Is There Any Reason to Sell PotashCorp?

Bloomberg news recently reported that BHP Billiton (NYSE: BHP  )  may bid for PotashCorp (NYSE: POT  )  again.

BHP Billiton famously bid for PotashCorp in 2010, offering a split-adjusted $43.33/share. At that time, the Canadian government rejected the Anglo-Australian conglomerate's offer because the deal did not pass Canada's net benefit test. 

Given the muted stock reaction to the news that BHP Billiton may bid again, it seems most market participants think an outright acquisition of PotashCorp is unlikely. Any current offer may not pass the net benefit test.

But the potential bid does bring up a question: With PotashCorp trading around half its peak price, are there any reasons to sell shares of the Canadian potash producer?

Low potash prices
PotashCorp, which depends on potash for a substantial part of its revenues, is trading around half its peak price. This is largely because potash prices are weak due to  a split in the global potash venture consisting of Canada's Canpotex (which includes PotashCorp, Mosaic  (NYSE: MOS  ) , and Agrium), Russia's Uralkali, and Belarus's Belaruskali. The split occurred when Uralkali broke from Belaruskali in July 2013 and announced that it would maximize production. Uralkali's announcement prompted fears of potash oversupply. The oversupply concerns led to lower potash prices and lower earnings for PotashCorp. 

Weak potash prices are not a reason to sell PotashCorp, however. In the long term, potash prices will recover. It is uncertain when that will happen but it may occur sooner rather than later. On April 18, Reuters reported that Belarusian President Alexander Lukashenko signaled to Uralkali that he was interested in ending the potash dispute. If Uralkali and Belaruskali get back together, potash prices will rise and PotashCorp profits should increase.

The bottom line
To me, there is no long-term reason to sell PotashCorp -- the company has great long-term potential. There are several reasons why.

First, potash demand should increase in the future. The United Nations expects the world population to increase from 7 billion people today to 9.6 billion people by 2050. 2.6 billion more people means more food and fertilizer demand. Since potash is a crucial ingredient for fertilizers, more fertilizer demand means more potash demand. 

Second, PotashCorp has a wide moat. The potash industry is an extremely difficult to get into -- it takes seven years of development and billions of dollars in capital expenditures to go from greenfield mine to production. Those high barriers of entry assure that PotashCorp will be around for decades to come.

Third, management is very shareholder-friendly. When confronted with lower potash prices in 2013, management reduced its workforce by 18%. Management also increased the dividend and announced a share buyback in 2013. The increasing dividend/share buyback trend should continue as the company's growth-oriented capital expenditures decrease in 2015.  

PotashCorp stock may be weak, but it is weak due to temporary factors. In the long term, PotashCorp remains a very solid bet. That is, after all, why BHP Billiton wanted to acquire the company in the first place. 

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