Potash Corp. Set For Rebound Over Medium Term As Worst Priced In

| About: Potash Corporation (POT)

Summary

Potash Corp. is a global leader in installed capacity with around 20% share.

Potash Corp. is on the low end of the potash cost curve, allowing it to generate profits even if potash prices should approach marginal costs of production in the future.

Fertilizer demand will grow over the long run as farmers look to increase yields and feed a growing population.

Potash Corp. of Saskatchewan Inc. (NYSE:POT)

Potash Corp. is the world's largest fertilizer producer by capacity and is headquartered in Saskatchewan, Canada. The company has annual sales of over $7bn and gross margins of ~$2.7 bn with operations in North America, South America, the Middle East and Asia. Potash is the company's largest segment representing 56% of gross margin with over 13 mn mt (metric tons) of capacity. The nitrogen and phosphate segments make up 33% and 11% of gross margin respectively. Potash Corp. is a member of Canpotex, a private potash export company of Saskatchewan-produced product.

Fundamentals

Chinese Potash Contract Not Likely Until After New Year

Contact settlements in China and India are expected to provide a floor for potash pricing but a Chinese agreement is not likely to occur until after the Chinese New Year (Chinese port inventories at ~3 Mt, well above historical levels this time of year at 1-2 Mt). Current expectations are that the contract price could settle below $265/mt, a drop of $50-60/mt from the previous contract price of $315/mt. China may be encouraged to keep potash prices around $260/mt in order to avoid inventory write downs by Qinghai Salt Lake Industry. Brazil potash prices are currently assessed in the $260-265/mt CFR range. In the U.S., NOLA potash barge prices fell to $225-235/st FOB (short ton, Free on Board) or $248/mt CFR (cost and freight), U.S. Gulf, the lowest price globally.

Financials

FYE - Dec 31st

FY10

FY11

FY12

FY13

FY14

In US $ mn

Revenue

6,539

8,715

7,927

7,305

7,115

Revenue growth (%)

64.4

33.3

(9.0)

(7.8)

(2.60)

Gross Profit

2,690

4,286

3,410

2,790

2,647

Gross profit margin (%)

41.1

49.2

43.0

38.2

37.2

Operating Profit

2,597.0

4,306.0

3,019.0

2,616.0

2,348.0

Operating profit margin (%)

39.7

49.4

38.1

35.8

33.0

Net Profit

1,775

3,081

2,079

1,785

1,536

Net profit margin (%)

27.1

35.4

26.2

24.4

21.6

EPS (GAAP)

1.9

3.5

2.4

2.0

1.8

Dividends per Share (NYSE:DPS)

0.13

0.28

0.70

1.33

1.40

Capital Expenditures (MUTF:CAPEX)

2,079

2,176

2,133

1,624

1,138

Cash & ST Investments

412

430

562

628

215

Total Assets

15,547

16,257

18,206

17,958

17,724

Total Debt

5,578

4,537

4,081

3,937

4,245

Total Equity

6,685

7,847

9,912

9,628

8,792

ROA

12.5

19.4

12.1

9.9

8.6

ROE

27.1

42.4

23.4

18.3

16.7

# of Employees

5,486

5,703

5,779

5,787

5,136

Click to enlarge

Competitive advantage

Potash Corp. is a global leader in installed capacity with around 20% share. Fertilizer demand is expected to grow over the long run as farmers look to increase yields and feed a growing population. Potash Corp. is on the low end of the potash cost curve, allowing it to generate profits even if potash prices should approach marginal costs of production in the future.

Potash Corp's competitive advantage prevents other companies from entering or competing in their industry. This is a mix of branding and the ability to keep costs low, which is extremely hard to replicate.

Major Risks

  • Lower demand along with rising inventory levels from Brazil, SE Asia and China due to slower economic growth
  • Weaker-than-anticipated sales volume and pricing along with higher-than-anticipated cost structure
  • Weather and crop conditions, which influence the ability to plant and fertilize
  • Fluctuations in natural gas prices also influence nitrogen fertilizer prices and cost structure
  • The completion of potash greenfield projects by new market entrants is uncertain and hence actual additions to potash industry capacity have lagged anticipated additions over the years

Key Catalysts

  • Strong demand from India
  • Rocanville and Picadilly ramping within the potash segment
  • 100K incremental MT of ammonia capacity following expansion project in Lima

Investment Rationale & Conclusion

Capacity expansions: Potash Corp. capacity expansion plans in place (17.1Mt of capacity by 2015 or ~22% of global capacity) ensures that it remains the dominant presence in global potash market performing the role of swing producer while managing supply with demand

Optimize Potash and Nitrogen production: Potash Corp. phosphate will leverage lower-cost, high-quality rock supply, while maximizing the value of Potash production. Potash Corp. nitrogen maintains focus on industrial customers to benefit from reduced volume volatility and better margins due to lower transportation and distribution costs. POT has best in class assets and first mover advantage on brownfield expansions.

Potash Corp. currently trades at $16.3 (closing price as on 19th Jan) with its 52-week range of $15.02-37.6 and looks attractive for potential upside from current levels over the medium term as outlined below:

  • Potash application rates in China and India lag scientifically recommended levels. With these two countries working to secure food supply, increasing potash application is a relatively pain-free way to raise crop yields and food production
  • Producers limit potash production allowing the market to re-balance and pricing begins a rebound in 2H16
  • Stock prices correction over the last 6 months already reflecting effect of lower potash prices
  • Global population growth and improving diets will lead to potash demand growth in the mid to high-single digits

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Sources : Company Financials, Company Press Releases, Investor presentations, SEC Filings -Form 10-K, 10-Q, Morningstar, Reuters, Yahoo Finance, Vuru, Northernminer)