Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Potash Corp./Saskatchewan (USA) (POT), BHP Billiton Limited (ADR) (BHP), Intrepid Potash, Inc. (IPI): Should You Avoid All Potash Producers?

Potash Corp./Saskatchewan (USA) (NYSE:POT)Uralkali, one of the biggest and most cost efficient potash producers in the world, has just announced a change in its marketing strategy from price-over-volume to volume maximization. Since Uralkali’s marginal production costs are just below $100 per tonne and current potash prices are around $400 per tonne (a few years ago the price was at $900), the price of this commodity might keep on plummeting going forward. The Russian producer has already declared that it plans to operate at 100% capacity by year-end. What should you do if you hold other potash producers in your portfolio?

Following the Russian trend

Potash Corp./Saskatchewan (USA) (NYSE:POT), the world’s biggest producer of fertilizers, has the largest incentive to follow Uralkali’s strategy and go for volumes at the expense of price stability. The main reason is that a relevant amount of the company’s capacity additions are expected to come online over the next two years. Even when North American demand for Potash Corp./Saskatchewan (USA) (NYSE:POT) is expected to grow by 25% year-over-year and international demand should also grow strongly, I believe that it is highly unlikely the company will be able to operate at full capacity, particularly as the company’s new projects ramp up during the next two years.

As a result of higher operating rates, Potash Corp./Saskatchewan (USA) (NYSE:POT)’s average cost per tonne should drop towards the $105 level (close to Uralkali’s cost per tonne). This should make the company a viable competitor in the international landscape even as prices come significantly closer to marginal production costs. Potash Corp./Saskatchewan (USA) (NYSE:POT)’s shares suffered strongly from Uralkali’s recent decision, and they are down by 22% year-to-date. I expect Potash’s EBITDA to go down to $3.3 billion by 2014 so the company would be currently trading at an 8.6 times 2014 EV/EBITDA multiple. I consider the multiple to be too high even when Potash pays an attractive 4.8% cash distribution yield.
Another relevant factor to take into account when thinking of selling Potash Corp./Saskatchewan (USA) (NYSE:POT) is that a potential acquisition by a strong miner such as BHP Billiton Limited (ADR) (NYSE:BHP) is further away now than ever before. BHP Billiton Limited (ADR) (NYSE:BHP), which is developing Jansen, the largest potash mine in the world, might even be thinking of suspending its heavy CapEx investment in the mine. The project represents a $10 billion CapEx effort, which is still in approval stage. I am sure that, if the Jansen’s economics continue to weaken, BHP Billiton Limited (ADR) (NYSE:BHP) could delay approval. The miner has already taken such kind of decisions at the iron ore Outer Harbour project.
I would be a buyer of Potash Corp./Saskatchewan (USA) (NYSE:POT) at 5 times EV/EBITDA. I think the market has not yet fully considered the effects of future commodity price instability and the reduced probabilities of M&A going forward. Nevertheless, Potash will remain on business thanks to the company’s cost advantages and, at the right price, it should be considered a buy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.