Update Potash of Saskatchewan (POT)
Potash of Saskatchewan (POT) has been telling investors for more than a month that it believes that demand is picking up and that prices for potash fertilizer would start to climb in the first quarter of 2010.
I guess the company really meant it.
Yesterday, March 11, after the close of trading Potash raised earnings guidance for the first quarter to a range of $1.30 to $1.50 a share. That is a huge leap from prior guidance of 70 cents to $1 a share set only on January 28. The Wall Street consensus had been for earnings of 94 cents a share. The company said it would make any revisions to guidance for the full year when it reported first quarter earnings on April 29.
The increase in guidance follows hard on the heels of news from Canpotex, the export arm of Canada’s fertilizer producers, that it was increasing export prices for potash. The price increase, effective immediately on all new sales, took prices to $415 a ton for standard and $430 a ton for granular grade.
In the January 28 guidance that accompanied fourth quarter earnings, the company had projected potash prices of just $365 a ton for 2010. At the time I called first quarter 2010 guidance laughably low. “The numbers don’t make a whole lot of sense except as a reaction by the company to seeing its guidance get smashed to the downside in quarter after quarter,” I wrote.
The jump to $415 to $430 a ton in March, however, is a bigger increase than I’d expected this early in the year.
It argues that demand is coming back more strongly and more quickly than I had estimated.
As of March 12, 2010, I’m raising my target price for Potash of Saskatchewan to $135 a share by July from my previous target of $130. (By the way in recent days, the market has been awash in rumors that BHP Billiton (BHP) would make a bid for a Canadian potash company. I think Mosaic (MOS) is a much more likely target than Potash.)
Full disclosure: I own shares of Potash of Saskatchewan in my personal portfolio.
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Good call Jim, thanks again!
Jim, you recommended at around 90 and your target is now in shouting distance. What’s the catalyst for it to move above 135? Higher production or higher prices? Do you see either? Great call and thanks.
The jump to $415 to $430 a ton in March, however, is a bigger increase than I’d expected this early in the year.
This is a very superb piece of work by Jim Jubak. I read his original postsome months ago when POT priced at 90 and bought in, since then I”ve traded in and out of it and done very well with this investment. Congrats, Jim deserves every accolade.
Being a farmer, I understand fully how fertilizer works. First off, China is one of the worlds largest fertilizer consumers. Second, the US is just now beginning to ramp up the use of fertilizer for the spring and summer row crop and hay production seson. Fertilizer is not used during the winter months. So, how convenient that they raise prices now. Also, potash is only one of three components in fertilizer production. The other two ingredients are Ammonia Nitrate and Phosphorous. Potash alone, wont do you any good. One fly in the ointment is there is a tremendous use of Nat Gas for the production of fertilizer. And as we know, gas is at multi year lows. But, as countries such as Ethiopia and Afghanistan begin to accept new methods for improving yields, by the use of fertilizers, this will definitely increase demand. I wouldn’t be at all surprised to see POT breach its all time highs of 200+ bucks by spring 2011.
I bought at $115 and when it fell back below $100 at the end of January I doubled down. BLACKJACK!
POT has a significant investment in a large Chilean miner of Lithium. That could develop into an interesting story…
http://www.nytimes.com/2010/03/10/business/energy-environment/10lithium.html
Jim
Yara is another of your picks in the fertilizer sector. Today it said it will not sweeten its offer to Terra that has received a counter offer by CF. What is your opinion on how this will affect the outlook for Yara?
The Chilean Miner (SQM) in the NYT story is on Jim’s watch list. He ran a post in the fall on batteries.
SQM has a had quite the ride (ala POT) without the bounce. It was 24 in 2000 or so, and at 100 in 2005 on its way to 200 by early 2008 then crashed with all the other commodity stocks. There were some interesting comments to Jim’s original post (available by clicking on the watch list icon and finding SQM); particularly one about EVs not being the choice of those needing low-cost transportation- and as a prius owner, the only reason to own a prius is it is low-cost transportation. The commentator made a great point about who was buying cars on the clunker program (and what they were buying)- it wasn’t EVs. Tthe recent problems with Toyota generally and prius specifically will likely dent prius sales.
But SQM is an easy way to play chile, and Litium-Ion batteries do will have application far beyond EVs. It seems a pretty good entry point if you need to add commodity producers. Its financials have improved considerably over the last five years, while its price has been halved.
Jim, is SQM something you expect to revisit in a future post?
SQM split 10-1 in March 2008; it did not crater. My mistake.
Can anyone explain why the ETF for Chile, ECH, went up right after the earthquakes? They are estimating the damage at 30 billion. Supposedly the copper mines are to the north of the epicenters and not as affected as the coastal regions to the south, although the 7(.?) aftershock was near Santiago. I don’t know where the SQM mines are located. It might have something to do with the inauguration of the new President, Pinera, who is a businessman and should favor policies that will be good for the economy. He owns Lan Airlines, a Jubak pick/watch. Perhaps the occurance of the earthquake during the inauguration is an omen of what is to come in Chile with the change in government. The have had a leftist government for many years.
Domino412: I agree on a run at 200 if not sure 150′s. Potash was know for trading like a commodity.
I wonder what will happen in the winter October out to 2011?
southof8 – what happened to SQM in March of 2008?
This “bull” market (within a secular bear, as Jim has neatly pointed out) has reached the top of its recent trading range — will it go back down towards its 200D moving average, or will it continue to go up (on its recent low volume)? I’d bet on better entry prices over the next couple of weeks…