Description

BUY IMC GLOBAL IGL $11.50 06/11/01
18 months into the most prolonged downturn in the fertilizer market since 1993, IGL is priced for the worst. Past management paid peak cycle multiples for noncomplementary businesses (salt and chemicals), in the process destroying shareholder value and tainting investor perception of the company. Current management has taken out significant costs and addressed near term balance sheet issues while positioning the company to benefit from improved phosphate pricing. At these prices, any one of several small catalysts could reignite fundamentals and interest in the stock e.g.1) China steps up purchases of DAP (there is evidence that the recent import quotas may be politically motivated) 2) Uneconomic Indian subsidies are curtailed 3) U.S crop outlook improves

PROS
*) Market share leader/low cost producer of phosphates and potash (i.e. fertilizer)
-Phosphates: annual capacity 8.5mm short tons, 9% of global capacity and 30% of US; principal products are DAP, MAP and TSP
-Potash: annual capacity 10.1mm short tons, 14% of global capacity and 37% of NA
-Other players: Potash Corp (POT), Cargill, Agrium (AGU) and Miss. Chemical (GRO)

*) Secular growth story intact
-Fertilizer demand increases with population/income growth, improving diets
-China represents 22% of world population w/ 7% of arable land

*) Cheap based on normalized operating results
-4.7x normalized EBITDA and 7x normalized earnings of $2.00/share
-discount to historical multiples (adjusted for this point in cycle)

*) Substantial operating leverage at bottom of cycle
-In last 2 years, management has taken out $160mm of permanent costs, mostly in phosphates
-Phosphates results severely depressed at $130/short ton (DAP) each $10 increase results in $55mm incremental EBITDA (off of a $135mm base)

*) Industry capacity outlook improving
-IGL shut in 45% of capacity, Cargill and Potash Corp. have followed step
-No significant capacity additions for next three years
-Much of nameplate capacity starts up late or is cancelled

*) Raw material pressures abating
-ammonia and sulfur prices have fallen of late

*) Near-term balance sheet issues have been addressed
-Recent $1b financing replaces near term maturities and offers financial flexibility to wait out the cycle; pro-forma EBITDA/interest of 3x and Debt/EBITDA of 4.0x (ex disc ops.)
-Salt and chemical businesses been classified as discontinued but will not be sold in short term; being carried at $700mm

*) Management incented to improve shareholder value
-weighted average options struck at $23/share; most recent grants at $16

*) Limited analyst interest

Catalyst

higher corn prices, Chinese ordering more DAP, droughts in US or overseas