Nutrien Sees Stable Potash Prices, Major Brownfield Advances
Nutrien Ltd., Saskatoon, came out of the gate on May 28’s Investor Day with a projection of expanded potash sales and capacity at stable prices, which most analysts saw as a straight shot across the bow of potential competitor BHP, Melbourne, and its looming Jansen project in Saskatchewan.
While BHP executives have conceded that they have “overpaid” for the project to date, it still remains on the table (GM May 24, p. 1), though not approved for final advancement.
In addition, Nutrien is involved in current nitrogen brownfield tweaks and is considering others, ongoing Retail M&A and greenfields, and a new sulfur-enhanced MAP to compete with The Mosaic Co.’s MicroEssentials (see story below).
“We plan to sell up to 17 million mt of potash in 2023 if demand warrants it, and we will have 2 million mt of cushion within our network at any given time to take advantage of opportunities as they arise, as we did last year,” said Susan Jones, Executive Vice President and CEO of Potash. “Our next generation potash initiatives will allow us to continue to aggressively drive down costs, increase our capability, and improve our reliability and flexibility.
“Not only do we have the ability to increase our production to 18 million mt – it’s bought and paid for – we have the line of sight to add an additional 5 million mt of brownfield expansion opportunities, given the size and scope of our current network,” she added.
Nutrien said its current mine network has the potential to add another 5 million mt in capacity through 2023, with an additional 5 million mt that could be added thereafter at a lower brownfield cost of $500-$700/mt, versus a projected greenfield cost of $800-$1,000/mt.
Nutrien’s 2018 potash sales were 13 million mt, and it projects that with annual demand growth it could be 15-17 million mt in 2023. It said it is the lowest-cost potash network in the world, and that 2018 costs of $60/mt could go to $50-$55/mt in 2023. It said 2018’s Potash EBITDA of $1.6 billion could range from $2.3-$2.7 billion in 2023.
Jones reiterated that in a stable pricing environment you ensure there will not be demand destruction, which occurred during the 2008-2009 time period. “Our own view is that over the next five years for grower affordability, prices should be remaining stable with what we can see today.” She said to do a greenfield, prices would need to be significantly higher to justify that investment.
In Retail, Nutrien is targeting $100 million of EBITDA per year from accretive acquisitions and greenfields. Through April, it has made 26 acquisitions, which include over 70 locations, $55 million in EBITDA, and $525 million in revenues. The Ruralco acquisition (GM March 1, p. 1), which is expected to close in the third quarter, will bring in another $50 million EBITDA.
Mike Frank, Executive Vice President and CEO of Retail, noted that in North America some of the recent acquisitions have been larger ag retail, like Security Seeds in Kentucky and Van Horn in Illinois, which were well-established, well-run companies. “And the fact that they decided that this was the exit window, I think that sent some shock waves into the industry as well. So, we’re optimistic that we can continue to consolidate the industry as we have.”
Frank also added that co-ops, which represent 30 percent of the retail business, are seeing unprecedented mergers as they seek scale. Nutrien is having conversations with them and believes there are now opportunities to consolidate with co-ops, and not just independents.
Nutrien said it expects to accelerate the acquisition of independents and cooperatives and supplement with greenfields in regions where acquisitions are unattractive or unavailable. Total Retail EBITDA guidance for 2019 is $1.3-$1.4 billion, with a 2023 target of $1.9 billion.
In Brazil, the company said it now has seven retail locations, three blending/formulation facilities, and five greenfields under construction. 2018 sales were $125 million. The company hopes to reach $100 million EBITDA from Brazil by 2023.
The company noted that Brazil has a lot of blenders, but it wants to get closer to the farmer, i.e., retail, and be a one-stop shop, as that is where the value is. Nutrien is currently eyeing farmers with 100-2,500 hectares. The company is targeting a $1 billion investment in Brazil over five years.
“We’ve got a slow and steady investment thesis,” Nutrien President and CEO Chuck Magro said, citing the company’s move into Brazil, noting that the company has now set up an M&A office in the country. “So we have people on the ground. We’re getting very smart in terms of which assets are the ones that we go after. But the reason we haven’t pulled the trigger is we haven’t found the right combination of assets and values. And we don’t plan to accelerate that just because we have decided we are going to invest in Brazil.”
On the nitrogen side, the company sees tighter global nitrogen supplies and higher prices, with limited new supplies coming online. It said current market prices do not support greenfields.
Raef Sully, Executive Vice President and CEO of Nitrogen and Phosphate, told analysts that the company has about $300 million in approved nitrogen projects. There are seven projects at five sites, and he called them small, but with high returns. These are a mix of ammonia, urea, and nitric acid, and include energy efficiency, small brownfield expansions, and product mix optimization. All approved projects will be complete in early 2020.
Sully said the company is currently considering a couple of larger brownfield and/or product mix projects. He expects a decision on these by year end.
In the near term, the company said while weather has improved in some areas, it remains challenged in others. With planting behind the five-year average, it concedes that fewer corn acres will likely be planted than previously expected. One particular benefit the company has noted is that it does not use the river system, which gives it a supply advantage over retail competitors that have been impacted by flooding.
Nutrien said farm economics have improved due to stronger crop prices and the recent U.S. government farm aid package. It expects fertilizer prices to hold in most major markets.
Over the next five years, Nutrien expects crop prices to improve modestly as grain and oilseed markets tighten on growing demand and trace. It believes grower economics will remain supportive over the period, with fertilizer prices stable-to-upward trending on improving supply and demand fundamentals.
On May 27, Nutrien announced that it would increase its quarterly dividend from US$0.43 per share to US$0.45 per share, commencing with the quarterly dividend having a record date at the end of the third quarter 2019.
Overall, analysts reacted positively to Nutrien’s update. RBC analyst Andrew Wong noted the company’s strong operations and growth opportunities and said shares are at a “very attractive entry point.” BMO’s Joel Jackson said the company remains a lower volatile agricultural play with significant capital to redeploy and an attractive upside, but he said 2023 guidance seemed ambitious as he was less bullish on crop prices and potash. Stifel’s Vincent Anderson said the update accomplished its goal of resetting expectations for deploying its strong cash generation, particularly noting U.S. retail consolidation, the strength of its digital platform, and its go-to-market potash strategy.