A Review Of Potash, Mosaic: A Look At The Future

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If you are looking to back the agricultural market, you should consider investing in potash producers alongside more diversified companies. Over the last 12 months, Mosaic and Potash have struggled to gain momentum--the former just underperforming the S&P 500, and the latter holding flat for 2012. How is the future outlook? From inventory reductions to the possible renewal of volume contracts from emerging markets, it's largely a story of mixed bags. Below, I consider this question in my assessment of Mosaic and Potash.

A Look At Mosaic's (NYSE: MOS) Business Environment

Barron's is forecasting a recovery in demand for potash and phosphate. The global potash trends have been low for a while, which has tempered investor expectations. In the October quarter of 2012, 1.9 million tons of potash came out at the low-end of the consensus range. Canada, which is the world’s biggest country producer of potash, with 9.5 million tons per year in 2010, positions Mosaic for stronger upside than recognized. Potash is mostly used in agriculture fertilizers to ensure plant growth. China, which had 3 million tons produced in 2010, also provides emerging market exposure. The renewal of Chinese and Indian potash contracts in the next few months will give the stock that needed catalyst to outperform broader market.
Bank of America has put Mosaic in its Top 10 most favorite stocks in 2013, though, since November 2011, companies with much higher sensitivity to corn’s prices have outperformed the S&P by 2500 bps versus just 300 bps for those more focused on fertilizer demand. Fertilizer demand should nevertheless rise with the crop’s advantageous prices.

Potash (NYSE: POT): Management Confident Despite Cutbacks

Potash is reportedly the largest company focused on this agricultural product with 20% of global capacity. Management said it will cut prices for domestic customers after announcing shutdowns of a number of potash mines over 36 weeks through February 2013. Shut-ins have resulted in reduction of around 1.6 million tones (13%) of the company’s capacity. Potash had to shut down its inventories because of uncertainty in China and India, but it expects an eventual volume recovery. For now, shipments have been reduced in the key export markets, mostly because of price uncertainties.

Even still, Potash is relatively optimistic about the future and is also looking to acquire the $16 billion Israel Chemicals, which of course will interest investors, although there are many obstacles to pass before the deal closes. Israel’s Ministry of Finance was against this transaction.
Potash expects that global potash shipments will be around 57.5 million tons in 2013--a 12.7% increase--when the Chinese and Indian contracts are renewed. China is trying a lot to keep the potash prices low, so I wouldn't anticipate a wave of new production.

At a respective 15.5x and 12.5x past and forward earnings, Potash looks relatively expensive compared to agricultural peer Archer Daniels Midland (NYSE: ADM). ADM is valued at only 13.5x forward earnings and is forecasted for nearly double the pace in EPS growth at 10% annually over the next 5 years. Assuming expectations are met, ADM will safely generate average annual returns of 12% or more when you factor in dividend distributions. With so much macro uncertainty in potash, investors should seek greater concentration through ADM or at least hedging their bets with a larger stake in Mosaic. Mosaic only trades at 13.4x past earnings despite being forecasted for strong growth than Potash.

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