Must-know: AGU’s growth drivers include potash and nitrogen

Growth drivers

Agrium’s (AGU) Wholesale segment has been involved in expansion plans for potash and nitrogen. This will increase capacity and help lower costs.

Jeffrey Ubben’s ValueAct Capital disclosed a 5.7% stake in Agrium last month. He told Bloomberg that Agrium could return “significant capital” starting in 2016 as “free cash flow explodes in 2016 with a recovery in crop prices and end to capacity investments in the wholesale business.”

Must-know: AGU’s growth drivers include potash and nitrogen

Potash expansion at Vanscoy

Agrium’s Vanscoy, Saskatchewan potash expansion project began in 2012. It should be completed by the end of 2014. It will ramp up to 2.8 million tonnes per year by the end of 2016 or the beginning of 2017.

According to Agrium’s annual report, the project is expected to increase its annual production capacity by one million tonnes. It will reduce the cash cost of production by ~$20 per tonne by 2017. In February, Agrium said that the project is expected to exceed previous spending estimates by ~25% due to labor shortages, contractor productivity, and extreme weather conditions in Saskatchewan.

Nitrogen sales volume growth

Agrium’s nitrogen facility expansion in Borger, Texas got board approval in February. The expansion intends to add a new urea production unit of ~610,000 tonnes. Approximately 100,000 tonnes—urea tonne equivalent—will be diesel exhaust fluid (or DEF). Agrium said DEF is used to reduce nitrogen oxide (or NOx) emissions in diesel vehicles. This product will help diversify its end-markets.

The project will also increase the facility’s annual ammonia capacity by ~145,000 tonnes. It will bring the company’s total annual gross ammonia capacity to ~635,000 tonnes. The total capital cost of the project is expected to be ~$720 million. Construction started in March 2014. It should be complete in the second half of 2015.

Agrium is also expected to benefit from its nitrogen facility expansion project in Egypt. It also has a brownfield expansion and efficiency project at the Profertil nitrogen facility in Argentina.

In Egypt, the company owns a 26% stake in Misr Fertilizers Production Company S.A.E. (or MOPCO). The expansion project stopped in 2011 due to unrest in the country. The project will increase the production capacity to 1.95 million tonnes of urea and 150,000 net tonnes of merchant ammonia.

In Argentina, the project will increase total projected annual production capacity by ~125,000 tonnes of urea and 10,000 net tonnes of merchant ammonia.

Nitrogen and natural gas pricing

Natural gas is the most important input for nitrogen and natural gas prices. It basically dictates the profitability of all nitrogen products. A report in July by Rabobank noted that the recent rapid capacity expansion could see the U.S. become self-sufficient in urea as early as 2017. Urea is a key nitrogen fertilizer. The report said that the capacity expansions have been driven by lower natural gas costs. You can follow natural gas pricing updates on the Market Realist website here.

Agrium’s peers—like PotashCorp (POT), Mosaic (MOS), and CF Industries (CF)—are also involved in capacity expansions. Agrium and its peers have exposure to VanEck Vectors Agribusiness ETF (MOO).

In the next part of the series, we’ll discuss Agrium’s plans to create shareholder value.