UNIVERSITY OF OREGON INVESTMENT GROUP 3 December 2010 I.M.E (non metallic mining) Potash Corp. of Saskatchewan, Inc Stock Data Price (52 weeks) 83.50 153.29 Symbol/Exchange POT / NYSE Beta 1.09 Shares Outstanding 279.69 M Average daily volume 5,928,570 (3 month average) Current market cap 44,322 RECOMMENDATION: SELL Current Price Dividend Dividend Yield 145.21.4 30% Valuation (per share) DCF Analysis $133.02 (70%) Comparables Analysis Target Price Current Price $128.23 (30%) $131.58 $145.21 Summary Financials 2009 (in Millions) Revenue 3,976 Net Income 987 Operating Cash Flow 1,411.38 BUSINESS OVERVIEW Potash Corp of Saskatchewan (referred to as PCS or The Company ) is the world s largest fertilizer company by capacity. It was established in 1975 and its headquarters are in Saskatchewan Canada. The Company has operations and business interests in seven different countries and is actively seeking to expand its global reach. Before getting Covering Analyst: Dan Applegate Email: applegat@uoregon.edu The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG s portfolio. In addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG s portfolio.
into the different operating segments of PCS, it is first important to understand why fertilizers are important to agriculture. Simply, fertilizers significantly increase crop yields. They increase root strength, improve flavor, color, and texture. Fertilizers also help fight disease and speed plant growth. As crops are harvested, the nutrients from the soil are depleted making fertilizers a constant and necessary part of agriculture. Ideally, fertilizers are purchased and applied annually so the soil is optimally fertile and farmers can maximize their yearly crop yields. In rough economic conditions the purchase of fertilizer can be delayed a year. However, fertilizer must be purchased and applied the following year, in excess, to make up for the lack of fertilizer used in the previous year. If fertilizers aren t consistently used the land will be leached from nutrients and become barren. This makes PCS s fertilizers a necessary input for farmers seeking maximum yields. PCS operates in three different fertilizer nutrient segments: potash, phosphate and nitrogen. When the three nutrients are combined, an optimal fertilizer is created. However, crop yield growth can still be accomplished by using any of the fertilizers independently. The three segments will be looked at in detail starting with potash. Potash (71.2% total gross margin in 09)- Potash is a natural potassium bearing mineral that is left behind by ancient evaporated seas. It is mined about 1,000 meters underground and has been used as fertilizer for hundreds of years. Besides its primary use as a fertilizer, potash is also used in a variety of industrial products ranging from soap to computer monitors. In 2009, 86% of their sales volume of potash was sold for fertilizer purposes. The Company recognizes its strength in selling potash as fertilizer and focuses on tailoring to fertilizer purchasers. Potash is sold all year round but PCS experiences high orders during the fall and spring due to planting and harvest times. PCS has the highest global capacity for Potash (20%) and treats the potash segment with precedence when looking for expansion opportunities. As a fertilizer, potash is synonymous with root strength and disease resistance making it a nutrient of choice for farmers. The Company has its biggest competitive advantage with potash because of the vast deposits located in Saskatchewan, the achieved economies of scale in production, and the fact that there are no known substitutes for this mineral. The Company has five mines in Saskatchewan and one mine in New Brunswick. PCS is making significant efforts to increase capacity being that The Company believes huge growth will ensue in the future. Canpotex, PCS, and offshore potash sales In the early 1970 s Canpotex was incorporated in Canada in an effort to protect Canadian potash companies from large foreign governments with significant purchasing power. The larger overseas governments and companies dictated the price of potash because of the monopolistic power they held compared to smaller Canadian potash producers. In response, Mosaic, Agrium, (both competitors of PCS) and PCS unionized to form Canpotex. Canpotex is the potash exporting and marketing company of Canada. Through Canpotex, PCS, Mosaic, and Agrium now have more negotiating power which translates to better sales contracts and more revenue. Canpotex also handles one of the most costly aspects of the business cycle: transportation. Transportation is very capital intensive and by unionizing the three companies can achieve higher levels of efficiency. Canpotex owns its own rail cars, storage facilities, and has access to strategic ports which gives Canadian potash suppliers a competitive advantage over global competitors. Canpotex transports potash to major foreign markets such as Australia, Brazil, China, and India. Phosphate (10.1% of total gross margin 09) Phosphorous is generally found in deposits containing ancient sea fossils. The majority of the phosphorous mined is from the southeastern U.S. and is used in fertilizer, feed, and industrial products. PCS uses wet process technology to mine the phosphorous rock. Wet process technology utilizes an acidic solution that is used to extricate the phosphorous. Phosphate is used as a fertilizer because it aids in photosynthesis and accelerates crop maturity. The two most common types of phosphate fertilizers are diammonium phosphate and monoammonium phosphate. In short, these two phosphate based fertilizers are produced by combining phosphoric acid and ammonia. The 10.1% of total gross margin is important to The Company because phosphate sales are less seasonal than potash. About 36% of PCS s phosphate is sold for feed/industrial 2
purposes and the remaining percentage is sold as fertilizer. Phosphate is used in feed because it assists in muscle repair and enhances skeletal growth. Phosphates are also used in soft drinks, food additives, and metal treatments. The price of phosphate is highly dependent on its chief input, sulfur. The current price for a tonne of sulfur is around $150 which causes COGS to be far less than last year when sulfur was almost $750 per tonne. Nitrogen (18.7% of gross margin in 09) PCS sells its nitrogen products in the fertilizer, feed, and industrial markets. Being that the air is 79% nitrogen, PCS s nitrogen products are synthesized from the air using steam and natural gas. Both urea (the main nitrogen base fertilizer) and ammonia are two nitrogen based compounds that PCS sells. Nitrogen is used as a fertilizer because it builds proteins and enzymes as well as accelerates plant growth. It is also applied as feed because nitrogen is known to be essential for cell maturation. PCS also supplies nitrogen for industrial uses because it can be used in plastics, resins, and adhesives. Sixty percent of all of the nitrogen sold by PCS is used for feed/industrial uses whereas as 40% is used for fertilizer. Also, more than three quarters of its ammonium sales are made to the dependable U.S. markets which is important because nitrogen sales are apt to be very volatile due to the high input of natural gas. PCS states that nearly 90% of the costs associated with producing ammonia are linked to natural gas. Being that the price for natural gas is often very high and volatile PCS produces 60% of its ammonia in Trinidad. Trinidad has a wealth of natural gas and offers long term low price contracts that PCS takes advantage of. As PCS continues to develop its presence in Trinidad, nitrogen prices may become more stable. BUSINESS AND GROWTH STRATEGIES PCS uses a variety of growth strategies that all encompass one main concept: the world s population is growing and the amount of arable land is not. According to PCS, without fertilizer the world would need 40% more farmland. This puts an ever increasing amount of pressure on farmers to produce the greatest amount of quality crops in the land provided. PCS s solution is to provide more fertilizer so stronger, healthier, and faster crops can be grown. PCS believes that as we increase our population more farmers will be forced to buy greater amounts of fertilizer in order to meet the food demand. There are three main tactics PCS uses to satisfy the growing population s demand. First, PCS has been making significant investments in their potash capacity. Second, they have been acquiring minority interests in global fertilizer producers. Third they have been keeping up to date on the latest macroeconomic trends to be sure they are allocating their resources in the right areas. Macroeconomic trends that point to global fertilizer growth 1. Population and income are growing together. The world s population has more than doubled since 1950. By 2020 the world s population is predicted to rise by nearly 800 million from its current number of 6.9 billion. As the population increases the demand for food will obviously grow. Also, more people in developing countries can afford meat. For every pound of beef seven pounds of grain are required to produce that pound of beef. The demand for meat, grain, and oilseeds has been rising steadily for the past 30 years. 2. Less farmland is available per person due to the rapid increase in our population. It is expected that by 2020 the land available per person will be half of what it was in 1950. For this reason farm efficiency will be crucial, making fertilizer an increasingly 3
important component of farming. 3. Low crop yields in developing countries are due to infertility. Developing countries have crop yields about one-third the amount of more developed countries such as the U.S. As these developing countries begin to understand the importance of proper fertilizer levels, demand will increase. Increasing potash capacity In response to these macroeconomic events, PCS has been increasing the capacity of their potash mines. In 2009 their potash capacity was about 10 million tonnes and with the current construction underway, PCS expects to be capable of producing 17.1 million tonnes by 2015. Even through 2009 when their fertilizer sales were historically low, they continued to increase capacity because PCS believes the long term revenue drivers will not change and potash demand will increase. The project is expected to cost around 7 billion dollars and will be completed around 2013. Increasing capacity is billions cheaper than a Greenfield project. Investments in potash-related companies PCS has invested in four potash-related companies: Sociedad Quimica y Minera, Arab Potash Company, Israel Chemicals, Ltd, and Sinofert Holdings Limited. 1. Sociedad Quimica y Minera- PCS began acquiring a position in SQM in 2001. SQM is the world s leader in specialty plant nutrition products and is based out of South America. PCS has strategically chosen this company partly because of the location of SQM. South America is a major growth opportunity because of the amount of arable land and the large amount of potash South America imports. PCS has been able to acquire 32% of the company and in doing so has the right to designate three of its eight directors. 2. Arab Potash Company- APC is a low-cost potash producer in Jordan. PCS began purchasing shares of this company in 2003 and now holds 28% of the company. Being the biggest shareholder, PCS designates three out of the 13 available board seats and holds the power to assign the top four management positions. PCS strategically chose to get involved with APC because of the large potash reserves that APC has access to and the location of APC with regards to developing industries. 3. Israel Chemicals Ltd- PCS has 14% ownership of this potash and phosphate fertilizer company. It doesn t currently have any board seats but ICL does have exclusive mines in the Middle East that PCS finds advantageous. ICL has logistical benefits because of its proximity to growth markets such as Asia. 4. Sinofert Holdings- PCS has invested in Sinofert since 2005 and now owns 22 percent of the company. PCS has the power to appoint two out of seven board seats. Sinofert is the biggest importer and distributor in China. PCS uses Sinofert as an information source into Asian markets. MANAGEMENT AND EMPLOYEE RELATIONS PORTFOLIO HISTORY Mr. William Doyle is the President and CEO of PCS. He has been with The Company for 23 years and assumed his current position on July 1, 1999. Previously, Mr. Doyle was on the senior management team before being promoted. He has been in the industry for 36 years and began his career in International Minerals and Chemical Corporation. Mr. Doyle is also the chairman at Canpotex, Canada s marketing and distribution company. He is very well acquainted with PCS and issues that ensue in the fertilizer market. Doyle made $1,092,000 as of fiscal year 2009. PCS employs 5,136 persons and all of the executive officers have been with The Company for at least ten years. PCS is currently held in the Tal Firs and Svigals portfolio. 4
In the Svigals portfolio, we purchased 25 shares on 5/11/2009 for $93.32 per share for a total cost basis of $2,341. Then, on 6/7/10, we purchased 21 shares at $95.52 with a cost basis of $2,013.92. On 8/16/10 we sold 23 shares. Today we hold 23 shares In the Tal Firs, 150 shares were purchased on 5/18/10 for a cost of $15,178.5. Forty shares were sold on 8/17/2010 for $5,587.50, leaving 110 shares left. RECENT NEWS Potash Sells $1 Billion in Bonds to Fund Share Buyback - WSJ, 23 November 2010 PCS sold $1 billion in bonds in hopes of appeasing investors and pushing the stock price higher. The offering comprised of 500 million in 3.25% notes and 500 million in 30 year 5.625% bonds. With fewer shares traded publicly, the stock price should rise. BHP Billiton withdraws bid for Potash Corp. - MSNBC, 14 November 2010 BHP withdrew its hostile takeover bid for PCS. BHP cited that it couldn t convince Canada s federal government that the takeover would benefit Canada. BHP s bid was 38.6 B and PCS believed they are worth more than that. Potash Corp. s Earnings Soar 62% - WSJ, 28 October 2010. PCS experiences a 62% jump in their third quarter earnings. PCS stated that rising demand for crop nutrients was the reason for the increase. Mr. Doyle stated that there is a huge opportunity for growth and expects earnings to continue to increase. INDUSTRY PCS operates in the fertilizer industry. The industry is highly competitive, dynamic and can be quite volatile as evidenced by last year s dismal industry performance. Fertilizer and crop prices are the key drivers to industry performance. It is also important to note that the fertilizer industry is subject to performance swings because their inputs and outputs are generally commodities. To exemplify this, consider the 2007 and 2008 commodity boom. Farmers had incentives to produce more crops with greater efficiency because the prices for crops, such as wheat and corn, were high, making their margins much larger. In turn, farmers have more disposable income to reinvest in the form of fertilizers so they can continue to maximize their yields. This is the reason for record breaking sales in the industry during 2007 and 2008. However, as crop prices, especially wheat and corn, fell in 2009 farmers made less money on their crops and their margins shrank. With less disposable income and less incentive to grow fertilizer intensive crops, fertilizer demand shrank drastically, as evidenced by the poor industry performance in 2009. In the two charts below the relationship between crops (wheat and corn) and potash fertilizer (KCI) are clear. Crops and fertilizers have a causal relationship and are an important trend to keep track of when looking at the fertilizer industry. 5
The U.S. is a mature fertilizer industry and is expected to grow only by about 3% in the future. Most of the fertilizer growth companies will experience will surely come from overseas and may be three or four times the grow rate expected in the U.S. PCS and its chief competitors Mosaic, Agrium, Belaruskali, Yara, and CF industries are competing for global market share particularly in China, India, Southeast Asia, and Brazil. China and Brazil are two of the biggest opportunities for growth because they import such a great deal of potash. As depicted by the following graph, PCS has the opportunity to gain market share because as foreign growth increases PCS has enough capacity to satisfy demand. Currently, the industry faces the same types of costs across the board. Historically, these costs are comprised mostly of the inputs to make their products. Natural gas, ammonia, and urea are the significant cost drivers. Monsanto has a slightly different cost structure with regard to these particular inputs but still experiences them to an extent. Looking forward, the industry is forecasted to spend a considerable amount on capital expenditures due to global fertilizer growth. PCS and other industry players are recognizing the importance of having capacity available and are investing heavily in it. Efficiency in the fertilizer industry is also very important and reaching economies of scale can have big impacts on operating results. Looking forward, as the economy recovers the fertilizer industry is expected to see large amounts of growth. S.W.O.T. ANALYSIS Strengths: #1 in global capacity for potash, #3 for phosphate, and # 3 in nitrogen There are only 12 countries with significant potash production yet a 160 countries consume it No known substitutes for potash Long term, lower cost contracts for natural gas in Trinidad Weaknesses High rail and ocean freight delivery costs for Saskatchewan produced potash Production costs are exposed to Canadian dollar volatility Many of the inputs are expensive Contracts may force PCS to operate unprofitably among high gas prices Opportunities Capacity additions allows PCS to satisfy high demand Rising global demand for food provides opportunities for growth 6
Seize global market share Threats Demand can be temporarily affected by volatile crop prices causing changes in consumption patterns Lawsuits regarding environmental devastation and anti-trust issues Government controls and regulations COMPARABLES ANALYSIS For the comparables analysis, I chose to use Mosaic, Agrium, CF Industries Holdings, and Monsanto. I chose these companies because they are in similar industries and more importantly have similar risk and growth, especially towards the bottom line. Being that PCS has much higher revenue margins, it wouldn t be as plausible to use these metrics because my revenue is worth more than my comparables. Therefore, I used metrics that were closer to the bottom line such as EV/Operating Cash Flow, EV/Gross Profit, and EV/EBITDA. Mosaic-30% The Mosaic Company engages in the production and marketing of concentrated phosphate and potash crop nutrients for the agriculture industry worldwide. The company produces phosphate crop nutrients for use in crop nutrients and feed phosphate for animal feed ingredients. It also produces and sells potash for use as fertilizers and animal feed ingredients, as well as in industrial applications. In addition, The Mosaic Company produces and/or markets phosphate-, potash-, and nitrogen-based crop nutrients and animal feed ingredients, as well as operates sales offices, crop nutrient blending and bagging facilities, port terminals, and warehouses. Mosaic s headquarters are in the U.S. yahoo finance Mosaic is the most comparable competitor. Mosaic operates in all of the same segments, is a part owner in Canpotex, shares similar risk (both internally and externally), and has growth strategies similar to PCS. Mosaic and PCS serve the same customers, distribute their fertilizers globally, and share similar costs. For these reasons I weighted Mosaic at 30%. Agrium- 25% Agrium Inc., together with its subsidiaries, produces and markets agricultural nutrients, industrial products, and specialty products worldwide, as well as involves in the retail supply of agricultural products and services in North and South Americas. The company s retail segment markets crop nutrient products, including nitrogen, phosphate, potash, sulphur, and micronutrients; crop protection products, such as herbicides, fungicides, adjuvants, and insecticides; and seeds. This segment also offers agronomic services, as well as product application, soil and leaf tissue testing and analysis, and crop scouting services. The company s Wholesale segment produces, markets, and distributes nitrogen, phosphate, potash, sulphate, and other crop nutrient products for agricultural and industrial customers. This segment also owns and operates facilities that upgrade ammonia to other nitrogen products, such as urea, nitric acid, and ammonium nitrate, as well as provides Rainbow plant food products. They are headquartered in Calgary, Canada. Yahoo finance Agrium is exposed to similar risks and growth as PCS. Agrium is headquartered in Canada so they experience similar governmental regulations and taxes. Agrium is also a part owner in Canpotex. Agrium sells nitrogen, phosphate, and potash based fertilizers. Agrium also has similar growth objectives and cost structure. I weighted Agrium 5% less because their metrics are trading at lower multiples compared to Mosaic. 7
CF Industries Holdings-20% CF Industries Holdings, Inc. manufactures and distributes nitrogen and phosphate fertilizer products in North America and export markets. It operates in two segments, Nitrogen and Phosphate. The Nitrogen segment offers ammonia, urea, and urea ammonium nitrate solutions. The Phosphate segment provides diammonium phosphate, monoammonium phosphate, and granular muriate of potash used in agricultural fertilizer applications. CF Industries Holdings customers include cooperatives and independent fertilizer distributors located in the grain-producing states of the Midwestern United States. The company was founded in 1946 and is headquartered in Deerfield, Illinois. Yahoo finance CF Industries operates in two of the three segments that PCS operates in. Being that their potash sales is insignificant compared to PCS s it is necessary to weight CF Industries less. Without a big potash segment, a lot of the same risks and growth opportunities aren t present. However, the two companies do still share a lot of the risks associated with producing nitrogen and phosphate. CF Industries exports globally and is looking for growth opportunities overseas like PCS. Intrepid Potash- 10% Intrepid Potash, Inc., together with its subsidiaries, engages in the production and marketing of muriate of potash or potassium chloride, and langbeinite under the Trio brand name primarily in the United States. It also offers byproducts, including salt, magnesium chloride, and metal recovery salts. Intrepid serves agricultural, industrial, and feed markets. The company was founded in 2000 and is based in Denver, Colorado. Yahoo Finance Intrepid Potash is only in the business of potash. Intrepid is similar to PCS in that they invest significantly in growth and have very similar metrics as PCS. Intrepid is exposed to a lot of the same risks with regards to potash because they specialize in it as well. However, Intrepid is a far smaller company that has not strongly entered into foreign markets. Since PCS is growing in the foreign sector and Intrepid is staying relatively national the risk factors are quite different. For these reasons I weighted Intrepid 10% Monsanto- 15% Monsanto Company, together with its subsidiaries, provides agricultural products for farmers in the United States and internationally. It operates in two segments, Seeds and Genomics, and Agricultural Productivity. The Seeds and Genomics segment produces corn, soybean, canola, and cotton seeds, as well as vegetable seeds, including tomato, pepper, eggplant, melon, cucumber, pumpkin, squash, beans, broccoli, onions, and lettuce seeds.. This segment also develops biotechnology traits that assist farmers in controlling insects and weeds, as well as provides genetic material and biotechnology traits to other seed companies. The Agricultural Productivity segment offers glyphosate-based herbicides for agricultural, industrial, ornamental, and turf applications; lawn-and-garden herbicides for residential lawn-and-garden applications; and other herbicides for the control of preemergent annual grass and small seeded broadleaf weeds in corn and other crops. The company was founded in 2000 and is based in St. Louis, Missouri. Yahoo Finance. Monsanto and PCS have different products but operate in the agricultural industry and the two companies are closely linked. Seeds and fertilizer go hand in hand. As seed sales go up so does the amount of fertilizer needed to grow the seeds. Monsanto and PCS are exposed to the same risks in that they are both expanding globally and are seeking to 8
enter similar markets. Both companies are planning to enter into foreign markets through acquiring interest in other companies. For these reason I weighted Monsanto as 15% DISCOUNTED CASH FLOW ANALYSIS For the discounted cash flow analysis I used the percentage of revenue method. Most of my forecasts are based on a variety of factors including company guidance, industry trends and predictions, and macroeconomic data. Revenue- When projecting PCS s revenue, I broke down the three segments by product and then further detailed the revenue model by breaking it up based on manufactured sales tons and price per tonne. Multiplying product sales and the price per tonne gives the dollar sales. I found this level of detail particularly important for accurate revenue projections because the price per tonne of potash is expected to grow faster than the amount of tons manufactured. This provides more clarity into PCS s operations and enables one to see where the true revenue growth lies. If revenue was not broken down in this way it would be possible that the overall revenue growth could be just caused solely by increases in commodity prices. Looking at the revenue model one can see PCS s manufacturing growth as well. I forecasted significant revenue growth in potash because it is PCS s primary concern and they have invested in increasing capacity for this product far more than phosphate and nitrogen. When projecting my revenues I took into account the strategic actions that PCS has been put in place to succeed in the foreign markets. If PCS did business solely in mature markets such as the U.S., the projected growth would have been considerably less. However, The Company believes that in the foreign markets the sky is the limit for growth, as do I. Cost of Goods Sold- Being that most of the inputs are commodities, projecting cost of goods sold was difficult. Historically, as the price for commodities, such as natural gas and sulfur, increase so does PCS s COGS. I projected that COGS, as a percent of revenue, will increase because the commodity prices, especially with respect to agriculture, are expected to grow over the next ten years. The reason why I had COGS increase by such a small margin is because PCS is becoming more efficient in locking in price contracts. Contracts with countries such as Trinidad, assure me that PCS will not see their COGS increase in such a manner that it cannibalizes their bottom line like in 2009. Capital Expenditures- PCS is currently involved in expansionary projects and plans on being primarily finished with these expensive projects by the end of 2013. As noted in in 2013, Capex drops by 16% because PCS will be tapering off their expansionary spending. The Company will continue to make improvements to mines into perpetuity but with a smaller amount of funds. Tax Rate- Historically, the tax rate was around 25%. However, due to new tax laws imposed by the Canadian Government PCS will experience a tax cut of about 8%. The new legislation will be enacted the first part of 2012 so the 17% is used going forward from that date. 9
Beta- I calculated beta by running a five year monthly regression against the S&P 500. I received a beta 1.09, which seems appropriate. RECOMMENDATION PCS is an established company with great growth prospects according to The Company. However, its financials have previously been rocky and I believe it will continue to perform in this manner for the next few years. After tearing apart and analyzing PCS, I recommend a sell on both the Tall Firs and Svigals portfolio. The Company is also overvalued based off of qualitative data in both my DCF and comparable analysis which supports my sell recommendation. 10
APPENDIX 1 COMPARABLES ANALYSIS The University of Oregon Investment Group 30.00% 25.00% 20.00% 10.00% 15.00% ($ in millions, except per share data) Potash Mosaic Agrium CF Industries Intrepid Potash Monsanto Stock Characteristics Current Price 145.21 67.58 82.37 124.24 31.21 67.44 50 Day Moving Avg. 145.07 67.66 83.15 115.69 30.53 56.97 200 Day Moving Avg. 118.92 54.2 67.02 88.49 25.55 55.06 Beta 1.09 1.31 1.24 0.86 1.42 0.92 Size ST Debt (MRQ) 2,200.20 1,379.10 2116 725.3 46.8 3,322 LT Debt (MRQ) 4481.3 1224.1 1612 2,550.80 25.7 1,862 Cash and Cash Equiv. (MRQ) 359.8 2362.7 914 648.4 99.7 1485 Minority Interest 0 28 0 438.2 0 44 Market Value Preferred Stock 0 0 0 0 Diluted Share Count 305.23 445.65 158 71.13 75.1 536.39 Market Cap 44,322 30,117 13,014 8,837 2,344 36,174 Enterprise Value 50,644 30,386 15,828 11,903 2,317 39,917 Profitability Margins Max Min Avg. Median Gross Margin 25.80% 24% 23.40% 35.50% 40.50% 48.40% EBIT Margin 26.20% 17.70% 5.20% 31.70% 30.70% 17.30% EBITDA Margin 32.80% 24.30% 9.70% 35.60% 36.20% 23.00% Net Margin 21.30% 12.20% 2.80% 14.00% 18.30% 10.50% Credit Metrics Interest Expense (MRQ) 16.5 12.4 24.5 58.3 0.43 47 Debt/Equity (MRQ) 0.15 0.09 0.29 0.37 0.03 0.14 Debt/EBITDA (LTM) 2.5297 1.3426 2.9398 2.7294 0.9087 2.1493 EBITDA/Interest Expense (LTM) 11.263 8.268 5.408 5.119 0.340 10.286 Operating Results Revenue (LTM) 5825.5 7490.2 10,299 3,234.10 336.2 10,502 Gross Profit (LTM) 2149.6 1,910.20 2337.5 1,012.40 80.3 5086 EBITDA (LTM) 2641.2 1938.9 1268.1 1200.3 79.782 2,412 Operating Cash Flow (LTM) 2891 1739.8 1015.8 745.3 99.6 1398 Valuation average EV/Revenue 0.00 x 8.69 x 4.06 x 1.54 x 3.68 x 6.89 x 3.80 x 3.60 x EV/Gross Profit 23.56 x 15.91 x 6.77 x 11.76 x 28.85 x 7.85 x 12.88 x EV/EBITDA 19.17 x 15.67 x 12.48 x 9.92 x 29.04 x 16.55 x 15.19 x EV/Operating Cash Flow 17.52 x 17.46 x 15.58 x 15.97 x 23.26 x 28.55 x 18.94 x Metric Implied Price Weight EV/Revenue 47.93133967 EV/Gross Profit 69.99 10.00% EV/EBITDA 110.74 45.00% EV/Operating Cas 158.66 45.00% Price Target 128.23 Current Price 143.7 Under (Over) Valued -12.06% 11
APPENDIX 2 DISCOUNTED CASH FLOWS ANALYSIS The University of Oregon Investment Group ($ in millions, except per share data) Q1-Q3 A Q4 E 2010 A+E 1 2 3 4 5 6 7 8 9 10 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25 10.25 2007 2008 2009 2010 2010 2011 E 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E 2018 E 2019 2020 Total Company Revenue 5234.20 9446.50 3976.70 4726.40 1652.00 6378.40 7927.13 9466.15 11215.21 13181.14 15530.25 18309.01 21123.60 24102.85 27033.37 29777.24 % Y/Y Growth 80.48% -57.90% 18.85% -65.05% 286.10% 24.28% 19.41% 18.48% 17.53% 17.82% 17.89% 15.37% 14.10% 12.16% 10.15% Cost of Revenue 3353.00 4539.10 2950.70 2864.40 1007.72 3922.72 4914.82 5963.67 7121.66 8435.93 10017.01 11900.86 13835.96 15907.88 17977.19 19057.44 % Revenue 64.06% 48.05% 74.20% 60.60% 61.00% 61.50% 62.00% 63.00% 63.50% 64.00% 64.50% 65.00% 65.50% 66.00% 66.50% 64.00% Gross Profit 1881.20 4907.40 1026.00 1862.00 644.28 2455.68 3012.31 3502.48 4093.55 4745.21 5513.24 6408.15 7287.64 8194.97 9056.18 10719.81 Gross Margin 35.94% 51.95% 25.80% 39.40% 39.00% 38.50% 38.00% 37.00% 36.50% 36.00% 35.50% 35.00% 34.50% 34.00% 33.50% 36.00% Operating Expenses SG&A 212.60 188.40 183.60 169.70 58.65 228.35 277.45 321.85 375.71 448.16 535.79 640.82 749.89 867.70 986.72 1101.76 % Revenue 4.06% 1.99% 4.62% 3.59% 3.55% 3.58% 3.50% 3.40% 3.35% 3.40% 3.45% 3.50% 3.55% 3.60% 3.65% 3.70% provincial mining and other taxes 135.40 543.40 29.00 55.90 33.04 88.94 317.09 473.31 616.84 790.87 1009.47 1190.09 1373.03 1578.74 1784.20 1965.30 % Revenue 2.59% 5.75% 0.73% 1.18% 2.00% 1.39% 4.00% 5.00% 5.50% 6.00% 6.50% 6.50% 6.50% 6.55% 6.60% 6.60% Foreign exchange (gain) loss 70.20-126.00-35.40 7.20 2.48 9.68 7.93 9.47 11.22 13.18 15.53 18.31 21.12 24.10 27.03 29.78 % Revenue 1.34% -1.33% -0.89% 0.15% 0.15% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% Total Operating Expenses 418.20 605.80 177.20 232.80 94.16 326.96 602.46 804.62 1003.76 1252.21 1560.79 1849.21 2144.05 2470.54 2797.95 3096.83 % Revenue 7.99% 6.41% 4.46% 4.93% 5.70% 5.13% 7.60% 8.50% 8.95% 9.50% 10.05% 10.10% 10.15% 10.25% 10.35% 10.40% EBIT 1463.00 4301.60 848.80 1629.20 550.12 2179.32 2409.85 2697.85 3089.79 3493.00 3952.45 4558.94 5143.60 5724.43 6258.22 7622.97 % Revenue 27.95% 45.54% 21.34% 34.47% 33.30% 67.77% 30.40% 28.50% 27.55% 26.50% 25.45% 24.90% 24.35% 23.75% 23.15% 25.60% Other (Expense) Income 125.50 333.50 343.40 241.10 84.25 325.35 404.28 492.24 594.41 698.60 776.51 915.45 1056.18 1205.14 1351.67 1488.86 % Revenue 2.40% 3.53% 8.64% 5.10% 5.10% 5.10% 5.10% 5.20% 5.30% 5.30% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Interest Expense 68.70 62.80 120.90 69.70 24.78 94.48 198.18 246.12 336.46 395.43 388.26 411.95 422.47 421.80 473.08 521.10 % Revenue 1.31% 0.66% 3.04% 1.47% 1.50% 1.48% 2.50% 2.60% 3.00% 3.00% 2.50% 2.25% 2.00% 1.75% 1.75% 1.75% Pre-tax Income 1519.80 4572.30 1071.30 1800.60 609.59 2410.19 2615.95 2943.97 3347.74 3796.17 4340.71 5062.44 5777.30 6507.77 7136.81 8590.73 % Revenue 29.04% 48.40% 26.94% 38.10% 36.90% 37.79% 33.00% 31.10% 29.85% 28.80% 27.95% 27.65% 27.35% 27.00% 26.40% 28.85% Less Taxes (Benefit) 416.20 1077.10 83.50 476.70 146.30 623.00 627.83 500.48 569.12 645.35 737.92 860.62 982.14 1106.32 1213.26 1460.42 Tax Rate 27.39% 23.56% 7.79% 26.47% 24.00% 25.85% 24.00% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00% Net Income 1103.60 3495.20 987.80 1323.90 463.29 1787.19 1988.12 2443.50 2778.62 3150.82 3602.79 4201.83 4795.16 5401.45 5923.55 7130.31 Net Margin Add Back Depreciation and Ammortizatio 291.30 327.50 312.10 96.40 41.30 137.70 554.90 1277.93 1906.59 2438.51 2950.75 3478.71 3802.25 3856.46 4055.00 4168.81 % Revenue 5.57% 3.47% 7.85% 2.04% 2.50% 2.16% 7.00% 13.50% 17.00% 18.50% 19.00% 19.00% 18.00% 16.00% 15.00% 14.00% Add Back Interest Expense*(1-Tax Rate) 49.89 48.01 111.48 51.25 18.83 70.06 150.62 204.28 279.26 328.21 322.25 341.92 350.65 350.09 392.66 432.51 % Revenue 0.95% 0.51% 2.80% 1.08% 1.14% 1.10% 1.90% 2.16% 2.49% 2.49% 2.08% 1.87% 1.66% 1.45% 1.45% 1.45% Operating Cash Flow 1444.79 3870.71 1411.38 1471.55 523.42 1994.95 2693.64 3925.71 4964.47 5917.54 6875.79 8022.46 8948.06 9608.00 10371.22 11731.64 % Revenue 27.60% 40.98% 35.49% 31.13% 31.68% 31.28% 33.98% 41.47% 44.27% 44.89% 44.27% 43.82% 42.36% 39.86% 38.36% 39.40% Current Assets 1811.30 2267.20 2271.70 1975.00 1652.44 1652.44 3646.48 4354.43 5159.00 6195.14 7454.52 8971.42 10561.80 12292.46 13787.02 15484.17 % Revenue 34.61% 24.00% 57.13% 41.79% 44.00% 25.91% 46.00% 46.00% 46.00% 47.00% 48.00% 49.00% 50.00% 51.00% 51.00% 52.00% Current Liabilities 1001.90 2615.80 1559.90 2200.20 743.40 743.00 3567.21 3975.78 4486.08 5008.83 5746.19 6591.24 7393.26 8436.00 9461.68 10422.04 % Revenue 19.14% 27.69% 39.23% 46.55% 45.00% 11.65% 45.00% 42.00% 40.00% 38.00% 37.00% 36.00% 35.00% 35.00% 35.00% 35.00% Net Working Capital 809.40-348.60 711.80-225.20 909.04 909.44 79.27 378.65 672.91 1186.30 1708.33 2380.17 3168.54 3856.46 4325.34 5062.13 % Revenue 15.46% -3.69% 17.90% -4.76% 55.03% 14.26% 1.00% 4.00% 6.00% 9.00% 11.00% 13.00% 15.00% 16.00% 16.00% 17.00% Change in Net Working Capital 602.70-1158.00 1060.40-937.00 197.64-830.17 299.37 294.27 513.39 522.03 671.84 788.37 687.92 468.88 736.79 Capital Expenditures 644.80 1273.70 2026.10 1459.00 512.12 1971.12 2774.50 3407.81 4037.48 2636.23 2795.45 3295.62 3802.25 3856.46 4055.00 4466.59 % Revenue 12.32% 13.48% 50.95% 30.87% 31.00% 35.00% 35.00% 36.00% 36.00% 20.00% 18.00% 18.00% 18.00% 16.00% 15.00% 15.00% Unlevered Free Cash Flow 197.29 3755.01-1675.12 949.55 11.30-173.81 749.31 218.52 632.73 2767.92 3558.32 4054.99 4357.45 5063.63 5847.33 6528.26 Discounted Unlevered Free Cash Flows 11.04 666.25 176.86 466.17 1856.35 2172.34 2253.47 2204.31 2331.74 2451.05 2490.98 12
The University of Oregon Investment Group Manufactured Product Sales (tonnes in thousands) 2006 2007 2008 2009 2010 1-3A Q4 E 2010 A+E 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Potash Sales 7,196.00 9,400.00 8,547.00 2,988.00 6,265.00 2,086.70 8,351.70 9,353.90 10,195.76 11,011.42 11,782.21 12,606.97 13,489.46 14,298.83 15,156.75 15,914.59 16,551.18 % growth 30.63% -9.07% -65.04% 179.51% 12.0% 9.0% 8.0% 7.0% 7.0% 7.0% 6.0% 6.0% 5.0% 4.0% Phosphate sales 3,970.00 4,151.00 3,322.00 3,055.00 2,667.00 1,196.80 3,863.80 4,172.90 4,465.01 4,799.88 5,087.88 5,393.15 5,716.74 6,002.57 6,302.70 6,617.84 6,948.73 % growth -11.21% -19.97% -8.04% 26.47% 8.0% 7.0% 7.5% 6.0% 6.0% 6.0% 5.0% 5.0% 5.0% 5.0% Nitrogen sales 4,675.00 5,731.00 5,042.00 4,967.00 3,929.00 1,417.90 5,346.90 5,988.53 6,527.50 6,919.15 7,265.10 7,628.36 7,933.49 8,250.83 8,539.61 8,838.50 9,147.84 % growth 22.59% -12.02% -1.49% 7.65% 12.0% 9.0% 6.0% 5.0% 5.0% 4.0% 4.0% 3.50% 3.50% 3.50% Price Per Tonne Potash Sales 170.51 191.17 475.96 440.09 346.37 381.01 355.03 408.28 469.52 539.95 620.95 714.09 821.20 919.75 1011.72 1092.66 1158.22 % growth 12.12% 148.97% -7.53% 10% -19.33% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 12.00% 10.00% 8.00% 6.00% Phosphate sales 308.56 394.36 866.95 449.75 487.44 469.5855615 482.98 507.12 532.48 559.10 587.06 616.41 647.23 679.60 713.58 749.25 786.72 % growth 27.81% 119.84% -48.12% 7.39% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Nitrogen sales 274.65 313.9069796 495.240123 258.9088987 319.4197506 296.918605 313.79 332.62 352.58 373.73 396.16 419.93 445.12 471.83 500.14 530.15 561.96 % growth 14.29% 57.77% -47.72% 21.20% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Dollar Sales (in thousands) potash 1,227,000.50 1,797,000.20 4,068,000.10 1,315,000.80 2,170,000.40 669,000.06 2,839,000.46 3,819,032.49 4,787,157.22 5,945,649.27 7,316,121.43 9,002,487.41 11,077,560.76 13,151,280.14 15,334,392.64 17,389,201.26 19,169,855.46 % Growth 46.45% 126.38% -67.67% 115.89% 34.52% 25.35% 24.20% 23.05% 23.05% 23.05% 18.72% 16.60% 13.40% 10.24% phosphate 1,225,000.10 1,637,000.10 2,880,000.70 1,374,000.40 1,300,000.80 562,000.00 1,862,000.80 2,116,182.75 2,377,531.32 2,683,638.47 2,986,889.62 3,324,408.15 3,700,066.27 4,079,323.06 4,497,453.67 4,958,442.68 5,466,683.05 % Growth 33.63% 75.93% -52.29% 35.52% 13.65% 12.35% 12.88% 11.30% 11.30% 11.30% 10.25% 10.25% 10.25% 10.25% Nitrogen 1,284,000.10 1,799,000.90 2,497,000.70 1,286,000.50 1,255,000.20 421,000.89 1,676,001.09 1,991,916.95 2,301,460.85 2,585,921.41 2,878,130.52 3,203,359.27 3,531,383.26 3,892,996.91 4,271,006.91 4,685,721.68 5,140,705.26 % Growth 40.11% 38.80% -48.50% 30.33% 11.0% 10.0% 8.0% 5.0% 5.0% 3.5% 3.5% 3.50% 3.50% 3.50% Total Revenue 3,736,000.70 5,233,001.20 9,445,001.50 3,975,001.70 4,725,001.40 1,652,000.95 6,377,002.35 7,927,132.18 9,466,149.38 11,215,209.15 13,181,141.57 15,530,254.84 18,309,010.30 21,123,600.11 24,102,853.23 27,033,365.61 29,777,243.77 % Growth 40.07% 80.49% -57.91% 60.43% 24.31% 19.41% 18.48% 17.53% 17.82% 17.89% 15.37% 14.10% 12.16% 10.15% 13
APPENDIX 3 DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS Assumptions for Discounted Free Cash Flows Model Tax Rate 17% Terminal Growth Rate 3% Risk-Free Rate 2.7500% Terminal Value 82645.266 Terminal Risk Free Rate 4.1600% Beta 1.09 PV of Terminal Value 28002.86 Market Risk Premium 7.0% Sum of PV Free Cash Flows 17080.56131 % Equity 91% Firm Value 45083.42 % Debt 9% LT Debt 4481.3 Cost of Debt 5.63% Cash 359.8 CAPM 10.38% Equity Value 40602.12 Terminal CAPM 11.79% WACC 9.86% Diluted Share Count 305.23 Terminal WACC 11.136% Implied Price 133.021 Current Price 145.21 Under (Over) Valued -8.39% APPENDIX 4 BETA SENSITIVITY ANALYSIS Beta St. Deviation Implied Price Under (Over) Valued 1.74 2.00 80.55-43.95% 1.580 1.50 92.76-35.45% 1.42 1.00 107.59-25.13% 1.25 0.50 127.20-11.48% 1.09 0.00 133.02-7.43% 0.928-0.50 181.63 26.40% 0.765-1.00 233.69 62.62% 0.603-1.50 282.99 96.93% 0.44-2.00 373.66 160.03% APPENDIX 6 SOURCES -Yahoo Finance -IBIS World -Facset -Wall Street Journal -Investopedia 14