With an Introduction to Commodities Chase Mathew, Kar Seng Yee Alexander Hu, Christopher Chung
The Agriculture Boom Grain futures trading at record highs Wheat Corn Soybeans
The Agriculture Boom PowerShares Agriculture ETF (DBA) 60% increase from Jan 07
Increasing Demand Increasing world population More than doubled since 50 years ago Increasing demand in quantity/quality of food Increased grain consumption: 48% direct consumption 35% livestock feed Livestock population more than doubled since 1950 17% ethanol/other fuels (rapidly growing share)
Increasing Demand Increasing demand for biofuels
Decreasing Supply Bad weather, especially in China and Australia Farmlands converted into factories Farmers have to choose what to dedicate their land acreage to grow Growing more of one grain results in less of another Global warming could cut farm output by 1/6 th by the year 2020
Decreasing Supply Lowest Global Grain Stock Levels in Modern History
The Fertilizer Market
Nutrients Nitrogen Urea Ammonia Potash Phosphate
Nitrogen Rising Nitrogen Prices
Nitrogen (Urea) Black Sea Urea $335/ton Recent fall on price, but rebounding due to increasing demand in L.A.,Africa, and Turkey Chinese Urea $350/ton Supply mainly to Indian market NOLA (New Orleans, Lousiana)
Nitrogen (Ammonia) Unprecedented high price Tight supply and demand from all around (agri/tech) Black Sea ammonia $550/ton spot $565/ton forward market Northwest Europe $600/ton
Potash Rising Potash Prices
Potash Produced in Eastern Europe and Saskatchewan Negotiation with Chinese importers Major producer BPC is seeking $100 raise from Chinese importers Until the negotiation is over, expected to remain calm
Phosphate Rising Phosphate Prices
Phosphate Produced in Central Florida and Pacific Northwest of US Demand increases during the summer period Currently $680/ton and rising International market experiencing short supply and strong demand
Industry Trends High grain and oilseed prices Leads to increased production and thus increased fertilizer demand Increasing demand for urea in Argentina, India, and Brazil Increasing demand for potash from China Increasing demand for phosphates from Brazil and Europe Demand for fertilizer is resilient against economic downturn
Agrium Is Largest agricultural retailer in the U.S. Leading global wholesale producer and marketer of agricultural nutrients Premier supplier of specialty fertilizers Provider of high-tech consulting for farm centers 3 Business segments: Retail Wholesale Advanced Technologies
Business Breakdown 2007 EBITDA 3% Retail 51% 21% 15% Potash Phosphate Nitrogen Wholesale 10% Advanced Technologies
Retail Segment Largest agricultural retailer in the U.S. More than 400 retail outlets worldwide Largest distributor of seeds, crop protection chemicals and fertilizers direct to growers Premier provider of products and services to over 50,000 growers across N. and S. America
Retail Segment 2007 Retail Sales by Product
Retail Segment Western Farm Service 82 Stores Revenue $690 million Key Crops: fruit, vegetables, wheat Crop Production Services 324 Stores Revenue $1.12 billion Key Crops: corn, soybeans, wheat Agroservicios Pampeanos S.A. 30 Stores Revenue $165 million Key Crops: wheat, soybeans, corn, fruit
Wholesale Segment Manufactures, markets, and distributes: Nitrogen Potash Phosphate Produces 8 million tons of nutrients annually - 2-3% of global capacity Extensive distribution system - 12 production facilities - 100 distribution warehouses
Business Breakdown Product Sales by Market/Region Nitrogen Potash Phosphate Canada 19% 7% 46% U.S. 41% 47% 53% Industrial 24% 3% 1% International 16% 43%
Wholesale Segment Increasing Nitrogen Margins
Wholesale Segment Increasing Potash Margins
Wholesale Segment Increasing Phosphate Margins
Wholesale Segment Nitrogen Phosphate Potash Distribution Engro Distribution Ammonia Pipeline
Advanced Technologies Segment Products: Environmentally Safe Nitrogen (ESN) Specialty fertilizer products w/ slow release technologies Branded professional products Used by: Crop growers Professional turf owners Professional horticulturists Broad acre markets
Advanced Technologies Segment Advanced Fertilizer Brands
Spanning the Value Chain
Agrium s s Strategy 1.Grow value chain through acquisitions 2. Pursue International opportunities
Agrium s s Strategy 1. Grow value chain through acquisition Nu-Gro - Acquired Jan 06 Advanced fertilizer technology Professional turf products Expanded product line and customer base Pursell Technologies Acquired Aug 06 Patented ESN technology Added R&D expertise 2006 2007 Royster-Clark -Acquired Feb 06 Doubled retail operations to over 400 retail centers in the U.S. and S. America Increased warehouse capacity by 440,000 tons Hanfeng - Acquired 19.6% stake April 07 Specialty fertilizer sales in China
Agrium s s Strategy 2. Pursue International opportunities Argentina nitrogen facility Nearly $100 million in EBITDA over past four years Building nitrogen factory in Egypt to be completed in 2010 Supplying potash to Asia, Latin America, and Oceania through Canpotex Limited 40% of potash produced sold outside N. America Providing specialty fertilizers Hanfeng (China) provides geographic diversification and option to participate in future joint ventures
Agrium s s Outlook Pursue lower cost production Recycle, redeploy and resell unused/obsolete assets Cost-cutting Gasifying asphaltenes (by-product of burning bitumen) as a feedstock for nitrogen plants Gasifying coal to replace usage of natural gas in production processes Increase leverage to raise prices
Agrium s s Outlook Strengthening wholesale arm mainly by increasing potash production 4 new facilities to be completed in 2008 Coming acquisition of UAP Combined retail operation will have annual sales of more than $5.2 billion Management anticipates synergies of $115 million by 2010, mostly captured in 2009
UAP Holdings, Inc. Major Distributor of crop inputs in the United States & Canada $3.2 billion Revenue $469 million in Gross Profit $226 million EBITDA Approximately 370 facilities across North America Will double Agrium s s retail business Increases Agrium s s presence in the USA, especially Texas and Florida Mid-tier service model Geared towards price sensitive customers
UAP Acquisition Synergies will allow Agrium to: Benefit from UAP expertise in crop protection Combine seed business Expand customer base Expand private label crop protection product lines Reduce SG&A expenses Decrease exposure to regional weather patterns Increase geographic, crop and product diversity
UAP Acquisition wheat and potatoes fruits and vegetables corn soybeans cotton AGU Retail Locations wheat UAP Retail Locations States w/ significant expansion to Agrium s retail footprint
UAP Acquisition Retail EBITDA and Acquisition Synergies
Why Agrium? Strong agriculture industry trends Diversified products and sources of revenue Offers products through entire value chain Strong retail and wholesale arm New Advanced Technologies Segment Differentiates AGU from competition High growth potential (149% yoy Revenue growth) Expanding Internationally Wholesale in China/India 31 retail outlets in Argentina, 4 in Chile
Why Agrium? Record high net earnings of $441 million in 2007 Broke previous record of $283 million in 2005 Record High 4Q Results 4Q 2007 vs 4Q 2006: Net Earnings: $172m vs. -$62m record high Earnings per Share: $1.24/sh vs. -$0.47/sh EBIT: $250m vs. -$87m Wholesale EBITDA: $307m vs. $99m record high Retail EBITDA: $47m vs. $28m record high Advanced Technologies Sales: $70m vs. $36m
Agrium vs. Industry Agrium, Inc. Peer Group S&P/TSX Composite Price/Earnings 21.7 42 17 Price/Book 3.4 7.7 2.5 Price/Sales 1.7 6.4 1.9 Price/Cash flow 17.9 27 8.7 Price/Free CF 37.5 38 25 EV/EBITDA 14.8 24 29.6 EV/Sales 2.1 6.6 7.8
Agrium vs. Peers AGU MON POT MOS TNH Price/Earnings 21.73 51.56 44.28 52.5 11.68 Price/Book 3.39 7.88 7.81 8.83 13.87 Price/Sales 1.7 6.92 8.96 6.36 3.75 Price/Cash flow 17.89 28.09 27.78 32.65 12.66 Price/Free CF 37.47 37.81 43.55 43.33 14.1 EV/EBITDA 14.81 26.05 26.21 26.84 13.55 EV/Sales 2.12 6.95 9.14 6.55 3.56
Agrium s s Risks Phenomenal harvests Supply outstripping demand for 2-32 3 years in a row will slow agriculture momentum Weather conditions Customers activities curtailed during normal seasons will decrease demand for fertilizers Exchange rates, especially USD vs CAD Natural gas prices Failure to obtain forecasted synergies China/Iran building new plants to undercut AGU Political/civil unrest in Egypt