Potash/Fertilizer Industry: The Week That Was

The past week was packed full with potash/fertilizer industry news. First, we had Potash Corp. of Saskatchewan (POT) eclipsing the $200 benchmark, culminating in POT becoming the largest company in Canada by market capitalization. The very next day, Intrepid Potash (IPI), an IPO we have been talking about for some time, debuted on the New York Stock Exchange finishing up 58% for the day.

This is on top of raising the number of shares offered in the IPO, as well as the pricing of the issue by roughly 50%.

click to enlarge images

Intrepid had an impressive debut rising 58%. IPI offers American investors another potash company, pure-play at that, to invest in. Should potash prices continue to rise, one would expect the largest US producer to rise as well.

Thursday before the open, POT released blowout earnings while also providing higher guidance on future earnings (quarterly and yearly).

The whole industry was winded by Thursday, and many of the stocks ended the day down, even though Potash Corp. reported those stunning numbers. We speculated in a previous article that they would need to blow away numbers past the already inflated expectations which had arisen after The Mosaic Company (MOS) reported their earnings earlier this month.

It is no secret that the last run-up in share prices for the industry is due to some short squeezes, so it would not surprise us if Thursday's sell-off was in part due to some short sellers re-entering their positions. The $200 puts were popular when POT crossed over, so it would not surprise us if the 'Big Boys' were playing/hedging their bets.

Friday morning, CIBC World Markets maintained their "sector outperform" for Potash Corp. of Saskatchewan. CIBC raised their price target to $275 from $260 while also raising their EPS estimates for 2008 and 2009. CIBC sees EPS in 2008 in the range of $10.22-10.47 and EPS in 2009 from $13.80-18.22. For the record POT sees earnings in 2008 from $9.50-$10.50, so one could read between the lines and reason that POT will raise earnings estimates again next quarter- 'under promise and over deliver'.

Potash has had an improbable run over the past three months, as depicted in the above chart. A possible breather could be warranted here, such as when the stock hovered around $150. The stock could pull back about $20 and would still be in a bull trend.

We found some interesting notes in the earnings release, which really blew our mind. We knew that Potash controlled most of the world's potash production and held large stakes in many other producers around the world, we had no idea that these stakes amounted to $26.50/share, or roughly $8.6 billion total. If you take this out of the share price, the P/E of Potash Corp. becomes that much more attractive. The company's production estimates for 2008 came in lower than the numbers we use, however their future numbers for 2012 will come in about one million tonnes KCl above our numbers. The company believes that they can get production up to "15.7 million tonnes KCl by the end of 2012." By 2015 they expect to raise their production in Saskatchewan by another 1.5 million tonnes a year.

This indicates that the company's production base will increase by 65% by 2012, which is mind boggling when you consider that in four years a $60 billion plus mining company is going to increase their mined production by over half with the possibility of increasing revenues over that time by 100% (and maybe 200% if current prices hold and/or increase in their market segments).

I cannot think of another time in recent history when a company this large had such ambitious plans, let alone the management team in place to pull it off.

Nearly every type of fertilizer product available has increased in price, with some increasing by nearly 300%. Sales to China plummeted as they did not negotiate a contract in time to receive shipments for the current quarter, so expect increased sales over the next quarter and year as China will need to stock up on fertilizers for the growing season.

Keeping an eye on potential new issues coming to market, watch MagIndustries (MAAFF.PK) which has plans to take public its potash subsidiary. It is a complicated transaction and one in which the money has already been raised- now the company is waiting for approval. This could be an attractive potash player as they will be among the next 3 new potash entrants, and the only one in Africa. Once full production is reached, the mine should produce somewhere in the neighborhood of half a million tonnes of KCl per year. If you keep in mind that Intrepid Potash has current production of 800,000 tonnes KCl/year, you can easily figure out what the stock could be worth.

If potash stocks can hold their current levels and keep the shorts from re-entering their trades in big ways, further gains could be quite possible sooner rather than later. Mosic (MOS) is one of those such stocks, along with Terra Industries (TRA), Terra Nitrogen (TNH), Agrium (AGU) among others. It was tough not being 'King Potash' (Potash Corp.) or the hot IPO of the week (and probably year) Intrepid Potash, and the fore-mentioned stocks were those taken to the woodshed for some quick take downs.

If Mosaic can hold the $120 level, all should remain rosy for shareholders- be they long-term investors or short-term speculators. If MOS falls below the $105-110 range, technical problems may arise for all shareholders.

Although many new investors have arrived on the potash scene in the last few months, it appears that the long-term story is still intact. Although a pull-back should be in place after these great run-ups, none has occurred as of yet, which leads us to believe that most of these new arrivals are intrepid investors. And thank god for their arrival, because the fresh blood injected enough new money to chase off the potash industry bears which most likely enabled the last pop. Bears remain timid, and will most likely remain on the sidelines in the near future. Watching the options market is one way to gauge when the market believes that the industry is going to have a healthy correction, and Potash Corp. and The Mosaic Co. would be good ones to pay attention to (as they have large followings, are widely known, and highly liquid).

Disclosure: none

Comments

[bluesmoke:]

Good article. Geven everything you mentioned, I just don't understand why China potash company Migao, CA:MGO is getting beaten up so bad, especially given the fact they are now building a new sulfuric acid plant.

2008 Apr 27 11:08 AM

[Arnie:]

I find the whole fertilizer play to be very interesting given the additional high demand for food as a feed for animals and for bio-fuels. I thought the whole negotiating process with China and India was interesting in the way that India negotiated first instead of waiting for China to drive down the price. By going first India got the quantity they wanted but it looks like they paid a higher price $625/tonne vs. $575 for China. China only got 1 million of the 2.5 million tonnes they had bought the previous year. Being a backyard gardener, I was expecting other announcements on the sales of the 2 other fertilizers i.e. nitrogen and phosphorous. If you're growing crops, you really need the 3 main elements potassium (potash), nitrogen and phosphorous. If you have ever bought a bag of fertilizer you'll see the numbers e.g. 12-12-12 which refers to the percentage of each element in the bag. Potash is an important element, but it tends to stay in the soil unlike nitrogen and phosphorous which leaches out faster and needs to be continuously renewed.

2008 Apr 27 04:51 PM

[Mark Anthony:]

I think there is a potash bubble forming. Read this article:
seekingalpha.com/artic...

2008 Apr 27 05:16 PM

[Adesai:]

how can you say its a bubble??? The demand to supply ratio is high which is evident with the price of potash from $250 to $1,000 just this year....imagine what the price will be in 2-3 years.

2008 Apr 27 06:50 PM

[dpinvest:]

Thanks to Matthew Smith & Mark Anthony for your articles. Given the MOS, AGU & POT outlook for substantial increases in EPS 08 & 09, yet crosswinds from shortsellers, possible dollar rally, possible commodity correction - what are we to do now? My solution: buy on dips, trade for short term profits, don't expose too much capital for too long - because the sharks will eat you if traders force the momentum down. Remember one of Herb Greenberg's 5 lessons learned in his article in this weekend's Wall St Journal - stocks & companies often move in opposite directions. We can't ignore the tape, despite great fundamentals. Your thoughts fellas?

2008 Apr 27 09:58 PM

[hook:]

one thing I think you missed...there aren't a lot of shorts in these stocks which leads me to believe there are a lot of weak longs at these levels. will be interesting for sure to see if Janus can keep POT up here.

2008 Apr 28 08:42 AM

[User 172125:]

Adesai- Ignore the dribble - I just bought 3000 more V this morning and 1000 ipi- I look at this as a buying op- let the doubters keep selling the stock.

By the way- to the guy talking about the 'shorts'- Underwriters can't loan out shares to short for 30 days in an IPO- good luck finding shares to short from anyone for IPI at this point. The reason that there is movement right now- is that professional traders play on peoples emotions. They know that the minute someone sells POT- and there is this talk of a 'bubble' people will sell- which is what they are doing- the professional then comes in and buys after the 3 point drop- and the sheep come back into the stable running the stock back up- at which point the pros sell the stock back to the unsuspecting fools....... dog chasing its tail...... it is not shorts that produce these movements within 30 days on ANY IPO.

Sophisticated buy and sell and even swing traders- come in on a day like today (like I did) and buy more shares under 50......

IPI is a winner- and like any stock, if you believe in it look at corrections as a buying opp- don't panic- there is no ag bubble- we are only half way into a multi-year ag commodity run-

IPI will be a 75$ stock within 3 months

2008 Apr 28 11:49 AM

[User 172125:]

One note about Seeking Alpha-

Those of you reading seeking alpha should know that this is a trader's site. Most of the people writing these articles don't even own stock. They are PAID to slam stocks like IPI and V - hoping that you will panic and sell the stock so that the people paying them will be able to buy the stock at a lower price.

I know most of you reading this post know this- but I want to make sure those that believe they are reading legitimate articles by professionals realize that these are hacks writing slam pieces for money. (Just to prove my point- watch how quick someone insults me- they will attempt to discredit anyone that spreads the truth - because it costs them money) (For further proof- type in V in the search at the top of seeking alpha's home page- this stock was slammed by a whole plethora of the alpha 'crew') V is up over 60% in the last month- if thats not proof- then I'd love to selll you the Brooklyn Bridge :-)

2008 Apr 28 11:55 AM

[Tim Plaehn:]

I typed in V and found the reporting to be straight forward and balanced. I find the majority of the articles at SA to be on the bull side and positive about companies. If you have an educated and researched opinion about a stock, submit it for publication. They are always looking for good content.

2008 Apr 28 01:25 PM

[Marol:]

V winner -- thanks for a possible tipoff. I do recall, however, an enormous ruckus over what was perceived as a trader trying to unfairly blast one of the solar stocks.

Mr. Smith -- short-term trading and buying on the dips seem to me only to work when I know that they really are just dips. I'm a novice, and really do want more on how you tell what's what? Thanks. (Hmm. Maybe you could just post notes here when you think it's time to take profit, and when you think it's time to buy! But short of that, my question remains.)

2008 Apr 28 07:24 PM

[jjason:]

I think that there is a big difference between the goals of everyone on SeekingAlpha. Day traders, long term investors, momentum investors, technical traders/investors, all of them have different things to say. I wonder if any of you short term traders ( like one day to say, three months ) realize that investing in stocks, short term, is a zero sum zero game where there is a loser for every winner?

The only other activities that I can think of where there are more losers than winners is blackjack, slot machines and other forms of gambling.

I am a reader on this site so that I can make intelligent investing decisions. I am retired. I look for safety of principal and income from dividends and capital gains. I am not interest in reading BS.

There are a lot of writers on SeekingAlpha. Some of them actually write good articles.

On POT and the other companies involved in potash, 1. I think there is a monopoly situation. 2. There is also much speculation going on. 3. If some governments take the time to end this "cartel" maybe the price of potash will come down.

Finally, like Arnie, I am a backyard gardener. But unlike Arnie, I do not use any fertilizer. I compost and have an outstanding population of worms. No fooling. As an organic gardener I have an excessive supply of cukes, tomatoes, green beans, zuccini squash, yellow squash, green onions and flowers. My garden is labor intensive and uses only energy from the sun...and I recycle gray water too.

I recommend organic gardening to everyone. I do not recommend POT...just look at the price to tangible book ratio. POT is overpriced and so is potash.

2008 Apr 29 08:48 AM

[beachtango:]

For heavens sake why is it that when certain stocks start going up people misuse the word BUBBLE so darn much? Why is it when a group of stocks like AGU, MOS, POT, Bunge, IPI, report better than expected earings they get slammed and placed in the same capacity as tech stocks from the late 90's, that had hardly the same importance to humans as companies that produce real and tangible needs for survival? WHY? WHY? For once I hope that commentary on the aformentioned stocks exihibit the rewrds that they deserve now and in the future !

2008 Apr 29 07:44 PM

[beachtango:]

correction i did not mean to say IPI and AGU had reported earnings since AGU is due for earnings on May 2nd, and IPI not for a while....

2008 Apr 29 07:45 PM

[Just someone:]

I do think potash is in the bubble formation phase. I know that this is a supply and demand market so my reason for calling this bubble forming is because when the price of a product gets too high, people find something different to do the same job. It may take some time but when the heat is on things get done. I'm both long and short on potash. I bought AGU in December '07 with the expectations of seeing it to $65 by the end of '08. I sold at $86 and I am happy because I exceeded both profit and time expectations. When IPI came along I picked up as much as I could, yes I did pay a little more than I wanted $51, but my expectaions are to see $65 in 2 years. Thats my long side. I play the short side as well, I figure as long as emotional people are buying and selling for whatever reason I might as well make a few hundred on the side every few days. If I don't loose my profits I'll be buying long on these. I may not have made any point with this post that's because I forgot the point I was trying to make.

2008 May 01 02:25 AM

[Adesai:]

anybody know when IPI (intrepid potash) will be releasing the quaterly earnings????

2008 May 02 09:09 AM

[golds:]

Potash-POT: Sinofert says they will have a 3M shortfall, a positive for POT@BMOC
May 6, 2008 10:44:00 AM
View Additional Profiles

BMO Capital said Sinofert Holdings, the largest distributor of imported fertilizers in China, expects a 3M ton shortfall in China this year. The firm views this as positive for POT and pricing.

3,000,000 tons shortfall.

IPI the largest US supplier only makes 980,000 tons at full capacity !

Pot is going UP UP UP.

2008 May 06 11:57 AM

[lino:]

I am a Chinese invest, I do investment on chinese potash company- Salt Lake Potash Co. , the company got double wins on the price incresment of potash. The import price to China now is about 700usd CIF, and the cost for the production is only about 130usd. You can image how profitable for the company in the following years. It makes more than 2M tonnes a year, occuping 20% of the market.
Now the company worths about 8-9 billion US.
The problem is the potash price is already so high, it will hurt the end farmers. Now Chinese government controls the pricing (the price for the local potash is about 500usd last in later March and no new price has been issued since then). Otherwise the stock crazy bull in China will boost the stock selling at 18 billion, I guess.

Sorry for my terrible English writing.

2008 Jun 02 05:04 AM

[lino:]

investER,

2008 Jun 02 05:12 AM