New PotashCorp CEO Won't Change Fundamental Issues

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Over the weekend, PotashCorp (NYSE: POT  ) announced that an external mining executive had been chosen to replace longtime CEO Bill Doyle. While investors have been unhappy with the company's stock returns, the industry as a whole faces numerous fundamental issues that will override the effect of the CEO selection. The recent breakdown in the Belarusian potash marketing arrangement and new market entrants such as BHP Billiton (NYSE: BHP  ) will have bigger impacts on the stock.

PotashCorp is the leading contributor to the North American potash marketing organization called Canpotex. The new leader will have to stabilize demand for this arrangement with the disruptions caused by Russia and determine how to deal with high margins for potash that are drawing global miners into the market.

Jochen Tilk will take over as PotashCorp president and CEO on July 1. He replaces Doyle, who has worked at the company for 27 years and served as CEO for 15. Doyle was instrumental in transforming PotashCorp into a leader in the sector, though many analysts now argue that he helped lead the sector into overbuilding based on long-term demand that hasn't materialized fast enough.

Tilk was most recently CEO of Inmet Mining, which was bought out last year by First Quantum Minerals. He has spent 30 years in the mining industry, but has no apparent experience in the fertilizer sector.

Most analysts are surprised that PotashCorp selected an outsider to lead the company, specifically an executive who built up a relatively small miner and sold for a premium that was a fraction of the nearly $30 billion valuation of PotashCorp. Considering the Canadian government wouldn't likely ever approve a deal to purchase a key miner like this, the hiring selection raises a lot of eyebrows.

Tilk comes to PotashCorp amid potash pricing pressures. The primary issue facing the sector is whether Belarus and Russia can return to a cooperative agreement; this seems very unlikely considering the tensions over Russian moves in Crimea.

BHP mine
The high margins in potash will continue to attract other companies looking to open potash mines. BHP failed to buyout PotashCorp in 2010, but it is investing in a mine in Saskatchewan and recently included the commodity on a list of core operations.

The Jansen Potash mine has an expected output of 8 million tons a year, with the capability of supporting up to 10 million tons annually. The mine is estimated to have a 50-year service life, with resources of about 5.3 billion tons. The company approved a $2.6 billion investment plan in August 2013, with initial production expected in 2017. BHP Billiton recently claimed another goal of establishing potash as a pillar of the company's long-term growth.

Foolish takeaway
The ongoing political tensions with Russia and the desire of global miners to push forward with potash investments suggest the fundamental issues facing PotashCorp are more significant than the new CEO. Consequently, investors should continue to expect margin pressures in potash, leading to a difficult environment for the stock.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 14, 2014, at 5:53 AM, assisgnmeaname wrote:

    As is often the case with Motley Fool blurbs, this has no logical consistency.

    On the one hand the author sites criticism of POT for "...overbuilding based on long-term demand that hasn't materialized fast enough." Yet, he says two or three times how it's the potash industry's high margins that are leading to new competitors such as BHP.

  • Report this Comment On April 15, 2014, at 6:54 PM, maholder wrote:

    Not sure I understand your logic....both are criticisms and concerns about the stock going forward. Those high margins will have a hard time overcoming the overbuilding by POT and the new entrants.

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Mark Holder

Mark has been writing for TMF since Dec. 2012 with a primary focus on taking advantage of opportunities provided by the market in the energy and tech sectors.

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