Finally, PotashCorp seems to have gone past the pricing crisis that occurred last summer when Uralkali broke its ties with Belaruskali and decided to follow the strategy of volume-over-price. PotashCorp shares already trade at pre-crisis level. The company's second-quarter earnings of $0.56 per share easily beat analysts' expectations, driven by increased shipments and improved pricing. This year, PotashCorp outperformed its Canpotex peers Mosaic and Agrium. Will PotashCorp be able to carry this momentum?
Potash has already bottomed
Following a nonstop drop in the last four quarters, potash prices managed to rebound. PotashCorp sold its potash for an average of $263 per ton, higher than the first-quarter price of $250 per ton. This is good news for Mosaic and Agrium, which typically reach a higher sales price than PotashCorp.
The second-quarter potash price is still 24% below last year's price, but it could be the beginning of the new trend. Last year, many buyers were reluctant to make purchases, as they were trying to identify how low potash prices could go. This resulted in a drop in inventories. This year, they have to catch up. In fact, PotashCorp has raised its global potash shipment expectations to 56.5 million-58 million tons. If global shipments approach 58 million tons, it would be a record year for potash consumption, according to PotashCorp.
The deferred demand for potash in combination with ever-growing demand for food has supported potash prices. In addition, it's hard to think of a catalyst that could send potash prices below $250 per ton in the near term. Potash is a very capital-intensive industry, and new sources of supply cannot appear out of nowhere. Yes, BHP Billiton continues to slowly develop its huge Jansen potash mine. Rio Tinto recently expressed its interest in potash as well. However, it will take years for this new potash production to materialize. Until then, the potash industry looks protected from supply shocks.
Isn't the rebound already in the share price?
PotashCorp shares are up more than 25% since the lows reached when investors panicked over the possible consequences of Uralkali's move. Meanwhile, PotashCorp's realized sales price dropped 24% for potash, 3% for nitrogen, and 2% for phosphates. The company was able to offset some of this negative impact by growing its nitrogen sales from 1.4 million tons in the second quarter of 2013 to 1.7 million tons in the second quarter of 2014, but it was not enough. The company's second-quarter revenue was down 11%, and earnings were down 24% compared to last year's figures.
In addition, PotashCorp has completed its share-buyback program. Under this program, the company bought back 43.3 million of its shares at an average price of $34 per share. Share buybacks offer great support for companies' shares and are a good way to return money to shareholders. During the earnings call, PotashCorp was asked whether it planned to launch a similar buyback program. Management's answer was extremely vague, so one should not count on the renewal of the program in the near term.
A further rebound in potash prices could act like a good upside catalyst for PotashCorp. However, while the company's shares trade at levels seen last July, its revenue and earnings are down significantly. Thus, at least part of the possible potash price upside is already reflected in PotashCorp's share price.
Bottom line
As usual, PotashCorp remains a solid and well-run business. Potash prices seem to have found the bottom and could have upside in the future. However, PotashCorp shares have already recouped losses related to potash price weakness, while the company's earnings have not. This leads to the conclusion that PotashCorp's upside potential is moderate unless the potash market sees a major rebound in prices.
