RBC Analysts Expect Potash Corp. Stock to Double

Even as sharers of Potash Corp. of Saskatchewan Inc. (POT) are plummeting today, falling by more than 4% to under C$158 in mid-afternoon trading, RBC Capital is expecting the stock to more than double to C$375 as Chinese potash buyers begin negotiations for a pricey new contract in Seattle, Wash.

Analysts Fai Lee and Owen Martin say in a research note that Potash Corp., one of the world's largest potash producers, is currently trading at a flat realized potash price of $430 per tonne (about $530 per tonne  delivered), but RBC believes this is far below market prices which range between $900 and $1,100 per tonne.

They also point out that the Belarusian Potash Company is expecting to squeeze higher contract prices out of the Chinese, while Uralkaliy OAO, a Russian potash company, predicts the negotiations will bring prices closer to spot (to about $1,000 per tonne from $640).

The analysts' report says:

(This is) consistent with our view that Potash Corp. Is very attractively valued.

Uralkaliy also made several statements in its recent second quarter conference call that will benefit Potash Corp. The Russian company plans to start production at its proposed Mine-5 greenfield potash mine in 2013, but more importantly, Urakaliy would sacrifice sales volume for higher prices.

The report said:

We believe this is a significant statement and very positive for potash prices in the long term.

On Tuesday, Uralkaliy announced that is had been awarded a tender from Bangladesh at $1,100 per tonne for October delivery, with other markets likely following suit as early as 2009.

RBC Capital derive its share price target from a valuation multiple analysis and discounted cash flow analysis based on an equity discount rate of 8.75%. The price reflects a 2009E Enterprise Value//Earnings Before Interest Depreciation Taxation and Amortization multiple of 8 and a Price/Earnings multiple of 13.5x, plus C$90 per share for future potash expansion projects.

There are numerous obstacles to achieving this growth, however. An unexpected decline in global demand, a drop in fertilizer  prices, negative government intervention in China and India, and even a rail-car shortage for carrying potash could all leave Potash Corp. short of its target, the analysts say.

Comments

[DAD08:]

Well- I guess we'll see what the market thinks. I happen to agree with RBC, however at this point- it does not matter what I think or anyone else, the only thing that counts is the market perception.
Good Trading to All.

2008 Sep 05 08:57 AM

[rkr:]

Potash-Nitogen etc., all dragged down again w/commodities.
Yet they really have nothing in common. Oil drops, this helps the potash producers as it cuts their production costs. People I know in the bussiness (agra/ feed/ fertilizers) say their profits will be up 45 to 60% vs. 6 months ago.
Buy "IPI" as well as Pot,

2008 Sep 05 09:14 AM

[CT Programmer:]

Never pay attention to what the market says today, or tomorrow, or next week. Next year no one will remember the buzz from now. Fundamentals. Go long. All of the potash/fertilizer companies are on solid ground, and even if they top out at $1,000 a ton and stay there, or even back off maybe to $800 due to demand erosion, their PE's and fwd PE's are at historic lows. Will they dip more in September and you can get a better price? Probably. But that's just trying to squeeze an extra 10% or so out of your 50%+ return. There will be solid returns. Not astronomical like some predict ("quadruple market cap"), but definitely solid.

And even if you think oil and ag is joined at the hip for price movement, think about this. Last year oil's high was $70, and even if oil slid all the way back down to $70, that's a low. It's more likely to be trading in the $90-110 range for a while, and trending up from there. There may be a commodities exodus right now due to the sudden retreat, but that is short lived. Even if the Asian economies "slow down" to just single-digit growth. Think long and leave the day-to-day movements to be sweated out by the day-traders.

2008 Sep 05 09:39 AM

[Hashisheen:]

I finally took the plunge with POT a few weeks ago so am out of pocket at the moment. Stubbornly, I've refused to sell as I can't see how a Compant with such good fundamentals can continue going down (probably very naive on my part). Anyway, this is the secong article I've read today that convinces me that I should remain in POT and maybe even average down. Follow this link for other POT information that investors may or may not be interested in.

www.businessweek.com/i...

Disclosure : I am (nervously) still long in POT (Bought in at 204).

2008 Sep 05 11:21 AM

[Urbane Gori...:]

And TNH has moved 20-25% from it's bottom in early August???? Can only be NatGas prices.

jegan

2008 Sep 05 11:29 AM

[LT Investor:]

I too bought in a few wks ago - too early! It seems the POT bears' main argument is slowing global economy/demand (and the workers' strike if it doesn't end soon), and POT bulls mainly argue that potash prices will go up (i.e. fundamentals of fertilizer business). It seems obvious both points have merit. But which of the opposing factors will "win out"? If potash prices keep going up that much (from ~$500 to $1000 per tonne), will the farmers of the world just accept this? Is there a point where farming certain crops doesn't make sense anymore?

Also nervously long on POT.

2008 Sep 05 12:54 PM

[Emerson:]

I like this article, but what I like better are the posts--for once. Normally I cringe when I feel I have to read the posts to articles on Seeking Alpha but not this time. I think we all bought the same stock on the same day at the same time! I also bought it at $204 (so much for my technical analysis!) but had to sell. Now I'm nervously waiting with the rest of you to see if it will bottom out and continue up from there. Before I bought POT I used to enviously watch as it climbed daily up the charts--until I bought it that is! (I think I'm going to start an invest service whereby people will pay me to NOT invest in their stocks :) Good luck to all of us.

2008 Sep 05 01:08 PM

[Chris Lau:]

Technicals are very negative, even if fundamentals are strong. Sentiment for commodities is negative. Two reasons not to go long on POT right now.

2008 Sep 05 01:20 PM

[specks:]

When Gold was over $1000 everyone said it was going to $2000!
Question: Where is it Now???

2008 Sep 05 02:05 PM

[Hashisheen:]

Emerson, we should go into business together, I too have an unhappy knack of buying shares just before they plunge, we should start an advisory service.

As regards the technicals, the support level seems to be $145 (I've gleaned this from the work of others) and the only bullish indicator (according to my analyser) is MACD. The next support level is $110 (again gleaned from the work of others) so if we go below $145 I think I might sell and look to pic it up again later.

The other thing that seems obvious is that if Emerson and Myself both sell, POT will rocket !!!

Hope you all have a good week-end

2008 Sep 05 02:06 PM

[CT Programmer:]

When gold was at $500, everyone said it was going to $1,000. And guess what? It did. But that doesn't mean it will stay at $1,000 forever and keep going up and up. Commodities are cyclical. Don't kick yourself and don't sell. Hold and wait. Read other stuff for a while and don't second guess. 2 years from now people will be looking back saying "God, I wish I had bought back then." Trying to time another 10% doesn't seem like much at that point.

2008 Sep 05 03:40 PM

[Deltaxray7:]

I also bought last month at $217. But am considering buying more
while it's lower. The company is solid. demand for their product for the foreseeable future is great........What more could you ask for.
Go long.......

2008 Sep 05 09:50 PM

[Joe Z:]

If Emerson and Hashisheen would not mind another partner maybe we could form an LLC. I have bought and sold POT at least 15 times this year. Last hold is at $193. Tried for a Dec. $150 call at $25 yesterday but it walked away from me. After all this, I think I am at a break even after not using a stop loss on the $193 buy. Go Long, no no, I mean Short....

2008 Sep 06 08:55 AM

[cfant:]

Unbelieveable! A pleasant bunch of posters.

(Long term buyer.)

2008 Sep 06 11:09 AM

[Did U Think...:]

OK, now we are going to see who knows anything about how markets work. POT is going back below 100 - well below. Forget all this crazy "doubling" hype. Once a mania chart has broken down like POT the best you can hope for is a sideways consolidation before it completely collapses.

The whole market is going to crash. Dow well below 1000 (think 7500). The bust and subsequent nationalization of Fannie and Freddie will require the gov't to be more careful about what loans it accepts going forward. This will tank the housing market even more because let's face it, a 200k house used to be considered expensive and now it is just considered to be average. Before this is over, a 200k house will be considered expensive again because it's hard to pay sky high prices if you don't have a job and you don't think housing is a good speculative investment.

Laugh now, cry later.

2008 Sep 07 02:11 AM

[Hashisheen:]

Well, this last poster might be right, but where is the analysis to support it. The bail out of Freddie and Fannie should stabalize the housing ,market (I agree housing prices should be lower). However, this is a different argument. The price of housing has a relationship with a persons salary. As mortgages become harder to find (eg because you can no longer borrow five or six times your annual salary to buy a house) then the market will fall until houses are priced at a value where people can start buying again (maybe 3-4 times salary). The bail out will mean a weaker dollar and this in turn will be bullish for commodities which POT seems to be linked to (although I'm not sure why).

Finally, the fundamentals for POT are still sound, the number of shares available are reducing due to the Company Buy back and the market for fertilizer is as sound as ever, all good reasons to stay in POT. So, you might be right, but you've not convinced me to bail yet.

2008 Sep 07 02:13 PM

[einstein p ...:]

The commodity stocks have been brutal --- but they still have strong fundamentals and earnings visibility. Still, it's been hard to hold a position in POT and sleep at night, so I've been on the sidelines other than the 150 and pray for "Hail Mary" bounce trade.

If you and Emerson decide to change your mind and bail on POT, please let me know in advance. If the stock does soar after you sell, I'd like to sign up for your advisory service. God knows, nothing else is working and I could use all the help I can get. The dart board just isn't working anymore. :)

2008 Sep 08 05:05 PM

[Yes, No, Maybe:]

Yes, the fundementals are great, the world needs more food, and fertilizer is the best way to increase yield.

No, all commodities are collapsing, even gold the ultimate safe haven, POT could be dragged down with the rest.

Maybe, this is temporary and just as fast as POT fell it could bounce back with avengence.

I think the real story is that nobody really knows when it will come back, including all the so called experts. The question is not if but when. Investors will be kicking themselves next year if they bale and miss out on at least a two-bagger.

2008 Sep 08 10:28 PM

[AG MANIAC:]

I hate to break your heart, but this dog has had his hunt! Since Cramer hyped fertilizer, all of the group went to xyz in a hand basket.Problem with fertilizer companies is they got too greedy. You can not out run your customers capital. When you triple the price like the P&K boys have, there is not sufficient capital in both the wholesale and retail sector to pay for this inventory.It would be one thing if only P&K were asking for 3x, but fuel, steel, seed, chemicals, freight, insurance, and I can go on forever, you get the drift. If you want, I wil give you some demand destruction numbers from several large fertilizer producing states, that will blow you away. Can they export all the P&K off shore, maybe, but once India and China figure out the U.S is not paying 3x - How long will they continue to be carved like a turkey? I guess they could close production, but that might not help their stock. And by the way, you think the banks are in a good mood and willing to risk lending growers 2-3 times their historical inputs? Farmers can grow soybeans with little inputs and limit their inputs and risk. Farmers in most states manage risk! See hurricanes in GOM. Big money is done with energy, alternative energy, commodities, and fertilizer - I wish I knew where the next POT is, because that is where BM is.

2008 Sep 09 10:33 PM