Friday, November 22, 2013

The Potash Endgame

Potash producers Mosaic (MOS) and Potash Corp. (POT) have been hammered this year as changes to the market leave their shares wracked with uncertainty.


That might be about to change, says JPMorgan analyst Jeffrey Zekauskas and team, who believe the end of the uncertainty is nigh. They write:

The endgame in potash industry dynamics appears now to have begun. Belarus wants a return to a price over volume dynamic for the potash industry, and the change of ownership of Uralkali is the crucial step for obtaining it. Suleiman Kerimov and his partners own a controlling interest in Uralkali and are now selling their controlling interests…The motivation of the sale of the Kerimov interest has been the dissatisfaction of the Russian government with the disruptions in its relations with Belarus caused by the volume-over-price strategy set in motion by the Kerimov-led Uralkali on July 31, 2013…

The political disruption between Russia and Belarus was caused by Belarus receiving lower hard currency revenues from its state-owned potash company, Belaruskali, because of Uralkali's elevation of volume over price as a strategic priority. We believe the point of the change in ownership of Uralkali is the alteration of Uralkali's go-to-market strategy. We believe that an execution of a change in strategy by Uralkali would be a dynamic that would raise the value of Potash Corp and Mosaic, given their sensitivity to changes in product prices.

Zekauskas calls shares of Mosaic and Potash Corp. “undervalued.” He writes:

Both companies have replacement values that are almost twice their current share prices. Mosaic has a large share repurchase program it plans to execute beginning at the end of November 2013. Potash Corp has a 7.5%-8.0% sustainable free cash flow yield following the conclusion of its large potash capacity expansion effort.

Shares of Potash have ticked up 0.2% to $31.29, while Mosaic has gained 2.3% to $47.49.

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