Gregory Orr

Gregory Orr
Contributor since: 2008
If the macro environment is challenging for POT, it must be devastating for higher-cost producers. Think Mosaic closed a Saskatch mine, I'm sure BHP can't wait to become the highest-cost producer in Canada and start throwing money in the ground. Just one or two dry years, and the irrationality should swing the other way. Blue-Chip with 7% div yield... That's irrational. Think I'll go load up on Netflix like all the cool kids. Good point about the lack of rebound on nix-K+S. Still think POT would do better managing K+S assets in Canada, and gain the distribution in Europe. Meet the Russkies in Berlin...again...
High-cost producers are going belly up, will be a ton of cheap leases at fire-sale prices. Was piqued by the comment about massive stockpiles in China, does anyone have more intel on that??
Also curious about MacQuarie and BHP... bet this piece created quite a buzz in the BHP Boardroom...
If China has big stockpiles, then what does that do to the value of Urall's rail network?? Think Sinofert will take control of Urall... What say, Amigos?

All this speaks to the value of K+S distribution network in Europe. Will POT buy MOS and AGU out of Canpotex, and then bill them for distribution services??
We're witnessing a massive consolidation, and the low-cost producers with cash and quality management will be waking to a brave new dawn.
A dry summer or two, and the lemming of Irrationality will about-face...
Jochen Tilk got his Masters of Engineering from Aachen(RWTH Aachen??) which has an exchange program with Oxford and MIT, arguably the finest engineering school in Europe. One thing I can say for certain is that JT knows one heck of a lot more about mining and the European market than I do, or probably anyone posting comments on SA. I would take pause before I would call JT's plan foolish. My guess is it's all about distribution. As the Juniors fold up, their assets basically become worthless, for the near term. The big prize here is distribution, as well as "POTblocking" the Russians in Europe
I just can't wait for the day when I can sit and play Sudoku, instead of getting leg cramps, when the Ecstatic Island Expressway is moving at 4 mph. Kinda cool that an idea, like autonymous driving, could substitute for some massive infrastructure buildout, and better use what we already have. I don't need Fully Auto, just would be nice to relax a bit, and maybe even sleep between NY and VA or the Poconos
Was going to suggest maybe she should get out of East New York...
Thanks Mark. Out of all my posts about Jansen, you're the first person who seems to be thinking about whether the economics actually make sense. Here's to disrobing the Emperor's New Mine
Long Island drivers will freak out if they can't cut people off within 3 feet of their bumper! Keep wondering if HOV lanes will be converted into AutoDrive, or some hybrid between private and mass transit. Anyone know if it's being developed? Think I'd still sleep with one eye open, like when my girlfriend is driving...
6% dividend yield. How did POT wind up in the Junk Bond Bin?? Conventional wisdom says K moves with corn. One dry summer, or a flood at Solakansk, or an accident, stronger Ruble, or another Putin Land Grab. Think the Shorts are pretty much out of POT. Waiting for the Cramer Bus to pull up. Someone remind him POT pays a dividend...
Think POT should pick up IPI on the cheap, and just do a JV deal with K+S to distribute in Europe
Wonder how much longer they'll be allowed to evaporate off the Colorado River
Rich, I was also under the impression that Jansen is being "slow-walked". Think POT wants the distribution assets into Europe via K+S, become less dependent on China, and start shipping product east. Wouldn't surprise me if they shut down the K+S mines entirely. If they want K+S cheap, they should go into a full-fledged price war with URALL. Of course, that would be cutting off their nose to spite their face, Russian-Roulette style...
Hi DG, like your analysis. Do you have any idea what the projected cost of production is for Jansen? To me, it looks like a huge hole in the ground into which BHP is throwing money. Are they trying to guarantee that the price of potash goes and stays under 200 a ton? I've heard estimates of construction costs of 2000 per ton capacity. If their net operating profit is $100 a ton, isn't that a 20-year payback?? BHP must have a very positive outlook for long-term pricing, or maybe they have a major bug up about getting rejected on the takeover bid. Where are they going to get the rail capacity to get 8 million tons to market?
I have serious doubts about whether Jansen will even be completed, with prices under 400 a ton, and rail capacity already strained. I've heard construction costs of $1500-2000 per ton of new capacity. Payback horizon looks pretty far off at 350 a ton. POT keeps cutting their cost per ton, and cranking out cash. As an investment I would look at it like an inflation-hedged bond, but I like it better to trade, because of the changes in volatility. I would either buy it for the dividend and forget it, or take profits when it pops, and be patient for bottoms. if Solikamsk is permanently shut down, it could push the top of POT trading range above $40...but I'd rather cash out at 38, and buy back at 33
Hmmm. Highly volatile commodity price...and only modest earnings growth expectations? Guess we'll see about that.
i'll take all you want to sell at $19
White Swan event in the form of mine flooding. Russians have made such a mess of the industry, their own company...Canadians, just steady as she goes. Good management always trumps in the long run. Wonder when the bean counters will raise their target over $40...
How does a bumper crop and perfect growing conditions reduce demand? The north american market is sold out, nutrient uptake from the soil has been substantial in the last 2 years, farmers have cash in pocket, and the nutrient is near-term cheap. I look back to the 2010 USDA Soil Survey that said that most of the North American corn belt soils were marginal to deficient in potash. Is the whole potash thing a hoax? Or do low soil levels actually reduce yield?
I look at POT as an inflation-protected bond that throws off a 4% yield, and it seems like the cash flow situation is only improving, without price increases. If your reasoning is accurate, than BHP would have to be masochistic to move forward with Jansen.
Two good years of rainfall, and the canadian producers are selling out of inventory. URALL investors are not happy with their share price. POT has reaffirmed the dividend, and will continue to pump out cash. Any incremental price increase goes right in the pocket of investors. URALL has signaled a 10% increase in the China price. The dividend yield is 4.16. The correlation is to rainfall, which actually drives consumption, not grain prices. When everyone gets a decent sized piece of a very large pie, that's good. When developing populations can afford grain, that's good too. The uncertainty is out, except for those who manufacture it for a living.
Enlightenment! Does anyone keep track of fish production and corn demand?
Very rational of RJ to do so. Clearly, RJ is minding the store, and giving their clients timely advice.
And guess what? AG PROFESSIONAL just published a piece that URALL may increase the china contract price 10% for 2015...
URALL produces less than 12MM tons in a 55MM market. Do they have the capacity to "dump" much more product on the market?? Think they're shooting for 15MM tons, but still, they can't supply the entire market. It's just the China contract price that they can impact. POT management has demonstrated a commitment to hold prices as much as possible, and cut production. Does anyone know the condition and age of URALL infrastructure, or their safety record?? I don't, but I've always had a gut feeling that a major accident is a real possibility, and could be a white swan event for the Canadian producers, perhaps more so than a rapprochement between Bela and Urall, which is also still a real possibility. Would be great if anyone in our community knew what was actually happening on the ground(or, underground??) in Russia. Will Europe and North America pressure China to cut Russian imports? This should be the most boring business in the world, but it reads more like a spy novel. The near-term outlook for demand is "sluggish to improving", but the geopolitical wild cards remain, and should be taken into account. POT can maintain modest margins in this environment, and keep paying out the dividend. Weaker players will fall by the wayside. And the current prices are a real discouragement to new players building, or expanding capacity. POT will supply the marginal demand when it returns, at a higher price than the China contract for sure.
Only people living under rocks for the last year would have been disappointed by the earnings release. When you beat consensus by 25%, either the analysts were all asleep, or the news was encouraging, not disappointing. No offense, Apex, but have you been following this market, or did you just fall off the turnip truck and decide to write a potash article?
Most bizarre price action I've ever seen. Up $1.68 in pre-market, went to -.03 late in the session ...If you just looked at the chart, you would see an up day with big volume, have to look closely to see the price action. Odd that they would beat on earnings by 25% and wind up flat for the day. I mean really! POT was euphoric in pre-market, up 4.6%, and sold off all day. Also thought it was odd that TD would downgrade to hold, while maintaining a 39 price target, right before earnings. Any thoughts out there?? I'm expecting it to go higher, and it's definitely got momentum...
Will read through the archives, and look forward to your next piece!
All the best..
Thanks, GC. Just read the MF article. You mentioned that you expect grain prices and potash to realign into a new cycle of demand. Could you expand on that?
Thanks for your excellent work, GC. Any thoughts about how Russian sanctions might impact potash markets?
Yes, would be good to hear more about the physical plant. My understanding is that Canpotex distribution infrastructure is state-of-the-art. Yes, URALL produces at a lower cost per ton, but I always have this picture in my mind of a guy with a bushy moustache pounding his fist on the table demanding more production. A major accident in Russia seems like a possibility to me, just a gut feeling. That could make for a "White Swan" event in the potash markets. I definitely have my money on the Canadians to produce a quality product, maintain infrastructure, and focus on worker safety. That steady-as-she-goes approach always wins in the long run. The chance of a major Russian screw-up has to be considered in the big picture, as well as the possibility of URALL and BPC returning to cartel status.
Another excellent piece, G.C., if not sobering. POT et.al. are starting to look like\ utility stocks, or inflation-protected bonds. What do you think of the whole Ekonomics story? Do farmers who apply consistently achieve consistently higher yields than those who don't, all other factors being equal? Are crop yields in India as dismal as reported, and is lack of nutrient the main reason? I generally assume if grain prices are low, then the crop is large, and everyone is making a fair buck. And has cash to buy fertilizer, IF they see a difference in yield per acre.
I think what makes the difference is simply the weather, especially rainfall. My pet theory is that rainfall is the biggest driver of real potash demand, via uptake, leaching, or worst-case, runoff and severe flooding. In a drought, the K just lays in the soil, correct?
If the political climate changes in India, do you think they're more likely to buy from URALL, or Canpotex? Does it matter?
It feels to me like much of the investment community is pretty uninspired by the Ferts, in a world of Amazon, Netflix, and Tesla. Do you think investors might go to POT, like they might run to utilities, in a selloff of the growth stocks, esp. tech?
Would love to get your take on the above. Thanks for another excellent piece.
Hi KRV, yes, it's a concern. I think the offsetting factor is that POT is winding down CapEx, and cash flow should remain stable to improving, unless there is another drop in prices, which I think is unlikely. They dodged a bullet when the Israeli Chemicals buyout fell through. Think POT will pass on acquisitions, unless someone like IPI goes belly up, and can be bought on the cheap. Think management will continue to pay out in dividends, or buy back stock. Maybe continue smaller infrastructure improvements to bring down cost of production. POT is a cash cow, and there isn't much else exciting to do with the money.
Agree with Newbie that the long-term story for POT is great. I think it's the safest investment on the planet. It's just a foot race between new demand and new capacity. Demand will pull ahead at some point, but I think it's gonna be neck-and-neck for the near-term.
Another interesting tidbit was that Benzinga posted a rumor that BHP may want to buy MOS for $62 a share. MOS oversold pretty hard on Thurs, and I'm watching it this morning to open a call position. POT and MOS are both somewhat oversold right now, so I think it's a good entry point for an investor. MOS just has the added cherry on top of a possible buyout, which actually is a better business decision for BHP than developing Jansen. 62 looks rich. MOS is trading around 19x, 62 would be 25x. Maybe that's where the number came from. From BHP's gloomy outlook in iron ore, 25x might look good, especially if they're really thinking long-term.
That's the key as I understand it. You don't just drill a hole in the ground and start selling a million tons of potash a month later. The number I've heard on construction cost is $2000 per ton of new capacity. Then there is the already overburdened rail capacity in Canada. You have to get your product to market. I think PotCorp is producing at around $90 a ton. No way RT or BHP can compete there. The price collapse a year ago really hurt buy-and-hold investors, but was a really good thing for the long-term outlook for POT. The economics just don't make sense for a new player to jump into the potash game. I love the long-term story for a conservative investor, especially now at $35 a share. You get a nice yield from the dividend, with improving cash flow, and no really attractive alternative other than to buy back stock or pay out dividends. The big question on fundamentals is how will the supply/demand equation play out. In the near term, demand is soft. Will it turn around this fall? A year from now? 5 years? 10 years? At $35, it's a classic widows-and-orphans blue chip, possibly one of the safest investments on the planet right now. A big fat cash cow. POT will be the Last Man Standing in a price war, other than URALL. There is the possibility for a white swan event also to kick the share price up. But supply/demand will most likely be a grind for a good number of years to come.
BHP and RT are looking at anemia in the iron ore markets, with slowing demand from China, and they're looking for another mining sector to generate revenue. BHP says they want to go forward with Jansen, but oddly passed on port development rights in Vancouver. Potash may be soft, but iron ore is worse. The question is whether they are willing to put up $2000 per ton of capacity in construction costs to get into the potash game, with the chance that they could knock margins down to no better than iron ore.
Potash Corp is the low-cost North American producer, and they would prevail in an all-out price war, but that would hurt shareholders, so better to try to stay steady-as-she-goes, wind down cap-ex, and keep doling out the cash in dividends.
This article was sobering to say the least, but The arguments are excellent. Well done, Stone Fox. POT can be looked at like a bond paying 3.68% yield. POT could receive an upside pop if the Russians kiss and make up, or if a junior player folds, or if BHP decides it's not worth the cash investment to develop Jansen. Might not be a bad idea to buy some call leaps in case of a "white swan" event. Might be good to buy and hold if you like the yield, and probably some inflation protection, better than bonds. But I don't see much untapped upside in the fundamentals. I'm expecting a price pullback to the 35's, and then run back up, maybe hit 40 after earnings in July... maybe not.