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Potash Corp of Saskatchewan Inc
Mitsui & Co. (8031), the most acquisitive Japanese company in the last decade, is looking for more targets outside of its traditional commodities businesses.
Sitting on almost $17 billion, or near the two-decade-high cash pile of last year, the 136-year-old trading house that gets most of its income from iron ore now wants assets in the food, fertilizer, power and transport industries.
The goal is to boost so-called non-resource profit to 30 percent within six years, Chief Executive Officer Masami Iijima said. It was at about 6 percent last year, company data show. Iijima, who rose through Mitsui’s metals, mining and energy divisions since joining in 1974, has given himself two years to assemble enough non-resource assets to generate 150 billion yen ($1.82 billion) in net income.
“Iron ore and coking coal are not going to have the same expansion as a decade ago, so for the traders that means either moving downstream or moving away from these into food, among other sectors,” said Benoit Descourtieux, president of OP Investment Management Ltd. in Hong Kong. “There’s a demand- supply shift in food that we saw in iron ore 10 years ago.”
In the year to date, Mitsui has made 29 acquisitions -- including purchases made as part of joint ventures -- valued at $6.9 billion in industries ranging from mining, healthcare and energy to pharmaceuticals and batteries, according to data compiled by Bloomberg.
That’s more than the 23 deals each by Blackstone Group LP and Carlyle Group LP, the two biggest private-equity firms by assets, and the 20 by Warren Buffett’s Berkshire Hathaway Inc.
“The fruits of what we sow in these one-to-two years will take some three-to-five years to ripen, so they will be in the 2015 to 2020” time frame, said Satoshi Tanaka, chief operating officer of Mitsui’s consumer services unit, at a briefing in Tokyo on Nov. 30. He didn’t elaborate on investment targets.
Mitsui should target both food raw materials and processing companies and may look at fertilizer targets in China, Descourtieux said.
“With food, maybe they should make it one of the core businesses,” said Descourtieux, who invests in Japanese traders and declined to say whether he holds Mitsui shares. “Supply always catches up with demand on food, but there’s a time gap.” Unlike with iron ore, it’s rare for food capacity to expand and lead to large oversupply, he said.
The trader may look at fertilizer projects with existing business partners and Mitsui has the best ties in South America among its domestic rivals, CLSA Asia-Pacific Markets analyst Penn Bowers said in an interview in Tokyo. Mitsui is more likely to buy into fertilizer producers than grain suppliers, he said, declining to name specific companies.
Mitsui and Japan’s four other major trading houses -- Mitsubishi Corp., Itochu Corp. (8001), Sumitomo Corp. (8053) and Marubeni Corp. -- spent more than $85 billion on takeovers since 2007, compared with $28.5 billion in the prior five years. The import and export companies outspent commercial banks, the next most- acquisitive industry, by more than 25 percent in the latest five years, data compiled by Bloomberg show.
Mitsui, Japan’s biggest importer of iron ore from investments in Australia and Brazil, completed 161 purchases in the last five years, or more than one deal every two weeks.
The investments didn’t boost its stock price. The shares closed at 1,168 yen in Tokyo on Dec. 13, a 58 percent drop from the 2,750 yen peak on May 22, 2008, that concluded a five-year quadrupling in market value. In the same period the ThompsonReuters/Jefferies Commodity CRB (CRY) index fell 32 percent.
The trading houses also rank among the lowest in price-to- earnings ratios of the country’s stocks.
The shares fell because the traders became “asset heavy,” moving into owning and operating mines and energy businesses from trading the commodities, Tanuj Shori, a Nomura Holdings Inc. (8604) analyst based in Hong Kong, said in an e-mail. That added volatility to earnings from fixed costs, he said.
Still, the expansion helped Mitsui build its cash pile. As of Sept. 30, its net debt-to-equity ratio was 86.5 points, compared to more than 400 points in 2003.
Profit for the fiscal year ended March 31 climbed to a record $5.51 billion, more than 10 times the $443.5 million 10 years earlier.
Mitsui became a force in resources, a kind of “Goldman Sachs of commodities,” said Yuuki Sakurai, president of Fukoku Capital Management Inc.
Even so, the company lags its four Japan rivals in profits from non-resource businesses.
“They need to show some sizable returns from their Asian hospitals, chemical ventures and so on for investors to believe that they can make it in non-resources,” said Jiro Iokibe, an analyst with Daiwa Securities Group Inc. (8601)
Mitsui gets 54 percent of net profit from iron ore mining, trading and dividends from miners, Barclays Plc. said in a Nov. 21 note.
“They need to change strategy,” Iokibe said. “The cash amount coming from the iron ore business will decrease.”
Iron ore spot prices will fall to $96.59 a metric ton in 2015 from $168.33 last year, according to Daiwa Securities estimate on Nov. 27.
Mitsui earned 6.2 percent, or 27 billion yen, of a total net income of 434.5 billion yen from non-resource units in the fiscal year ended March 31. Last month, it lowered its annual profit target by 23 percent to 310 billion yen for the year ending March 31 after a slide in commodity prices.
Mitsui will take the next one-to-two years to set up a structure to earn 150 billion yen from non-resource businesses out of a total 500 billion yen profit, Iijima said at a Nov. 5 briefing in Tokyo.
“Areas we hope to strengthen and want to focus on are food, chemicals, machinery, and infrastructure, including IPP and water utilities,” he said. Mitsui has had bigger profit margins in upstream businesses and may look at food fertilizer assets in phosphate and potash, he said.
Mitsui’s rival and Japan’s biggest grain trader Marubeni (8002) strengthened its food focus after agreeing to buy Gavilon Group LLC in the U.S. for $5.6 billion including debt in May. That will be the biggest boost to earnings next year, Marubeni CEO Teruo Asada said in Tokyo in November.
“Mitsui see the upstream opportunity in food, certainly more on the fertilizer side than the actual Gavilon-type of grain trader, or the farm-gate business,” CLSA’sBowers said. “It’s a great way to play a long-term food story, but you’re doing it from the resource side.”
Mitsubishi last year invested in meat and livestock in China with Cofco Corp., and since then added grain collection and coffee plantations in Brazil, as well as phosphate in Peru. Mitsubishi, which had also looked at buying Gavilon, will make food one of its key areas, said CEO Ken Kobayashi in Tokyo in April.
Itochu, Japan’s biggest iron ore importer after Mitsui, in September bought Dole Foods Co.’s canned business worldwide and its Asia fresh fruit and vegetables unit for $1.4 billion. In November, CEO Masahiro Okafuji said he wanted to make Itochu the most profitable Japanese trading house in non-resources.
The potash market, estimated to be worth about $19.4 billion a year by Bloomberg Industries, is dominated by five companies, which control more than two-thirds of supply. That makes them among the most profitable mining businesses.
The average potash export price for Russia’s OAO Uralkali, the world’s top producer in the first half of 2012, is six times the cost per ton of production, excluding freight, data from Uralkali show. Uralkali’s margin on earnings before income, taxes, depreciation and amortization was 64 percent in the first half, according to the company.
BHP Billiton Ltd. (BHP), which had a 53 percent Ebitda margin rate in the last fiscal year, offered to buy the industry’s biggest producer by market value, Potash Corp. (POT) of Saskatchewan Inc. in 2010, before Canada’s government blocked the $40 billion deal.
Russia, Belarus and Canada have the world’s biggest potash reserves, as well as much of the phosphate, two of the three main fertilizers used by farmers to boost crop yields. The other is nitrogen.
While scope for acquisitions in the former Soviet Union is “extremely difficult” due to market consolidation, Mitsui may be able to invest in return for off-take or equity in new projects in Africa and Canada, said Mikhail Stiskin, an analyst with Sberbank Investment Research covering fertilizer makers.
“There are opportunities for those with access to funding and a long term investment horizon like Mitsui as the secular fundamentals of fertilizers look healthy,” Stiskin said.
BHP, which partners Mitsui in Australian iron ore mines, may look for investors ready to put $2 billion in the $7.3 billion Jansen potash project in Canada, Deutsche Bank AG said in a Nov. 26 report. The project would be BHP’s first foray in potash, which CEO Marius Kloppers has called a key commodity.
Brazil’s Vale, another Mitsui partner in iron ore, is looking for investment in its potash mine in Argentina.
Vale Chief Financial Officer Luciano Siani said Oct. 25 that the company needed a partner to go ahead with the $5.9 billion project.
All these possibilities and more will be looked at by Mitsui, Bowers said.
“That’s where the trading companies exist: they know every little avenue out there,” Bowers said.
Japan, the world’s biggest grain importer, will always need to import food and demand in Asia’s emerging markets mean anyone who knows how to connect the growers with the buyers will do well, said Fukoku Capital’s Sakurai.
“When you look at Mitsui, Mitsubishi’s history, I don’t think they care very much about a few years of downward trends,” Sakurai said. “They would like to get into the market and root down these businesses; it’s not day-trading, it’s 20- year trading.”
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