The Stock Picker’s Guide to Potash Corporation of Saskatchewan for 2014

A challenging 2013 may have created an excellent buying opportunity.

The Motley Fool

For Potash Corporation of Saskatchewan (TSX:POT)(NYSE:POT), 2013 was a year to forget. The stock, which traded above $40 in late 2012, traded as low as $30 by mid-2013.

The big event was Russian rival Uralkali’s decision to withdraw from a marketing agreement with the Belarusians and pursue a volume-over-price strategy. The move sent potash prices from $400 per tonne down to $300. PotashCorp CEO Bill Doyle called the move “probably the single dumbest thing that I’ve ever seen”.

PotashCorp produces all three soil nutrients – potash, phosphates, and nitrogen – but is of course best known for being the world’s largest potash producer. The global potash market is extremely concentrated, with production limited to 12 countries.

Making the industry even more concentrated, PotashCorp has collaborated with its two main Canadian rivals, Mosaic (NYSE:MOS) and Agrium (TSX:AGU)(NYSE:AGU) to sell potash overseas through a single marketing agency, Canpotex.

Until last July, the world’s second and third largest producers were doing the same thing. But after Uralkali backed out, prices slumped. Buyers were also more timid, causing PotashCorp to miss sales volume estimates for the last two quarters of 2013.

Looking ahead, the future looks just as turbulent for PotashCorp. A major headline has been increasing industry supply on the horizon, especially from the world’s largest miner, BHP Billiton. Such developments could not only flood the market with excess capacity, but also undermine the pricing power of organizations like Canpotex. So why would anyone own shares of PotashCorp?

First of all, PotashCorp’s replacement value (the amount of money a rival would have to spend to replicate PotashCorp’s production) is over $50 per share, well above the current share price of $35. Replacement value can be a very useful metric for valuing commodity companies, partly because it isn’t overly sensitive to changes in the cycle.

The story gets better. PotashCorp is one of the industry’s low-cost producers, and the company has already taken steps to lower its cost of production by another $15-20 per tonne. Its production expansions, which began in 2003, are over 90% complete. The mines are very long life, deferring the need to make large capital expenditures in the future.

In the meantime, PotashCorp can return cash flow to shareholders. The company currently has a 4% dividend yield, and is also buying back shares. As long as the stock price stays near current levels, PotashCorp will likely complete its $2 billion buyback program by August. Mr. Doyle said on the last earnings call he finds the company’s shares “extraordinarily cheap”, thus making buybacks one of the best uses of cash flow now that the mine expansions are nearly complete.

Foolish bottom line

One of Mr. Doyle’s comments that everyone can agree on is that potash is a “notoriously difficult business to forecast”. Investors, be warned. Certainly, very few could have predicted that 2013 would turn out the way it did. But at $35 per share, PotashCorp offers plenty of upside for the risks involved.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has a position in Potash Corporation of Saskatchewan.

More on Investing

Canadian stocks are rising
Dividend Stocks

1 Dividend-Growth Stock You Won’t Want to Miss in the Real Estate Sector

A growth-oriented REIT is a strong buy today after raising its dividend by more than 5% in each of the…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Investing

Retirement Investors: 3 TSX Stocks That Could Rally With the Economy 

Always buy stocks you are bullish on when they trade below their 52-week highs. A recovery rally can enhance your…

Read more »

some canadian stocks rose
Investing

3 Stocks I’ll Load Up on in 2023

Toronto-Dominion Bank (TSX:TD) is one stock I'll load up on in 2023. There are others, too.

Read more »

HIGH VOLTAGE ELECRICITY TOWERS
Dividend Stocks

Better Buy: Emera Stock vs. Hydro One

Higher-risk utility Emera should provide higher returns over the next five years, given the dip and its higher yield.

Read more »

Growing plant shoots on coins
Tech Stocks

3 Growth Stocks That Look Ready to Double in 1 Year

These three growth stocks are "sleeping giants" ready to blast off in 2023 and beyond for investors who pick them…

Read more »

Payday ringed on a calendar
Dividend Stocks

Passive-Income Hat Trick: 3 TSX Stocks to Buy for Monthly Cash

Investors seeking passive income can invest in these Canadian dividend stocks and earn attractive monthly passive income.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Get Passive Income of $435/Month With This TSX Stock

Here’s how dividend investing in Canada could help you get reliable monthly passive income.

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

2 Undervalued Growth Stocks to Buy Right Now

Once a growth stock becomes too heavily discounted or undervalued, investors begin to wonder about its ability to bounce back,…

Read more »