Potash Stocks Sag on Weak Uralkali Earnings Report - Analyst Blog

Potash stocks fell yesterday after the world's largest maker of the nutrient Uralkali came out with a disappointing earnings report for 2014. The company swung to a loss of $631 million in 2014 from a profit of $666 million a year ago as elevated financing costs dented its bottom line.

The Russian potash maker’s financing expenses skyrocketed to around $2.1 billion in 2014 from $353 million in 2013, resulting from around $2 billion in losses on foreign exchange and revaluation of derivative instruments.

Uralkali’s production, in fourth-quarter 2014, was hurt by work suspension at its Solikamsk-2 mine in Russia's Perm region due to flooding. The company has revised the schedule of its capacity expansion projects in light of the accident and is taking measures to produce additional 0.8 million tons of potash starting 2016. Uralkali, which produced 12.1 million tons of potash last year, expects the incident to negatively affect its production in 2015.

Following the release, shares of Potash Corp. POT sagged around 2.9% yesterday while Mosaic MOS lost 2.8%. Moreover, Intrepid Potash’s IPI shares fell roughly 4.4%. Agrium AGU was the least affected stock with shares slipping 0.7% on that day.

Shares of North American potash stocks notched up gains in Nov 2014 after Uralkali suspended operations at its Solikamsk-2 mine and evacuated workers due to increasing inflows of brine (salty water) into the site. A sinkhole with a diameter of 30-40 meters was detected to the east of the mine. The news triggered a lift in most of rival potash stocks on speculation that a potential shutdown of the mine would affect Uralkali’s production capacity and benefit its competitors.

Uralkali came up with an update on the situation of the affected mine in Dec 2014 and stated that the size of the sinkhole widened to 50-80 meters. The company further noted, last month, that the sinkhole size has increased to 58-87 meters (elevating the risk of complete mine flooding) with average brine inflow shooting up from roughly 200 cubic meters per hour between Dec 11, 2014 and Jan 21, 2015, to 820 cubic meters between Jan 22 and Feb 6.

Uralkali faces a threat of losing its position as the largest producer of potash to rival Potash Corp. The Solikamsk-2 mine has an annual capacity of 2.3 million metric tons and accounts for about a fifth of Uralkali’s total production capacity.

A similar incident forced Uralkali to shut down a mine at Berezniki back in 2006. The company, in Dec 2014, said that it might have to write down as much as $1 billion (mostly due to lost reserves) if the Solikamsk-2 mine is eventually shuttered.

Potash stocks took a hammering in Jul 2013 after Uralkali exited the Belarus Potash Company (“BPC”), one of the two largest cartels (the other is North America’s Canpotex) which controlled the market for potash over the last few years. The duopoly, which account for more than two-third of global potash trade, influence potash pricing by controlling the production and supply.    

Uralkali, which has around 20% share of global potash production, broke its alliance with Belaruskali in BPC and decided to direct all potash export through its Switzerland-based trade arm – Uralkali Trading. The company warned that its change of policy could lead to a fall in potash prices on higher competition.

The cartel dissolution hit potash stocks hard with Potash Corp., Mosaic and Intrepid Potash were the worst affected, wiping out roughly $12.5 billion of their market value combined.

Nevertheless, potash prices recovered last year after taking a nosedive in 2013. Producers of the nutrient are expected to see healthy demand this year, supported by continued strength in China and prospects of a demand recovery in India on the back of the recent changes in the fertilizer subsidy structure.

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