Can Russian Politics Force Uralkali Back Into The Cartel? – #potash
Potash Corp: Can Russian Politics Force Uralkali Back Into The Cartel?
Oct 25 2013, 02:38
by: Achilles Research
Disclosure: I am long POT, MOS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)
Potash Corporation of Saskatchewan’s (POT) shares managed to hold up well in light of yesterday’s Q3 results that basically confirmed the market’s expectations. On October 10, 2013, Potash released an update to its Q3 EPS guidance and estimated it will earn $0.41 per share. It landed right on the spot and delivered a Q3 EPS of $0.41 which is down markedly from the $0.74 per share earned last year and result of increased uncertainty in the potash market and expected price declines.
Potash’s chart below depicts a giant, nasty gap that resulted from Uralkali’s (OTC:URALL) intentions to break up the Belarusian/Russian potash cartel. All potash producers were subsequently thrown under the bus with pessimism peaking about future potash prices which were estimated to fall well below market prices at that time. While production increases lead to lower prices they also lead to higher demand. It remains unclear what profitability effect Uralkali’s strategic move is going to have on the industry in the long-term. At the moment, the potash market is still characterized by uncertainty and lower prices in anticipation of massive increases in potash supply in the future. However, an ensuing volume- and price war is not helping anybody in the industry and, contrary to market perception, also isn’t benefiting Uralkali as evidenced by the loss of its market capitalization in the third quarter.
Can Lukashenko force Kerimov to sell Uralkali?
I believe Potash producers in general offer a significant bargain mainly because the market places a huge uncertainty premium on share prices. I have previously argued that Potash Corp. could turn out to be a great bargain for contrarian investors and I stand firm with my opinion and my investment in the company.
Lukashenko, dictator of Belarus, currently runs a hard line against Kerimov, the largest shareholder of Uralkali and black sheep in the potash industry. Belarus is highly dependent on revenues from its potash operations and Uralkali’s cartel break-up leaves a nasty mark on the Belarusian budget. Lukashenko also had Uralkali’s CEO taken into custody in August which shows how serious he is in applying pressure to Uralkali. A political dimension added to the conflict is not in the interest of Uralkali or its largest shareholder. In an interesting turn of events, Russia also opened a criminal case against Uralkali’s CEO Baumgertner. From Yahoo Finance, October 14, 2013:
Russia’s main investigative agency opened a criminal case Monday against the chief executive of Russian potash company Uralkali who is under house arrest in Belarus on embezzlement charges.
Belarus responded by arresting Baumgertner, also on suspicion of abuse of power. But on Friday, Belarusian President Alexander Lukashenko announced that the executive now faces charges of embezzlement, not abuse of power. If convicted, he could face 12 years in prison.
If charged in Russia with abuse of power, Baumgertner could face up to four years in prison.
Belarusian authorities have also issued an arrest warrant for Russian billionaire Suleyman Kerimov, who is Uralkali’s biggest shareholder.
A price war between Belarus and Russia isn’t in the interest of both countries. Russia also has an incentive to keep commodity prices high – both for political and economic reasons.
Belarus and Russia are now running a confrontational campaign against Uralkali and a possible outcome might be that Kerimov will be forced to sell its stake and a potential acquirer will resume the cartel partnership with the Belarusian counterpart. If investors have any doubt about Russia’s confidence in pursuing commodity-related politics, they should remember Russia’s hardcore stance against Mikhail Khodorkovsky, former shareholder of Gazprom, who fell out of grace and was simply put in the slammer. After the announcement that Uralkali will quit the cartel, Uralkali’s share price plunged 34% and made Uralkali’s shareholders just as happy as shareholders in Potash Corp. or Mosaic (MOS).
Kerimov seems to be at least interested in selling his stake in Uralkali and interest certainly is there. I think there is a chance that Russian politics could force Uralkali back into the potash cartel which would resemble a massively positive catalysts for the sector. After all, a massive deterioration in commodity prices isn’t in the interest of Uralkali’s shareholders either.
Contrarians might find great value in Potash due to its depressed share price and pessimistic industry outlook. A resumption of the cartel structure is a low-probability event but a political front is clearly forming against Uralkali. At a minimum, I expect Kerimov to sell its stake in Uralkali, probably to another Oligarch. Those people are a special breed particularly when considering how most of them achieved their wealth after the collapse of the Soviet Union. They have strong interests in oligopolistic structures and price-dictating businesses that escape real competition. New ownership, a CEO facing criminal charges and possibly a conviction as well as Russian politics could force Uralkali back into the cartel with positive effects for the industry. The drama is unfolding behind the scenes.