POTASH CORP. OF SASKATCHEWAN $41 (Toronto symbol POT; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 865.1 million; Market cap: $35.5 billion; Price-to-sales ratio: 4.3; Dividend yield: 3.6%; TSINetwork Rating: Average; www.potashcorp.com) is the world’s largest fertilizer producer. Its five potash mines in Saskatchewan and one in New Brunswick account for 20% of global potash capacity. Five of its mines have reserves of between 65 and 84 years. It also makes fertilizers from nitrogen and phosphate.
Results reflect fertilizer prices
Due to volatile fertilizer prices, sales fell from $9.4 billion in 2008 to $4.0 billion in 2009 (all amounts except share price and market cap in U.S. dollars). Sales recovered to $8.7 billion in 2011 but fell to $7.9 billion in 2012.
Earnings declined from $3.67 a share (or $3.5 billion) in 2008 to $1.11 a share (or $987.8 million) in 2009. (All per-share amounts adjusted for a 3-for-1 share split in February 2011.) Earnings then turned around and rose to $3.51 a share (or $3.1 billion) in 2011. However, earnings fell to $2.42 a share (or $2.1 billion) in 2012.
Cash flow per share fell from $4.32 in 2008 to $1.46 in 2009 but climbed to $4.16 in 2011. Cash flow then fell to $3.12 a share in 2012.
The company expects global potash production of 55 million to 57 million tonnes in 2013, up from 51 million tonnes in 2012. That’s mainly due to rising fertilizer use in China, India and Brazil. However, the extra supply will continue to dampen prices. In the first quarter of 2013, the company sold its potash for an average of $363 a tonne, down 16.6% from $435 a year earlier.
Emerging market demand is rising
To stabilize prices, Potash Corp. and other producers have scaled back their output. Over the long term, potash’s outlook remains bright. That’s because demand for more and better food is rising, which will prompt farmers in developing countries to use more fertilizer. As well, fertilizer is now only used on half of the world’s farmland.
In the past decade, Potash Corp. has expanded its mines to meet rising fertilizer demand. These projects are now largely complete. As a result, the company will spend $1.5 billion on upgrades in 2013, down 28.6% from $2.1 billion in 2012.
That decline has freed up cash for dividends. Potash Corp. has raised its quarterly payout three times in the past year. The current annual rate of $1.40 U.S. a share yields 3.6%.
Potash Corp.’s strong balance sheet also cuts its risk: its long-term debt of $3.5 billion is just 10% of its market cap. It holds cash of $585 million, or $0.68 a share.
Low multiples for a market leader
The stock trades at just 13.0 times the $3.00 U.S. a share that Potash Corp. will probably earn in 2013. It also trades at a reasonable 10.4 times its projected cash flow of $3.75 U.S. a share.
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