Is It Really Time To Cover A Potash Short?

| About: Potash Corporation (POT)

Summary

Potash Corp. slashed '16 EPS expectations and cut the dividend 34%. .

The potash miner continues to be squeezed by falling margins for the key fertilizer. .

Whether pressing a short is no longer wise, the stock appears to have limited upside due to the structural change in the potash market.

According to Scotia Capital, the carnage is sufficient to cover a short in Potash Corp. (NYSE:POT). Though Scotia lowered the price target to $18, the firm thinks the recent price action is reason enough to no longer expect the stock to head lower.

Potash held strong at $34 as 2015 started, but the stock has now lost 50% in the last year. Though my previous research warned investors to stay away from the stock on numerous occasions, most of the comments fought my recommendation. Now the question is what to do with the stock at multi-year lows following a dividend cut.

Collapsing Margins

The biggest risk to the Potash Corp. investment was always the irrationally high potash margins due to cartels in Canada and Belarus. These cartels propped up potash margins far above those achieved for other fertilizers like nitrogen and phosphate. In Q4, the margins for potash fell back to reality.

Potash Corp saw the average realized price for potash collapse to $238 per tonne, down from $284 per tonne last year. Combined with the reduced volume, the gross margin fell to only $183 million from $445 million last year.

Nitrogen saw a smaller collapse with the gross margin falling to $142 million for the quarter. Note that for the first nine months of the year, potash produced a gross margin of roughly $1.1 billion versus the $560 million for nitrogen. Now the gross margin contributions are similar.

The issue with potash was clearly highlighted in this Q4 earnings slide showing the margin impacts from all three fertilizers. The real significant hit came from potash.

Reality is starting to set in with potash as the company named after the fertilizer barely achieves a higher gross margin in comparison to nitrogen. Heck, the combined margin of nitrogen and phosphate now exceeds the amount from potash.

The company forecast 2016 global potash shipments inline with the total for 2015. The lack of growth in potash continues to greatly impact the financials of Potash Corp. that ramped up production to meet supposed emerging market demand that hasn't really materialized.

Dividend Cut

In a odd move, the company decided to cut the dividend by 34% to $1 per year, or $0.25 per quarter. The peculiar part is that Potash Corp. only forecast earning around $1 in 2016.

Unless earnings rebound by 2017, the company could come back and cut the dividend again. The balance sheet isn't that impressive anymore with over $4.2 billion in debt and negligible cash. The company does have roughly $3.5 billion in investments and nearly $1 billion in investments available for sale. Either could easily be monetized to cover short-term cash demands.

Even with the dividend cut, Potash Corp still offers a large 6.1% dividend yield.

Takeaway

Investors can go with Scotia Capital and use the positive reaction to negative news as a short-term trade. The reality though is that the high margins claimed by potash in the past may not ever return. The stock might bounce higher, but the recommendation is to sell Potash Corp. on any rallies until the supply/demand equation improves.

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: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.