Is Potash Corp Cheap After Canada Blocks BHP’s Bid?

Yesterday evening the Canadian government effectively blocked BHP Billiton’s (NYSE: BHP) attempt to buyout Potash Corp. (NYSE: POT) for $39 billion, or approximately $130 a share.  While it was fairly apparently based on Potash trading price (hovering between $143-145) that the company would not accept that offer, Canada’s action left little room for compromise and effectively shut the door on even a raised off from BHP.  As of this morning, shares of Potash are trading at $139, off 4.46% since yesterday’s close.

All takeover questions aside, following the drop in Potash Corp’s share price is the company a compelling investment based on its present value and earnings power?

Potash Corp is one of the primary beneficiaries of a major secular trend–the emergence and development of many global economies at the same time combined with a burgeoning global population.  In order for these expanding economies to feed their growing populations, they must extract increasingly more food from a fixed quantity of arable land.

Global arable land per capita.

Potash itself is a high potassium salt used as one of the primary fertilizers for crop growth and global supply of this mineral is geographically confined to a few relatively small areas.  For example, the Indian sub-continent and its huge population has no indigenous potash whatsoever, while Potash Corp. alone controls 20% of the global supply of this important fertilizer.

The rally in the fertilizer stocks started with the Russian fires and then on August 17th, Potash Corp. announced that it had rejected the hostile takeover offer from BHP and the sector took off.  That day, shares of Potash Corp opened above $140 and have been trading in that range ever since.  Meanwhile, since that time, shares of Mosaic (NYSE: MOS) the world’s second largest potash producer of potash–surged another 37%, with 20% of the move coming after October 1st.

Historically, Potash Corp trades at a higher earnings multiple in contrast to Mosaic, due to its dominant market position, faster growth rate and higher earnings power.  As of the close yesterday (before the afterhours selloff) the two were trading at roughly the same P/E ratio.  One can reasonably infer that the takeover offer from BHP had effectively suppressed the company’s share price from advancing with its peers.  Investors focused their attention on the prospects of a higher offer and the Canadian government’s opinion rather than on the company’s own growth and value.

While some questions do remain about whether the protectionist stance by the Canadian government will harm the prospects for shareholders to unlock this latent value, the company’s management from the beginning strongly expressed the belief that the bid failed to reflect the real “intrinsic value” in the enterprise.  Now investors can put aside all questions related to the takeover offer in order to hone in on the company’s value independent of the BHP bid.

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Disclosure: Long POT and AGU