On Monday, August 26, it was announced that Belarus would be launching a full-scale investigation into the world's largest producer of Potash, Uralkali (OTC:URALL). In the wake of today's announcement, I wanted to shift my focus a bit closer to home, and examine a number of catalysts behind my decision to remain bullish on shares of Potash Corporation of Saskatchewan, Inc. (POT).
Headquartered in Saskatoon, Saskatchewan, Potash Corporation of Saskatchewan, Inc. operates the world's largest fertilizer company by capacity, producing the three primary crop nutrients: potash, phosphate and nitrogen. It also offers solid and liquid phosphate fertilizers; animal feed supplements; purified phosphoric acid, which is used in food products and industrial processes; hydrofluosilicic acid; and silicon tetrafluoride. In addition, the company produces nitrogen fertilizers and nitrogen feed, as well as industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate, and nitric acid. It holds the right to mine 773,812 acres of land in Saskatchewan; and 58,263 acres of land in New Brunswick in Canada.
Performance and Trend Status
On Monday, shares of Potash Corporation of Saskatchewan -- which currently possess a market cap of $26.46 billion, a P/E ratio of 11.84, a forward P/E ratio of 12.89, and a forward yield of 4.58% ($1.40) -- settled at $30.55. Based on Friday's closing price, shares of Potash Corporation of Saskatchewan are trading 0.27% above their 20-day simple moving average, 13.63% below their 50-day simple moving average, and 21.48% below their 200-day simple moving average.
These numbers indicate a short-term uptrend for and a mid-to-long-term downtrend for the stock, which under normal circumstances would translate into a selling mode for most traders, but given the fact that these circumstances aren't exactly normal, I'd look to accumulate shares at their current levels. Why? Since the current downtrend is due to a short-term abnormality (the withdrawal of Uralkali from the Belarus-Russian potash cartel), I strongly believe the lasting impact on the remaining global potash entities is already priced into shares at their current levels.
Where Will The Price of Potash End Up?
If we were to take the recent comments of the CEO of Uralkali seriously, then yes, prices will most definitely plummet in the not-so-distant future to as low as $250/t, but if we stop and step back for just a second, and realize that the impact on Potash wasn't as bad as we had originally guessed, we may just be headed toward a rebound in price. If prices were to ever dip near or below the $250/t benchmark, both the Greenfield and Brownfield-related projects could be suspended indefinitely. As of July 31st, the price of potash was about $392.50/ton and I strongly believe it can sustain levels between $350/ton and $425/ton over the next 12-24 months.
How Will The Long-Term Demand Meet Market Needs?
According to my Seeking Alpha colleague, CJ Money Research, "Long-term, supply will meet demand, since, as far as he's concerned, there is enough potash in the world to supply the world forever. If current mines cannot meet supply, prices will increase and production capacity will expand to meet higher demand. New production capacity, however, takes years to bring to market since conventional Greenfield projects take a minimum of 7 years to complete and Brownfield projects usually take between 2 and 3 years to complete".
When addressing the idea of new production capacity I think that we need to consider the idea that the introduction of any type of efficiency-based innovation would subsequently reduce the present timetables for both Greenfield and Brownfield related projects. Although none are presently in the marketplace, I think that any efficiency-related improvements to both the Greenfield and Brownfield project-based timetable could have a positive impact on the way the world's demand for potash is handled.
For example, Potash recently noted that "The advantages of our brownfield expansion program are most pronounced when measured against the development of a potential greenfield mine. Because we have expertise in developing potash assets and can leverage our existing infrastructure, we believe our new tonnes are being built at a fraction of the estimated time and cost of a greenfield mine -- giving us a significant advantage compared to new producers. Furthermore, most of our expansions have been undertaken at a time when few others were building, meaning we have both a time and a cost advantage compared to new brownfield projects". And I strongly believe that both the time and cost advantages will benefit Potash in the long run.
Recent Dividend Behavior
Since April 12, 2011, Potash Corporation of Saskatchewan has increased its regular quarterly distribution four times in the last ten payable quarters. From an income perspective, the company's forward yield of 4.58% ($1.40) coupled with its continued distribution increases make this particular stock a very viable income option for long-term investors in search of a higher-yielding play in the potash sector.
For those of you who may be considering a position in Potash Corporation of Saskatchewan, I'd keep a watchful eye on a number of catalysts over the next 6-12 months. These catalysts include but are not limited to the near-term behavior of the price of potash per ton, any indication that the project-related timetables for both Greenfield and Brownfield projects has the potential be reduced and lastly any upward movement in the company's annual dividend as market conditions become a bit more favorable.