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Why Potash Corp should take a run at Intrepid Potash…in a year

Potash Corp. of Saskatchewan Inc. should consider a takeover of Intrepid Potash Inc., even though the analyst recommending such a deal doesn’t think it will happen for a year.

Ben Isaacson at Scotiabank noted that Potash Corp.’s failed acquisition of German-based K+S AG was about both consolidation and accretion. However, he also pointed out that improving the North American potash market is a much more important task.

While Intrepid offers a potential suitor roughly 1 million metric tonnes of capacity, it is also a high cost producer and therefore realizes the lowest margins among the majors.

That’s why Isaacson only thinks a transaction makes sense if Potash Corp. can replace its margins with Intrepid.

“Continuing to run Intrepid’s assets is not a viable option for Potash Corp, in our opinion,” the analyst told clients. “We also think it would be too risky for Potash Corp. to shut down Intrepid’s assets in the hopes of a meaningful and sustainable price response.”

He thinks Potash Corp. should focus on growing Intrepid’s specialty potash business, a less commoditized market that offer relatively stickier prices and margins.

Isaacson doesn’t think Potash Corp. will pursue Intrepid for nine to 12 months as a result of anti-trust concerns. However, he noted that once the Legacy potash project in Saskatchewan has ramped up, Potash Corp. should be able to show regulators that potash supply to the U.S. is more diverse that it is now.

The analyst suggested Potash Corp. could offer a roughly 50 per cent premium to Intrepid’s recent trading range, which would mean it’s buying capacity at a 40 per cent-plus discount to what it offered K+S.

“Perhaps this is fair; after all, U.S. potash prices have dropped dramatically since the K+S bid, and IPI doesn’t have a reliable non-potash earnings stream like K+S,” he said.

Isaacson also believes that Potash Corp., along with Israel Chemicals Ltd. and the Luksic family, are the leading candidates to pursue Chile’s Sociedad Quimica y Minera (SQM) – a leading global fertilizer producer that Potash Corp. already has a stake in.

“For Potash Corp., consolidation via Intrepid, or diversification via SQM both achieve a similar objective: managing exposure to the potash market,” the analyst said.