POTASH CORP. OF SASKATCHEWAN (Toronto symbol POT; www.potashcorp.com) is the world’s largest fertilizer producer. Its six potash mines in Saskatchewan and one in New Brunswick account for 20% of global potash capacity. Four of its mines have reserves of between 75 and 108 years. It also makes fertilizers from nitrogen and phosphate.
The company’s sales and earnings vary with volatile fertilizer prices. That’s why its sales jumped from $5.2 billion in 2007 to $9.4 billion in 2008, but dropped to $4.0 billion in 2009 (all amounts except share price in U.S. dollars). Sales recovered to $6.5 billion in 2010, and rose to $8.7 billion in 2011.
Earnings rose to $3.51 a share (or $3.1 billion) in 2011, from $1.98 a share (or $1.8 billion) in 2010. Cash flow per share climbed to $4.16 in 2011, from $2.60 in 2010.
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Potash stocks: Farmers using more fertilizer to counter North American drought
The company sold its potash at an average price of $434 a tonne in the first half of 2012, up 11.3% from $390 a year earlier. That’s because the drought in North America has pushed up grain and corn prices. As a result, farmers are applying more fertilizer to improve their crop yields. Moreover, rising sales to developing regions, such as South America and Asia, have also boosted prices.
The improving outlook for fertilizer prices is prompting Potash Corp. to increase its production. The company aims to raise its annual potash capacity from 13.3 million tonnes at the end of 2011 to 17.1 million tonnes by 2015.
To meet this goal, Potash Corp. will probably spend $2.2 billion in 2012 to expand its mines and upgrade its facilities.
The stock trades at 12.5 times the $3.36 U.S. a share that Potash Corp. will probably earn in 2012. It also trades at 10.1 times its projected cash flow of $4.15 U.S. a share. The $0.56 U.S. a share dividend yields 1.3%.
In the latest edition of The Successful Investor, we consider the outlook for potash prices and look at Potash’s capacity to handle the added risk it is taking on with its expansion program. We conclude with our clear buy-sell-hold advice on the stock.
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