Monday, November 15, 2010

PotashCorp (NYSE:POT): Colour on BHP news - bounce?

We have couple of firms out with supportive comments on PotashCorp (NYSE:POT) after news BHP Billiton has withdrawn its offer for a Canadian company.

- BMO Capital is out saying POT’s price may experience additional short-term selling pressure as event-driven investors liquidate remaining positions in response to this disappointing news. The downside price pressure, in firm's view, is not expected to be large as fertilizer industry fundamentals, notably potash, have strengthened considerably since the launch of BHP’s $130/share bid on August 17. In addition, based on the preliminary rejection of BHP’s bid by the Industry Minister Tony Clement, today’s announcement by BHP should not be overly surprising either. They believe that investors with a fundamental focus should be accumulating POT. BPC’s recently announced potash price increase of $25–30/tonne for S.E. Asia and Brazil has reportedly gained some traction in Vietnam with two small orders: 30 Kmt for IPC and 100 Kmt for BPCat $430/tonne for standard grade. FMB has also reported that BPC has indicated a price of $405/tonne to Chinese buyers if settled immediately or $430/tonne for January/February. The combination of robust crop prices and demand rebound from overly depressed levels in 2009 has restored pricing power to potash producers.

Firm reits Outperform and $175 target on POT.

- Morgan Stanley is even more bullish reiterating their Overweight rating and $180 price target following today’s announcement that BHP will officially withdraw its bid. While They do not view BHP’s action as a surprise, it does officially remove the overhang that they believe has caused Potash Corp. to underperform its peers since underlying grain fundamentals took off in early October. While it is impossible to know how much merger-arb money remains in the stock on the hope that a BHP deal could be resuscitated following the
Canadian government’s preliminary rejection, the arb thesis is now over. They expect valuation to return to fundamentals, which prescribe a $150-$175 share price today.

Is it “no” to BHP or to everyone, and should that matter in valuation? Potash bears argue that Potash Corp. should trade at a discount now that some may argue that it cannot be taken over. Morgan Stanley says they disagree for a number of reasons:

1) Pre-bid, they do not believe that the stock ever traded with an M&A premium (see the
$84 share price from July 2010);

2) While they have no knowledge of potential strategic activity, the firm is not sure that a deal by another party would be turned down, should another party emerge at some point in the future;

3) If it is “no” to anyone, then it would likely also be “no” for the majority of Potash Corp.’s peers, to whom Potash Corp is currently trading at an abnormal discount;

4) They see this as the evolution of the bear thesis now that: i) Fundamentals have reverted materially against bears; ii) The BHP bid has at the very least demonstrated that new entrants understand that economic returns are superior to “buy” rather than to “build” (i.e., Potash Corp’s replacement cost is at least $160 per share, MSCO estimates).

Notablecalls: While is somewhat humorous to see Morgan Stanley calling BHP's back-off a removal of overhang, the stock should not be trading down 10 pts on the news.

It was fairly clear to everyone, the deal was dead in the water 10 days ago.

There will be arb pressure there but I suspect the smart money left the stock weeks ago.

POT is worth keeping on the bounce radar in the n-t.

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