Potash Corp. plays a key role in ensuring that there is enough food to feed the world’s growing population.

The food-production sector offers enormous opportunities to companies that benefit from the world’s growing food consumption. The global population is rising rapidly and, according to a recent United Nations report, will increase by almost 3 billion people by 2050—40% more than today.

Also, rapid urbanization and increasing per capita income in developing countries support growing demand for food and protein. Global protein consumption is expected to grow from the current 80 grams per day to 130 grams per day by 2050.

At the same time the amount of arable land is declining so that soil productivity, especially in developing countries, must improve through better use of nutrients.

A Global Force

Potash is the world’s largest fertilizer producer by capacity and makes the three primary crop nutrients: potash, nitrogen and phosphate.

The independent commodities research group, CRU, estimates that fertilizer consumption, including potash, nitrogen and phosphate, will grow from around 160 million tons in 2010 to 215 million tons by 2025, continuing the 20-year historical pattern of just over 2% volume growth per year. Unsurprisingly, most of the growth in fertilizer demand is expected to come from the developing world, including China, India and Brazil.

Potash Corp. (TSX: POT, NYSE: POT) is the primary global potash producer and operates some of the lowest-cost production facilities in the world. The bulk of the production is done in Canada, with the rest in four potash-related businesses in South America, the Middle East and Asia. The production and sale of potash-based fertilizers contribute more than half of the company’s annual profits and carry the highest profit margin of its three main product lines.

In the mid 2000s the company embarked on a C$8.4 billion expansion program that should more than double annual potash production capacity to over 19 million tons by 2017.

However, many of the other major producers, including Agrium and K+S, will also bring considerable new capacity on stream over the next few years, which will bump global potash production capacity more than 10%. Despite ongoing demand growth, it’s likely that idle capacity will continue for the foreseeable future, keeping prices down.

Potash, along with its marketing partners Mosaic and Agrium, holds a 34% share of the 60-million-ton global potash market, followed by Uralkali, Belaruskali and K+S. The major markets are China and India, which together account for about 50% of global sales, followed by Brazil and North America. Some of the crops that rely on potash include wheat, corn, fruit, vegetables and sugar.

The company’s two smaller divisions for nitrogen and phosphate contributed 36% and 8%, respectively, of 2014 profits. Products from these divisions are used in fertilizers, animal feed and industrial products.

Safe Dividend

Potash qualifies as a Dividend Champion based on its long history of uninterrupted dividend payments, sound balance sheet, ample cash flow, attractive dividend yield and reasonable prospects for growth over the medium to long term.

A key question is whether volatile product prices along with considerable new capacity will hinder the company’s ability to pay and grow its dividend in the future.

Historically, the profit margins of the business have been growing steadily despite the speculative bubble in fertilizer prices in 2008, followed by the collapse in 2009. Free cash flow (operating cash flow adjusted for non-cash items and minus capital expenditures) has comfortably covered the dividend payments over the past 10 years (except 2009), and that’s despite product price volatility and a considerable capital expenditure program.

We are comfortable that the company will be able to sustain its dividend even in a lower-potash-price environment for several reasons. Free cash flow is expected to ramp up over the next few years as the capital expenditure program drops sharply from the $2 billion per year that Potash spent between 2010 and 2013 to around $500 million per year by 2018.

Potash operates some of the lowest-cost potash production facilities, with current cash operating costs at $83 per ton (the spot price is around $300 per ton). Those costs are expected to drop further as new low-cost production facilities at Rocanville and New Brunswick come into full production in 2016 and 2017.

Given the company’s competitive position on the global potash-production cost curve, operating cash flow should remain sound even if potash prices fall as much as 30% below current levels. And the balance sheet remains in good shape, with a debt-to-capital ratio of 29%.

Attractive Valuation

The valuation premium of Potash over its peer group dropped considerably over the past year, and the dividend yield of over 7% is attractive. Consequently, we believe the dividend is sustainable even with much lower potash prices.

Investors should note that the estimated replacement cost of the potash, nitrogen, and phosphate mining and production facilities that Potash owns is much higher than its market value plus outstanding debt. Based on our estimates, the replacement value of Potash’s plant and mining facilities is around C$80 billion compared with a C$42 billion enterprise value.

Lastly, the company owns minority interests in four potash producers in Chile, China, Jordan and Israel. Their total annual potash production capacity is around 10 million tons, and the investments have a current market value of C$4.7 billion or C$5.70 per share, which is the equivalent of 20% of the Potash share price. For those reasons we believe Potash represents good value even as other major producers add capacity.

Buy Potash Corp. below C$35 or US$27.