Its Pause and Play For These Potash Stocks
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
PotashCorp recently announced that it would close its mine in Allan and New Brunswick for eight weeks. This decision has been taken by the company to eliminate the mismatch between demand and supply. While it is facing issues of lower demand, its stock is also declining continuously. In the last two months PotashCorp’s stock has declined 12% from $44 in Sept. to the current level of $38.
Although Potash is facing issues because of a lower demand, it’s not the only company that is facing these headwinds. Let’s see how Potash is performing against its peers:
|
Company Name |
Gross Margin (Last 12 Months) |
Return on Assets (Last 12 Months) |
|
PotashCorp (NYSE: POT) |
48% |
12.31% |
|
Agrium ) |
27% |
9.95% |
|
The Mosaic Company (NYSE: MOS) |
28% |
9.38% |
Source: Yahoo! Finance
The Mosaic Company, one of the closest competitors of PotashCorp, is facing significant pressure from China, which is delaying its long term contracts with the company. China is pressuring Mosaic and other suppliers to lower their prices. With this pressure, its shipment estimation has fallen down to 1.3 - 1.4 million tons from its earlier level of 1.6 - 1.9 million tons.
On the other hand, Agrium, another large fertilizer company, is facing an internal management problem. Its biggest shareholder, Jana Partners LLC, is pressuring it to spin off its farm retail network into a separate company and to replace half of the company's directors. Jana Partners, a New York hedge fund, is criticizing the company for its poor capital utilization performance and for its lack of concern for shareholders.
The weakening global demand outlook will hurt all the companies in the short term. This is mainly because both the Chinese and the Indian governments are delaying long term contracts and other markets are waiting for this settlement to happen to get a price reference. I think demand should increase once Potash and Mosaic both finalize their contract with these governments, which is expected in 2013.
Looking at PotashCorp, one of the most awaited bits of news for Potash is its deal to increase its stake to 25% in ICL (Israel Chemicals Ltd). Currently Potash owns 13% of ICL. The company looks to be in a perfect position to gain from this deal. Potash has previously tried to increase its stake, but it was rejected by Israeli authorities. But looking at the gains for both the sides and the challenging market, I think this time the government should not raise such issues.
This deal will boost capacity expansion of Potash to ~17.1 million tons. This will also provide it the control over low cost source of potash, which is estimated to be ~$90/t fob. Additionally, ICL has a very good quality production capacity of ~6Mt in the Dead Sea. Another point to look for would be that once Potash raises its stake in ICL, this will provide the company an opportunity to increase its holding to 100%, or it could also go for merger. In any of the cases, Potash will experience significant operating leverages.
Apart from this deal, there are other growth drivers which I feel would help the company to maintain its leading position in the Potash market.
Increasing Shipment in India and China:
The top two potash consuming countries, India and China, are expected to increase their purchase of potash to ~57 million tons. In India, rising price inflation and reduced subsidy has resulted in lower demand of potash this year. But India’s inventory has also reduced significantly to almost half of its previous levels. So, it is expected that India will increase its potash purchase in the near future.
Demand in North America:
In 3Q 2012 potash shipment in North America was recorded as ~1 million tonnes, encouraged by a speedy U.S. harvest that lets farmers bulk up fertilizer for autumn applications. With advanced harvest and improved moisture conditions, we can expect improved soil nutrient needs in 4Q12.
Improvement in Latin America:
With the coming Safrina crop season (February/March corn planting) in Brazil, the demand is expected to be on the higher side. Soybean and Corn planting has already started, and farmers should start buying potash for these crops.
Summing up, I feel PotashCorp will benefit from the increasing demand of fertilizers globally. Additionally, its contract issue with China and India is expected to be completed by 2013, which would create significant demand. While Potash waits for approval of any deal with ICL, it will continue to enjoy dividends from ICL with its current holding. Furthermore, its dividend yield of 2.20% against Mosaic’s 1.90% and Agrium’s 1% makes this stock more favorable. Looking at the growth prospects, I feel this stock will bounce back, and would recommend buying PotashCorp at the current level.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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!
