The potash sector and those climbing valuation premiums

Investors have been looking with interest at the potash sector ever since BHP Billiton's $38.6 billion overture for Potash Corp. of Saskatchewan. Even though that takeover battle ended in an outright rejection of the offer, there have been a spate of smaller-minded deals since then. One example, Germany's K&S and its successful bid for Canada's Potash One.

Since then, potash prices have been climbing, moving higher than $400/metric ton for contract prices. Spot market prices are even higher.

Potash is key to improving crop yields and emerging markets' demand for food continues to put pressure on agri-markets worldwide. That means the run-up in potash prices may not be over for some time.

This brings us back to those takeover deals and current valuations for global players — and market expectations that more deals could be in the pipeline.

But, as Paul Ausick at puts it:  "Whether that’s already priced into the potash companies’ shares won’t be clear for a while yet."

His examples:

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.

He's even looking at Potash Corp; it's share price didn't fall after the BHP Billiton deal fell apart. In fact, they continue to rise. "If Potash Corp. shares are overpriced, the whole sector could be overpriced," he writes.

And that means deal-makers might be forced to sit on the sidelines — at least until potash prices climb to a point that might make an expensive takeover offer attractive. Either that, or the traditional boom-and-bust nature of the potash market could return in earnest, placing downward pressure on those premiums.