After potash-geddon last week a variety of articles were written trying to figure out the implication of the BPC cartel break-up on the share prices of potash producing companies
My note was a little bearish to say the least and within it I recommended a short of Potash (POT), Mosaic (MOS) and K+S with K+S being my highest conviction short due to their significantly higher unit cost of production (c.$280 per tonne) as well as their Potash One expansion becoming risky with long term prices of $380 required for a decent rate of return.
POT and MOS shorts would have profited ever so slightly but the ensuing volatility meant heart attacks for those who went short on the open so I won't chalk these up to a win.
POT was trading around $30 when I issued the short and now trades at $29.58 (will likely open at +$30 today anyway).
Mosaic is a similar story but the big mover was Kali and Salz. K+S was trading at EUR21.30 when I issued my short to SA (I won't count my own position which was initiated prior to the article) and now trades at EUR16.98 which quantifies as a 21% return in seven working days.
Yesterday evening, good old Bill Doyle, Potash CEO, came out with an interview answering some of the most pressing questions that investors had regarding potash.
Where do you see the price, do you see Canpotex breaking apart, are you viable with sub-priced potash, is the dividend sustainable.....
Furthermore he stated that he believed there would be a U-turn (to a degree) by Ural as stakeholders had nothing to gain from this new pricing strategy. As he put it, the owners of Uralkali bought it fully valued and wouldn't have any interest in scrapping their lucrative business model.
He also suggested that domestic prices were unlikely to change much as Ural cannot profitably enter this market due to the difficulties in transportation costs.
Around the peppering of useful information stood a lot of emotive reasoning and despite the positive spinning, a lot of Mr. Doyle's arguments were almost ridiculous. In particular, Bill argued that they treated their clients as 'customers' and put them first (surely everyone does) and then said that farmers would hate to see these sudden price drops as it would devalue their inventory.....surely consumers like cheaper prices, Bill??
On top of this, his statement that the dividend is sacrosanct can also be misconstrued. In my opinion, he is talking about the dividend policy, i.e. the amount of free cash flow given as dividend as opposed to the number itself. I highly doubt the dividend would remain as it is if the worst scenario hit and export prices tumbled 25%.
I am not a U.S. analyst (hence why my K+S call was the highest conviction) but on page 135 of Potash Corp's most recent annual report was the fact that $4.6bn of sales come from within the USA. Furthermore, a look at Uralkali's full-year report on page 22 suggests that only 17% of their exports go to Europe and the U.S. combined.
It leads me to believe that although Potash may see a reduction in Indian and Chinese prices, the domestic market may actually remain quite sturdy. Mr. Doyle paints a strong argument here and added that prior to Ural's IPO, these tiffs have occurred a number of times (although probably not this scale in my opinion).
With this in mind, I am now happy to close all my short positions and have begun to consider a long position in Potash Corp pending further investigation.
With regards to K+S, I have flipped this position long in our portfolio, half yesterday and half this morning, as the news from Bill Doyle will lead to a degree of short covering (there is currently no borrow in the name and a holders list shows you that everyone under the sun has heavily shorted and already profited from this name).
Now that we have had a good amount of time to digest the information and the various reasoning, I believe there is a chance of temporary reconciliation by BPC but even if these guys decide to attempt volume production, the stakeholders may get tired of this after a certain amount of time. Furthermore I believe that the U.S. producers have a degree of geographic insulation which means the price drop seems to have more than compensated for additional risks.
With regards to K+S, my long position is strictly a trading position and I would actually look to close it CoB today or tomorrow.