1.1 Company Description and Business Scope. Potash Corp Saskatchewan started as a crown corporation until its initial public offering took place on the Toronto Stock Exchange at $18.00 CND and $15.125 USD New York Stock Exchange in November 2, 1989. Since then, it has developed into the world's largest fertilizer producer, accounting for nearly a quarter of the world's capacity as well as having business interests in seven countries with 5,136 employees. The company's claimed goal is to feed the world through steady global expansion in a sustainable environment. Five sites in Saskatchewan and one in New Brunswick are dedicated to the production of potash, and seven facilities in the central and eastern United States are responsible for generating phosphate. Its three out of four nitrogen plants are also located in eastern United States and one in Trinidad. The company's main product lines are solid, liquid phosphate fertilizers, animal feed, supplements, industrial acid, purified acid, nitrogen feed, ammonia, urea nitrogen solutions, ammonium nitrate, and nitric acid. In an attempt to seek lower costs, stronger ties and recapture profit from the lower stream , Potash Corp takes stakes in foreign fertilizer importer and suppler, including Arab Potash Company, Sociedad Quimica y Minera, Israel Chemicals Limited and Sinofert Holdings Limited. Furthermore, the company also establishes and directs Canpotex Limited, an offshore marketer and distributor, jointly with its competitors, Mosaic and Agrium. Canpotex acts similar to a cartel that helps steering potash prices as well as reduces Potash Corp's reliance on alternative distributors since each stakeholder supplies their own product for Canpotex to serve to the rest of the world. In addition, Potash Corp and Mosaic partners to form Phoschem, a marketing organization that deliberately exports phosphate fertilizers.
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1.2 Consumer Applications
''''''Potash Corp Saskatchewan's main product branches are potash, phosphate and nitrogen, which enrich farming soil, live stock foods and forms industrial chemical compounds. The ultimate consumers of its products are agricultural and industrial producers. Potash is essential in strengthening disease resistance in plants. Popular plants such as potatoes, tomato and corn require extensive potash saturation in soil. Phosphate is responsible for stimulating the growth of plants and increasing crop yield. Its element, phosphorus, is used to make animal feeds. Nitrogen helps to keep plants green. Its industrial uses include making plastics, carpets and batteries.
1.3 Operational Highlights
''''''Potash Corp has ten facilities throughout North and Central America. Each has distinct focus of production. Potash's supply of raw material is mainly self explored, extracted and produced from sites in Allan, Cory, Lanigan, Patience Lake, Rocanville, New Brunswick, Aurora, Cincinnati, Geismar, Joplin, Marseilles, Weeping Water, White Springs, Augusta, Lima, and Trinidad. Its products are distributed to domestic and foreign fertilizer suppliers, including Sinofert Holdings Limited, who then market the product to ultimate consumers. The company is at the top stream of the supply chain. All Canadian potash production sites, except for New Brunswick, ship their products via the Canadian Pacific and Canadian National railway to destinations in North America or to loading ports. Canpotex handles deliveries at the ports and ship them offshore. Ninety-five percent of the products from the New Brunswick site are shipped offshore through Potash Corp's loading terminal at St. John. Remaining products are directed to the domestic market. The products from phosphate and nitrogen facilities in the United States and Trinidad are distributed via roadway, local water terminal, pipelines and railway.
''''''One of Potash Corp's focuses is to be the most efficient partner of a customer's global supply chain integration and collaboration. Accordingly, since 2001, the company has initiated an enterprise supply chain management program to improve operational efficiency and increase customer satisfaction. The firm expects that this program will significantly reduce customers' response time demand and to improve delivery schedule accuracy.
''''''To facilitate customer interaction and information access on a real time basis, Potash Corp has established a range of telephone and internet based services covering applications in online customer account, order entry, market info, financial reporting, production data and geographically segmented customer service representative.
''''''In the recent decade, Potash Corp continues to diversify its customer base while supporting growth of existing market. Among all active customers in 2002, over thirty percent of them were new. The company's customers also gained market share in a number of end applications. In the anticipation of the economical recovery and the rise in the global demand for fertilizers, Potash always looks for exploitable opportunities to expand its capacity while maintaining sustainability.
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1.4 Relevant News
2. Industry Analysis
2.1 Profit Drivers
As individual income in the developing countries rise, demand for higher quality protein based diet increases, hence causing additional pressure onto food production. It takes seven pounds of wheat to produce one pound of beef. The current world population of 6,768,181,146 is twice the size of 1965. World population is projected to reach 9 billion in 2050. Corn and soybean prices have consistently risen at a rate above inflation over the last ten years, which promotes the incentive for farming. Given the insight of enormous population growth on the finite land space, food production efficiency is compelled to improve. This allows the fertilizer industry to play an indispensable role. Apart from the long term fundamental drivers, short term externalities contribute to the demand for fertilizers as well. Unpredictable natural occurrences and governmental policies, including the flood in China, the continued Russian wheat yield disappointments and China's US$590 billion stimulus pack that targets explicitly on its industrial and agricultural sector induces demand in the short periods.
2.2 Cost Drivers
''''''The cost of freight garnishes profit margin and is greatly influenced by the crude oil price. The fact that the average freight cost per tonne sold does not seem to have apparent correlation with the crude oil price is because Potash Corp signs annual contract with shipping lines including Tropical Shipping, Star Shipping, Inchape Shipping, Norton Lilly International and Wilmington Shipping Company. The fluctuation in the average freight cost per tonne sold is approximately one year behind the fluctuation of the crude oil price. The total amounts the firm spent on freight, transportation and distribution in the years 2007, 2008 and 2009 are $470.20 million, $457.30 million and $319.10 million respectively.
''''''Weather, management inefficiency and mechanical failure may result in temporary termination of production. The more frequent these occurrences are, the higher per unit fixed cost will incur. The costs of shutdown weeks are $18.7 million, $49.90 million and $152.80 million in the years 2007, 2008 and 2009 respectively.
The potential increase in royalties would greatly influence the cost. Under the current royalty regime, the provincial government favours price over volume. If Potash Corp produces at full capacity, the supply of fertilizer will soon surpass the global demand, hence will drive down the price and hurt Saskatchewan's royalty revenue. The current provincial royalty policy encourages companies to cut spending by reducing capital investments on expansions and projects. However, this contradicts the interest of Potash Corp and the industry. Potential amendment in the provincial royalty regime may be unfavourable to the corporation.
In the recent uncertain economic environment, drastic fluctuations in currencies, driven by imbalances in the financial performance of major countries, exposes the real retained profit of the firm in extensive risk. A majority of Potash Corp's cost of goods sold and operating expenses are paid in Canadian dollars, and the United States is a major consumer of its products. With the soaring loonies against the United States dollars, the cost of production and sales amplifies relative to revenue. In the last two years, the value of a Canadian dollar with respect to United States dollar fluctuates in a range of $0.78 to $1.01.
2.3 Key Markets
Brazil, India, China, South East Asia and North America are Potash Corp's main focusing markets. Brazil, being a major exporter of agricultural products including soybeans, sugar, coffee, orange, tobacco, beef and chicken, relies severely on its farmland. The Brazilian soil is low in potassium (compounds into potash) by nature. Therefore, its future demand for potash is inevitable. India, with seventeen percent of the world's population and only eleven percent of the total farmable land, is necessary to increase its application of fertilizer to maintain its food supply. China, with a population of close to 1.4 billion and a rapid growth in individual income, more people are turning from starch based to protein based diet. It is essential for the country to apply fertilizer to maintain its supply of food. Southeast Asia has the largest palm oil producers in the world. Palm is oil is a type of cooking oil made from potash intensive palm tree. Canada and the United States are the most efficient agricultural producers in the world which provides a stable and substantial market. Consumption in these countries is always stable. Figure 2-1 shows the trend in the global demand for fertilizers and demonstrates that the demand in 2009 is an outstanding deviation.
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2.4 Recent Development and Trends
''''''Global demands for fertilizer have consistently increased with the exception of 2009. Agricultural inputs have declined with the fluctuating commodity prices since late 2007. Financial crunch and tight credit market in 2008 have caused the price of fertilizer essentials, including phosphate, to soar above the roof. As portrayed in figure 2-2, the prices of phosphate have increased by $400.00USD from the historical average of $50.00USD. Famers became reluctant to utilize regular amount of fertilizers to crops and attempted to delay the purchase and speculated that prices will fall in the sustainable future, hence shrunk the demand.
''''''Farmers commonly hedge the price risk of their product on the futures market before determining any input. In the past six months, agricultural sector has experienced consistent growth, which in indicates that commodity prices have remained attractive. This may encourage crop production, hence driving up demand for fertilizers in the foreseeable future. Many farmers throughout the world are getting prosperous spot prices for their crops and are encouraged to apply more fertilizers. The optimistic anticipation may drive the fertilizer consumption to 187 million tonnes in the next three to four years.
''''''In anticipation of the demand for fertilizers returning to the trend line, Potash Corp increases its capacity on an efficient and sustainable basis whenever an opportunity arrives.
On August 14, 2004 Potash Corp had announced the initiation of its $3.8 billion four year expansion project that would increase the firm's capacity to 18 million tonnes by the end of 2012. The plan focuses explicitly on boosting the capacities of facilities located at Allan, Cory and Rocanville. Upon the completion of the project, Rocanville and Allan will have two shafts, which significantly increases their productively and eliminates bottle-necking.
Three similar capacity based projects were completed and one was initiated within the last two years. A miller I Lanigan that was deployed in the 1090s was refurbished to add 1.5 million tonnes of product per year beginning in the second quarter of 2008. The construction of a solution mine at Patience Lake boosted its capacity by 360,000 tonnes in the first quarter of 2009. At the Cory facility, the expansion increased production volume by 1.2 million tonnes. Rail yard and storage was also upgraded in the second quarter of 2010 to prevent bottlenecking at a total cost of US$775 million. The firm is dedicating US$1.6 billion on New Brunswick site in the interest of a new 2 million tonne potash mine and capitalizing the New Brunswick port, which opens the opportunity to penetrate the growing Latin American market. The plan is expected to be fully operational by 2011.
''''''Potash, as a chemical, has an irreplaceable value in the fertilizer industry. By investing in lower stream firms, Potash Corp captures greater profitability and stronger ties with the both domestic and foreign partners. Marketing and distributing overseas captures vast market share and generate greater potential for the company. The global market for fertilizers is heavily concentrated and governmental regulations are limited. Potash Corp is one of the largest producers in the world operating at economies of scale. Therefore, the firm''s operating fix costs and fixed mining royalties decrease as volumes increase. The management team is well experienced, including William Doyle, who has served in the board since 1989. The firm has vast potential exploitations with its significant reserves locating in geographically diversified and stable environments.
''''''The company has the permit to mine phosphate for more than thirty years at Aurora NC. Mining quality phosphate ores at large volumes provides the firm with cost advantage in comparison with other non-incorporated companies. The fact that Potash Corp mines in close approximate with the processing facilities further extends its cost advantage over its competitors. The company now possess a pronouncing position in the North American acid, feed, and liquid phosphate fertilizer market.
''''''Potash Corp possesses long term contract with the government of Trinidad that entities the firm to extract natural gas at low cost. The production in Trinidad represents sixty percent of the company''s natural gas production, which makes the company the largest importer in the world. The location of the manufacturing facilities in the United States is comparably isolated from the competitions in the United States Gulf imports. The sale of nitrogen is stable due to the fact that more than seventy percent of the outputs are sold to less cyclical business consumers.
Potash Corp is unable to transport its good in an effective and cost efficient manner. Most of the plants in Canada are located in Saskatchewan with one in New Brunswick. Both of these locations are not the dominant market. High cost of railway and ocean freight transport of finished product from production sites to distributors may result transportation bottleneck. The fluctuating Canadian currency exposes its profits and costs to greater uncertainty. The government of Canada as well as the government of Saskatchewan and New Brunswick have higher taxes in comparison with the global benchmark.
''''''The freight of ammonia to fertilizer processing plants is becoming more strenuous and expensive. The soaring prices of raw materials such as sulphur and ammonia have a negative impact on profits. Many of the plants are operating at high costs, hence profitability is greatly subjective to production volume.
The fluctuation in the natural gas price greatly affects the forty percent of the production of nitrogen compound. The company have negotiated long term contracts with many industrial customers, which may force the firm to produce temporarily at losses when the price of natural gas is high.
The rise in the income of the developing countries with an aggregate population of over three billion people, demand for protein based diet drastically increases, hence extending pressure onto crops. Along with the ever increasing global population on a finite land space, farmers are compelled to improve agricultural yield efficiency by increasing the application of fertilizer. In the anticipation of growth in the developing markets, Potash Corp is executing plans to expand to meet the potential demand.
''''''There are a limited number of companies with qualified capability and resources to produce competitive outputs such as purified acid. Therefore, many of the smaller non-incorporated firms may redirect their product lines to other less quality sensitive outputs.
''''''Opportunities in the European market are optimistic due to the fact that Europe has higher gas prices than the United States. Political instability and infrastructure insufficiency in several low gas cost regions discourage new firm from entering into this field.
Increasing in the price potash may attract competitors and encourage competition. The recent economical fluctuations and crop price volatilities may temporarily affect demand, and the corporate strategy of matching production to market demand may be disproportional in the short term.
''''''The fertilizer processing and mining industry have high environmental remediation costs and as well as a broad scope of permit regulations. Underground mine shaft safety standards can only attempt to prevent but cannot predict potential hazardous events.
''''''Governments accumulating ownership of natural gas may influence prices to be adjusted according to political decisions rather than the market. The ever changing transportation regulations in the United States and Canada are constantly amending towards security, hence increasing complication and cost of freight. It is especially difficult to obtain shipping permits for nitrogen.
4.1 Key Players
William Doyle had been serving on the board of directors since Potash Corp first went public in 1989 and had been the chief executive officer of the corporation for eleven years. He was a graduate from the Georgetown University and is now a director of its board. Doyle's venture in the fertilizer industry started with the International Minerals and Chemical Corporation thirty six years ago. In 2009, the company compensates his excellence through a salary of $1,092,000.00 plus option awards, restricted stock awards, change in pension value and other compensations totalling $7,986,762.00. He is rated on the Forbes magazine as Saskatchewan's $500 million man.
Potash Corp's current chief financial officer, Wayne Brownlee, is recognized as the forerunner in the privatization of Potash Corp in 1989 and the decisive expansion decision to the United States market. Being seven years of Treasurer, vice president and chief financial officer have awarded him with the position of executive vice president. Prior working for Potash Corp, Brownlee worked for the Saskatchewan Department of Finance, which gave him the title of Deputy Minister of the Treasury Board Division. Both of his Bachelor of Science and MBA are obtained from the University of Saskatchewan. He is also on the boards of Sociedad Quimica y Minera de Chile and Great Western Brewing Company. His total compensation is valued at $71,341,013.00.
G. David Delaney is the firm's current chief operating officer and executive vice president. He is authoritative in the performance, improvements and security of the company's operations. He is formerly the company's PCS Sales. Prior joining Potash Corp, he worked for Arcadian in various supervisory positions. Apart from being the chief operating officer of Potash Corp, he is on the board of the Arab Potash Company. He exercised the company stock option valued at $4,147,340.00 and earned an annual compensation of $409,500.00 this year. Potash Corp's Executive compensation is segmented into base salary, short, medium and long term incentives to motivate and attract superior talents and skills.
Stephen Dowdle, with eleven years of experience in the fertilizer industry, took David Delaney's former position as the PCS sales after Delaney is promoted to be the chief operating officer in June 2010. Apart from ability to negotiating deals with foreign and domestic customers, he acknowledges the quality and nature of fertilizer products due to his extensive knowledge with agronomy and soil microbiology. In 1999, he joined the company's board as the vice president of international fertilizer sales and was later promoted to be the senior vice president of fertilizer sales in 2006. His role is overseeing both domestic and global product transactions. Apart from working for Potash Corp, he is a director of Canpotex Limited, Phosphate Chemicals Export Association, Sinofert Holdings Limited and the International Plant Nutrition Institute. The University awarded him a Bachelor of Arts degree in Anthropology, and the University of Hawaii awarded him with a PhD in Agronomy and Soil Science.
4.2 Competencies of Management
''''''William Doyle, apart from being a CEO, is the chairman of Canpotex Limited, director of The Fertilizer Institute and International Plant Nutrition Institute, and an executive management group member of the International Fertilizer Industry Association. With Doyle involving in multiple organizations in the industry, he is capable of cleaving business barriers and establish composite network for the firm. The chief executive officer of Mosaic, potash's largest competitor by size, only served Cargill prior joining Mosaic. His currents roles limit to the CEO of Mosaic, director of Canpotex and Calson School or Management at the University of Minnesota. Therefore, William Doyle is capable of bring his out lasting potential, connection and experience than his largest competitor.
''''''One of the company's many talented directors, Christopher Burley, has twenty one years of experiences in the field of investment banking, which brings the firm substantial connections to investment banks and the capability to suggest feasible solutions to financial issues. Whereas Bruce Waterman, the chief financial officer of Agrium, have only dealt with tax, investor relations, controllers, information technology and government relations, which does not demonstrate extensive knowledge and practice in financial investments. Similarly, Lawrence Stranghoener, the chief financial officer of Mosaic, spent seventeen years working for Heneywell Inc and was later resigned when the company was merged with Allied Signal in 1999. Christopher Burley and Wayne Brownlee demonstrate greater capability and insight than both Waterman and Stranghoener.
David Delaney, with ten years of experience as the president of PCS Sales and involvement in Arcadian Corporation, demonstrates solid understand of the operational chain of the industry. In contrast, Mosaic's COO James O'Rourke spent a majority of his career life on the mining and processing aspect of the industry. Agrium has not yet appointed a chief operating officer. Instead, COO's role is covered by the heads of multiple divisions, which may result in management loophole due to lack of central administration. Delaney, with a diversified knowledge and vision brings greater yield and prosperity to the company.
Share Price Performance
5.1 Recent Share Price Performance and possible Causes
''''''The split adjusted share price of Potash Corp followed a steady incline until 2007. In 2007, prices of raw materials and crude oil have experienced drastic increase. The heating economy propelled agricultural demand. The global grain consumption, fuelled by the ever increasing population growth, had exceeded production, hence had sustained a shortfall for eight years. The firm's directors have anticipated the opportunity for global expansion, and have always looked for way to expand. Though many proposed projects have been differed or cancelled due to the high cost of construction, the market had recognized the consistent positive cash flows from operation, which laid the fundamental for the company's potential to finance new facilities when prices readjust. Therefore, its share price soared from $53.47 to $141.70 on the Toronto Stock Exchange, yielding a 165 percent annual return. Its stock price is relative on the New York Stock Exchange. The booming of the company's stock price continued with the market performance until the third quarter of 2008, when the credit crisis is realized by the major. The market lost confidence, and investors began to withdraw funds from the capital market, triggering the recession. Potash Corp's stock price, subject to systematic risk, fell from $233.65 to $67.50 on the Toronto Stock Exchange within less than six months. Though the market collapsed and dramatically impacted Potash Corp's share price, its market value remained above the price at the beginning of 2007. This demonstrates the prevalence of the firm's fundamental value and suggests its capability for recovery. The common theory was that if the firm's stock price remained above a prior period, the fell in price is completely due to market influence. The firm specific factors remained steady, hence share price would be the first one to rebound once the market shows a tiny sign of recovery. This was observed in less than a month as its price jumped above $100.00 per share.
As the Potash Corp released the news regarding the growth of the firm's sales volume on July 28th, 2010, its share prices rose to around $120.00. On the 17th of the following month, BHP's confirmation on making approach to acquire Potash Corp at $39 billion propelled investors to pour money into the firm, causing its share price to surge to $158.00 within a week. As time rolls forward for two months, the effect of the BHP acquisition news faded slightly, and the price per share fell 5.69 percent. Its currently price of $149.01 is reflected through complication of the firm's fundamental value, the value of its offshore investments, the anticipation of BHP's acquisition and risk of unknown factors. The Chinese crown corporation Sinochem and Canada's Ontario Teacher's Pension Plan have also made counter bids and investors are still uncertain as which suitor will eventually succeed and the company's prospect under new management.
The biggest competitors by market capital are Agrium, Mosaic, Monsanto, Syngenta AG which together occupies $102.41 billion out the total industrial market capital of $158 billion.
6.2 Potash with Respect to Competition
As the largest player in the fertilizer industry by capacity and market capital, Potash Corp is able to produce at minimum cost and retain the highest operating margin and net profit margin among all competitors. Investors are confident in the firm and are willing to pay a higher price for every dollar earned and a higher price for its equity. Its return on asset and return on equity ranks third and second respectively among all other competitors. It is also the second most leveraged key player in the industry. It is interesting to see that Potash Corp, largest company in the field, has the least number of employees among other big firms.
6.3 Potential Synergies and Impacts of a Merger
Once the Anglo-Australia mining company, BHP Billiton, takeover becomes reality, Potash Corp's will obtain extra capital to further expand its capacity to meet the growing global demand. New projects will be initiated and new mines will be built including the proposed one at Jansen Lake.
China is one of the biggest potash consumer and importer in the world. If the Chinese state owned enterprise Sinochem Holdings Limited succeeds with their counter bid, they would manipulate the productions in their best interest. Supply of potash may be significantly increased, hence driving down the potash price.
6.4 Operational Result
*quantity is calculated by revenue/average price per unit during the corresponding year
Production over the Two Years:
*quantity calculated is the aggregate production amount of each of Potash Corp's plants
''''''Over the last two years, Potash Corp have produced more quantity than sold, hence have increased inventory.
''''''As of June 30, 2010, Potash Corp has a total asset of $13,063.80 million, consisting $6,494.50 million in liabilities and $6,569.30 million in equity. This capital composition corresponds to a debt ratio of 0.497137 and an equity ratio of 0.502629.
''''''The estimated annual return of the market over the last ten years is 8.0056 percent. The current one year London Interbank Offered rate is 0.77 percent. The beta of the stock is 0.6. Therefore, the firm's expected return on equity is:
E(r_E )=r_f+''(r_m-r_f )
E(r_(E POT) )=0.0077+0.6(0.080056-0.0077)
E(r_(E POT) )=0.051114
E(r_(E POT) )=5.1114% per year
Out of all the debt obligations, 11 percent are due within one year, 18.5 percent are due between one and three years, 16.5 percent are due within 5 years and 54 percent are due later than 5 years. The company's one year, three year, five year and nine year bond currently yields 0.977, 1.499, 2.692 and 3.906 respectively. The weighted average cost of debt for the firm is:
r_D=2.9382% per year
In the second quarter of 2010, the company obtained an operating income before tax of $646.30 million and paid a tax of $174.3 million. Therefore, current tax bracket of the company is:
The weighted average cost of capital for Potash Corp is:
WACC=(1-T_c)D/V r_D+E/V r_E
''''''This value of Potash Corp's WACC may have deviated from the WACC stated on the corporate database of 10 percent. However, the data base WACC is not up to date. The recent drastic decline in interest rates and bond yields significantly lowers the required rate of return for debts. Therefore, the newly calculated WACC is more reliable and reflects the firm's actual cost of capital. However, the calculated WACC is under the assumption that the firm is free and willing to refinance its debt whenever a superior offer is available.
''''''The company's production volume is at one third of its maximum capacity and all mines have more than twenty years of shaft life. Therefore, growth in sales of the next five years is no likely to be bound by its production limit. The rate of population growth of the firm's client countries, including the United States, Canada, China, India, Brazil, Malaysia, Indonesia, Thailand, Vietnam and Philippines influences of the growth of the global demand of the firm's fertilizer fundamentally. The population growth in the next five years will likely to follow the current upward trend. The average annual increase in population of the above countries over the last three years is 0.975 percent.
''''''The recovery of the economy will have a cyclical effect on its revenue in the coming years. After the crisis, many governments adjusted their monetary interest rates and adopted fiscal stimulation. The largest stimulus packages are '860 billion, US$787 and $588 billion from the European Union, the United States and China respectively. On October 3, 2010, the Chinese premier, Wen Jiabao, promises that the Chinese reserve will buy Greek government bonds after which it has already bought bonds issued by the troubled government of Spain. Wen's announcement propelled investors' confidence, and the market inclined roughly 4 percent. With countries and unions consecutively implementing plans to overturn the recession and catalyze the economy through monetary adjustments, stimulus pack and corporations, the economy is expected to enter a short period of consistency. According to historical observations, once signs of recovery appear, the market would boom at a outrageous pace due to the fact that investors are adverse to miss the bus of prosperity and are eager to initiate ahead of the market speculation.
''''''Potash Corp's revenue in the third and fourth quarter of the current year is projected to be 23 percent more than the previous quarters due to seasonality factors. Its revenue in the following year is expected to remain steady in the following year. A conservative estimate of sales growth in the second and third year is 30 percent, factoring economical boom and the fact that the firm plans to penetrate the Latin American market after 2011. Revenue is expected to increase at a declining rate from 2014 to 2015 as the market becomes more saturated.
High inflation during and after the anticipating economic recovery is expected due to the substantial amount of stimulating hot money when outputs are low and unemployment is high. The current inflation is 1.7 percent, and the projected inflation in 2012, 2013, 2014 and 2015 are 2.3, 2.6, 3.0 and 3.5 percent respectively.
Over the next five years, interest rates are expected to incline during the recovery stage of the economy, and bond yields will increase after 2012. Potash Corp's bonds with one to three years of maturity will have to be refinanced at a higher spot rate. Therefore, the firm's cost of debt and WACC will be readjusted.
According to the expectation theory, an upward sloping yield curve indicates that the market is expecting interest rates to rise in the future. From the latest zero coupon yield curve, we can infer that the one period forward rates are:
f_n=((1+y_n )^n)/((1+y_(n-1) )^(n-1) )-1
The zero rates in the years 2011, 2012, 2013, 2014 and 2015 will be 71.35, 103.82, 114.97, 91.70 and 68.07 percent greater than the current interest rate respectively. Suppose the company's corporate bond follows the similar trend, the bonds with maturity of one year will be refinanced at 1.713, 2.038, 2.150, 1.917 and 1.681 percent in the respective years. The bonds with three years to maturity will be refinanced at 3.517 percent in the year 2013. Therefore, the readjusted firm's WACC for each of the upcoming five years follow:
The cost of goods sold for the second quarter of 2010 is $854.20, corresponding to 59.41 percent of the total revenue. The profit margin is expected to shrink in the following from the 2011 to 2012 by 8 percent due to the increase in wages. Selling and general administrative expenses are expected to increase by 6 percent in those years.
As of 2009, Potash Corp has properties, plants and equipments with a total book value of $6,413.3 million. The total depreciation and amortization of the year is $312.10, corresponding to 6.68 percent of the previous year's ending book value of total properties, plants and equipments. Upon the firm's expansion into the Latin American market in 2011, the total book value of land, facilities and machines is expected to be $7,223 million. In 2009, the firm allocated $1,763.8 million on capital investments due to take advantage of the low price of capital. However, as the market recovers and aggregate demand increases, prices are deemed to increase, hence investments is expected to decrease. Expenditures on foreign investment are projected to be $1,523 in 2010 and decrease at a rate of 40 percent for the next five years.
Revenue is expected to grow at a constant rate of 2 percent from 2015 to perpetuity, and the WACC of 2015 will remain constant for the years beyond.
The discounted cash flow of the company with a terminal value at t=5 follows:
The CCA tax shield is integrated into the calculation.
Potash Corp's net present value of its futures cash flows is $148.58 billion. The company also occupies 32 percent of Sociedad Quimica y Minera, 14 percent of Israel Chemicals Limited, 18 percent of Sinofert Holdings Limited and 28 percent of Arab Potash Company at a total value of $7.47 billion. The company currently have 296.6 million shares outstanding, hence per share value is:
((148.58+7.47))/0.2966=$526.13 per share
However, the firm may not be will or able to refinance its debt anytime a better offer becomes available. Therefore, the WACC may be higher than the calculated one. If a WACC of 10%, as obtained from its data base, is used instead of the calculated WACC, the NPV of the firm's cash flows is $48.25456 billion. The share price would be:
(48.25456+7.47)/0.2966=$187.88 per share
Given the current price of $146.78 per share, an investor should still buy the stock in both cases.
"US$130 is too little, so too $170." Said Bill Doyle to the Globe and Mail "When you think about this company being sold for US$130, $150, $160 or $170, and you look at the future growth of this company and where we are going with the share price, this deal has a long way to go. US$170, that is crazy."
Statistics and facts used for Company Overview
Facilities and Investments: http://www.potashcorp.com/about/facilities/potash/allan/
CIA Fact Book: https://www.cia.gov/library/publications/the-world-factbook/geos/xx.html
Corporate History: http://www.potashcorp.com/about/history/
Usages of Potash: http://examples.yourdictionary.com/potash
Usages of Phosphate: http://theinflationist.com/agriculture/phosphate-rock-phosphate-companies-investing-in-agriculture
Usages of Nitrogen http://en.wikipedia.org/wiki/Nitrogen
Expansion News: http://www.journalofcommerce.com/article/id29876
Henderson State University: http://www.bbc.co.uk/news/business-11462016
Statistics, facts and graphs used for Industry Analysis
Fertilizer Profit Driver: http://www.potashcorp.com/news/1005/
Figure 2-1: http://www.potashcorp.com/news/1005/graph03/
Fertilizer Demand Analysis: http://www.glgroup.com/News/Fertilizer-Demand-Most-Likely-To-Bounce-Back-in-2010-43308.html
Figure 2-2: http://theinflationist.com/agriculture/phosphate-rock-phosphate-companies-investing-in-agriculture
Potash Corp Projects: http://www.potashcorp.com/news/863/
Facts and Statistics used for Company Analysis
Wiki Invest: http://www.wikinvest.com/stock/Potash_Corporation_of_Saskatchewan_%28POT%29
Potash Corp Management Discussion:
Potash Corp Analysis:
Facts and Statistics used for Management Overview
William Doyle's Compensation: http://people.forbes.com/profile/william-j-doyle/64820
Agrium's Management: http://www.agrium.com/about_us/agrium_
Mosaic's Management: http://phx.corporate-ir.net/phoenix.zhtml?c=70455&p=irol-govHighLights
News and Data used for Share Price Performance
Facts and Statistics used for Financial Overview
World Bank: http://data.worldbank.org/indicator/SP.POP.TOTL
Bank Rate: http://www.bankrate.com/rates/interest-rates/libor.aspx
Bank of Canada: http://www.bank-banque-canada.ca/en/rates/yield_curve.html
Quotes Used for Recommandation:
Bill Doyle: http://www.theglobeandmail.com/report-on-business/video/potash- ceo-slams-bhp-bid/article1748993/?from=1759784