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Instant Analysis: PotashCorp to Close Another Potash Mine

By Rich Duprey - Jan 22, 2016 at 8:00AM

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The potash producer continues to feel pressure from the industry supply glut.

What happened?
Potash producer PotashCorp (POT) announced it was indefinitely suspending operations at its Picadilly potash mine in New Brunswick that went on line in 2014 and primarily supplied customers in Latin America.


Does it matter?
Like a tortoise, the potash industry in general is in the process of drawing within its shell for protection. In addition to suspending the Picadilly mine, which is a lower-cost project than its adjacent Penobsquis mine that it closed in November, PotashCorp also shut down inventory at its Cory, Lanigan, and Allan mines in Saskatchewan in December.

Agrium (NYSE: AGU), which is a partner of Potash and Mosaic (MOS -0.18%) in the North American potash marketing organization Canpotex, forecast significant cutbacks in capital spending. From a high of more than $2 billion in 2014, where nearly $1.5 billion worth was targeted for growth capex, it estimates its future run rate will see just $800 million in total capital spending, with a paltry $250 million allocated to growth.

Similarly, Mosaic has been cutting production as "neart-term challenges in the current environment" mandate it be more cautious.

PotashCorp says the mine suspension will result in the loss of 420 to 430 jobs, with 100 employees remaining on during the transition period. CEO Jochen Tilk understands it's never an easy process to suspend operations, but also points out "these are important steps in running a sustainable business and positioning the company to best meet the needs of its many stakeholders over the long term."

Potash prices have fallen below $300 per tonne as a supply glut has depressed the market. The industry rout began when the Belarusian potash cartel broke up in 2013 and the producers began vying for market share by lowering prices. Potash, which had sold for over $400 a tonne, crashed to $315 at the time and have since gone lower. At its peak, potash went for more than $900 per tonne.

While worldwide demand for potash will remain strong as it is a key crop fertilizer component, the shakeout from competitive pressures has yet to run its course, meaning PotashCorp may face additional capacity concerns in the future.

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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