"The end of the potash world as we know it"


BMO Capital Markets calls the breakdown of the Belarus Potash Company (BPC) cooperative between Uralkali (URALL.PK) and Belaruskali "the end of the potash world as we know it."

"Discipline and price-over-volume leadership in the potash industry seem to have crumbled, and we expect a major exit by investors out of potash producers (POT, MOS, ISCHF.PK, IPI, AGU, SQM and CMP) and the fertilizer sector in general," firm says. "We believe potash earnings estimates will move materially lower, but industry multiples will likely lower too as investors question why potash producers still deserve historical premium multiples over diversified miners."

One final note: "Perhaps Uralkali is simply attempting to shock the market to encourage Belaruskali to reconsider marketing together, but these discussions would likely have already happened behind the scenes."

Premarket: POT -13%. MOS -12.8%. ISCHF.PK -16.5%. AGU -12.5%. SQM -3%.

Comments (46)
  • rambler1
    , contributor
    Comments (1024) | Send Message
     
    Didn't Dan Loeb do his homework?
    30 Jul 2013, 07:36 AM Reply Like
  • Chris Damas
    , contributor
    Comments (1742) | Send Message
     
    I guess this means BMO doesn't have POT as an outperform with a $46 target anymore (like they did yesterday).

     

    I've been bearish on POT for almost three years (since the BHP bid was disallowed)and this is sad vindication. Down 23% in premarket to $29.10 on 700 thousand.

     

    Could be a buying opportunity if they kick in the buyback to save face.
    30 Jul 2013, 07:47 AM Reply Like
  • therealevan
    , contributor
    Comments (244) | Send Message
     
    And here i've been building my position in POT at the $40 range.. Bollocks !
    30 Jul 2013, 08:46 PM Reply Like
  • Mike Walker
    , contributor
    Comments (391) | Send Message
     
    I go with the final note that it's a 'shock and awe' attempt to bring Belaruskali back in line. What company would rationally go down the road of a 25% haircut on price ?
    30 Jul 2013, 07:49 AM Reply Like
  • Chris Damas
    , contributor
    Comments (1742) | Send Message
     
    I think you really have to understand Russians. Another Berezniki company, VPSMO, flooded the titanium market back in the 90's.

     

    It seems irrational, but at $62/ton USD cost for MOP, is it? Drives the new entrants out of the ground literally.
    30 Jul 2013, 07:59 AM Reply Like
  • scchan.2009
    , contributor
    Comments (215) | Send Message
     
    Spats between rich Russians - and we all get to lose money.
    30 Jul 2013, 08:03 AM Reply Like
  • Chris Damas
    , contributor
    Comments (1742) | Send Message
     
    Well actually its the Belarussians that hate the Russians.

     

    Could be the Chinese will step in and get an investment to secure supply.
    30 Jul 2013, 08:07 AM Reply Like
  • 7iron10
    , contributor
    Comments (224) | Send Message
     
    At ~4.8% dividend...POT a buy here?
    30 Jul 2013, 08:11 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2863) | Send Message
     
    If prices of their commodity drop from $450/ton to under $300/ton, how save is that div?
    30 Jul 2013, 09:27 AM Reply Like
  • StayCool
    , contributor
    Comments (204) | Send Message
     
    Next question up - how safe are cash flows going forward to support current dividend yields??????
    30 Jul 2013, 08:14 AM Reply Like
  • scchan.2009
    , contributor
    Comments (215) | Send Message
     
    It is worth noting there is a number of Russian billionare sell off their stake URALL.PK just a couple of days ago (reported on Financial Times).

     

    Someone knows this is coming. Sadly they are Russians. If it is Wall Street trader doing this, SEC regulators will be ringing the doorbell immediately.
    30 Jul 2013, 08:16 AM Reply Like
  • Mike Walker
    , contributor
    Comments (391) | Send Message
     
    I'm looking at the downdraft as an opportunity. Taking a new position in POT this morning pre-open at $28.20
    30 Jul 2013, 08:20 AM Reply Like
  • Mike Walker
    , contributor
    Comments (391) | Send Message
     
    POT volume, 4MM shares pre-open
    30 Jul 2013, 08:22 AM Reply Like
  • labas112
    , contributor
    Comments (519) | Send Message
     
    Can someone explain what happened here and why this is having a huge swing? I am a MOS owner, so I am looking at my options on what to do.
    30 Jul 2013, 08:23 AM Reply Like
  • Mike Walker
    , contributor
    Comments (391) | Send Message
     
    Get out or average down
    30 Jul 2013, 08:28 AM Reply Like
  • dhunter3759sa
    , contributor
    Comments (499) | Send Message
     
    Buy SQM, only 20% rev in Potash, strong cash flow, great demand for other com and yet 16% haircut ?
    31 Jul 2013, 01:25 AM Reply Like
  • scchan.2009
    , contributor
    Comments (215) | Send Message
     
    I think best to do if you already own POT or MOS (like I own POT) is to wait to see what happens. It seems this is used as a threat to force the involved parties in East Europe back to the table and compromise.

     

    If you sell right now, you will take immediate loss. In the medium/longer term, MOS and POT are very sound business with sound management and balance sheets. They are in no risk in going out of business, and fertilizer price is a good hedge against inflation. If you are comfortable with valuation after 20-25% fall, this may be a chance to buy.

     

    It will be interesting how this will also effect collateral agriculture businesses - Monasto, Deere.

     

    Anyway, this will be largest one-day-loss for a single stock I will see. (Laugh) POT is about 3% of my portfolio, I guess this offsets the 15% one-day-rise of ATVI just a few days ago (which is the single one day largest gain I had seen - laugh).
    30 Jul 2013, 08:29 AM Reply Like
  • The Fox
    , contributor
    Comments (822) | Send Message
     
    scchan.2009,

     

    I admire your attitude. To laugh in the face of your largest one day loss is a rarity I would imagine. Good to see you view the glass as half full. I am trying to get there...just still shocked at the 25% premarket loss. I would expect this out of a small cap with no earnings but not POT. No one could have expected a one day move like this. Wow.
    30 Jul 2013, 09:12 AM Reply Like
  • RobbyRob
    , contributor
    Comments (362) | Send Message
     
    They say "buy when the blood is in the streets...even when it is your own." Shocking development overnight, especially with the Dan Loeb news yesterday. Tax loss selling may hammer it all week...but I smell blood and that is a good thing long term. Fundamentally the world needs fertilizer and always will thanks to the topsoil erosion. Mines are finite.
    30 Jul 2013, 09:25 AM Reply Like
  • Chris Damas
    , contributor
    Comments (1742) | Send Message
     
    Well MOS sells alot of potash and its the higher margin product.
    Last quarter released July 16 they made gross margin of $489 million from potash versus $290 million for phosphate there other product.

     

    Since the gross margin for potash is very healthy (47%), even a decline of $100 per ton in international K prices would still mean maybe 35% margin. The US potash market is more protected as few international players sell there.
    30 Jul 2013, 08:31 AM Reply Like
  • scchan.2009
    , contributor
    Comments (215) | Send Message
     
    Yes, it is very important to not to overreact to bad news for good companies (a bad news that come out of nowhere - and no one could have seen this coming - except a bunch of Russian insiders).
    30 Jul 2013, 08:35 AM Reply Like
  • Gregory Orr
    , contributor
    Comments (135) | Send Message
     
    so who exactly is the low-cost producer?? Will Belarus now be supplying global demand...by rail? Wheelbarrow?
    30 Jul 2013, 08:35 AM Reply Like
  • scchan.2009
    , contributor
    Comments (215) | Send Message
     
    I think it will help if you educate yourself about the potash business:

     

    http://bit.ly/156wQ7a

     

    1/2 of the global reserve of potash is in Canada. Canada has 6 times more reserves than Belarus.
    30 Jul 2013, 08:38 AM Reply Like
  • Yorick
    , contributor
    Comments (776) | Send Message
     
    So what we are really saying is that like the diamond business, the potash industry is a price fixing cartel which has been manipulating volume to keep prices high, that it really isn't about supply and demand but a couple of companies that fix this price like banks fixed LIBOR....nice
    30 Jul 2013, 08:47 AM Reply Like
  • scchan.2009
    , contributor
    Comments (215) | Send Message
     
    That is true to a degree to any commodity business - oil, metals. Sadly, a large enough segment of commodity production is based on China and Russia - where politics trumps everything. The aluminium crash in the last few years is driven by overproduction from China.
    30 Jul 2013, 08:57 AM Reply Like
  • Chris Damas
    , contributor
    Comments (1742) | Send Message
     
    If POT's potash prices drop 20% both internationally and domestic (to $259 and $337 respectively per ton), and costs stay the same, POT's Q2 gross margin goes from 68% to 40% and gross profits from potash decline 30%.

     

    That's only the potash business. They have the nitrogen business (doing worse but more industrial than ag) and phosphate business also more stable due to industrial and feed..

     

    Obviously their international equites (ICL, SQM, APC) are all down as well.
    30 Jul 2013, 09:11 AM Reply Like
  • Realto
    , contributor
    Comments (675) | Send Message
     
    Unless this all blows over, and turns out to be a ploy by Russian oligarchs, I would count on a POT div. cut or even ending divs- if their earnings do in fact decrease.
    Why do I say this? In their 23 yr. div history, they have cut the div. twice, from .02 to .01, and .03 to .02. In the beginning of 2011, POT was only paying .03. Since then they have increased it dramatically, at %30 and %50 clips, to where it is now, at .35. That level can't be sustained.
    Also consider that in periods of biggest share price declines- 2008, and 2010, POT either cut or froze the div. I would not count on a 4% or 5% YOC dividend.
    30 Jul 2013, 09:14 AM Reply Like
  • just dan
    , contributor
    Comments (22) | Send Message
     
    I've been a loyal POT investor from the start. There hasn't been any
    dividend cuts . Stock splits yes, no cuts.
    30 Jul 2013, 09:28 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2863) | Send Message
     
    And how well do you understand cash flow?
    31 Jul 2013, 03:32 AM Reply Like
  • RobbyRob
    , contributor
    Comments (362) | Send Message
     
    Maybe Goldman Sachs can buy up all of the potash, charge us to warehouse it and move it back and forth to make some more money for themselves. It's too bad that the regulators want JPM and GS out of the commodities business. See what happens when we play without them?
    30 Jul 2013, 09:28 AM Reply Like
  • ck1000
    , contributor
    Comments (23) | Send Message
     
    chris,

     

    You've been spot on with this. Is MOS or POT the better option play here from the long side?

     

    Thxs,

     

    CK
    30 Jul 2013, 09:30 AM Reply Like
  • dhunter3759sa
    , contributor
    Comments (499) | Send Message
     
    SQM is the better play under $35 by far
    31 Jul 2013, 01:28 AM Reply Like
  • Chris Damas
    , contributor
    Comments (1742) | Send Message
     
    My calculation shows Q2 EPS would have dropped 20% to 59 cents with a 20% cut in both international and domestic K prices.

     

    The divvy of 35 cents would be covered.

     

    But these stocks don't trade off dividends.
    30 Jul 2013, 09:30 AM Reply Like
  • MadisonAv
    , contributor
    Comments (5) | Send Message
     
    Uralkali could be a buy here. With a 25% increase in production for next year, they could thrive in this new environment where they are clearly the lowest cost producer. What do you guys think?
    30 Jul 2013, 09:41 AM Reply Like
  • Chris Damas
    , contributor
    Comments (1742) | Send Message
     
    It's all about delivered cost. POT and MOS have a long ship ride to India and China, but not Brazil. URKA sells to China via train so this was always going to be shorter haul but not to Brazil.

     

    Some organization named Nafka bought 17.5% of URKA recently.

     

    But usually you don't want to buy anyone when a price war is brewing.
    30 Jul 2013, 10:03 AM Reply Like
  • Gregory Orr
    , contributor
    Comments (135) | Send Message
     
    This is a stake in the heart for new greenfield development. Will Bel be able to expand production at 300 a ton? Will they deliver to Iowa? Or will they burn themselves out in a desperate move to generate short-term cash flow? Looks to me like a future crash in supply, paired with sure and steady increase in global demand. As I write this, I'm watching the 20 handle fade on POT. and lets remember that Howard Buffett is a farmer...
    30 Jul 2013, 10:23 AM Reply Like
  • Mike Walker
    , contributor
    Comments (391) | Send Message
     
    Back out at $29.90
    30 Jul 2013, 10:28 AM Reply Like
  • Chris Damas
    , contributor
    Comments (1742) | Send Message
     
    Well, I think the POT buyback is key for short term timing. They didn't buy shares in Q2 and it doesn't have regulatory approval yet. But it will soon. Probably alot of buying expecting them to go into the market in a few days. Note the volume so far today (combined 58 million, is as much as the whole $2 billion one year buyback - so maybe not enough.

     

    A firm Capital Advisors in SF had accumulated POT - wonder if they are adding.

     

    Note AGU's buyback is live with room and the stock has already rallied to down $3 and change versus down $10 in premarket as the retail actually benefits from lower K prices. However, their Vanscoy expansion seems very badly timed.

     

    The one taking it on the chin is Mosaic - they aren't as diversified as the other two.
    Sixty three percent of GM in Q4 was from potash. It's at $41.76. I can't remember if the buyback is restricted until November or they could go into the market.

     

    Yes the small cap potash stocks are getting beat up. Even Karnalyte which has a mining finance deal down 35%. IPI down 29% - ouch.
    30 Jul 2013, 10:35 AM Reply Like
  • Judoguy
    , contributor
    Comments (57) | Send Message
     
    The fundamentals have not changed .Now you can buy pot cheaper and wait for the upturn that will come have patience the best time to buy good companies in a sector is when there is kaos the best stay strong and the badly managed sink.If anything cost average down.
    30 Jul 2013, 10:44 AM Reply Like
  • oaksleeksbeans
    , contributor
    Comments (163) | Send Message
     
    Which stocks benefit from lower potash prices?
    30 Jul 2013, 10:54 AM Reply Like
  • Chris Damas
    , contributor
    Comments (1742) | Send Message
     
    The end user benefits. The farmer. And maybe the consumer because lower fertilizer prices means farmers can plant more and be profitable.

     

    Note we don't actually have lower prices yet. Belaruskali was selling out of the agreement with Uralkali already all year which led to Uralkali picking up and leaving to sell through their own Uralkalki Trading. So it's a threat. Not a reality yet.

     

    Stocks these days shoot first and ask questions later.

     

    My guess the low is not in yet because POT and MOS have been overbought for years - thanks in no small part by the many authors trumpeting their virtures on SA.

     

    Where are the 7 billion hungry mouths now?
    30 Jul 2013, 11:16 AM Reply Like
  • Chris Damas
    , contributor
    Comments (1742) | Send Message
     
    Now that my rant is over - yes, some companies benefit from lower K prices - Yara and PhosAgro buy potash for their NPK (bagged) fertilizers. But its a relatively smaller part of their business - Yara mainly N, PhosAgro mainly P.

     

    It looks like a good bounce here on MOS and POT. I am tempted but I have no stomach given 63% of gross margin for both companies comes from potash sales. I think down 20% is a fair number for EPS projections and the stocks are both trading exactly that. Mitigating this to some degree is that MOS and POT sell granular potash in the US whereas Uralkali is talking about international potash which is standard grade. Also, MOS sells K-Mag a special formulation which gets a better price. Ditto for Intrepid. If you look at the corn and soybean crops in the USA -looking great per yesterday's crop progress report - that's a negative for fert demand in 2014.
    30 Jul 2013, 11:37 AM Reply Like
  • Maverick investor
    , contributor
    Comments (7) | Send Message
     
    Chris, Some great observations and insight as usual.

     

    Do you have any further thoughts on CF as I recall you had some rather negative thoughts a month ago as to whether there might be an ER miss. Seems possible you could be right, but have you revised the downside potential given the publicity yesterday and buy back possibilities lending support? I think CF do have some potash in Florida from memory (sorry if I am wrong) but are more nitrogen related and so does this make then a potential destination for funds pulled out of the potash guys or do you think they might also be tarred with the same brush vis a vis bad sector sentiment? I agree with you I would not have the stomach to buy Pot or MOS on this weakness, regardless as to whether the Russian situation is a threat or otherwise because sentiment will have been affected and the PE ratings have been chased to high for a long while anyway. Any bounce might be a dead cat bounce from those attempting to catch the falling knife and PT and Mos might settle down considerably lower over time. If one has to have sector exposure it seems that CF being lower rated is safer, as if it does miss Er, or go lower on negative sentiment its nitrogen dominance might help as there might be less percentage downside. Same principle might also apply to RNF Would be interested in your thoughts.
    30 Jul 2013, 12:47 PM Reply Like
  • Chris Damas
    , contributor
    Comments (1742) | Send Message
     
    A few weeks ago I had CF pencilled in for Q2 at $7.59 and revs of $1.53 billion versus $7.73 and revs of $1.69 billion by the street. So I was doing well avoiding CF which was $179 recently. Then yesterday Loeb screwed all that up. I think they are probably wrong on their numbers and I doubt CF will delay their expansion or listen to them about the dividend. I think Steve will tell them no thanks.

     

    So now CF is down $5 at $197 or so. If you put out a statement like Loeb did, you have to figure he (we'll find out how much after the Q3 13-G) he should be buying more here and also his hedge fund buddies. So no, I think the K market is seperate from the themes he was talking about which were mainly US N dynamics.

     

    Thanks for reading.
    30 Jul 2013, 12:59 PM Reply Like
  • Christopher Bayliss
    , contributor
    Comments (300) | Send Message
     
    You think that Dan Loeb has his numbers wrong?
    30 Jul 2013, 08:24 PM Reply Like
  • mosheoskar
    , contributor
    Comments (68) | Send Message
     
    If u buy uralkali u buy the trouble maker. They are nooooooot interested in u investing otherwise they wouldn't said what they said. Probably this will be bad for the industry for along time until consolidation will accrue, and it probably won't
    30 Jul 2013, 01:10 PM Reply Like
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