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Terra rejects CF’s latest offer; CF responds
Terra Industries Inc. sent a letter to CF Industries Holdings Inc. on Aug. 25 responding to CF’s latest offer, dated Aug. 5. Terra said that after careful consideration of the proposal its board unanimously concluded that the offer continues to run counter to Terra’s strategic objectives, substantially undervalues Terra both absolutely and relative to CF, and would deliver less value to Terra shareholders than would owning Terra on a stand-alone basis.
“CF Industries has made a full and fair offer with an exchange ratio premium of over 35 percent in an all stock transaction,” CF said in a statement Aug. 25. “Terra stockholders would own nearly 50 percent of the combined company and would benefit from real and substantial synergies. CF Industries is confident that Terra stockholders will show their support by voting for CF Industries’ nominees at Terra’s annual meeting, which should have been held by now.”
Terra has yet to announce a date for its 2009 annual meeting. It has until the end of the year to have the meeting.
J.P. Morgan Analyst Jeffrey Zekauskas in a recent report said that Terra would be worth $38-$39 per share on a comparable basis to CF’s valuing of itself. Zekauskas valued the current CF offer for Terra at $37 per share. He noted that CF is currently seeking $100-$110 per share from Agrium Inc. Based on this, he said if Terra is valued in the same way, it would be $38-$39, which would represent 68 percent of replacement value. He estimates Terra replacement value at $57 per share. As of Aug. 27, Terra closed at $33.06.
Zekauskas suggested that Terra could use its $1 billion in cash to buy back shares at current prices as a defensive move. This would boost his projected earnings per share for Terra in 2010 from $2.20 to $3.20. He also said a combination of a recapitalization and an auction would likely yield higher bids than the current CF bid. “We think there is opportunity in owning Terra stock at current prices,” said Zekauskas. He believes the most recent sale of a nitrogen property in North America – The Mosaic Co./Investment Saskatchewan’s sale of Saskferco Products to Yara International ASA – was at a price well-above replacement costs at U.S. $1.58 billion (GM July 21, 2008, p. 1). Then again, that sale was during a fertilizer industry peak, prior to the onset of the global financial crisis later in 2008.
Zekauskas began coverage of Terra Aug. 18 with a rating of overweight. His December 2010 price target for the company is $35. He also covers CF, and as of July 29 rated it neutral, with a December 2010 price target of $80.
One CF fan said J.P. Morgan has the lowest projections for CF, far lower than the average analyst, and their views do not reflect market consensus on the relative value of CF and Terra.
CF had offered a fixed exchange ratio of 0.465 shares of CF for each Terra common share (GM Aug. 10, p. 1). As a result, the deal is now valued at $3.71 billion, up from the initial bid value of $2.1 billion (GM Jan. 19, 2009, p. 1). Under this plan, Terra’s shareholders would own 49 percent of the combined company, CF’s 51 percent. CF further sweetened the pot by saying it would retain Terra President and CEO Mike Bennett on the board of the new company, as well as in a senior executive position. CF also welcomed having a number of Terra board members on the combined board, and suggested that CF would consider locating some functions in Sioux City.
CF said it was prepared to return at least $1 billion of cash to stockholders of the combined company following the closing of the transaction, which likely would be accomplished through open market purchases or a self-tender offer. In addition, immediately prior to the consummation of the combination, the company would distribute an aggregate of five million contingent future shares to CF stockholders. These contingent shares would be converted into CF common stock should the stock trade at more than $115 per share over a specified period following the close. This gives pre-merger CF shareholders the opportunity to increase their stake in the company from 51 percent to 54 percent.
EPA decision causes uproar in Florida
A battle royal is brewing over the U.S. Environmental Protection Agency’s agreement to set numeric limits on nutrient concentrations in Florida waters. In a consent decree signed by lawyers for EPA and environmental groups, the agency agreed to propose “numeric water quality criteria for lakes and flowing waters” in the state by Jan. 14, 2010, with final regulations to follow Oct. 15. The deadlines for coastal and estuarine waters in 2011 would be the same. The Florida Wildlife Federation, the Conservancy of Southwest Florida, the Environmental Confederation of Southwest Florida, St. John’s Riverkeeper, and the Sierra Club sued EPA in July 2008.
“The suit challenged an unacceptable decade-long delay by the state and federal governments in setting limits for nutrient pollution,” environmental law firm Earthjustice said. “EPA’s agreement to set enforceable nutrient limits settles that lawsuit.”
The filing of the consent decree “has nationwide implications,” Earthjustice said. “Currently, Florida and most other states have only vague limits regulating nutrient pollution. EPA will now begin the process of imposing quantifiable – and enforceable – water quality standards to tackle nutrient pollution.”< An EPA Inspector General report released shortly after the filing of the agreement criticizes the agency for failing to address "widespread" nutrient pollution. "EPA's 1998 National Strategy and Plan to promote state adoption of nutrient water quality standards (which better protect aquatic life and human health) has been ineffective," the report said. "In the 11 years since EPA issued its strategy, half the states still had no numeric nutrient standards," the IG said. "States have not been motivated to create these standards because implementing them is costly and often unpopular with various constituencies." States have failed to meet promised deadlines, the report noted, and "the current approach does not assure that states will develop standards that provide adequate protection for downstream waters. Until recently, EPA has not used its Clean Water Act authority to promulgate water quality standards for states. EPA cannot rely on the states alone to ensure that numeric nutrient standards are established." "States continue to report over 14,000 impairments for nutrient and nutrient-related pollution on their impaired waters lists," the IG said. Though lauded by environmentalists and ballyhooed by EPA, the agreement angered the state of Florida, which said it had been researching the issue for years. Mike Sole, secretary of the state Department of Environmental Protection, told the St. Petersburg Times that he was “frustrated” by EPA’s action and predicted that it would cost the state’s taxpayers dearly. “It is going to affect you and I as Floridians,” he told the newspaper.
And a host of Florida business and utility interests – including fertilizer companies – are determined to kill the deal.
The Florida Water Environment Association Utility Council asked U.S. District Judge Robert Hinkle to stay the case until it can file a lawsuit. The association, which also has asked to intervene, sent EPA a 60-day Notice of Intent to Sue (NOITS) on Aug. 14, meaning that the soonest it could sue would be mid-October. The Florida Minerals and Chemistry Council also filed an NOITS, which said EPA had already approved a 2007 state plan to develop numeric criteria. Under that plan, the department “would have until 2011 before EPA would consider the state to be untimely in its pursuit of state numeric nutrient criteria,” the council said in its Aug. 24 letter.
A number of groups that have already intervened, including the state and national farm bureaus, fruit and vegetable growers, and cattlemen, said the decree “will dramatically and adversely affect” their interests. Noting that they were not involved in the settlement negotiations, they asked Hinkle to schedule a “fairness hearing” on the proposal. They said they would argue that “the evidence and record will show that the proposed consent decree is not substantively fair….In addition, it is not a product of careful scientific study and deliberation on the part of EPA, [and] the timelines . . . are far too short to allow for the establishment of scientifically defensible criteria.”
They also said that the agency’s decision was driven more by litigation than science, citing an EPA memorandum that discussed settling the case to prevent the judge from ruling against the agency. Specifically, EPA was worried that Hinkle might agree with the plaintiffs’ argument that with the release of its strategy in 1998, EPA had already made the requisite “necessity determination” that nutrient limits should be adopted promptly for nitrogen and phosphorus. With that legal precedent, environmental groups could sue in a number of other states, the agency speculated. To limit the repercussions from Florida, the consent decree does not conclude that the 1998 strategy amounted to a necessity determination.
The IG report quoted EPA’s Ecological and Health Protection Branch Chief as saying the Florida determination was state-specific and that no other determinations were planned for the near future.
Shortly before leaving the agency, Assistant Administrator for Water Ben Grumbles made the necessity determination, concluding that nutrient criteria had to be developed for Florida. But the utility association said he had only two weeks to make the decision, foreclosing the possibility of careful study.
The industry parties asserted that “EPA’s determination was undertaken as an exercise in litigation risk management, rather than an effort to implement the goals of the Clean Water Act or to establish appropriate standards for water quality criteria in the State of Florida.” The judge has not decided whether to schedule a hearing. He likely will begin focusing on the case in September.
ICL Fertilizers 2Q income off 85 percent
Operating income at ICL Fertilizers, the fertilizer segment of Israel Chemicals Ltd. (ICL), saw an 85 percent drop in operating income during the second quarter ending June 30, 2009, to $111.5 million on sales of $465.1 million, versus the year-ago $731.4 million and $1.35 billion, respectively.
Fertilizer six-month operating income was $250.3 million on sales of $836.2 million, versus the year-ago $1.14 billion and $2.3 billion, respectively.
It said the first-half drop reflects a sharp decline in quantities sold of most of the segment’s products and lower prices for phosphate fertilizers, mitigated partially by the period’s higher-than-average selling prices for potash as compared to year-ago levels.
While ICL is upbeat that potash demand is continuing to return in Brazil and India, it says it continues to stockpile potash at the Dead Sea. It noted that it has signed a nine-month supply agreement with its Indian customers for the sale of 1,085,000 mt of potash (including optional quantities) at $460/mt DEL.
Israel Chemical net income to shareholders was $152.3 million on sales of $1.1 billion for the second quarter, down from the year-ago $703.2 million and $2.1 billion, respectively. EBITDA dropped to $235.5 million from $904.3 million.
Six-month net income was $311.1 million on sales of $1.98 billion, down from the year-ago $1.05 billion and $3.61 billion. EDITDA was down at $495 million from $1.41 billion.
ICL said that as of June 30, company net debt was $756 million, the lowest level in company history.
ICL announced that it will pay a dividend totaling $100 million on Sept. 16, 2009, in respect of second-quarter results. Earlier dividends paid this year include $100 million on June 17 for the first quarter, and $175 million on May 4 for fourth quarter 2008.
Fert. production brings 244k jobs, $57.8 B in value to U.S. economy, says new study
The Fertilizer Institute (TFI) released a report Aug. 21 showing that the U.S. fertilizer industry supports 244,000 jobs and adds $57.8 billion in value to the U.S. economy. The study, conducted by Charles River Associates International (CRA), found that the fertilizer industry directly employs more than 24,800 people, who produced fertilizers valued at $15.1 billion in 2006. These jobs had an average annual compensation of $76,000, which was almost 80 percent higher than the U.S. average compensation across all industries.
“For the first time, the CRA report quantifies the valuable economic contribution of the fertilizer industry to the U.S. economy,” said TFI President Ford West. “We urge the Senate to review this report with an eye toward potential valuable job losses among the domestic fertilizer industry that could take place if, as we anticipate, climate change legislation leads to higher energy prices.”
The nitrogen fertilizer manufacturing sector provides a total economic contribution of $23.7 billion and 80,000 jobs, of which $10.3 billion and 7,565 jobs were direct, according to CRA. The states with the greatest economic activity dedicated to the nitrogen fertilizer sector are Louisiana, Oklahoma, Iowa, and Alabama.
Phosphate fertilizer manufacturing was found to provide a total economic contribution of $21.2 billion and almost 90,000 jobs, of which $6.6 billion and 7,410 jobs were direct. The states with the most economic activity in this sector include Florida, North Carolina, Idaho, Louisiana, and Texas.
While economic contribution data for the U.S. potash manufacturing sector is not as available as other sectors due to non-disclosure rules, CRA found the potash industry provides an estimated 1,774 direct jobs.
Fertilizer mixing was also identified as a significant contributor to economic activity, with an annual contribution of $13.5 billion in output and more than 56,000 jobs. The sector is more dispersed than nitrogen and phosphate manufacturing, as it is not concentrated in large plants but instead in an estimated 6,000 fertilizer mixing facilities that are located near cropland where fertilizers are consumed. The top states with economic contributions to the fertilizer mixing sector are Indiana, Florida, Texas, California, and Ohio.
TFI noted that fertilizer manufacturing is a trade and energy intensive industry and is uniquely sensitive to the price of natural gas, which is required to make nitrogen. It estimates that gas contributes as much as 90 percent of the cost of producing a ton of ammonia, which is the building block for all other nitrogen fertilizers. In 2008, the nitrogen fertilizer industry spent $3 billion on natural gas. Each $3 mmBtu increase in the cost of natural gas raises nitrogen fertilizer production costs by over $1 billion. TFI notes that these are not costs fertilizer companies can pass on to its customers, as the industry is a price taker in the global fertilizer market.
TFI noted that since 1999 the U.S. nitrogen industry has closed 26 nitrogen fertilizer production facilities, due primarily to the high cost of natural gas. Currently, only 30 nitrogen plants are still operating in the U.S., and over 55 percent of the U.S. farmer’s nitrogen fertilizer is imported. Of this imported fertilizer, 82.7 percent comes from countries without climate change policies in place to regulate carbon, and a majority of these countries are those from whom we are striving for energy independence.
Any additional loss of U.S. fertilizer production could pose risks for the world’s food supply. “It is estimated that fertilizers are responsible for between 40 and 60 percent of the world’s food supply,” according to the report. “A quick calculation shows that if 50 percent of U.S. agricultural production is dependent on fertilizer, fertilizer use in the United States alone provides an economic value of up to $300 billion. If even half of the fertilizer is assumed to be domestically produced, that translates to a domestic ‘use’ value of $150 billion, or 10 times the production value for the industry.
“The ‘use’ value goes beyond economic value to the U.S. agriculture industry. In a world market struggling to keep food supplies apace with growing demand, agricultural products and fertilizers exported from the United States are important on a humanitarian level. If costs of U.S. agricultural products are increased as a result of a less-than-stable U.S. supply of fertilizers, the economic consequences could be large. This value of the U.S. fertilizer industry could well exceed the substantial measurable portion of the economic contributions of domestic fertilizer manufacturing that were estimated in this report.”
A full copy of the CRA report is available at www.tfi.org.
Ironically, natural gas prices last week were the weakest in 7½ years. The September NYMEX futures price expired at $2.843/mmBtu (see page 2). The question is whether Congress will consider the history of gas prices in looking at Cap and Trade legislation, or will it be more persuaded by the current gas market.
Ousted Athabasca exec seeks to topple API board
Ousted Athabasca Potash Inc. (API) President and CEO Dawn Zhou is seeking to topple the current API board of directors and return to power. Zhou says the current board is not adequately exploring the options that may be available with respect to the development of the Burr potash project in Saskatchewan. The current board, however, did announce plans in July to seek potential alliances with third parties (GM July 20).
Zhou was removed from her API positions, except for director, in June (GM June 29). API said at the time that while Zhou’s entrepreneurial expertise and experience in geotechnical matters surrounding exploration was key in the formation and early development of the company, it had reached a stage where the skills required of its CEO, in addition to familiarity with potash and the related chemicals processing industry, must include mining project finance and development, as well as building completion and operations experience. Zhou was replaced by Robert Boyd in August (GM Aug. 10).
Zhou, the sole director, officer, and shareholder of CSIT Consulting Inc., says she beneficially owns or exercises control or direction over an aggregate of 4,386,000 common shares of API, or 11.75 percent of API’s outstanding shares. CSIT owns 1,386,000 shares, or 3.71 percent of API.
Zhou said CSIT has filed proxy materials nominating an alternate slate of directors for election at the annual and special meeting of shareholders of API to be held Sept. 3 in Saskatoon. Zhou said CSIT’s vision for API is based on good corporate governance, respect, and protection of shareholders’ rights and the protection of the best interests of API. She proposes to replace the current API board with one aligned with CSIT’s vision and the majority of API shareholders. CSIT’s seven nominees include Zhou, Bradley Fettis, Kenneth MacNeill, Robert Cross, Brian Goodwin, Charley X. Ye, and Arnold Hillier. Fettis is currently API vice president, mining.
Current directors include Zhou, Boyd, potash veteran Robert Connochie, John King Burns, Leo Bingleman, James Gardiner, and Dr. Edward Schiller.
Zhou says the CSIT nominees collectively have considerable experience in prospecting, geology, exploration, mining, public companies, business development, international relations, corporate governance, capital markets, and accounting. Many of the CSIT nominees have been, and continue to be, associated with successful mining companies. Each of the CSIT nominees has consented to act as a director of API.
CSIT intends to vote in favor of the other items of business that will be considered at the meeting, such as fixing the number of directors, the appointment of the auditor, the amendments to API’s stock option plan, and the approval of unallocated options.
API established July 23, 2009 as the record date for determining shareholders entitled to notice of the meeting and to vote at the meeting.
Transammonia unit out $4.4 M over petroleum theft
Transammonia Petroleum, a Houston-based unit of Transammonia Inc., New York City, is out a total of $4.4 million due to the theft of stolen petroleum products from Petroleos Mexicanos (PEMEX). Donald Schroeder, the president of Trammo Petroleum, was charged in the Southern District of Texas in May and pleaded guilty to conspiring to receive approximately $2 million in stolen Mexican petroleum products. Schroeder, who is out on bond, faces a maximum punishment of five years imprisonment and a fine of $250,000 at his sentencing in December 2009.
“Immediately on learning of the government investigation, Trammo Petroleum offered its full cooperation and assistance to the government,” according to a statement from the company. “Mr. Donald Schroeder’s behavior was unacceptable and a violation of company policy. He has been terminated. We have been informed by the government that no other employee had any knowledge that there was any problem with the source of this product.”
“The government has agreed not to prosecute Trammo Petroleum,” according to the statement. “We have taken steps to prevent any recurrence of this type of behavior. We also agreed to provide restitution of $2.4 million to the Mexican company PEMEX and a fine of $2 million to the US government. We will continue to cooperate with the government in any way we can.”
The Houston U.S. Attorney’s office told Green Markets that Schroeder acknowledged that in February 2009 he and others were responsible for the loading of a barge containing stolen condensate valued at $2 million in Brownsvillle, Texas, and arranged for the shipment to be transported for resale to a company near the Houston area. Trammo profited approximately $150,000 from this transaction.
In June 2007, U.S. Immigration and Customs Enforcement and a Mexican customs administrator provided information regarding the smuggling of stolen PEMEX products into the U.S. Under Mexican law, only PEMEX and its authorized agents have the legal authority to sell and distribute its products abroad. During the investigation, ICE agents from San Antonio and Houston executed 10 federal search warrants on bank accounts in Texas. The investigation continues, with additional individuals and companies still under investigation.
USDA forecasts 38 percent drop in farm income
Washington-The U.S. Department of Agriculture on Aug. 27 released a report forecasting that net farm income would be $54.0 billion in 2009, down $33.2 billion (38 percent) from the preliminary estimate of $87.2 billion for 2008. The 2009 forecast is $9 billion below the average of $63.2 billion in net farm income earned in the previous 10 years. USDA said that 2009 crop prices have continued to decline, and prices for livestock animals and products have experienced sharp declines. With economic conditions deteriorating worldwide, demand for exports has tailed off, and there are few options available to expand marketing elsewhere. Sharply declining demand in 2009 has forced farmers to accept prices that are lower than were expected earlier in the year when production plans were made. The USDA forecast was not good news for the agriculture and fertilizer sectors on Wall Street. Already on Aug. 28, trading on some major fertilizer company stocks was starting to wane and at least one analyst had announced fertilizer company downgrades.
Mosaic Colonsay potash workers ratify new deal
Saskatoon-United Steelworkers (USW) Local 7656 members employed at Mosaic Potash’s Colonsay Operations, about a hour east of Saskatoon, have voted to ratify a collective agreement that will be in place from Aug. 14 to April 30, 2012. The agreement provides across-the-board wage increases of 5, 5.5 and 5.5 percent, along with premium increases for tradespersons in the second and third years of the contract. Office and technical employees receive 5.5 percent wage increases in all three years, alongside new job classification categories. USW Western Canada Director Stephen Hunt says that both sides bargained a fair agreement. “We are pleased to reach a collective agreement which addresses several concerns of our members,” says Hunt. “Even though potash production has been curbed during the current global economic crisis, our members are entitled to an increasing share of the comfortable profits that Mosaic and other Saskatchewan potash producers are making.” The agreement includes increases to pension plans and improvements to dental and vision care. New job posting provisions are provided along with improved provisions on probation, recall rights, and the use of temporary employees in work or production schedules and loadout procedures. The agreement also includes improvements to bereavement leave and a top up benefit for EI compassionate care. The company will also cover return-to-home travel at the end of an overtime shift. Mosaic has agreed that no temporary supervisors will be employed during layoff situations. A supplemental agreement on shift scheduling was also agreed to, along with the striking of a joint committee to improve return to work for injured workers.
Syngest cob-to-NH3 plant gets $2 M Iowa loan
San Francisco-Syngest Inc. has received a $2 million loan from the Iowa Development Board for the development of a $102 million corn cob-to-anhydrous ammonia plant near Menlo, Iowa. Syngest said this was wonderful news and a vote of confidence from the state. It said the total award amount, with tax credits and other incentives, is five-to-six times larger than anything the state has done in this category. Syngest is also seeking $2.5 million from the Iowa Power Board and a $50 million grant from the U.S. Department of Energy. The project could also qualify for $805,472 in state tax credits based on the capital investment. The plant expects to produce 50,000 st/y of ammonia using some 130,000 st/y of corn cobs. Syngest expects the plant to create 40 jobs, most of which will pay at least $13.30 per hour. It will source the cobs from local farmers.