Potash: A Good Way to Fertilize an Investment Portfolio?
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Using potash fertilizers can increase crop yields and improve plant quality, especially where potassium is deficient in the soil. "Potash" refers to a group of potassium (K) bearing minerals and chemicals. The dominant potash in the market is the compound potassium chloride (KCl). Fertilizer manufacturers mine this potassium from naturally occurring potash ore deposits. Can holding shares in potash companies increase your investment yields and portfolio quality? They can, but there is a lot of pressure on potash lately.
Intrepid Potash (NYSE: IPI) is the largest producer of potash in the U.S. They own five active potash production facilities - three in New Mexico, two in Utah. The HB Solar Solution mine (under construction) will increase the number of Intrepid's active potash production facilities to six.
Last month, Intrepid Potash announced preliminary sales and production results for the fourth quarter and full year 2012. Preliminary results for the full year ended Dec. 31 included Sales (tons) of 835,000 - 845,000 and production (tons) of 790,000 - 800,000. For the full year, preliminary results show an Average Net Realized Sales Price ($/ton) of $450 - $455 and a Total COGS ($/ton) of $235 - $245. In the fourth quarter, the company declared and paid a special cash dividend of $0.75 per share, or $56.5 million.
Of note to investors is Intrepid's commitment to their long-term capital investment program. The design of this program is to expand production of lower-cost tons across their portfolio of mining facilities. Total capital investment in 2012 was $245 to $260 million. The expectation is that the amount of capital investment will be approximately comparable this year. Therefore, Intrepid Potash is concentrating on cost containment to help boost profit margins – which could in turn bode well for future dividend payment increases to investors.
Potash Corp. (NYSE: POT) is the world's largest fertilizer enterprise by capacity. They produce the three primary plant nutrients. The company is a leading supplier to three distinct market categories: agriculture, animal nutrition, and industrial chemicals.
Last week, they reported fourth-quarter earnings of $0.48 per share ($421 million), compared to $0.78 per share ($683 million) in the same period the year prior. They reported full-year earnings for 2012 of $2.37 per share ($2.1 billion), compared to $3.51 per share ($3.1 billion) earned in 2011. They experienced lower contributions from all three nutrients. Their gross margin fell to $0.6 billion from the $0.9 billion generated in the fourth quarter of 2011. Their full-year gross margin was $3.4 billion, compared to $4.3 billion earned in the prior year.
Potash Corp. experienced a 38 percent decline in Q4 profits. This was attributable to falling demand from India and China--core Asian export markets. They additionally experienced lower realized prices. They expect potash demand to grow in 2013, anticipating worldwide potash shipments for the year to be between 55 million and 57 million tonnes, compared to the approximately 51 million tonnes shipped in 2012.
Going forward, investors must think globally when it comes to potash, not just North American usage, as declines in offshore sales volumes can significantly hurt potash enterprises. Total fourth-quarter potash sales volumes for Potash Corp. fell to 1.3 million tonnes, down 17 percent from the same period the prior year due to the reduced offshore sales. Their overall offshore sales fell 43 percent.
Investors should ask about what will happen to dividends when a company experiences profit declines. Potash Corp. answered that question by increasing their quarterly cash dividend from $0.21 per share to $0.28 per share – increasing their dividend by 33 percent. Keeping shareholders happy with dividend increases is a way to fertilize goodwill with them!
Vale (NYSE: VALE) engages in the exploration, production, and sale of basic metals in Brazil and worldwide. Their fertilizers segment provides potash, phosphates, and nitrogen. This month, Vale announced that they delivered a very good operational performance in the fourth quarter of 2012. Highlights include three annual production records being achieved – pellets (55.1 Mt), coal (7.1 Mt), and phosphate rock (8.0 Mt). However, their potash production declined by 10.6 percent compared to the year ago period.
In addition, according to a Reuters report, production at the company's huge potash mine in Argentina could face a delay of three years. Vale is lobbying for tax cuts and a more favorable exchange rate. The company is looking to address the issue of increasing costs. Therefore, they're stopping their $6 billion Rio Colorado project. Sources said Vale was asking the national government to waive the value-added tax (VAT) until production commences. Investors must consider governmental pressures that potash and other mining companies face. As I stated in a previous post (Superman Avoiding Kryptonite – Considers Investing in Uranium), governments around the world are continuing to enforce new taxes, levies, and royalties on the extracting of their resources.
Of further note to investors: The Rabobank Group, a Netherlands-based financial institution, published a report in 2012 that stated that global reserves of potash could surpass demand by 59 percent to 100 percent by 2020. If true, this will exert pressure on prices, causing potash prices to fall.
MichaelONTARIO has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!