Potash Corporation of Saskatchewan Inc.: Are Better Days Ahead?

Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) just hit a multi-year low. Is this an opportunity to buy?

The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) recently hit a new multi-year low, and investors are wondering when the stock will recover.

Let’s take a look at the current situation to see if the sell-off in Potash Corp. presents an opportunity.

Fertilizer woes

The global fertilizer market is on a downswing, and Potash Corp. is feeling the effects.

What’s going on?

Potash prices are off about 25% in the past 12 months and now trade near eight-year lows. A number of factors are hitting the market, and some are not expected to reverse course anytime soon.

The first big hit came in 2013 when Russia and Belarus decided to end their cozy marketing agreement. The breakup has resulted in the two companies battling each other for market share instead of cooperating to manage supply. That has put heavy pressure on global prices, and Potash Corp. is feeling the pain.

When the split was announced, potash prices quickly dropped from US$400 per tonne to just above US$300. Today, the spot price is about US$230 per tonne.

Rumours have periodically emerged that the two companies might kiss and make up, but there is little evidence to suggest a new partnership is imminent.

Crop prices and volatile currencies

The extended slide in potash prices over the past year can be attributed to demand factors.

Weak crop prices have kept U.S. buyers on the sidelines, and the huge rally in the American dollar against many emerging-market currencies has actually made potash more expensive for some buyers. For example, the Brazilian real has lost 55% of its buying power against the U.S. dollar in the past five years.

The plunge in the Canadian dollar has helped Potash Corp. to a certain extent, but its competitors are enjoying similar benefits.

Dividend watch

Potash Corp. reported ugly Q4 2015 earnings compared with the same period the previous year and slashed its quarterly dividend by 34% to US$0.25 per share. The company has provided 2016 earnings guidance of US$0.90-1.20 per share, so the payout ratio is sitting around the 100% mark.

For the moment, the dividend looks safe, but investors should probably consider it as a bonus when deciding whether or not to buy the stock.

Shutdowns

In response to the difficult conditions, Potash Corp. has closed facilities in New Brunswick, and two of the production sites in Saskatchewan have reduced output for a period of four weeks. The effect will be a 400,000 tonne reduction in 2016 output.

Should you buy?

There is no shortage of near-term pain, but dark days often present great buying opportunities.

Global potash sales are expected to increase in the coming decades as farmers struggle to keep up with rising demand for food. Potash Corp. is a low-cost producer, and the company is near the end of a multi-year capital program, so it is positioned well to benefit when the market finally recovers.

The Q1 2016 results might be messy, so investors should probably wait until the numbers come out before buying, but contrarian types with a long-term outlook might want to consider taking a small position on further weakness.

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 Andrew Walker owns shares of Potash Corporation.

More on Metals and Mining Stocks

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Tuesday, February 14

U.S. inflation data and more corporate earnings could keep TSX stocks highly volatile today.

Read more »

A miner down a mine shaft
Metals and Mining Stocks

Are Hydrogen Stocks or Lithium Stocks Better for Long-Term Investors?

Hydrogen and lithium stocks are excellent options in for long-term plays but remain speculative investments, according to some market analysts.

Read more »

People walk into a dark underground mine.
Metals and Mining Stocks

3 Top Mining Stocks in Canada to Buy in February 2023

Three Canadian mining stocks are attractive prospects for growth investors in February 2023.

Read more »

Gold bars
Metals and Mining Stocks

Better Buy: Barrick Gold Stock or Kinross Gold?

Here are some key reasons why I find Barrick Gold more attractive than Kinross Gold for long-term investors with a…

Read more »

People walk into a dark underground mine.
Metals and Mining Stocks

This Mineral Company Was on the Move in January 2023

While inflation is easing, this mineral company's stock is rising. How can you make money in this mineral stock?

Read more »

gold stocks gold mining
Metals and Mining Stocks

Is Now the Time to Buy Gold Stocks?

Gold prices can continue to rally throughout 2023, as inflation and interest rates peak, making undervalued gold stocks some of…

Read more »

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Thursday, February 9

As the ongoing corporate earnings season heats up, TSX stocks may remain volatile.

Read more »

A worker wears a hard hat outside a mining operation.
Metals and Mining Stocks

Cameco Stock Is Approaching its 52-Week High: Time to Invest?

Cameco (TSX:CCO) stock is nearing 52-week highs once more after falling from September last year, but should you wait for…

Read more »