Potash Corp: Assessing The Headwinds

Summary

The potash market suffers from weak supply-and-demand fundamentals that could continue to hamper Potash Corp's business prospects.

More supply is expected to be added to an already oversupplied market and Chinese and Brazilian demand is murkier due to questions governing their respective economic situations.

Shares seem fairly priced based on the current known headwinds surrounding the potash market, although prices could still conceivably fall moving forward.

Potash Corp (NYSE:POT) has been facing recent turbulence as a consequence of falling commodity prices relevant to its core business operations. Potash prices have fallen 11% since last month and 25% from one year ago, further compressing a market with substandard fundamentals.

Moreover, there are multiple potential drawbacks on both the supply and demand side of the market that may further negatively impact producers. Approximately 60% of POT's revenue is derived from potash sales and the company's shares could be poised to suffer further if the fundamentals of the market continue to deteriorate. Potash's FY2016 EPS guidance was slashed to the $0.40-$0.55 mark in late July upon the release of Q2 earnings and the company is cutting its Q3 dividend to $0.10/share in light of the unsustainability of a dividend payout that exceeds earnings.

The company claims that it expects to deliver 58 million to 61 million metric tons of potash shipments this year with 61 million to 64 million in 2017, which would represent a record-breaking level. But even if demand is high, that doesn't speak to the supply side of the equation. In 2015, POT produced 72mtpa (million tons per annum) yet failed to reach 60mt in sales. More production is also coming into the fray, with 10mtpa of Russian supply, 3mtpa of K+S supply, and Mosaic's (NYSE:MOS) $1.7 billion expansion of K3 mine, expected to produce 6.3mtpa upon completion. Sirius Minerals (LON:SXX) plans to build its newest mine under the UK's North York Moors National Park and is expected to produce 10mtpa starting in 2018 upon completion of the first phase and 20mtpa after ultimate completion of the second phase around 2021. Smaller/other projects include the Garlyk mine in Turkmenistan (expected completion in 2017) and London Harvest Limited's (LON:HMI) building of two projects in Brazil, which...