Let’s take a look at the current situation to see if Potash should be in your portfolio.
Weak potash, nitrogen, and phosphate prices hit Potash’s Q4 2015 results, which are all reported in U.S. dollars.
The company delivered fourth-quarter earnings of $201 million, or $0.24 per share, and full-year 2015 earnings of $1.3 billion, or $1.52 per share. Those numbers were significantly lower than the 2014 results of $0.49 per share for the fourth quarter and $1.82 per share for the year.
Segment results and outlook
Potash demand remains strong and total global shipments for 2016 are expected to be 59-62 million tonnes, about in line with both the 2014 and 2015 results.
Despite the demand strength, prices remain under pressure due to a market share battle being fought by the industry’s handful of global producers. Potash had an average realized potash price of $238 per tonne in Q4 2015, down from $284 per tonne in the same period in 2014. Gross margins are expected to drop significantly in 2016 compared with 2015.
Nitrogen results were even worse with an average realized price of $288 per tonne compared to $405 per tonne in Q4 2014. Gross margins in the nitrogen division are expected to take a hit in 2016 as growing global supply drives down prices.
Phosphate held up better with the Q4 average realized price, coming in at $522 per tonne, pretty much in line with the previous year. Gross margins for the phosphate group are expected to be roughly the same in 2016 as they were last year.
Guidance for 2016
Potash expects full-year 2016 earnings to come in at $0.90-1.20 per share. The company recently slashed its quarterly dividend by 34% to $0.25 per share, which brings the payout ratio to about 100% of expected 2016 earnings.
The company has closed its mining operations in New Brunswick and continues to focus on protecting its balance sheet through the downturn in the market.
Should you buy?
The long-term outlook for the fertilizer space is compelling despite the current low in the cycle.
Estimates put the global population for 2015 at about seven billion. That is expected to rise to as high as 11 billion by 2050, which is a lot of new mouths to feed in a short time frame. To make matters worse, farmers have less land every year to produce the crops needed, and the global shift toward greater meat consumption is expected to put even more pressure on resources.
As a result, fertilizer demand should rise significantly in the coming years.
If you have a buy-and-hold strategy and are looking for attractive long-term bets, Potash should be on your radar, but there probably isn’t a need to rush in right now.