A key overview of potash industry opportunities (Part 5 of 8)
How cost affects share prices
Since potash mines are fairly concentrated in specific regions, costs don’t differ much. However, there are some differences. Companies with higher costs tend to show more volatile share price growth over business cycles. Low-cost producers are often situated in locations with more economical mines, which gives them an advantage over other producers or new entrants if they want to expand.
Russian and Belarusian lowest-cost producers
According to a Morgan Stanley, the world’s lowest cash COGS (cost of goods sold) producer is Uralkali. In 2012, Uralkali’s potash cash COGS, defined as “gross cash costs plus royalties and excluding freight cost,” stood at $62 per metric tonne—the lowest of all producers.
Saskatchewan is the next lowest-cost
Belaruskali had a slightly higher cash COGS (cost of goods sold) of $77 per metric tonne. Following those two companies, cash COGS slightly jumps to $121 to $145 per metric tonne for Saskatchewan producers like Potash Corp. (POT), Mosaic Co. (MOS), and Agrium Inc. (AGU), with Mosaic Co. (MOS) paying the highest figure.
The cash COGS for Intrepid Potash Inc. (IPI), which mines potash in five locations (three near Carlsbad, New Mexico, and two in Utah), stood at $197 per metric tonne last year. The higher COGS makes IPI a more volatile investment than POT, MOS, or AGU.
Exclusion of depreciation
COGS are costs that are necessary to mine potash and store them in warehouses before they’re sold to customers. It excludes costs associated with selling the goods, corporate overheads, and general administration expenses for a mining company.
We exclude non-cash costs such as depreciation because it’s a sunk cost. Plus, when these companies need to open new mines when existing capacity dies out, the costs to bring the new mines to operational conditions can differ.
Economies of scale
Investors should note that economies of scale are an important factor that affects company performance. Low-cost producers may have similarly low-cost mines nearby. But smaller producers could outperform over the long run if they expands their operations, so that a larger share of their fixed costs can spread over larger quantities, resulting in higher margins.
Browse this series on Market Realist:
- Part 1 - Potash industry opportunity for companies POT, AGU, MOS, and IPI
- Part 2 - Why are economical potash deposits concentrated in 3 locations?
- Part 3 - Because potash is a global market, investors must think globally