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Andrew Allentuck

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High and rising

Andrew Allentuck

WINNIPEG (GlobeinvestorGOLD) — Potash has morphed from a dowdy child of the commodity markets into a product that is — from a financial point of view — downright glamorous. More than a decade ago, shares of Saskatoon-based Potash Corp. of Saskatchewan, the world's largest producer of the mineral, languished at $6 (U.S.) shortly after the stock's initial public offering in November, 1989.

This year, after a remarkable year of growth that has seen the share price double, the stock hit $106.67, following a two-for-one stock split in 2004. Potash Corp. has become a growth stock with a back story about insatiable world demand for fertilizer.

Recently the stock has traded at $96 on the New York Stock Exchange (POT-N) and at $118 (Canadian) in Toronto.

Consensus forecasts for Potash Corp.'s profit for 2006 — it reports in U.S. dollars on a calendar year basis — are $6 (U.S.) a share, up from what CIBC World Markets has projected as $4.70 to $4.89 a share for 2005 and $2.77 of record for 2004.

Investors in Potash Corp. stock are really buying a commodity story, for 90 per cent of price moves of the stock are explained by the commodity's price, noted CIBC analyst Jacob Bout. He predicted in a June 19 report that the commodity would rise in price from $143 to $156 per tonne by 2006. Potash inventories are still at historically low levels and producers are running flat out, he said. Potash accounted for $423-million of the company's gross margin in 2004, compared to $243-million for nitrogen and a modest $16-million for phosphate, its other products. Potash Corp.'s story remains potash.

Behind the switch in the fortunes of the company, which suffered a massive loss of $412-million (U.S.) in 1999 when the company was hit with costs of shutting down nitrogen fertilizer plants in Iowa and Nebraska, is the rosy outlook for potash. The company's 2004 annual report called the global outlook "very optimistic," based on anticipated increases in Chinese purchases and sturdy economic growth around the world. Prices for crops that are fertilized with potash are strong, the report noted. As well, world grain prices, which fell on a bumper crop in 2004, should rise in 2005, the report added. Farmers around the world have more money to spend, they can afford more fertilizer, and the world's eager bellies should boost soil nutrient use in the United States, the company's largest market, by 1 or 2 cent, the report added.

Bill Doyle, Potash Corp.'s president and chief executive, is confident that his company, which he calls "an 18-year overnight sensation," will sustain its growth. The corporate mantra makes it almost certain. "We went from being driven by the desire to maximize market share under the government owner to being driven by profits and shareholder interest," he explained.

It's been a tough evolution, for the company's price languished until beginning a remarkable rise in April, 2004. In the 15 years in the wilderness, it was hard to make money churning out potash, Mr. Doyle notes.

"We never planned on the collapse of the former Soviet union. It was the largest consumer of potash in the world. In 1989, they used 14 million metric tonnes. In 1993, after the collapse [of the Soviet regime], they consumed only 200,000 tonnes. Those almost 14 million tonnes had to have a home. The Russians wanted foreign exchange, they had an abundance of potash and their costs in rubles were negligible. To get hard currency, they began to dump into our markets.

"We could have taken them on, but it would have destroyed our profitability. It took not five years, as we then thought, but 11 years until 2004, before the Russians became price leaders in order to generate sufficient returns to cover capital expenditures for their mines."

Potash Corp. can continue its profitable rise from obscurity, Mr. Doyle said. "Today, with 86 per cent of all the excess capacity for potash in the world, the company is the only one able to satisfy growing global demand." What's more, he noted, the company has a lead of five years, the time it takes to develop a mine from the moment the first shaft is dug.

For now, with a quarter of the world's potash reserves but only 16 per cent of total global production, the company has room to grow, Mr. Doyle said. Last year, potash prices rose $50 to $125 per tonne and are still rising, he added. "There is nothing on the horizon that could cause prices to fall," he said.

CIBC World Markets estimates that Potash Corp. shares could rise to $100 (U.S.) a share based on an 18 multiple of price to earnings of $5.53 per share for 2006. The company is in the midst of an annual 5-per-cent share buyback. And the 60-cent annual dividend, equal to a yield of 0.6 per cent, was raised by 20 per cent when the stock was split two for one in August, 2004.

There are risks to the company's fortunes. The 2004 annual report spelled them out as including weather, crop conditions, prices of natural gas to produce nitrogen, rail and ocean freight costs. As well, there is an exchange rate liability. For every 1 cent rise in the Canadian dollar, Potash Corp. profit declines by $3.4-million (U.S) or 2 cents a share, said Betty-Ann Heggie, senior vice-president for investor relations. In spite of those risks, potash, which last year outperformed gold, retains its lustre.

Andrew Allentuck writes about investments for The Globe and Mail, and reviews books on finance for globefund.com and globeinvestor.com. He is also the author of several books.

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