When investors consider commodities plays, the first place many go is to the oil & gas sector or precious metals sector in Canada; one sector which has been beaten up perhaps worse than others of late, however, has to be the potash industry.
With potash prices continuing to find new bottoms, investor interest in a once-booming trade has waned in favor of other momentum plays which have, well, more momentum. In a relatively stagnant sector, it may be hard to fathom why an investment in Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) would be considered a prudent one today.
First off, the upcoming merger of Potash Corp. and Agrium Inc. (TSX: AGU) is expected to produce a vertically integrated potash giant with a better diversified stream of cash flows throughout the entire supply chain spectrum.
With the company’s existing low-cost commodity production, combined with Agrium’s retail prowess, gaining real and tangible synergies from this merger amounting to approximately half a billion dollars should be a key investment thesis every investor should consider.
With some analysts suggesting that Nutrien (the proposed name for the merged Potash Corp/Agrium entity) will be able to produce “mid-cycle earnings power roughly three times the currently depressed level of earnings in 2017,” it is hard to bet against Potash Corp. at current levels.
Buying dominant companies in industries with excellent long-term fundamentals at a relative discount should always be considered a prudent play.
Invest wisely, my friends.