Potash Corp./Saskatchewan Inc.’s Fresh Brazilian Bet: What You Need to Know

Interesting insight into why Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) is planning to acquire a stake in a Brazil-based company.

The Motley Fool

In its latest press release, Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) announced its intention to acquire a 9.5% stake in Brazil-based fertilizer company Fertilizantes Heringer S.A. in a transaction that’s likely to be completed by the second half of this year.

While an acquisition indicates PotashCorp’s focus on growth, it may not sound like a big deal if I tell you that the value of the transaction is pegged at US$55.7 million. After all, PotashCorp is the world’s largest fertilizer company with revenue, profits, and cash flow running into the billions.

But don’t go by numbers here, because the deal could give PotashCorp big thrust into a high-potential market. Here’s why.

A chart that you must see

PotashCorp counts Latin America among its top five global markets, and Brazil is a key play. As the world’s largest producer of coffee and sugar, Brazil’s fertilizer consumption is among the highest in the world.

More notably, Brazil is the world’s second-largest producer of soybeans after the U.S. This contributes to the nation being a top potash nutrient consumer, since soybeans are a potash-intensive crop. Here’s an interesting chart that shows a breakdown of Latin America’s crop-wise potash consumption.

Source: PotashCorp. Data Source: IFA, FAO, USDA, PotashCorp
Source: PotashCorp. Data Source: IFA, FAO, USDA, PotashCorp

By now, you must have realized what an important position Brazil holds in the global fertilizer map. In fact, industry experts soon expect the country to take over the U.S. as the world’s largest soybeans producer. That could mean a big surge in potash demand from the nation, and that’s exactly where PotashCorp’s role comes into play.

What you should know about Heringer

PotashCorp knows its game well, which is why it chose a company as big as Heringer to make headway into Brazil. Here are some quick facts about Heringer to give you an idea of the company.

  • Heringer is among the top three fertilizer companies in Brazil, with roughly 16% market share in terms of fertilizer sales volumes. Heringer counts global fertilizer companies like Mosaic and Yara as its key competitors.
  • Heringer’s sales volumes have consistently outperformed (Brazil) market average. For instance, the company’s fertilizer deliveries for the nine months through September 2014 grew 14% year over year compared to market’s average growth of only 7.3% over the period.
  • Heringer’s net income for the nine months through September 2014 hit a five-year high.

Long story short, Heringer has solid presence in Brazil, which is what PotashCorp plans to capitalize on.

PotashCorp’s game plan

It’s worth noting that Brazil relies heavily on imports for potash—the nation currently imports more than 80% of its potash requirements. It’s no wonder that PotashCorp aims to become Heringer’s “principal” potash nutrient supplier over time.

It’s a simple equation. PotashCorp is a top global potash producer, and Heringer a top potash distributor in Brazil. So, the deal should not only enable PotashCorp to sell more of its nutrients to Brazil, but also give it access to Heringer’s strong distribution network, thus allowing it to penetrate the Brazilian fertilizer market faster.

Wait, there’s more to this story

If you remember, there was news late last year that PotashCorp was to start operations at its new Picadilly potash mine in New Brunswick. The mine is about to open nearly seven years after the project was announced. The mine’s strategic location will give PotashCorp better access to Brazil.

During PotashCorp’s presentation at Credit Suisse Basic Materials Conference last year, Wayne Brownlee, executive vice president and chief financial officer explained: “There is a lot option value in New Brunswick at a much lower cost. They’ll be much more competitive, their ocean freight costs into Brazil are quite a bit lower than basically almost all of the other competitors that are selling into Brazil.”

So, even as PotashCorp spreads its wings in Brazil, it’s revving up its new mine to ensure that it’s one of the lowest-cost potash suppliers in the nation. The company clearly has a solid plan in place, one that should keep adding to shareholder value in the years to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Neha Chamaria has no position in any stocks mentioned.

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