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Potash: Trying Another Deal Adds Risk

Summary

Potash Corp. and Agrium confirmed the companies are in discussions of a merger of equals.

The deal faces regulator scrutiny, while not solving the market supply issues in the key potash fertilizer.

Potash now trades at a lofty level compared to the operations of the company without a fundamental shift in the sector that this proposed deal doesn't offer.

If at first you don't succeed, try, try again.

- William Hickson

This theory appears to be the mindset of Potash Corp. (NYSE:POT) as the fertilizer markets crash. My investment thesis predicted a few weeks back that the market picture didn't match the stock holding $16.

The company originally attempted to force a deal with K Plus S AG (OTCQX:KPLUY)(OTCQX:KPLUF) from Germany last year. With that deal never working out, Potash has apparently moved on to try another deal with Agrium (NYSE:AGU). The stock is up to $18 now where resistance has existed for most of 2016.

Deals

The basis of the K Plus S deal was to cut production of potash. The company had both high cost production areas in Germany and a new mine in Canada. The Legacy mine in Saskatchewan is on track for starting production by year end. The original goal was for the mine to reach annualized production of 2 million tonnes by the end of 2017.

With a merger, Potash Corp. could cut joint production and help stabilize the supply/demand scenario in the potash market. The Agrium deal is an interesting twist on this plot.

The company has a focus on retail stores as well as a position in the Canpotex marketing arrangement...


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