$600 million is still sitting there in the company coffer that was supposed to have been used for the buyback--at least that is what we were told on the CC. Crickets.
Of course the market is paying attention to the cessation of production at Uralkali's Solikamsk-2 potash mine because there goes 2.3 MMT of operational capacity. But that is the exception to what we usually hear about. It is always this project and that project that will be coming on line with the end result being that we are facing overcapacity for as far as the eye can see. For the purpose of my comment today, I am not going to offer any quarrel with any of that. No, I want to know why little or no attention is being given to those mines around the world that have less than 15 years of reserve life left that will detract from whatever increases emerge from the supposed projects. For example, MOS closed their Carlsbad, NM mine last July and so said goodbye to the 300,000 metric tons it produced. Add to that another MOS mine,( Hersey), the one and only one in Brazil that produces 625,000 metric tons annually (Taquari-Vassouras), one of the Soligorsk mines owned by Belaruskali and one of the English mines (I forget which one). And I don't think I have named them all. So aside from natural disasters, there is going to be a significant amount of loss of operational capacity in the coming years. Honest math requires taking account of both pluses and minuses.
One further comment. What I meant to say earlier is that I wonder whether this is Uralkali's backhanded way of saying that Solikamsk-2 is totally kaput. Referencing Berezniki-2 rather than the mine that is currently giving them problems is probably an attempt at a verbal dodge of reality, namely, that Solikamsk-2 isn't coming back and the new project is really a replacement for Solikamsk-2.
Berezniki-2 had troubles with flooding and sinkholes years ago. I hadn't heard much about it until now. But the 2 mines are not the same. The only thing they have in common is that they are flooded and there are big sinkholes nearby.
"The project to develop the Ust-Yayvinsky block of the Verkhnekamskoye deposit includes the construction of a new mine with two mine shafts with an annual capacity of 2.8 million tonnes of potassium chloride. In December 2011, Uralkali signed a contract with Deilmann-Haniel Schachtostroj for the construction of the shafts at the Ust-Yayvinsky mine. The contract includes the development of working documentation, construction of temporary structures for the surface tunneling system, shaft sinking and the development of infrastructure for utilities. The sinking of shaft No.1 started in 2013. The mine will produce the first ore in 2020 and will enable Uralkali to replace the depleting ore reserves of the Berezniki-2 mine."
Curious wording regarding the "depleting" ore reserves at Berezniki-2. But I suppose if the mine is totally flooded and the minerals are being washed away, then the ore reserves are indeed being depleted. I wonder whether this is their back handed way of saying Berezniki-2 is totally kaput. It sure sounds like it.
Here is the explanation from the analyst at UBS as to why they upgraded POT today:
Potash Corp is positioned to benefit from a significant ramp-up of low cost production through 2017 as its new Rocanville and Picadilly operations enter production. In the near-term the planned closure of Mosaic’s (MOS) Carlsbad operations in January 2015 and the current flood at Uralkali’s Solikamsk-2 mine could remove up to 2.4-3.4Mts of combined capacity from the market and provides the opportunity for Potash Corp to gain more volumes. Furthermore, this could also lead to higher pricing.
The current expansion at Rocanville and ramp-up at Picadilly will increase Potash Corp’s production capacity by nearly 4Mts and should contribute to materially lower costs. In addition, as these mines ramp-up through 2017 capex will decline and free cash flow should increase. In 2015 we expect free cash flow of ~$1.4B but even assuming flat pricing this could grow to $2.3B by 2017 as sustaining capex will drop to $800M per year.
Potash Corp’s dividend currently yields ~4% and we believe it provides downside protection given that the dividend can be funded even if potash prices remain flat. In fact over time we believe management may be able to return excess cash to shareholders through an increased dividend or further share repurchases.
I don't believe a word of this; just a lot of fuzzy math. When Uralkali announced that target for operational capacity for 2014 would be 11.5 MMT but Solikamsk-2 was fully operational then. The flooded mine will have been down for 2 months. So how then is around 700,000 metric tons of potash suddenly going to materialize since the mine flooded? Anybody can make up stuff including the happy talk crowd over at Uralkali who have little to cheer about this holiday season.
I look forward to the return of potash market sanity. I miss the former CEO but I guess he had to retire at some point. The new CEO lacks his predecessor's panache.
In late December last year, Surikov offered a variation on the same story; namely, that Uralkali was ready to restore cooperation with Belaruskali. However, a year later, we see that nothing happened in the interim. Of course it is true that if the old BPC cartel went back into operation, things would be better all around. And maybe given the precarious state of the Russian economy at the moment, getting the price of potash up a ways would be a good thing. But I am from Missouri on this one and will believe it when I see it. Still, it is hard to argue with the statement that the 2 potash companies, if they had a joint marketing agreement, would be able to secure better pricing for what they have to produce. On the other hand, these guys like to talk.
SQM is just not that big a player in the global potash market. Moreover, only 26% of its revenues come from all the potash it sells. If you take a look at their most recent quarterly reports, you will see that they have consistently missed earnings and revenue estimates. And the scandal involving its controlling shareholder and others vis a vis the shares of SQM have not helped the stock. Also, the recent election of the socialist Bachelet hasn't helped. But aside from all this, if you take a look at, say, MOS and POT, each of which have much larger potash operational capacity than SQM, you will see that those shares have come well off where they were when we first heard about Uralkali's troubles. So for the moment, nobody's stock is really benefiting from the demise of Solikamsk-2.
With interest rates on the ruble having been jacked up to 18% overnight, I have to believe that a fair number of domestic industrial projects will have a tough time getting or maintaining bank financing. Both Uralkali and OAO Eurochem are keen to develop and expand, as the case may be, what they have in terms of potash mining projects. However, given the relatively weak potash prices largely engineered by Uralkali and the high cost of capital right now, developments that looked promising as recently as early this year may no longer look particularly attractive and economic.
Overall therefore, I see Russia's financial problems as benefiting the Canadian potash miners, especially POT.
Most of PAA's infrastructure is for either shale oil or the oil sands a great deal of which activity is uneconomic at current levels. I am in it long term as well. Things should turn around by next year. In the meantime, the yield is safe and will likely continue to increase.
I wouldn't use the word "control." Instead, I would use the word "influence." Here is why.
The old BPC cartel strongly influenced if not controlled the global price of potash by restricting the volume they were willing to sell. With the demise of BPC, Belaruskali and Uralkali now sell all they can at maximum operational capacity. This change in strategy has caused the price of potash to drop 20%-25% from where it was as recently as last year. In the meantime, Canpotex, which includes POT, has always maintained a 'price over volume' strategy. As a result, POT, the largest participant, is essentially a swing producer whose sales volumes rise and fall depending on the market price.
The Russians had a greater influence on the price of potash when they had more potash that they could sell. However, with the demise of their Solikamsk-2 mine, they have lost a significant percentage of their operational capacity. Belaruskali, which also produces all out, cannot make up Uralkali's shortfall at all because they already sell all that they can produce. So at the margin, the Russians' influence on potash prices has been diminished and the greater the demand for potash going forward, that influence will be diminished further. In other words, supply and demand market forces will largely determine what the potash price will be.
I was not avoiding a discussion of the situation in India as much as I was endeavoring to indicate where I think the main driver of future growth in potash consumption was going to be. India is a place which must overcome appalling ignorance regarding agronomics. The only reason why Americans can grow 3 times as much food as Indian farmers on an identical size piece of land is that Indian farmers do not apply fertilizer in a balanced way. Combine their ignorance with poorly thought out governmental crop nutrient subsidy policies and you have a recipe for poor crop yields and food inflation. It is always possible that we will wake up one morning and find out that the newly elected government has changed nutrient subsidy policies for the better by significantly reducing the subsidy for urea. If that were to happen, it might push Indian farmers in a better direction but I am not counting on that. So I believe that India will remain the land of continuing disappointment for those who want to see them doubling or tripling the amount of potash applied to their farmland which is what they should be doing but aren't. The average Indian will always have money to buy gold and the Indian government, regardless of budgetary considerations, will always have money to buy weapon systems. Food, unfortunately, is second fiddle to those items.
I am right there with you as I have been a 'hard' money guy all my life. As a result, I was too blind to see that everybody around the globe wanted iPods and iPhones and colored iMacs (back in the day). But that is OK; it is important to be comfortable with who you are. My oil and gas energy partnership portfolio is getting hammered right along with the declining oil prices. I don't quite understand that given that this is essentially a transportation business. But that's sports. Fortunately the yield on these things is great, just like the yield on POT. I can live with that. Now to address your main point.
The gold story and the food story turn out to be predicated on different considerations. Gold, for example, cannot be allowed to rise significantly because that will be detrimental to fiat currencies around the world. Which is why that market is heavily manipulated. Will it stay down forever? I don't think so and believe everybody should own gold as monetary insurance in the event that we suddenly find ourselves falling into a financial sinkhole. The food story, on the other hand, cannot be manipulated. There is every indication, for example, that in China alone, the number of people who will ascend to the middle class by 2020 will increase by a factor of 3. And these people will want to eat better than they did formerly. Those who say that the potash market suffers from overcapacity did not, for example, take into account what just happened to Uralkali nor have they seriously factored in the extent to which the only serious increase in operational capacity over the next 5 years, say, is coming from Canpotex members and POT in particular. So the 3% on average annual increase in the amount of potash applied globally will inure in large measure to POT. With ever increasing free cash flow, there will be greater debt pay downs, dividend increases and share repurchases, all of which will redound positively to the share price. Good enough news?