From what I can tell, the worst margins Canpotex enjoys are in India and China. On the other hand, the best margins they enjoy are in North and South America as well as in East Asia. Using POT as an example to show the impact, POT's potash sales would drop. However, that would be offset by increased sales in the places they currently enjoy better pricing. To be sure, on a net basis, they would be selling less potash but they would earn more on what they did sell. Overall though, they would probably earn less revenue and maybe that is why it doesn't get off the ground. China and India of course would now be entirely beholden to Uralkali and Belaruskali [and to a lesser extent, ICL]. As a result, they would have increased sales to India and China but at the expense of sales elsewhere.
I am sure I must be missing something because if this tactic made economic sense, Canpotex would be implementing it. I am therefore not advocating anything here, just thinking out loud for the fun of it. Those who see the flaws in the approach should weigh in.
I don't believe we will have to wait until summer with regard to drought conditions. They already exist in much of the Mid-West and West, particularly in California, with no end in sight for any serious relief. Southern Brazil currently has extreme drought conditions. Australia is currently getting its share of drought. Russia has increasingly been having weather problems such as drought, extreme heat and forest fires. Put it all together and you might be right about the future direction of commodity prices, particularly grains.
Uralkali just finished agreeing to supply 850,000 metric tons of potash to its Chinese customers at $315 per metric ton, the same price obtained by Belaruskali and Canpotex. Noteworthy though is the tonnage represents an increase of 150,000 metric tons over last year's contract.
The term CFR stands for "Cost and Freight." It means that the seller of goods is financially and legally responsible for arranging for the carriage of goods by sea to a port of destination as well as providing the buyer with the documentation necessary to obtain the goods from the carrier. However, under CFR, the seller does not have to provide marine insurance against the risk of loss or damage to the goods during transit.
In an interview yesterday, Belarus head of state Lukashenko reported that the folks at Uralkali have contacted him to express an interest in having a resumption of the cartel between Belaruskali and Uralkali. However, Lukashenko told them there is nothing to talk about because he has no intention of resuming that relationship.
Belaruskali is gaining market share everywhere and is currently operating at full capacity. They remain satisfied that they are better off with the status quo which does not require them to curtail any production. Many believe that this is a short sighted approach given that higher prices for potash would result from a resumption of the cartel enabling Belaruskali to generate as much if not more revenue while selling less potash than selling more at lower prices. However, as long as Lukashenko believes that he is better off not dealing with Uralkali, there will be no resumption of the cartel. Which tells me that relatively depressed potash prices compared with the pricing that existed prior to the break up of the cartel will continue for the foreseeable future. Let's hope though that volumes at least will remain strong.
Here are some of the reasons why I can accept the recently pronounced negative assessment of POT by the analyst I was quoting and still remain confident that holding onto my shares is the right thing to do while at the same time sticking to factual data that is not the subject of denial or contradiction by anyone.
The next few years will see a massive decline in the company's CAPEX. This will have a significant effect on free cash flow. This is very positive and permanent and regardless of whether free cash flow is used to pay down debt on an accelerated basis, repurchase shares or increase the stock yield, the share price should benefit. POT has put in place a number of cost savings measures that will be enhancing margins by at least $20 per metric ton. This is significant and permanent. Despite contentions that potash prices are going to start falling, the opposite is currently the case and while POT may be losing market share in areas of the world such as China and India where margins are not as great as the company would like them to be, margins in North America and South America, remain strong and are likely to stay that way.
POT's Canpotex allocation will move up to the 56% range quite soon and although expansion projects undertaken by AGU and MOS will bring POT's allocation down, it is unlikely to materially decline for many years given the lead time of most of these other projects.
You are right in believing that the hallmark of the intelligent investor's mind is to see things as they really are. As you can see by what I have to say from time to time, that is what I am trying to do.
Because you asked if I agree with the analyst's contention that POT's share price is likely to remain depressed [ie., either fall, remain where it is or rise insubstantially], the answer is YES, I agree with that assessment. I thought that all the 'half empty' points were well taken, just that they do not dissuade me from maintaining my position. As for your responses to the analyst's points that I enumerated, your contention that Belaruskali is losing "massive" production capacity is hard to understand. They are producing potash flat out and are selling everything they produce everywhere including in North and South America. Sixty million is sixty million the company thought they had but now they don't. You have to sell a decent amount of potash to recoup that $60 million. There is no evidence that the cartel will reform and there is every indication by the behavior of the former BPC cartel members that they will continue to market their products separately. While it may make economic sense for them to work together, people often do uneconomic things. POT's Canpotex allocation percentage is increasing but Canpotex's global market share is decreasing. That was the point made in the piece. I don't see how that is arguable. I agree with you that it is at least an open question whether global sales volumes will be off much from last year's. Macquarie says that it will be way off but I think their assessment is that of an outlier and therefore dubious. I prefer to disagree with what analysts have to say without becoming disagreeable. You thought what the guy had to say was just spin and nonsense. I maintain that even allowing for its maximum credibility, it is information that should be of interest to traders, not long term investors. MOS and AGU are up today while POT is down and remains depressed. Those are facts.
I have held my position since 2007 so I am not exactly a day trader. The shares I swapped out last year for additional POT and AGU shares was my first stock sale. I don't get what you disagree with. Are you saying that the CEO deserved an additional $5 million for doing his job? Are you saying that the company's failure to follow through on its previously announced buyback by continuing to leave hundreds of millions allocated for the stock repurchase still sitting in the treasury is OK? How about all those bonuses the company paid out while the share price continues to languish? Just who is the company great for? Not the owners. I did not say that MOS was a bad company, just that none of the most recent developments, including that puny dividend bump we got recently, are indicative of a company worth serious investment money. Which is why I pulled out a lot of mine.
A recent piece by Rich Duprey points out a number of things not going right for POT. He mentions (i) disappointing potash pricing in China because of Belaruskali which is a likely harbinger of further bad pricing in India; (ii) the unanticipated increased Canadian royalty scheme that will take a large chunk out of POT's hide; (iii) the absence of any likelihood that the BPC cartel will ever reform; (iv) POT's declining market share globally as Belaruskali aggressively seeks to expand its markets; and (v) the absence of robust demand for potash compared with 2014. What all this adds up to in my view is that absent developments we cannot foretell, POT's share price is likely to remain depressed during 2015 and perhaps even beyond that. Of course, notwithstanding the foregoing, we might all be pleasantly surprised precisely by these very same unforeseen events. I have no crystal ball. I accept what the analyst is saying but still believe that he is talking to stock traders and not long term investors like me.
SQM produces all of its potash in northern Chile, primarily from the salar [salt flat] brines located in the heart of the Salar de Atacama. The region of Atacama was hardest hit by the recent flooding. However, I have not heard of any curtailing of potash production by SQM. SQM obtains its potash by pumping underneath the saline crust of the salar brines. After extraction, the salar brines are left out in solar evaporation ponds. Given that the Atacama desert is the driest place on earth, solar evaporation is an extremely efficient process of obtaining potassium from the resulting solutions.
I have never been all that taken with the 'diversify' mantra. I try to figure out the areas I like and then I make a field bet in them trying to pick out the best of the lot. I also like to limit myself to enterprises that pay me while I own them rather than depend on the 'greater fool' theory in which I will make out only if somebody out there pays more for what I own than I paid for it. In 2007, I decided that food was the place to be and in 2011 I added energy to that list. With regard to food, I went with agricultural nutrients. With energy, I went with the midstream oil and gas partnership units. POT used to be my largest AG holding but because the stock, as you rightly point out, has pretty much gone nowhere for years, my AGU position now greatly exceeds my POT shares in value because it has gone up significantly over the relevant time period. MOS is a big loser but I substantially cut that position last year and spread the proceeds over additional POT and AGU shares. So I now have very nice quarterly dividends coming from the latter 2 with the prospects for continued upside and increasing dividends looking probable given my long term time horizon. All of my energy picks proved to have been extremely successful with a number of them having more than doubled in value and none of them have appreciated less than 30% except 1 of them. And they all pay very nice quarterly distributions in the 4-5% range.
I mention all this only to illustrate that trying to hit a home run by picking a particular stock is very very hard. I certainly failed in that regard when it came to POT and I failed again with my major energy pick which is the only one with single digit gains including distributions. But the field bets saved me from disappointment. Some people are very good at picking stocks. I know that I don't have that ability. But when I research a given sector and then try to pick the best in the field and invest in all of them, I don't do too badly.
The company says it may have to review its output target for 2015 currently targeted for 10.2 MMT. The drop off in output is entirely due to the loss of mining operations at Solikamsk-2. Russia's spring high water season from mid-May until the end of June is likely to worsen conditions at the mine which is nearly completely inundated with water. Output for Q1 already reflects efforts by Uralkali to get more production out of its other mines.
The BHP offer in August, 2010, which is less than 5 years ago, was for $130 a share which comes to $43.33 due to the last 3 for 1 stock split. Even taking into account the much larger dividends that POT has paid its shareholders than what BHP has paid out, there is no question that using hindsight, that offer, had it been accepted, would have put shareholders in a more profitable position than they are in now. A lot has happened in the interim, much of it adverse to POT and its main business which could not have been reasonably anticipated and nobody else projected it. As it happens, the real time to have gotten out of POT was the end of June, 2008 when the stock hit its all time high of $80 a share. I owned it then but never saw the train wreck that followed. All that aside, POT is a much better company to own today than it was when BHP made its offer for a number of reasons. Its CAPEX is just about done, its yield continues to increase and it is not unreasonable to believe that all that extra operational capacity will one day be used to generate revenue. Owning POT is unlike owning a bond because all one can ever count on is the unchanging coupon yield. POT offers the potential for increased yield as well as an increase in its share price. Give it, say, another 10 years and let's have a chat then. I will still be a shareholder because I believe in its long term prospects.
Canada, like the U.S. will not let one of its companies divest itself of an appreciated asset unless whatever is received in exchange therefore will continue to be subject to the relevant local taxation. Moreover, there are only a limited number of transactions in either country that will allow the exchanging corporate shareholder to achieve its objective. What won't work is for POT to exchange its SQM shares for ICL treasury shares. What might work is a transaction in which POT exchanges its SQM shares for ICL shares in conjunction with other exchanges that would give ICL an 80% or greater interest in SQM. In the U.S., no cash could be used in such a deal but I am not sure about Canada. There are a few other techniques that also might work but they would be a lot more complicated to execute [e.g., a newly created holding company structure].
I agree with you though that POT is unlikely to do anything that would involve a disposition of its SQM shares that would leave it without the cash necessary to deal with the resulting tax liability.
My guess though is that POT has not given up attempting to acquire control of SQM but that cannot be done without the acquiescence of the controlling shareholder, Ponce. I have no idea whether the Chilean authorities could force Ponce to give up control in favor of POT but even without legal authority they might be able to convince him to do it in exchange for lenient treatment on his current troubles.
ICL and SQM are not in the same situation. SQM is a company whose problems have nothing to do with operations as opposed to management and ownership. ICL, in contrast, is a company whose operations are in turmoil. If POT wanted to get rid of either its interest in SQM or ICL, nobody could stop them. Each company is publicly traded and the shares of each are not under any kind of restraint of alienation. If former CEO Doyle were still in charge [although he isn't, he is still there advising the company], POT would only be looking to do a deal for either company on the cheap. I see a lot of possibilities/combinations going forward although none of them may come to fruition. CEO Tilk has a reputation as a deal guy so I won't say anything bad about his M&A skills unless and until he does something boneheaded which I hope he won't.
The CEO slashes jobs and costs. In other words, he does what he was hired to do--manage the company. So he gets rewarded with a $5 million bonus. Meanwhile, the company's share price continues to languish, remaining about 70% off its high that it reached 8 years ago. And the stock continues to go nowhere even as the peon shareholders get a tiny bump in their dividend. And the share buyback that was supposed to take place to complete what they said they were going to do? Never happened. The $600 million still sits there except for what the company is shelling out in bonuses to all those who are doing such a great job. I am so glad that I massively reduced my position in this loser company last year. I keep what remains only because of its phosphate business which one day might be worth something. When in doubt, MOS hands money to the insiders.
Two things. First, any disposition by POT of its interest in SQM would be a taxable event. Probably not all that bad in terms of taxable gain given the recent price drop. So let's say that is not a problem. The real problem is increasing POT's stake in ICL. This requires the permission of the Israeli government. Last year, when they sought control of the company by attempting to purchase the 52% controlling interest in ICL held by the Hofer family holding company, they were rebuffed. I am not sure POT would have any interest in any increase in the ICL holdings unless it enabled them to hold at least 25% of the outstanding stock in the company [to achieve better accounting and financial reporting] as well as board representation which they currently do not have. I believe that POT has a realistic shot to get what it wants in terms of ICL given the results of the Israeli election. The PM, who was reelected and who is expected to be able to form a government, previously favored POT being able to acquire the ICL interest held by the Hofer holding company [now down to 46% due to listing balance of shares on the NYSE]. Moreover, the Hofer family said they were amenable to selling their interest. But the then finance minister, Lapid, shot the deal down. Lapid and another minister were fired which triggered the recent election. The PM has offered the Finance Ministry to Moshe Kahlon who probably thinks differently about the whole matter. And the ongoing strike at ICL may prove to be the catalyst for some kind of shake up. But whether POT will try to run this thing up the flagpole again is anybody's guess.
I will stay on further developments at SQM. They matter to us because (i)POT still owns a significant stake in the company whose shares have now declined 30% in value in recent months because of the turmoil; (ii) POT may still try to secure control of the company because it is fundamentally sound while the controlling shareholder is in a lot of hot water; or (iii) POT may decide to exit its position and recent comments by the CEO of ICL, a company in which POT holds a 14% interest, has expressed interest in acquiring all or part of the outstanding shares of SQM.
I don't see how. POT had no control over the company and none of the POT execs who sat on the SQM board before they resigned have been called in for questioning which is reasonable given that they had no knowledge of what had been going on and because they were the only ones dissatisfied with the conduct of management and the BOD vis a vis the securities investigation.