Anticipate a more supportive potash environment through the balance of the year
- 29 Jul 2016
- The StarPhoenix
- PETER KOVEN
- Financial Post
Potash hopes this is finally the bottom
Despite track record of optimism, firm cutting dividends
The management team at Potash Corp. of Saskatchewan Inc. is developing a lengthy track record of being too optimistic about its industry’s prospects.
The Saskatoon-based company slashed its earnings guidance for the fifth time in six quarters on Thursday as its realized potash prices plunged to stunning lows. Potash Corp. also cut its quarterly dividend 60 per cent to US10 cents a share, the second time this year it has reduced the payout.
Yet despite the grim news, the fertilizer giant believes the potash market really has reached its “low point” this time, and better days are ahead.
“With customer sentiment improving and announced industry shutdowns, we anticipate a more supportive potash environment through the balance of the year,” chief executive Jochen Tilk said on a conference call.
However, the stock price is near a nine-year low as many investors remain skeptical that a turnaround is imminent. The potash industry has been mired in a three-year bear market due to high supply, middling demand and rising competitive pressures. And buyer uncertainty increased this year because sales contracts with China and India were delayed by months. The first contracts were only settled in the last few weeks.
That uncertainty weighed heavily on Potash Corp. Its realized potash selling price was a mere US$154 a tonne in the second quarter (including a one-time charge), down from US$273 a year ago. By comparison, spot prices topped US$900 a tonne at the market peak in 2008.
Lower prices and sales volumes resulted in a very weak quarter for Potash Corp. Earnings of US$121 million, or US10 cents a share after one-time items, were well below the average analyst estimate of US19 cents.
More significantly, Potash Corp. slashed its full-year earnings guidance to between US40 and US55 cents a share. Back in January, it was projecting a profit of US90 cents to US$1.20 a share for 2016, numbers that seem astronomical today.
The stock dropped seven per cent on Thursday, closing at $20.95.
Tilk remained upbeat, noting the recent China and India contract settlements have improved market sentiment. He also said potash inventories are low, and some producers are selling into Asia at a loss or very thin positive margin. That is not sustainable over the long term and suggests prices could rise.
“Experience is telling us that a rebound in demand is the norm following a year of later-than-normal contract settlements and delayed purchasing,” Tilk said.
Potash Corp. expects global sales volumes of the crop nutrient to reach 61 to 64 million tonnes in 2017, which would be a potentially record level and implies a major rebound in demand.
However, investor opinion is mixed on whether a market turnaround is a short-term or longterm proposition. Joel Jackson, an analyst at BMO Capital Markets, said he is not convinced this is a good entry point for the stock.
“We believe there will be a tug of war in the stock between those investors who want to believe this (guidance and dividend cut) signals a bottom, and those who will be concerned about much-lower earnings prospects,” he said in a note.
The dividend cut did not come as a surprise to analysts, who have been warning about it for weeks. At the prior dividend level, Potash Corp. was paying out US$1 a share per year, which is far more than it expects to earn in 2016 (US40 to US55 cents a share).
The company maintained a high payout ratio in the first half of the year because it was confident market conditions would improve. When that didn’t happen, it was forced to make this deep dividend cut.