Susquehanna Is Cutting Estimates On Potash, Warns On Lower Volume Forecast

Susquehanna Financial trimmed its estimates and price target on Potash Corporation of Saskatchewan (USA) (NYSE: POT) on lower nitrogen and potash prices.

Analyst Don Carson cut his 2016 earnings estimate by $0.30 to $1.05 a share versus guidance of $0.90 to $1.20 a share. Analysts' consensus earnings estimate came in at $1.04 a share. Carson, who has a Neutral rating on the stock, also slashed the price target by $3 to $14.

The analyst cut his 2016 potash gross profit estimate to $785 million from $990 million (and guidance of $800 million -$1.10 billion) as he lowered potash volume forecast (8.6 mln metric ton (MT) vs. 9.15 mln mt), and raised his cost of goods sold/mt estimate ($109/mt vs. $99/mt) to reflect the cost of maintaining excess capacity and realized price forecast ($200/mt vs. $207/mt).

"Domestic potash prices should rebound seasonally from current trough levels of $250/st fob Corn Belt to $275-$280/st fob; however, due to the low starting point for prices this year and prevailing negative sentiment offshore we do not see a recovery to the $300/st fob 4Q15 average," Carson said.

"We note the possibility of additional risk to potash prices as POT ramps its 2.7 mln mt Rocanville expansion and AGU boosts Vanscoy output to 2.45 mln mt from 1.9 mln mt (2015), which could see prices fall to the cost of the marginal Saskatchewan producers ($180/mt fob Vancouver), which equates to a $215/mt fob Corn Belt and $205/mt cfr Brazil," the analyst added.

The analyst also cut his 2016 nitrogen gross profit by $160 million to $695 million as he lowered his average realized ammonia ($383/mt vs. $422/mt), urea ($296/mt vs. $318/mt) and UAN ($197/mt vs. $208/mt) prices to reflect a challenging 2016 price environment due to lower feedstock costs and currency for Chinese producers and North American capacity additions.

Given POT's own 2016 shipment guidance of 8.3-9.1 million mt (vs. 8.7 mln mt in 2015), it appears to have 4-5 million mt of excess capacity. The analyst added that the company could idle 2-3 million mt of its excess capacity this year to tighten the global supply/demand balance (and save about $75 million in maintenance capex.