Money and Investing Thoughts

Terra Industries: Manufacturers of Urea Ammonium Nitrate, Anhydrous Ammonia and Ammonium Nitrate: News Release.

The press release linked above announces a distribution agreement between Terra Industries (TRA: 0.00 N/A N/A) and Brenntag North America for the exclusive distribution rights of Terra Industries’ Diesel Emission Fluid (DEF). First, a little background on the use of DEF.

On January 1, 2010, EPA mandates that new on and off road Diesel powered vehicles will be required to comply with a new, lower level of emissions. To comply with the requirements vehicle manufacturers will be using a technology called selective catalytic reduction (SCR). The SCR process requires a urea based substance be injected into the exhaust so the catalyst can capture nitrogen oxide (NOX). DEF is the official urea based fluid that will be used in vehicles with SCR.  NOX is the major pollution source from modern diesel engines (the 2007 emission rules eliminated the particulates) and SCR technology will remove over 90% of the NOX. All of the vehicle manufacturers offering Diesel engines will be using this technology.

Note: SCR technology has been used in European Diesel trucks for several years now with over 400,000 clean Diesel trucks currently on the road.

The new EPA rules will only apply to Diesel engines put in vehicles after 01/01/2001, so the initial use of DEF will be small and then grow as newer vehicles are purchased to replace older technology Diesels. Places like California will have mandates in place to force or encourage the retirement of older technology, higher polluting Diesel engines. Here are the projections for the amounts of DEF needed starting in 2010:

• 2010: 54 million gallons
• 2011: 172 million gallons
• 2012: 316 million gallons
• 2013: 463 million gallons
• 2014: 614 million gallons, and growing by 150 million gallons per year from there.

You can see the growth in demand will be there. What about supply. Terra Environmental Technologies is listed as one of the 5 manufacturers of DEF, along with Agrium Inc. (AGU: 83.28 +1.08 +1.31%),  CF Industries (CF: 186.75 +4.45 +2.44%), Dyno Nobel, Potash Corp. (POT: 46.93 -0.33 -0.70%) and Yara North American, Inc.  Brenntag is one of the 5 distributors of DEF I found listed. Brenntag is headquartered in Germany and is a global leader in the distribution of industrial and specialty chemicals.

Terra and Brenntag have a 2-way exclusive agreement for supply and distribution of DEF. It appears Terra’s penetration into this market depends on the depth of Brenntag’s sales connections. I know Terra management is high on this product as a growth market.

You probably noticed that the suppliers of DEF are all in the fertilizer business. DEF is a natural offshoot nitrogen based product from their nitrogen fertilizer production. Clean Diesel technology will be another growth area for some or all of these companies. I follow Terra Industries, but investors interested in this sector should get a warm fuzzy about another market for their product and start watching for DEF sales to determine which company will take the leadership in this product.

SCR and DEF information is from factsaboutscr.com

Note: TRA is a component of this site’s hypothetical Opportunities Portfolio.

Goldman, once warning of $200 oil, sees $45 in 2009 | Business | Reuters.

It look like the analysts at Goldman Sachs have learned their lesson in hindsight in regards to their $200 oil prediction. Their new prediction is within a $1.00 of where oil is currently trading. To bad they didn’t pick the $45 number 8 months ago!

To protect themselves further they should issue a standard deviation along with the prediction. A nice fat SD and they can claim accurate foresight no matter which way oil goes from here.

The article actually has the prediction of oil falling to $30 before recovering to average $45 for all of 2009.

A little research shows that GS predicted $200 oil within 2 years in early May when is was about $125. Oil peaked at about $150 a little over 1 month later. Contrarians might see this new prediction as a sign of soon to be rising oil prices.

I was scanning through some data on Terra Industries (TRA: 0.00 N/A N/A) and an interesting fact caught my eye. TRA has a current market capitalization of $1.4 billion. TRA is the general partner and holds 75.1% of the common units of Terra Nitrogen Holdings LP (TNH: 197.31 +1.349 +0.69%). TNH has a market cap of $1.7 billion. As GP, Terra Industries currently receives about 40% of Terra Nitrogen’s net income plus their 75% share of the regular distributions.

TNH has been popular with investors due to their high quarterly distributions. The company is a limited partnership that pays out the majority of the earnings of a single nitrogen plant in Verdigris, OK. Earlier this year, I wrote an article on the changes in TNH’s income payout that were of increased benefit to the GP and decreased the cash available to the common unit holders. The market has paid little attention to my analysis as TRA stock has fallen by 65% from when the article was written and TNH is off only 35% and shareholders have picked up $10.63 in dividends.

Let us look at the value divergence between the two Terras. Terra Industry’s 75% stake of TNH is worth $1.27 billion at current values. If the GP (wholly owned by TRA) collects 40% of Terra Nitrogen’s income before any distributions are made, let us value the general partnership of TNH at say $430 million (40% times $1.7 billion with a 1/3 knocked off as a fudge factor). This gives Terra Industry’s holdings in Terra Nitrogen a total value of $1.7 billion, $300 million more than TRA’s entire market cap.

TNH revenues are consolidated into the TRA income sheet and for the 3rd quarter TNH generated 31% of Terra Nitrogen’s total revenues. So the market is giving 69% of Terra Industry’s business a value of negative $300 million. Oh, and did I mention, TRA is sitting on $680 million in cash, half of the current market cap.

I know the short term future of fertilizer companies is considered bleak by many, but this current valuation of TRA is ridiculous. A couple of points to consider: Currently, Terra’s cost of natural gas is $4 to $5 less than their international competitors in Europe and the Ukraine. Low natural gas prices (the main component of nitrogen production) will allow TRA to maintain excellent margins even at significantly lower fertilizer prices. U.S. farmers will still plant a minimum of 85 million acres of corn next year and world demand for grains will continue to grow as populations increase. The dollar strength argument against grain exports seems a little weak since corn prices have fallen by 60% from their springtime peak and the dollar has rallied only 25% to 30%.

I am not sure the market will give up on the beating up of fertilizer stocks soon. I just wanted to point out that the current belief as reflected in the share price of Terra Industries may be very misguided.

Note: TRA is a component of this site’s hypothetical Opportunities Portfolio.

My favorite quote so far today:

The analyst who projected $200 oil should have lopped off a zero.

Commodities Collapse: Fast, Big and Still Going – WSJ.com.

The WSJ article linked above (sub. required) show how wrong the analysts were on the commodities bubble then gives some new predictions on how far down (much farther, of course) the prices will fall. Then they compare the commodities bubble to the dot com bubble to get parallels on price losses.

If I remember correctly many of the dot com bubble stocks never had any real revenues or profits and were just over sold ideas. Commodities are a real part of the world wide economy and have significant supply constraints. I believe price recoveries in many commodities will come pretty soon. Just my opinion.

How times have changed. Three months ago when I reported on Silver Wheaton’s (SLW: 35.96 -0.69 -1.88%) 2nd quarter results, I put forth the opinion that the stock would be a good value buy if the share price dropped below $12 from its current $14 to $15 trading range. Well the shares were not a good value at $12 and they fell all the way to $2.56 on October 27. The stock has been hammered for what I see as two reasons:

• Spot silver has fallen over the last 4 months from $17 per oz. to under $10.
• Falling base metal prices (lead, copper, zinc) may force the shut down of the mines where SLW gets their silver production as a by-product to the mine’s main focus.

I will respond to the second reason 1st. On the conference call management noted that they currently receive 85% of their silver from 3 mines that have been in production for over 100 years. There is almost no chance they will shut down and will probably shift to mining higher grade ores. They have been focusing on the lower grade ores that recent high metal prices made profitable and will now shift to higher yield ores to maintain profit levels.

As to silver prices, the online investment sites and discussion point to over supply, under supply, conspiracy theories and market manipulation. Silver Wheaton management believes that prices will recover next year, but at this point I think it is impossible to predict where precious metals will go. I do know that SLW purchases its silver at an average price of under $4 per oz. and will stay profitable at much lower silver prices if it comes to that.

The 3rd quarter earning came in at 9¢ per share, right in the 9-11¢ quarterly earning have been stuck in for the last 10 quarters. Silver sales have been stuck in the 2.7 to 2.9 million oz. per quarter range, defying company predictions of increased production from their contracted sources. This time they reduced their 2009 projections to 15-17 million oz. from their previous guestimate of 19 million oz. To invest in this stock means that you believe at some point in time silver production and sales will start ramping up significantly, increasing revenues and profits. This company does have 40%+ earnings per year growth in its future somewhere. When is the question.

SLW is a component of this site’s Opportunities Portfolio and last week I doubled the number of shares in the portfolio. The SLW position is currently about 2.5% of the portfolio.