Potash Corp. of Saskatchewan Inc. is finally taking the extreme measures required to adapt its business to a very weak potash market.
During 2015, the company cut its earnings guidance for three straight quarters as market conditions continued to deteriorate. But it still maintained an upbeat outlook making no changes to the operations or corporate structure.
That all changed over the past two weeks. On Jan. 19, the Saskatoon-based company shuttered its New Brunswick operations, setting up to 430 people out of work.
And on Thursday, Potash Corp. slashed its dividend for the first time ever and offered up a very cautious forecast for 2016.
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By taking these steps, the company effectively acknowledged the bear market could continue for some time, despite remaining optimistic in the long term.
“In this environment, we feel a prudent approach- is the correct one,” chief executive Jochen Tilk said on a conference call.
Potash prices have deteriorated faster and much more severely than almost anyone in the fertilizer industry expected. Within the fourth quarter of 2015, Potash Corp.’s realized potash selling price only agreed to be US$238 a tonne, down from US$284 within the same quarter a year ago. At the peak from the potash market in 2008, the crop nutrient was selling for more than US$900.
Tilk is quick to indicate that potash demand remains solid – Potash Corp. estimated that global demand was roughly 60 million tonnes in 2015, which may be the second-highest level to date. However the large producers haven’t been in a position to prevent prices from falling, even though they have matched supply with demand in a highly concentrated market.
Crop prices are weak, which affects just how much farmers are willing to purchase fertilizer. Farmers outside the United States are also feeling the affects from the strong U.S. dollar, that is hurting their buying power in local currencies and making them cautious. Additionally, the potash market become more competitive since a Russian-Belarusian marketing alliance collapsed in mid-2013.
Of course, fertilizer goods are vulnerable to the same economic turbulence that has crushed prices of many other commodities. In addition to potash, falling nitrogen and phosphate costs are taking a toll on Potash Corp.’s main point here.
The dividend reduction came as no surprise to investors, as Potash Corp.’s dividend yield was above nine percent prior to the cut. The quarterly payout was slashed 34 percent, bringing it to US25 cents a share.
Some investors may feel the dividend is still excessive, as it represents a payout ratio of roughly 100 percent for 2016. Potash Corp. expects earnings of US90 cents to US$1.20 a share this year.
But Tilk said in an interview that the earnings guidance for this year is incredibly cautious, and also the clients are confident it will meet or beat those numbers. He said Potash Corp. is taking a balanced approach with the dividend that allows it to keep financial flexibility as well as an investment-grade credit rating.
“It’s a combination of ensuring we protect the total amount sheet, but at the same time not to undermine the confidence we have in the business,” he said.
For your fourth quarter, the organization reported earnings of US$201 million, or US24 cents a share. Which was below the lowest analyst estimates.
While Potash Corp. has gotten credit to take the steps needed to adjust its business during the last little while, it will be hard to get investors thinking about this story until potash prices rebound.
“We expect challenges to carry on and the stock is one kind of our least preferred,” Citigroup analyst P.J. Juvekar said in a note.
