43 0.00 0.00%): 'Speculative buy' rating with a $1.30 price target
- Verde Potash (NPK-X 9.1 -0.14 -1.52%): 'Speculative buy' rating with a $12.00 price target
- Western Potash (WPX-T 1.2 -0.04 -3.23%): 'Speculative buy' rating and a $2.75 price target