Poor weather conditions in the U.S., including severe drought and hurricanes, not only forced to cut down projected crop production significantly but also extended the ongoing agriculture cycle for a year.
We believe higher crop prices, healthy farmer income, tight grain inventories, and increased fertilizer application rates in developing countries bode well for fertilizer stocks. We have a bullish stance on Potash Corporation (POT) and The Mosaic Company (MOS), and we are neutral on Intrepid Potash (IPI). The fertilizer industry is effectively operating at two different momentums; demand is steady, supply is tight and prices are high in the nitrogen market, whereas, the potash market is facing slow demand, high inventory levels, low prices, and there is a delay in key international contracts. Although we believe that the potash industry faces short-term headwinds, we expect a strong rebound in potash demand in 2013, driven especially by elevated crop prices.
The biggest concern facing the potash industry is the delay in new supply contracts with China and India. This delay in contracts will likely result in discounts on contracts prices because importers will feel no pressure to reach a deal before the first quarter of 2013. On the other hand, nitrogen (ammonia prices in particular) remains strong as supply remains tight and demand high. We expect this favorable nitrogen market environment to at least continue in some of the upcoming quarters.
The Mosaic Company
Low starting inventories to meet strong spring demand in phosphate resulted in lower than expected results. South Fort Meade (SFM) mine shutdown and bad weather also impacted phosphate earnings. Now when SFM mine is fully operational, (accounting for approximately 38% of company capacity) better results are expected due to lower rock costs and enough supply for positive demand in the market.
MOS, like other potash producers, is facing challenges in signing contracts with China and India and, in our opinion; it has increased the likelihood of lower settlement prices. Due to elevated domestic inventories, potash prices are decreasing in China, whereas, reduction in subsidies is translating into a weak demand in India. However, we expect both China and India to settle contracts by early 2013.
MOS is also expected to announce by the end of the year if it is to become fully integrated in ammonia by building a greenfield plant. If the company does build the plant, it will benefit from the current high price and tight supply situation. MOS has challenges in the short term but long-term prospects look good. The company, like POT, stands to benefit from the factors mentioned in the introduction.
MOS reported 3Q EPS of $1.01, below consensus EPS of $1.15, and down 14% from the same quarter last year. Revenue for the company also fell 19% y/o/y to $2.51 billion. Phosphate prices fell 8% y/o/y; however, potash prices were flat y/o/y.
Lower sales of phosphate, which declined as much as 30%, and poor weather, resulted in estimates beat. Lower start up inventories, lower production, prolonged maintenance work at factories, and hurricane Isaac, compounded supply issues for the company and it could not meet all farmer demand.
The company is expecting next quarter potash sales volume to be in the range of 1.6-1.9 million tons, with the upper end depending on sales to China and India. MOS expects average realized prices to be in the range of $420-$450 per ton. Expected range for phosphate volumes is 3.0-3.4 million tons, with upper end dependent on a strong fall season. Mosaic also announced an increase to its dividend by 150% to $0.5/share annually.
Potash Corporation of Saskatchewan Inc
We are bullish on Potash Corporation . As we mentioned in our previous article, POT is a low cost producer of potash and also the biggest. Potash is a high margin nutrient. At low cost, 50% of potential potash industry expansion is controlled by POT. The company is the third largest producer of phosphate and nitrogen. The company is fully integrated with high quality phosphate. POT is well positioned to benefit from a rebound in demand, as the market will eventually tighten.
POT reported third quarter EPS of $0.74, in line (missing by one cent) with consensus estimates of $0.75. POT missed analyst estimates by one cent in the last quarter too. The y/o/y EPS were down 21%. In its press release on 17th October, the company informed investors that due to delay in signing new contracts with key importers, namely, China and India, earnings for 3Q and FY2012 will fall below the low end of earlier released range, and that remained the key story of 3Q.
The company's nitrogen business posted better than expected results due to higher prices. The y/o/y gross profit was down by $12 million to $251 million.
Excluding the $0.39 Sinofert impairment charge in Q2'12, the company reduced its full year guidance to $2.80-$3.00 from earlier reported range of $3.20-$3.60. Analysts are expecting Q4'12 EPS of $0.73 and FY'12 EPS of $3.02
Intrepid Potash Inc
We have a neutral rating on IPI in the short term. We believe IPI has growth potential and it continues to benefit from its geographical niche. It supplies less than 10% of annual potash consumption in the U.S. Moreover, due to its proximity to the end user, the company is able to realize higher net potash prices. However, IPI has potash expansion related challenges and its exposure to single fertilizer type adds risk.
IPI reported Q3 EPS of $0.38, beating consensus estimates of $0.34 by 4 cents. The beat was largely due to lower than expected effective tax rates. However, segment results were in line with sell-side expectations.
Potash production was up by 9% y/o/y while sales were up 31%. Improved production at the east facility, which improved 20% sequentially, and shorter annual maintenance turnaround, resulted in higher production. Average realized prices for potash were down 9% y/o/y. COGS/ton was down $2 to $224/t.
Langbeinite production volume was flat y/o/y; however sales volume was down by a whopping 50%. Even then, results were better than sell-side expectations, mainly due to less warehouse costs. Prices were up 33%; however, COGS was also up 17% y/o/y.
IPI, in its quarterly press release, gave its production, sales, and costs outlook for the fourth quarter, hinting at EPS in the range of $0.26-$0.30, lower than consensus estimates of $0.33. Higher expected COGS for both segments and lower volumes for trio segment resulted in conservative guidance.
Both POT and IPI are trading at relatively high forward P/Es of 11.5 and 15.5, respectively. POT has a peg ratio of 4.5 and IPI of 0.66. POT has a dividend yield of 2.10%, and MOS of 1.90%. IPI has the highest long term earnings growth rate of 27.35%. POT and MOS have growth rates of 3% and 8%, respectively.
The Mosaic Company
Forward P/E (1 year)
PEG ratio (5 year expected)
Long-term earnings growth rate
Share price Performance (YTD)