The decline in commodity prices has not spared Potash Corp. of Saskatchewan. The problem for this Canadian producer is weaker demand combined with higher supply as a German competitor plans to open a potash mine in Saskatchewan and Russian giant Uralkali Group steps up production. In response, Potash has shut down three mines in Saskatchewan for most of December. While sales have fallen, Potash Corp. has a strong balance sheet. Still, lower potash prices could cause the company to cut its dividend, which currently yields 8.7%.
POTASH CORP. OF SASKATCHEWAN (Toronto symbol POT; www.potashcorp.com) gets 40% of its revenue and 50% of its earnings from potash, followed by nitrogen (35%, 40%) and phosphate (25%, 10%) fertilizers.
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The company continues to see weak demand for potash and other fertilizers in North America, Latin America and India.
That’s because record harvests have cut prices for wheat, corn, soybeans and other crops. As a result, farmers have less income to spend on fertilizers. In addition, Russia’s Uralkali Group, the world’s largest potash producer, has increased production in an attempt to boost its market share.
Prices could fall even further, as German potash producer K+S AG still plans to open its Legacy mine in southern Saskatchewan in 2016.
In response to rising potash inventories, Potash Corp. will shut down three mines in Saskatchewan for three weeks in December. It will also permanently close an older mine in New Brunswick.
Mining stocks: Dividend payout exceeded cash flow in most recent quarter
Meantime, the company’s sales fell 6.8% in the three months ended September 30, 2015, to $1.5 billion from $1.6 billion a year earlier (all amounts in U.S. dollars).
Its average realized price per tonne declined 11.0%, to $250 from $281.
Earnings fell 10.5%, to $0.34 from $0.38. Excluding unusual charges, Potash Corp. earned $0.37 a share.
The company’s balance sheet remains sound: its long-term debt of $3.7 billion is a moderate 25% of its market cap, and it holds cash of $73 million.
Potash Corp. now expects to earn $1.55 to $1.65 a share for all of 2015. The stock is down 40% in the past year, which is why it trades at just 11.1 times the midpoint of that range.
The $1.52 dividend now yields a high 8.6%, but the company may have to cut its payout if potash prices remain depressed. In the latest quarter, it paid out $313 million in dividends, which was more than its free cash flow (cash flow less capital expenditures) of $225 million.
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