When BHP Billiton Ltd. (NYSE: BHP) made its $38.6 billion offer for Potash Corp. of Saskatchewan (NYSE: POT), the size of the deal put a spotlight on the fertilizer makers, especially those that produce potash. Fertilizer makers like Mosaic Co. (NYSE: MOS), Intrepid Potash, Inc. (NYSE: IPI), Terra Nitrogen Co. L.P. (NYSE: TNH), and Compass Minerals International Inc. (NYSE: CMP) have all posted new 52-week highs since August. Are the shares overpriced?

Ultimately the BHP offer was rejected, but a re-shuffling in the potash industry has continued. The biggest deal involved two Russian companies, Uralkali and Silvinit, which closed a merger last Friday that makes the combined company the second largest potash producer in the world. On a smaller scale, Germany’s K+S AG completed a tender offer last week for the shares of Canadian potash miner Potash One Inc. (OTC: KCLOF), after which the German firm owns about 91% of the Canadian company’s stock.

Potash prices have risen to more than $400/metric ton for contract prices and about $450/metric ton on the spot market. BHP reported 2010 EPS last week of $5.95/share, and issued an estimate that by the end of 2011, spot prices for potash will rise to at least $500/metric ton.

If that its going to happen, then prices on the international market will have to rise. A recent contract between Canada’s potash marketing group Canpotex and Chinese buyers settled at $400/metric ton. In North America, potash already commands a spot price of around $550/metric ton. By the second half of 2011, potash producers could see a price increase of $50-$60 per metric ton.

The fertilizer stocks historically run on a boom-and-bust cycle. But it could be that this run-up is different. The continuing rise in potash pricing is based on greater demand for food, particularly grains, from emerging economies and the concomitant demand for fertilizer to grow that food.

In the medium term, there won’t be a lot of additional potash added to the world’s supply. It takes about seven years for a potash mine to be developed from scratch. BHP has said that it will advance to a feasibility stage review of its Janssen mine project in Canada, with first deliveries scheduled for 2015. That’s still a long ways off, and that’s the largest new development on the books.

Even so, the sharp rise of Potash Corp. shares following BHP’s offer has not been followed by a sharp drop after the deal collapsed. In fact, Potash Corp. shares continued to rise.

If Potash Corp. shares are overpriced, the whole sector could be overpriced. Shares of Intrepid are trading at more than 82 times trailing P/E, and shares of Compass are trading at more than 20 times trailing P/E. Mosaic shares are trading at nearly 20 times trailing P/E, but the company’s majority shareholder, Cargill, has announced a spin-off that could take a couple of years to complete. Terra, a master limited partnership, trades at a trailing P/E of just over 13, but the company is owned by CF Industries Holdings Inc. (NYSE: CF).

The Market Vectors Agribusiness ETF (NYSE: MOO), which has about 7.9% of its holdings in Potash Corp. and 7.4% in Mosaic, is posting a 52-week high today, above $57/share. Potash Corp., Intrepid, and Compass have all passed their mean price targets as reported at Yahoo Finance.

The market for potash is strong and is expected to remain that way for at least a couple of years. Whether that’s already priced into the potash companies’ shares won’t be clear for a while yet.

Paul Ausick

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