In a dramatic move that clearly surprised the market, Russia’s Uralkali disrupted one of the world’s largest potash partnerships by ending its joint venture with its partner in Belarus. Because of this, potash production is expected to jump, and as a result, global potash prices are expected to decline by as much as 25%.
This caused a massive hemorrhaging in shares of potash producers, including Potash Corp./Saskatchewan (USA) (NYSE:POT), Mosaic Co (NYSE:MOS) and Intrepid Potash, Inc. (NYSE:IPI). These stocks each fell 20% or more on the day of the announcement.
In light of this news, is the entire industry doomed? Should investors rush for the exits while there’s still time?
A rude wake-up call
Shareholders of these companies had to be startled by the day’s news. After all, anything that causes companies worth billions to lose a fifth of their value in one day has to be Earth-shattering news.
Indeed, analysts were quick to slash price targets on these firms, citing the likely downward pressure on global potash prices.
Goldman Sachs wrote that although their previous expectations were for potash fertilizer to sell for $486 per ton in the second half of this year and $520 per ton next year, they now project potash prices to sink to $300 per ton.
Potash Corp./Saskatchewan (USA) (NYSE:POT) is the biggest company of the three by market value, and as a result, has the most to lose from this. Potash Corp./Saskatchewan (USA) (NYSE:POT) was performing very well to begin the year, both in terms of its share price as well as its underlying operations.
Potash Corp./Saskatchewan (USA) (NYSE:POT) reported earnings per share growth in the second quarter as well as the first six months of the year. Cash provided by operating activities in the first half of 2013 was $1.9 billion, a record for the company.
At that time, Potash Corp./Saskatchewan (USA) (NYSE:POT) guided investors to expect between $2.45 per share and $2.70 per share in full-year 2013 earnings. That means that after the massive sell-off, shares now exchange hands for just 12 times the midpoint of this year’s projected EPS.
As opposed to Potash’s success, Mosaic Co (NYSE:MOS) and Intrepid Potash, Inc. (NYSE:IPI) were struggling even before the Uralkali announcement, which certainly only makes things more dire going forward for the latter two.
Mosaic Co (NYSE:MOS)’s fiscal 2013 recently concluded; the company is not performing as well as Potash Corp./Saskatchewan (USA) (NYSE:POT). Mosaic Co (NYSE:MOS)’s 2013 diluted EPS stayed flat from the prior year, and net sales clocked in at $10 billion, down 10% from $11.1 billion the year prior.
This explains why Mosaic Co (NYSE:MOS) shares were actually down 6% year-to-date, even excluding the massive 20% drop on July 30.