Don't Gamble on Potash Stocks

Don't Gamble on Potash Stocks

Several weeks ago, Russia's largest potash producer, Uralkali, decided to quit a partnership with Belaruskali and promised to increase its output. Most of the world's potash supply was controlled by two marketing ventures, which negotiated supply contracts on behalf of their members. The first was the Uralkali-Belaruskali partnership. The second group is called Canpotex and consists of Potash Corp. , Mosaic and Agrium .

Uralkali CEO, Vladislav Baumgertner, has stated that the company plans to increase production and gain market share. He speculated that prices could fall under $300 per ton. Potash and Mosaic reacted wildly to the news, losing almost 20% in one day. Agrium, which is less heavily involved in potash, did not suffer a big decline as a result of the news. The stocks continue to trade near their yearly lows, but I think it's too early to go bottom fishing.

The size of the impact
Potash sales accounted for 38.1% of total net sales for Mosaic in the second quarter of this year. However, potash brought 71.6% of operating earnings. This means that the drop in the potash price would heavily affect the company's earnings.

For Potash Corp, potash accounted for 45.4% of net sales and 62.6% of operating earnings. The company expects that demand for potash will grow 9.8% in 2013 in comparison with 2012. New developments suggest this would not be enough to support the price of potash.

The third Canpotex member, Agrium, is the least affected company. Potash wholesale brought only 3% of its revenue in the second quarter. However, the stock is also under pressure, as there is widespread price weakness among agricultural chemicals.

What does the future hold?
Uralkali plans to raise potash production by almost 24% in 2014. Chances are, the company would not be alone in this move. Nobody wants to lose market share. For example, Agrium has stated that it plans to complete the expansion of its Vanscoy potash mine in Saskatchewan despite recent developments.

Some analysts stated that the breakup between Uralkali and Belaruskali would not last long because the move hurts the whole industry. However, Belaruskali has stated that it has no plans to return to the partnership as long as Uralkali is run under current management.

Bottom Line
The stock market dislikes uncertainty. There is a lot of uncertainty about the future of potash-related companies, and there's more to come. The companies have yet to prove that they can operate in the lower price environment. In addition to that, it's difficult to predict how low the price of potash could fall. The momentum price swings could be significantly below Uralkali predictions, as buyers will try to squeeze every penny from potash suppliers.

Potash Corp could get some support because its dividend will attract income-oriented investors. The stock currently yields 4.6%. Should the price of potash drop in an uncontrolled fashion, the sustainability of the dividend would be in question. Agrium and Mosaic, which yield 2.3% and 2.4% respectively, cannot count on such support. Their yields are not big enough to justify the risks.

I expect more downside for these stocks. Agrium will be the least affected, but the stock will remain under pressure in sympathy. Mosaic and Potash have yet to test their new lows. The shift to the new reality will be painful for potash producers.

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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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