With over 12 million tons in current potash capacity, replacement cost is anywhere from $30 to $45 billion. One very important fact: in addition to the capital outlay, it takes 7 years to develop a fully operational
Potash also owns a 14% stake in the
Factor in another $7.5 billion Potash is expending for brownfield mine expansion, $7 billion in nitrogen and phosphate assets, and the company's equity replacement cost is can start to approach $60 billion, compared with the $39 billion BHP offer. At $60 billion, Potash shares are worth approximately $200 a share. So if BHP’s offer is at the low end and $60 billion is at the high end, then a midpoint of $175 a share may bring Potash management to the table.
By 2015 Potash Corp will have spent about $7.5 billion to add an additional 6 million tons of potash capacity. This implies that Potash is bringing this additional capacity at a cost just over $1,000 a ton versus $1,800 a ton for competitors. Potash can do for $7.5 billion what it would cost someone like a BHP $13 billion.
Understand that this capacity expansion accounts for over 50% of all new capacity coming on board during that time. In other words, simply having the capital to construct a mine is just that. You have to first locate the reserves, of which nearly 40% is held by Potash and its equity investments and another 28% is held by
So add it all up: $30 to $45 billion for the existing assets, $7.4 billion for the equity stakes, $7 billion for nitrogen and phosphate assets, plus $8 billion or so in new capacity - which is worth more to a competitor - and an equity value of $51 to $66 billion gets you in the ballpark. With 297 million shares outstanding, that’s a share price range of $171 to $222. Given the lack of available reserves on this scale, I would narrow my range to a minimum $180 a share.
No surprise then that the market voted by sending shares to nearly $150 the day the $130 offer was announced. Thankfully, Potash insiders truly understand the value of their business. In the words of CEO Doyle, “we are not opposed to sale, but are opposed to letting someone steal the company.”