After the market close yesterday, The Mosaic Company (MOS) reduced its second quarter ending November 30 guidance for potash sales as well as phosphate fertilizer sales. This was predictable because fellow Canpotex partners PotashCorp (POT) and Agrium (AGU) had already indicated international business was slow. However, MOS provides a later update including the first couple of weeks of November visibility.
MOS had closed yesterday at $50.75 on a down day for the DJIA (down 58.90), but dropped another 4.4% to $48.50 on 778,470 shares after hours.
At 12:15 pm it is currently trading at $48.84 on 5.9 million traded.
POT is currently trading at $37.75, down $1.00 on 5.4 million, and AGU is trading at $96.44 down 37 cents on 607,000.
Mosaic reduced the Q2 midpoint guidance for potash sales by 400,000 to 1.3-1.4 million tons from 1.6-1.9 million.
The company indicated the range "already excluded shipments to China and India" (translation: there are none expected by Canpotex to these countries to November 30).
The larger but less profitable phosphate fertilizer and feed sales were also downsized by 200,000 tons to 2.9 million-3.1 million from 3.0-3.4 million. Apparently, dealers are looking at the weak potash market and thinking it could migrate to phosphate as well.
PotashCorp had already reduced its guidance for its Q4 and fiscal year when it released its Q3 on October 25th.
PotashCorp guided 7.6-8.3 million tons of potash sales, and since 5.9 have already been made, that would leave 1.7-2.4 million total for Q4 (combined North American and offshore).
But I don't see that happening. I think it is going to be lower and more like 1.35-1.45 million similar to Mosaic.
Since 2H contracts to China and India were not signed, potash shipments are not leaving the Port of Vancouver - not in November, nor in December are any likely.
Another key nuance for PotashCorp traders within the Mosaic guidance is the company expects "lower near-term demand in other international countries as well."
Since the bulk of POT's Q3 1.107 million tons of international sales were to Asia ex-China and Brazil, this could signify lower Q4 sales than expected to those countries as they satisfied their needs in the prior quarter, which was stellar for PotashCorp (1.955 million tons) versus Mosaic's Q1 international sales of 950,000.
It should be noted that PotashCorp can sell outside of Canpotex from its New Brunswick mine, which can ship to South America, whereas most of Mosaic's S.W. U.S. potash production probably is sold domestically.
Without China and India, I could see PotashCorp's international potash sales in Q4 coming in at only 800-900,000 versus 1.16 million in Q4 2011.
Typically POT's international sales in Q4 are just slightly ahead of Mosaic's Q3 as their December month is slower than Mosaic's September month, adjusting for the mismatch in quarterly ending dates.
Domestic sales of potash are also running somewhat slowly, as evidenced by Agrium's lackluster numbers for overall Midwest retail farm sales. The verbatim is that dealers are shy to take on year-end inventories in the face of the "fiscal cliff." Mike Wilson, when queried on BNN TV, said that the Q4 in potash was basically "rough."
My guess for those for POT would be 550,000 tons versus 422,000 last year.
All in all, I see PotashCorp's total Q4 potash sales coming at only 1.35-1.45 million. The shortfall of about 700,000 tons from the midpoint of their guidance would put a dent into PotashCorp's gross margin for the segment to the tune of $188 million, using the Q3 margin per ton of $269.
That's far below the 1.7-2.4 million range offered on October 25.
Gross margin from potash drives the majority of POT's cash flow. Although Mosaic said they expect slightly higher than expected prices for potash and phosphate, I would expect the low volumes to create more downside guidance from POT going forward.
I've heard a lot about how PotashCorp's CAPEX will wind down with the potash segment expansions 75% complete.
That's fine (as of September 30, about $1 billion has been spent of the remaining $2 billion estimated CAPEX left), but if volumes and gross margin keep declining, the lack of CAPEX will be replaced with weaker cash flows.
My best guess for POT is a downward revision to the P/E multiple to 12 and applying that to my adjusted EPS of $2.75 for the year (lower than the $2.89 EPS guidance they gave us on October 25) you could expect a $33 US stock price, or another four-five bucks of downside from here.
This means you should sell this stock unless you like throwing good money after bad.
Of course the stocks may continue to reflect the bullish comments coming out of both companies that 2013 will be supported by pent up demand for fertilization and because the population keeps getting bigger.
We have heard that story many times before, haven't we?
In the meantime, both POT and MOS grind lower and lower.
Someone really has to dig out the story as to what the Chinese and Indians are going to do if they don't buy Canadian potash this year.
Working on it.