Why I'm Buying PotashCorp, Again
As Christmas draws near, the spirit of Kris Kringle -- of giving, goodwill, and happiness for all -- is upon us. Creepy beards, chintzy tinsel, and fake animals engaged in awkward action poses abound. It's all quite exhilarating. But for me, nothing elicits the Christmas spirit like Russian oligarchs. They're the reason I'm buying shares of PotashCorp for my Real Money Portfolioagain.
I first bought shares of PotashCorp on a simple premise: The Eastern European potash "cartel" -- whose existence ensured high potash prices and years of robust cash generation for the five incumbent potash producers, by limiting supply to market -- wasn't busted (more on the saga here), despite Russian potash biggie Uralkali's move to crush it. Even if it was , I thought the probable impact nil. That accrued to long-term investors' advantage, as the market's concerns over the potash industry's post-cartel return profile have put PotashCorp shares on markdown.
A few months later, that hypothesis appears on the mark. Ownership shuffles at Uralkali look to have fast-tracked the fractured Eastern European cartel's return. For potash producers, and for PotashCorp, that could make next Christmas flush. And in the interim, PotashCorp's management has undertaken a few smart moves of its own, reducing capacity and cutting jobs. While worrisome on its face, these decisions strengthen Potash's near- and long-term cash-generating capacity.
All told, PotashCorp's prospects have significantly improved, but shares have hardly budged. I'm not one to look a gift horse in the mouth. When Russian oligarchs hand me a tidily wrapped present, I take it. I'm adding a position equal to 1.5% of my portfolio's capital.
The cartel's Backstreet Boys moment
For those not monitoring the activities of Russian fertilizer oligarchs, a quick tale of the tape follows. Uralkali announced it was leaving Belarusian Potash Corp. -- the Eastern European cartel also known as BPC-- in July, and intended to pursue a volume-over-price strategy. Management planned to flood the market, push potash prices lower, and grab share. Potash producers' shares belly flopped 25% in response, and potash prices fell from $400 per ton to $300 per ton, as the market anticipated Uralkali's volume push. For PotashCorp and its Canpotex (the North American cartel) compatriots, Mosaic and Agrium , which had benefited from the cartels' nice-guy capitalism, that was bad news.
As the drama unfolded, PotashCorp execs maintained that Uralkali's move was a grand bluff and BPC wasn't a thing of the past. There was some truth to that, it seems. By noted Russia journalist Jonathan Helmer's account, exiting BPC landed Uralkali management afoul of Vladimir Putin and Mother Russia, who preferred that the cartel remain whole. More surreal, the Russian president allegedly gave a nod to the Belarusian government's decision to arrest and detain Uralkali CEO Vladislav Baumgertner when he visited with President Alexander Lukashenko to "discuss" the BPC situation.
A bizarre series of events followed. (Or maybe they're not so strange, for those apprised of life as a Russian oligarch.) Months later, former Uralkali Chairman Suleiman Kerimov and price-over-volume architect's 21.75% Uralkali stake ended up sold to Mikhail Prokhorov, the globetrotting owner of the Brooklyn Nets and Russian businessman cum politician -- a Kremlin-friendly character. Another deal followed, for a 20% stake in Uralkali to Russian chemical producer Uralchem. By most reports, Uralchem, like Prokhorov, also sits on the right side Putin. One thing seems absolutely clear: these deals had the Russian politburo's hands all over it. An odd coincidence followed. On the heels of these deals, Baumgertner was released to Russian custody faster than you can say crony capitalism. That's just how the "post-Soviet" world turns.
The intent of this spectacle seems fairly singular, in my opinion -- setting up BPC's homecoming. Further proof: Uralkali execs recently mused that they're not opposed to reviving BPC. Should that happen, potash prices could return to $400 per ton sooner than later. That's very good news for potash, and for PotashCorp.
PotashCorp's chess match
As the saga unfolded, PotashCorp announced plans to sack 18% of its workforce and shutter capacity at its potash and phosphate operations. This looks bad. A company capitalizing on robust demand doesn't lay people off or shut mines.
But the reality's more nuanced. PotashCorp operated its mines at 65% of capacity in 2012. Because mining operations are a hugely capital intensive, high fixed-cost endeavor, PotashCorp's bottom line got stung. That figure's likely worse in 2013, as buyers delayed potash purchases in hopes the Uralkali-induced tumult would push prices lower yet.
Cutting capacity rights the ship for PotashCorp. Management expects to realize a $15-$20 per ton gross margin improvement from higher capacity utilization and moving activity to lower cost mines. It can still support 10 million tons of production, which for the foreseeable future should be more than sufficient. To my eye, that looks pretty smart.
Given a longer-term view, the fundamentals supporting potash demand -- increasing consumption of protein and vegetables, higher per capita fertilizer application in emerging economies, higher caloric consumption worldwide, and the need to maximize crop yields amid a growing worldwide population -- remain solidly underpinned.
A nutritious meal
All of this might have you asking: If it's so obvious, why haven't PotashCorp shares moved? To my eye, the market's taken a wait-and-see view. The potential for a few rocky quarters at PotashCorp is hardly out of the question, and I'm fine with that. And while it seems more than likely, BPC's return isn't yet in ink. But where many investment analysts -- and investment managers -- take a one-year view of a company's prospects because their livelihood is reliant upon it, we're afforded a liberty they're not as individual investors -- the long-term view.
That's why I'm feeding my Real Money Portfolio another helping of Potash shares.
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The article Why I'm Buying PotashCorp, Again originally appeared on Fool.com.Michael Olsen, CFA has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp. 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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