, 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.