Potash: Buy on Bad News

09/16/2013 8:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

Our top stock pick of the month is the world's largest producer, by capacity, of potash and the third largest of nitrogen and phosphate, notes Gavin Graham, contributing editor to the Income Investor.

Potash Corporation of Saskatchewan (POT) has seen its share price fall by half over the last three years and almost 20% in the last month. That's due to the decrease in the price of potash and the collapse of the Belarus Potash joint venture.

This more than reflects all of the bad news out there, and BHP Billiton's recent decision to go ahead with the US$2.6 billion development of its Jansen project, shows that the world's biggest miner feels that potash is a commodity with an attractive future.

Potash Corp. has reduced its costs by suspending production at some of its facilities, and generated an unchanged gross margin of $1.1 billion (all figures in US dollars) on its potash operations for the first half of 2013, despite the fall in the potash price.

It also achieved a gross margin of $547 million, against $521 million in 2012, on its nitrogen business.

Phosphate saw its contribution fall, from $248 million in 2012 to $182 million, on prices that fell from $552 a tonne to $517 a tonne. The company raised its dividend payout by 25% to $0.35 cents a share per quarter in May. That's the fourth increase since the beginning of 2011, and gives it an attractive 4.7% yield.

The price of potash may well fall further. However, the company has reduced its output to match demand and is the lowest cost potash producer globally; therefore it would be an eventual winner if such a situation occurred.

The share price already reflects a worst-case scenario, including a reduction in projected earnings per share for 2013, to the range of $2.45 to $2.70, down from $2.75 to $3.25. This gives it a P/E ratio of 12.1 times 2013's earnings.

Dividends are paid quarterly in January, April, July, and October. Potash is a Canadian firm; as such, US residents will have to pay 15% withholding tax that may be reclaimable as a foreign tax credit.

Potash shares are suitable for investors looking for a reasonable yield from a world leading commodity company that is selling at a seven-year low. Investors should be prepared to accept some volatility, due to developments in the fertilizer market.

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