Stock Market Research Platform 21 May 2020

Nutrien Stock Analysis

THE KEYS WHEN IT COMES TO NUTRIEN:
- Low cost potash producer with 6 million tonnes production ramp up option at
extremely low cost and 50 years of production ahead
- Integrated with retail after the merger with Agrium contributing $650 million in
synergies
- $2 billion cash flow at the bottom, or possible bottom, of the fertilizer cycle
- Good distributions to shareholders and sound balance sheet
- Possible growth coming from pricing but also from operations
- Potash is an oligopoly with 9 global players playing the prisoners dilemma game with
China and India on pricing and production rates
- Global demand is likely to grow but production growth has also a lot of potential.
However, expansion is not cheap
- The market is expecting lower for longer potash prices
- The trend is for an increase in demand for potash over the long-term.
- Stock is at multidecade lows.
- To make it a great buy, a low risk high reward one, the market cap needs to be around
$12 billion!

Contents
Introduction and current situation .......................................................................................... 2
Nutrien – business overview .................................................................................................. 5
Retail business ................................................................................................................. 15
Potash ............................................................................................................................... 16
Nitrogen ........................................................................................................................... 22
Phosphate ......................................................................................................................... 24
The outlook and potash market ............................................................................................ 25
Explaining the potash market........................................................................................... 28
Q1 2020 highlights and conference call notes ..................................................................... 29
The fundamentals ................................................................................................................. 34
A quick earnings and cash flow/dividend model ............................................................. 37
The risks ............................................................................................................................... 37
Potash market ................................................................................................................... 40
CONCLUSION .................................................................................................................... 43

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Introduction and current situation

Nutrien is a stock that I have followed for a while now. Actually, since 2014 have I been
following the sector (time flies). It was usually on the expensive side of things due to its
quality but now is the time to give it another good look!
A lot has been going on with the company on a corporate level, from merging to selling the
SQM stake which might create risks but also opportunities!
Nutrien is the entity created after the merger of PotashCorp and Agrium in 2018.
The current situation is the following:

Source: SA
The thing is that if there is enough food, there will be less incentive to produce more, less
incentive to apply more fertilizer and fertilizer prices will fall. Lower oil prices destimulate
ethanol production and consequently also food prices decline. However, this is typical Wall
Street; ‘when the short-term outlook is negative, you better sell everything as it is all worth
nothing’. Also, the downgrade comes after the stock has gone down 50%. When it goes back
up, you can expect an upgrade, but only after the fact.

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This is exactly where we as retail, long-term investors have the opportunity to pick up good
long-term businesses at below intrinsic value. We have to calculate the long-term outlook
beyond the cycles and the likely cash flows in various scenarios and understand sector
dynamics.
There are many moving parts, but all that can be researched in order to find the long-term
cycle values. There are also some competitive advantages as mining costs, distributions costs,
scale but also non-competitive issues like investments in capacity, low debt cost that
stimulates investments in this part of the cycle consequently lowering general pricing.
In light of the above, the stock price is extremely volatile but the business is what it is and
actually much more stable. They didn’t have one year of negative cash flows in the last
decade.

Source: Morningstar – PotashCorp prior to 2018

We have to see whether there is a difference between the stock price and the long-term value
of the business. Nutrien is one of the biggest companies and has historically delivered stable
returns. It is likely it will do so in the future too.

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From the last proxy report:

Plus, nobody owns more than 10%.

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Nutrien – business overview

To give a full overview of the business it is better to start with the Annual report and then
discuss sector dynamics from other sources.

29% of EBITDA comes from retail, 37% from potash, 29% from nitrogen and 5% from
potassium. They also show EBITDA per share but what am I more focused on is free cash
flow. Over the last two years is was at $2 billion. With a market capitalization of $18 billion,
we are looking at double digit returns if the last two years have been an indication of what we
could normally expect from Nutrien.

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Merger synergies are leading to $650 million in savings per year.

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Here are the financial highlights, we’ll have to estimate what will be the future cash flows
and dividends.

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All in all, Nutrien looks like a good company, let’s see whether what the CEO says is true:

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The situation is simple, there is significant pressure on fertilizer prices, and as we have seen,
the pressure is expected to continue in 2020 and perhaps in 2021.
Perhaps this quote from the Annual report better explains the company:
“We have some of the world’s highest quality, lowest-cost crop nutrient production assets,
combined with an unparalleled Ag Retail distribution network. We leverage our unmatched
size, scale and platform to create superior long-term shareholder value.”
So, it is about the assets, that have a competitive advantage and about retail plus scale. This
shows the power the company has:

Having the capacity to ramp up 6 million tonnes of

production as little cost is a huge advantage. To show the value of that we can compare it to
BHP’s Jansen project, a $5.7 billion investment, where $3 billion already went down the
drain, that could produce 4 million tonnes. There is no point for BHP to proceed when
Nutrien can just increase production if necessary and make the whole BHP project worthless.
That is why BHP will decide the fate of the project by the end of 2021.
BHP thinks the potash market could double by 2040, if that happens Jansen would be
profitable but then Nutrien would be off the charts.

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$5.7 billion returned to shareholders is almost 33% of

the current market capitalization.

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As investors, we are very interested in the growth and capital allocation.

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$1 billion sustaining capital is in line with depreciation.

The target is to have investment grade credit rating all the time.

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EBITDA should have to fall to $3.2 to be below investment grade. That could happen in a
short period of time, but then others would be hammered to bankrupt due to their higher debt
levels.

Plus, their capital allocation strategy seems smart:

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Retail business
This is interesting because they don’t only sell it to you, they also have more than 3,000
agronomists to help sell the products. An interesting benefit from merging with Agrium.
They have acquired Ruralco, the third largest retailer in Australia, Actagro and are building a
network in Brazil. It is all being improved with tech, to give advice to customers so we can
say they are tech users. Plus, 11.6% of North American sales goes through their digital
platform already.

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The opportunity in the retail business is very interesting as the market is segmented. Scale
could add stability to the business and cash flows.
The short term and long-term business outlook
When it comes to fertilizers, the short term is difficult to predict as it depends on rainfall,
pricing, oil prices that put pressure or vice versa on ethanol and many other moving factors.
In the long-term, it all depends on whether there will be more global demand for food but
Nutrien looks like a real investment, not a bet on higher prices. At any level, it is likely to
make money.

Source: 2019 Capital Markets Day

Potash
The company has 21% of global potash capacity with access to decades of mining thanks to
their 6 mines in Saskatchewan.
Cory mine example:

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More than 70 percent of the world’s potash capacity is held by the six largest producers. Our
primary competitors are located in Belarus, Canada, Germany, Israel, Jordan and Russia.

The production cash cost is $63 per potash ton.

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Source: Q1 2020 Report

Demand for potash has been growing at 2.5% per year since 2000. There has been a decline
in 2019 of 3% due to lower palm oil prices, bad weather in the US and lower commodity
prices in general.
The forecast is for growth in the long-term.

Here is BHP’s video about future potash demand. Future demand is based mostly on
population growth and middle-class growth.
https://www.youtube.com/watch?v=RmaGh4g1JtY
But, all of that doesn’t impact Nutrien much as the gross margins are high on a cash cost
basis. When it comes to fertilizer production, the initial investment is a huge chuck of costs
and with the company, that is mostly a sunk cost already.

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With a cost of $63 per ton and a price of $300, you do the math. In an average year, then
make $1 billion just from potash, in a good year, if those years come back again, they will
make two billion or more. In a bad year, they will make a few hundred million of free cash
flow, but the risk of going under is likely low.

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In 2018, they impaired their Brunswick mine as it is more profitable to mine just in
Saskatchewan. That was a non cash cost of $1.8 billion. Another indication of how expensive
it is to develop those mines.
All in all, it is costly do develop new mines and you need a good incentive price to do that.
Long-term, we might see another cycle boom, but you never know that.

Plus, the company expects to further reduce production costs and even beat the White
Russians.

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Long-term, they expect to lower costs and increase production. Plus, if there is a benefit of
higher prices, even better.

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But, what if we don’t see higher prices for longer and the Wall Street expected scenario of
lower for longer materializes? Well, the company is likely to still be profitable due to the low
cost position that others hardly can compete with. As an investor, am I happy with EBITDA
of $1.5 billion or just $1 billion coming from potash in a bad case scenario? That depends on
the price I need to pay to own one of the lowest cost global producers.
Potash prices:

Source: Mosaic
Nitrogen
Nitrogen is a highly competitive business where the bonus for Nutrien are low North
American natural gas prices.

In any case, Nutrien’s cash costs are also low but actually not that special in North America.

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Source: Q1 2020 Report

Their forecast is for a tighter market over time. But, as long as input prices remain low,
nitrogen will remain a difficult market.

The question is whether we have reached bottom prices or not?

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Phosphate

The ramping up of production in Saudi Arabia and Morocco puts pressure on the market,
alongside the other issues that are hitting fertilizers in general. But, by the end of 2019,
production margins were at unsustainably low levels, which led to further production
reductions and provided some support to prices entering 2020.

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The outlook and potash market

Let’s start with the guidance. This is a cyclical business, so when prices are low, you can’t do
miracles. But prices are not going to stay low forever as few will invest with low prices and
demand is still growing and expected to grow more long-term.

Q1 new guidance:

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Their long-term outlook is also very interesting. They plan to add to profitability with things
they can control. If prices help long-term even better. The below chart suggests a potential for
EBITDA doubling from the current situation and possibly reaching $7 billion in a good year.

Source: Capital Markets Day 2019

Per segment:

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Given the current situation they might not reach their 2019 target, but they might reach it
from 2023 to 2028. Their target is higher than the current market cap.

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However, potash and retail don’t have a great moat. There is plenty of potash ore in the earth.
So, we have to calculate what could be the lower for longer price bottom.
Explaining the potash market
BHP’s Jansen project is likely to cost $5.7 billion and produce 4.5 million tonnes. This means
that the cost of setting a ton in production is about $1,266. Let’s say that you want to get your
money back in 10years, then you have to add $126 to your cash cost of production. If the
cash cost of production comes in close to $50 per year, your breakeven price is $176. So, the
deal China recently signed for a price of $230 shows we are closer to the bottom, but I would
not exclude that in a bad year or two, we see prices below the above breakeven. This also
indicates that capital costs and investment burdens are key within this sector, production costs
are secondary.

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Q1 2020 highlights and conference call notes

Notes from the Q1 2020 conference call

- On M&A, they are doing due diligence and waiting for the situation to pass.
They actually do interesting acquisitions. If you have the scale to complement the additions,
then those are smart, even at normal prices. If you buy something, the price is fixed at that
point in time, but the upside is infinite long-term.

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- “Also the fact that, and this is no surprise to anyone on the call,
that there's excess capacity of potash in the market right now.”
- Biofuel is the main short term unknown because with lower oil prices, you don’t need
corn to make more of it.
- On long term potash prices, there is the temporary impact of new supply, low biofuel
and lower corn prices, but demand has been growing steadily up till now.
- “And we would expect that if potash demand continues to grow
globally at that 2.5% per year level, once we see the COVID
situation and the oil prices stabilize a little bit, you're going to see
the supply demand for potash tighten quite readily. And as the
market supply demand starts to tighten, I think you're going to see
prices follow.”
It is always good to look at sensitivities when it comes to analysing a business.

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A $20 change in potash price by tonne, would add $205 million to EBITDA, or better to say
to EBT (earnings before taxes) as interest costs, depreciation and amortization wouldn’t
change much.
However, one can’t simply expect potash prices to be much higher in the future because those
were higher in the past. Mining costs have declined as a lot of money was invested in big
operations when potash prices were much higher between 2008 to 2014. As it takes almost a
decade to develop a big mine, here we are with oversupply now. For higher prices, we will
have to wait for more balance in the market.
Potash mining costs have been going down, thus prices will likely follow:

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Source: Mosaic
Given the situation in the markets, the increased production ramping up, it is likely prices are
going to remain subdued for a while.

The situation looks more positive for the phosphate markets where demand might grow faster
than new capacity!

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From another perspective, the outlook for fertilizers looks very good as the world’s
population grows.

Source: K+S
Asia doesn’t have much production, while Russia and the US have the advantages, but the
Russians have lower costs.

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The fundamentals
The company has $8.675 billion in debt, with an average interest rate around 5% and well
distributed maturities.

The debt is not that big compared to the assets and long-term debt is just above a third of
equity.

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A quick earnings and cash flow/dividend model

Guidance for 2020 is $3.8 billion in EBITDA – so, we can deduct $0.6 for interest payments,
$0.2 for tax and there is $1 billion for CAPEX. There is $1.8 billion of depreciation and
earnings should be at $1.1 billion or around that, thus we come to around $2 in EPS.
On cash flows, I add the $1.8 billion in depreciation and deduct the $1 billion in capex to
arrive at almost $2 billion in cash flows. That is $3.5 in cash flow per share at current market
prices. If they pay out 50% of that, we are at the dividend of $1.8 per share or about 5.2%.
Perhaps they do some buybacks or reinvest that money into growth, and you get additional
future returns.

The risks
Jansen BHP + unused capacity
The big elephant in the room is BHP’s Jansen project, but also the big positive. If the trend
stays, there will me much more need for potash, thus all would benefit but it is always a
market timing issue – I mean a supply and demand issue for the potash market! Plus, Nutrien
is just part potash.
BHP can invest up to $17 billion in Jansen and could make it a 100 year project. For starts,
$3 billion have already been invested, the shafts are completed and another $2.7 billion have
to be invested to ramp up 4.5 million tonnes of production. Nutrien says how greenfield
potash projects are not profitable, but that could be only politics and BHP has already spent
quite a few bucks when pries were much higher. It is likely that BHP will go on with the
project as $3 billion is already a sunk cost and they see it as an environmental diversificator.
At this point they can chose to throw away the $3 billion invested or invest another $2.7
billion to produce 4.5 million tons. At a cash cost of $50, that would return about $600
million in cash flows per year, so they are most likely going forward to it as it is a great
return on what is the remaining investment.
On top of the above project in North America, there is plenty of unused capacity and also
idled mines. As soon as prices would go up, many projects would soon become profitable and

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over time, push production up and prices down. The typical cycle of a commodity, especially
of one where the ore is easy to find and there is plenty of it.
However, it is about how much can production go up, and if it does, who makes money and
how much does Nutrien make?
Mosaic has been promising Esterhazy for years now that should lead to higher production
with lower cost. So, there is 2 million tonnes.

Source: Mosaic
K+S managed to practically destroy itself with the Bethune mine but they keep going now.
On the other hand, the company has to idle production in Germany due to environmental
reasons etc. So, the market is not as easy as it looks with production additions, but it will be
an interesting game to follow.
Eurochem is the big contributor to the market with two projects adding potentially 4 million
tonnes to the market.

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Source: Eurochem
The Garlyk mine in Turkmenistan is also full with issues.

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Sirius minerals could not find an investor and was acquired by Anglo for pennies on the
dollar. We will see whether Anglo will develop the mine in the UK.
Potash market
On that topic, I was listening to Phosagros’s capital markets day in September of 2019 and
when asked about acquisitions from a typical Wall Street perspective as you have to do
something so that investment banks can earn fees, the CEO practically got mad at first for
such a stupid question but then explained how Potash will likely be worth less than iron ore.
Apart from Jansen, another risk long-term investors should keep in mind. So, there is the
possibility for lower for longer prices.
Plus, we can say that the spike in prices over the last 15 years was all due to the agreement
for potash, a cartlel between Belaruskali and Uralkali, alongside Canpotex. Given that the
Belorussians are increasing production, it is not said that the Canadians will cover for global
demand growth. However, an agreement between the White Russians, would easily increase
prices but then Nutrien could increase production and make the money – so it is a prisoner’s
dilemma with a dozen players.

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Source: Ycharts
The current market is 66 million tonnes, but capacity will likely be much higher in 2032 and I
don’t know whether demand will reach that.

Source: Highfield resources

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There is so much that they can produce, incredible!.

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Priced out of Asia

Uralkali, Belaruskali have incredibly low production costs, even lower than the $60 per tonne
by Potash corp. The recent price agreement with China has set the floor at $220.

Source; SA
Other risks
Changes in agricultural trends, tariffs, regulations etc.

CONCLUSION
It is a tough game, like a 9 player poker game with a few additional players in the form of
customers. Timing is a crucial factor as it impacts debt, profits of others. Then market share,
can you push others around etc.
In the current situation, we have a low cartel situation, thus there is fight for market share.
Projects launched 10 years ago based on high prices are still coming online (from Jansen to
others). But prices are low. There won’t be many projects as large as in the past, where
demand grows at a stable rate.
There is a possibility for a cycle boom somewhere in the next 10 years as the sector looks
ugly at the moment and for the foreseeable future. “lower prices for longer” is what the

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market is pricing in. However, it can also get uglier and that is what investment banks are
forecasting.
On the other hand, I am looking at the business as it is now – it looks good! If it does reach
its targets, that would be great, if it doesn’t it will still be good.
Investment perspective - $1 billion for dividends – that is 5.5% minus taxes is what I’ll likely
get as relatively certain. On top of that there are investments, acquisitions, growth and
capacity additions with potential cartel agreements etc. On top of everything there is the
likelihood there will be 9 billion people on the planet and their calories requirements might
continue to grow.
The stock can fall another 30 to 50% in a lower for longer prices scenario and, as we have
seen, rare scenarios happen more often than not. I have made a small sketch of what what is
going on could mean for the investment. It is likely the dividend wills stay in all scenarios but
the market cap might suffer because, as you have seen, Wall Street is focused on the short
term outlook.
Lower for longer prices:

But, the above bottom might be a great entry if afterwards we enter into a strength scenario:

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That might create a situation for a 3x cyclical return alongside the safety of the dividend and
the good business Nutrien is. Further, if we ever get a new cycle boom, the returns could be
much higher.

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This is the risk and reward of investing in Nutrien at the moment. I’ll keep following and
waiting for the perfect pitch in comparison with other opportunities because after all, Nutrien
is a good business.

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