Topic: Mining Stocks

Merger creates strong momentum for Canadian resource giant

A merger completed at the beginning of 2018 is paying off for this stock as sales rise and costs shrink. 

The merger created a world leader in the agricultural industry. Cost savings from the elimination of overlapping operations have already been larger than anticipated; lower costs and higher sales pushed up earnings in the latest quarter. Meanwhile, the dividend’s new rate is higher than the combined payouts of the two original companies.

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NUTRIEN LTD. (Toronto symbol NTR; took its current form on January 1, 2018, through the merger of Agrium (old symbol AGU) and rival fertilizer producer Potash Corp. of Saskatchewan (old symbol POT).

Potash Corp. shareholders received 0.40 shares in Nutrien for each POT share they held; Agrium investors received 2.23 shares for each AGU share.

Agrium sells seeds, fertilizers and other agricultural products through more than 1,500 company-owned stores across North America, South America and Australia. Those operations supply about 55% of Nutrien’s sales. The remaining 45% comes from the bulk sale of nitrogen fertilizers, potash and phosphate.

  • The combined company has 20,000 employees and operations in 14 countries
  • Produces and distributes over 25 million tonnes of potash, nitrogen and phosphate a year
  • Aims to pay out 40% to 60% of its free cash flow as dividends

In the three months ended June 30, 2018, the combined company’s sales rose 10.8%, to $8.15 billion from $7.35 billion a year earlier (all amounts except share price and market cap in U.S. dollars; the year-earlier amounts are pro-forma figures supplied by the company). Strong demand for fertilizers and seeds in the spring planting season was the main reason for the higher sales.

Nutrien’s earnings from continuing operations in the quarter improved 5.1%, to $741 million from $705 million. That’s partly because the merger has let the company cut $246 million from its annual costs. It now expects total savings of $350 million by the end of 2018, up from its initial estimate of $250 million.

If you exclude merger-related costs and other unusual items, Nutrien earned $1.48 a share in the latest quarter; the company did not provide a year-earlier comparative figure.

Mining Stocks: Sale of lithium assets helps fund two new acquisitions

To win regulatory approval for the merger with Potash, Nutrien agreed to sell some of its investments in smaller fertilizer producers. Those holdings include a 32% stake in Sociedad Química y Minera de Chile S.A. (SQM). In addition to offering fertilizers, that Chilean company is the world’s leading producer of lithium, a key component of batteries for electric and hybrid-electric cars and electronic devices.

Nutrien took advantage of soaring lithium demand and prices to sell its SQM shares in two separate transactions. Under the first deal, it sold its class A shares in SQM to China’s Tianqi Lithium Corporation for $4.07 billion. It later sold all of its class B shares to other investors for $1.0 billion.

The cash will help Nutrien pay for some new investments, such as two acquisitions it made in July 2018. The company agreed to acquire privately held Waypoint Analytical, Inc. It operates laboratories and related facilities in the U.S. that analyze soil samples. That data will help Nutrien develop more-effective fertilizers for specific regions. It has not disclosed what it will pay for Waypoint.

At the same time, the company agreed to pay $63 million for Illinois-based Agrible Inc. That privately held firm makes software to help farmers detect disease threats and monitor their crops.

Eliminating overlapping operations has so far let Nutrien cut $150 million from its annual costs. It expects those savings will rise to $500 million annually by the end of 2019.

The new company pays a quarterly dividend of $0.40 U.S. a share. The annual rate of $1.60 U.S. yields 2.8%. That rate is roughly 27% higher than the combined payouts of Agrium and Potash Corp. Nutrien also plans to buy back up to 5% of its outstanding shares over the next year.

The share of Nutrien are up 26.3% in the past six months. For all of 2018, the company should earn between $2.40 and $2.70 a share. The stock trades at 29.2 times the midpoint of that forecast.

Recommendation in The Successful Investor: Nutrien is a buy.

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