Potash Downgraded At HSBC On 'Uncertain Strategy'

• Potash Corporation of Saskatchewan (USA) POT shares have plunged 40 percent year-to-date, declining steadily from above $35 in March to slipping below $25 in September.
• HSBC analyst Yonah Weisz downgraded the rating on the company from Buy to Hold, while reducing the price target from $37.75 to 24.50.
• Potash’s commercial and financial strategy is uncertain, following the failure of the company’s proposed bid for K+S, Weisz mentioned.

On 5 October, Potash announced that it had decided to walk away from its proposed K+S bid. “This comes at a time of deteriorating pricing and demand in potash markets,” analyst Yonah Weisz pointed out.

There has been a significant decline in prices in the Brazilian potash market over the past two months. While prices remained around $335/t in May, June and most of July, they rose beyond $320/t in August. Weisz said, however, that the latest indicators reflect a decline in prices to USD290/t or below.

In the report HSBC noted, “We think implications for 2016 are negative as well. Assuming Brazilian prices stay at around USD300/t for the rest of the year, the Chinese contract price could be due for a reduction from the current USD315/t, to cUSD275/t, if the negative spread of USD25/t between the two markets established in 2013 is maintained.”

Weisz said that the downgrade in rating reflects weaker fundamentals as well as an unclear strategy. Potash has not disclosed its plans for unitizing its large cash flows in 2016 and beyond. “But the attempt to purchase K+S implies to us that the firm still looks for growth by acquisition, meaning PCS shareholders may not in the end pocket these sums or the value of stakes in ICL or SQM,” he added.

Such uncertainty makes Potash’s shares “less desirable,” Weisz mentioned, while adding that the company has “easy ability to borrow and no need for cash” due to which the 2016 payout estimate of $1.273 million, or $1.52 per share, “can be covered by the firm.”