potash corporation of saskatchewan - agriculture stock

About one month ago, Potash Corp. (POT) reported 2008 2nd quarter results. These results have inspired numerous articles and comments, all well worth reading, as well as the report itself.

Through these reports, it has become the practice of the CEO, William J. Doyle, to offer tremendous insights into his company, as well as the general industry trends in fertilizers.

This has resulted in a massive flow of information so strong and positive that it is difficult for anyone to digest it all in just one sitting. Therefore it seems best for all concerned to have many different articles written by many different people, in order to fully understand and appreciate what he is saying.

One set of numbers that some people may have missed concerns the projected 2008 gross margin increase. In relation to the previously announced price increases that are already in the pipeline for the remainder of 2008, he said,"We are now forecasting 2008 potash gross margin more than 300% higher than achieved in 2007," and "Our nitrogen and phosphate margins are now forecast to exceed 2007 levels by more than 85% and 200% respectively."

To better understand and appreciate what his words and numbers actually mean, it's necessary to go back to the year 2007 gross margin results for each segment, and work forward from there. These were 912.3 million for potash, 536.1 for nitrogen, and 432.8 for phosphate. These numbers must now get multiplied by their respective 2008 projected percentages to get 3649.2 for potash, 991.8 for nitrogen, and 1298.4 for phosphate. When added together, the projected 2008 total gross margin becomes 5939.4 million, or almost 6 billion, which is a 216% increase over the actual 2007 total gross margin of 1881.2 million.

Is this what has caused the recent 13 day, 20% sell-off in stock price from the close of 200.69 on July 23rd, the day before the report was issued, to the close of 160.91 on August 11th?

Or was it just a part of the 38 day, 33% sell-off from the June 17th all time record closing high of 239.5?

The year to date stock price increase at the close of the day, August 11th, 2008, was about 12%. Does this 12% increase accurately reflect a year on year projected 216% total gross margin increase? Or, am I supposed to believe that the numbers given were simply not good enough to justify the stock valuations?

Or, shall I conclude, once again, that investors simply don't understand what this company's stock is actually worth?

Agriculture fertilizer stocks - still has growth

Even though commodities' prices have come down from record highs, agribusiness is hardly a fallow sector, Citi Analyst Brian Yu said, deeming fears of slowed agricultural demand "misplaced" in a Sunday note on agricultural commodities.

"We are not suggesting that a global slowdown will have zero impact on grain demand, but [we] want to highlight the weak historical correlation," Yu said. "The point is that fertilizer stocks are being grouped with industrial metals and energy when the supply-demand characteristics are arguably very different."

Shares rallied throughout the agribusiness sector on Monday as Yu said rising cattle and hog prices coupled with low global grain stockpiles bode well for fertilizer fundamentals. Increased meat consumption keeps corn in high demand since the crop accounts for 61.0% of animal feed. That, combined with tight global grain supply, means farmers will continue to invest in fertilizers as a way to maximize crop yields. The Market Vectors Agribusiness exchange-traded fund gained 80 cents, or 1.6% to close Monday's trading session at $49.95.

Soaring fertilizer prices sparked investor concerns of a bubble, especially as corn prices went on a six-week slide on reports that Midwestern flooding didn't destroy as many crops as initially feared. (See " Crops To The Rescue.")

"There is a big different between equities that trade at a low multiple because fundamentals/pricing/earnings are deteriorating and equities that trade at a low multiple [since] earnings expectations are rising while prices have lagged," Yu said, adding that he thinks fertilizers fall into the latter category and reiterating "buy" ratings on Agrium (nyse: AGU - news - people ), CF Industries (nyse: CF - news - people ), Mosaic (nyse: MOS - news - people ), Potash (nyse: POT - news - people ) and Terra Industries (nyse: TRA - news - people ).

Mosaic shares gained 6.1%, adding $5.90 to close Monday's session at $103.42, and CF Industries rose 1.9%, or $2.43, to $131.38. Agrium and CF Industries both added $2.03, or 2.6% for Agrium, which closed at $80.44 and 1.9% for CF Industries, to close at $131.38. Potash rose by 0.1%, adding 23 cents to $170.04.

Yu believes Potash's sell-off--the stock has lost nearly 19.0% in the last month--is overdone, especially since data on Friday showed potash producer inventories fell by 10.0% since July.

Potash - Execs load up stocks when prices dip

When Potash Corp. of Saskatchewan (POT) saw its shares fall as much as 15% on Tuesday, some saw it as an accurate reflection of the slowing world economy and the bearish impact this has on commodities and the companies that produce them. But others saw it as an opportunity, driving names like Agrium Inc. (AGU) and Potash Corp. to quickly make up some of their steep losses.

One person that appears to have seen an opportunty in the Potash Corp. sell-off is Garth Moore, president of the company’s PCS Potash division. He bought 3,000 company shares on Tuesday for C$175.51 a piece, just off the intra-day low. He later bought another 2,000 Potash Corp. shares for prices as high as C$180.67 to bring his company holdings to 24,800 shares.

Other than the company’s own buyback program, which a filing on Wednesday showed that 1,683,100 shares were repurchased and canceled at the end of July, company insiders haven’t been doing much of note. But maybe a sell-off for a stock that is up roughly 100% in the past 12 months is just the motivation it needed.

Potash - 2008 stock repurchase program

On January 23rd, 2008, a little noticed news item was released by Potash Corp. (POT). That particular day was also the day when the stock price reached its lowest point of the year, about 120, which was about 7 dollars under the 50 day moving average. Once again, for the sake of argument, this was also the day when the historic hand off to Potash occurred, as well as the day that marked the end of the negative influence of that unlucky albatross (see Part V). So this was, all in all, a rather meaningful day for the long term investors in Potash Corp.

The news item was an announcement of a share repurchase program, involving up to 15,82 million shares, or about 5% of the outstanding 315.4 million shares. At the very low price of 120 per share, that equals $1.8984 billion! If considered advisable, these shares are to be repurchased on the open market through January 30th, 2009, at prevailing market prices. The timing and amount of purchases if any, will be dependent upon the availability and alternative uses of capital, market conditions and other factors.

How interesting that management would choose such a propitious day for the kick off of their share repurchase program. Low price day, kick off day, hand off day, and farewell to albatross day, are all taking place on the same day, and no one really seemed to notice. The choice of this day means that management could then start to repurchase shares at the lowest available price of the year, $120 per share.

I wonder if the markets have the positive effects of the savvy of this management team priced in correctly? I also wonder if the markets truly understand what share repurchase programs are all about, and how they influence all the numbers relating to efficient use of what is, after all, the shareholder's capital. I would also like to mention that on that same day, management also declared a "measly" dividend of only 10 cents per share. For some investors, that's a clear sell signal, as obviously management doesn't know what to do with its profits, or how to best reward its long term shareholders. Or does it?

Another news item was released by Potash Corp on April 24th, 2008, concerning its fourth quarter results. Included within this bewildering collection of numbers, were the fourth quarter results for the share repurchase program. These revealed that management had repurchased 3,398,800 shares at a cost of 516.3 million, or 151.9 dollars per share. This means that 21.48% of the total amount of shares available in their program were bought, which also represent about 1.08% of the total amount of tradeable shares.

It seems to me that management succeeded in buying back 1.08% of the total shares from the panic stricken Potash bears, at a price equaling 46.64% of Monday's closing price of 222.75. This means that those shares which management bought for 516.3 million, would now be worth 757 million, if still in circulation, which is a difference of 240.7 million. So who benefits?

So what did management do with all the repurchased shares? Answer: It destroyed them all. Now why would management destroy the value of $757 million worth of company shares that only cost it $516.3 million on the open market in the first place?

Answer: To make the remaining shares more valuble! The laws of supply and demand are working quite well at Potash Corp, I can assure you. Many of the remaining shares are in the hands of the company's cherished long term investors, for whom the share repurchase program is intended to benefit the most. Does anyone understand this?

Warren Buffet sure does. He said, "When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the market place, no alternative action can benefit shareholders as surely as repurchases" Peter Lynch calls share repurchases "The simplest and best way a company can reward its investors." Joshua Kennon at beginnersinvest.about.com calls them "The golden egg of shareholder value." I even like them.

Apparently the people shorting this stock, and the ones trying to time the market by all their excessive buying and selling activities, don't seem to realize that they are up against management's share repurchase program. It looks like management is buying when the fear and ignorance is greatest, usually represented by the stock trading below its 50 day moving average. This is the patient long term investor's best insurance policy. We are happy when the stock price goes up of course, but we are also happy when the stock price goes way down. Then the share repurchase program kicks in and eventually makes are shares worth more. So we are happy no matter what happens.

If the patient long term investors got a 201% return in 2007, plus a 54.73% year to date return to Monday, July 21st, then I wonder how the other players have done. If they can top the returns of us lazy and ignorant long term investors, then they have done very well indeed. But have they?

Missing the party

It's one thing to arrive at a party after the festivities are in full swing; it's another thing entirely to arrive just as guests start trickling out. The same can be said for stocks, where Fools do not want to be that guest who never knows when to go home.

I freely concede I missed a mammoth opportunity with the recent surge in agriculture stocks. More painfully still, I owned shares of Potash Corp. of Saskatchewan (NYSE: POT) a couple of years ago and sold for what I thought was a tidy 20% gain. Woe is me! After the recent sell-off in agriculture stocks, though, the time feels right to at least take another look.

Potash Corp. today is trading at around 8% below its record high of $241, while fellow fertilizer giant Agrium (NYSE: AGU) is off by around 11%. Given the speed of their respective price appreciations, I agree with my colleague that such names remain a little "frothy". What about Sociedad Quimica y Minera (NYSE: SQM)? This Chilean fertilizer producer only really started seeing accelerated share growth in 2008, and yet has fallen 27% from its June high to trade around $42 today.

SQM is a major global producer of specialty plant nutrition for every stage of the crop cycle, but also offers diversification from pure agriculture exposure by producing lithium and iodine. SQM is a serious player in lithium production, supplying the very busy steel and aluminum industries. Lithium is also a key element in the batteries used in hybrid cars like the Toyota (NYSE: TM) Prius. SQM also boasts the largest iodine production capacity in the world. Iodine is used in medical applications, LCD displays, etc. While competitor FMC Corp. (NYSE: FMC) also offers both fertilizers and lithium products, SQM is the only player I've seen with this particular trio of business segments.

With net earnings in the first quarter of 2008 that bested the previous year's quarter by 50%, SQM looks intriguing to me at this stage. Every Fool has their own inner comfort level when it comes to investing in stocks with major momentum. While Potash Corp. and Agrium may very well reach new highs again soon, the more precipitous decline in shares of Sociedad Quimica y Minera, combined with the unusual trifecta of products offered, makes SQM a standout in this Fool's eyes.

ETF tracker - Gold, PGM metals and Potash

Gold ETF Making History - The largest gold ETF has been a real trailblazer lately.

The SPDR Gold Trust (GLD) is the most actively traded call option on the Chicago Board Options Exchange, reports Sophia Grene for the Financial Times. The news is remarkable because it’s only been a month since the options began trading.

The decision to allow options on the fund involved resolving some jurisdictional issues between the Securities and Exchange Commission [SEC] and the Commodity Futures Trading Commission [CFTC], since the SEC oversees funds, while the CFTC oversees commodities - which are within the fund.

The two agencies finally came to an agreement and established a permanent regulatory liaison between them.

Last week, GLD was also listed on the Tokyo stock exchange, where it became the first physically-backed commodity ETF listed.

The gold in the fund is held in the London vaults of HSBC Bank USA. The fund is up 10.8% year-to-date.

Gold, Silver, Platinum, Palladium ETFs - Oh, My!
Platinum and palladium ETFs are reflecting the love investors have for metals that do much more than look pretty.

Platinum demand is being driven, literally, by its primary use as a catalyst in devices that remove automotive pollutants, says Carolyn Cui for the Wall Street Journal. Thanks to tightening emissions standards and a growing global auto population, demand for the metal has risen 8.6%.

Factor in the personnel, production and equipment woes of mining companies already struggling to keep up with demand, and you’ve got rising prices. South Africa’s electricity outages earlier this year also pushed the price of metals, including gold and platinum, to new highs. Platinum is 12% off its high.

Since ETFs that hold physical platinum were launched by London’s ETF Securities last year, the price of platinum has risen 52% and palladium is up 20%.

Fund companies looking to harness that growth have been launching a number of new products this year, including:

iPath Dow Jones-AIG Platinum (PGM): Launched on June 24
E-TRACS UBS Long Platinum (PTM): Launched on May 9
E-TRACS UBS Short Platinum (PTD): Launched on May 9
ELEMENTS MLCX Precious Metals (PMY): Launched on April 4; holds 32% platinum; 52% gold; 8% silver and 8% palladium
But unlike ETFs for platinum, the ETNs don’t hold the metal, which leaves the market unaffected. Instead, they buy or sell contracts in the futures market to replicate price movements.

Some have noted that demand for platinum has been tapering off, driven lower by the high prices. For years now, automakers have been replacing platinum with palladium, which isn’t as pricey.

Some automakers are looking to go even cheaper than that, as one mining company has developed a catalyst that uses silver for diesel-fueled engines.

Other ways to access precious metals include:

iShares Silver Trust (SLV), up 20.2% year-to-date
PowerShares DB Precious Metals (DBP), up 10.5% year-to-date
SPDR Gold Shares (GLD), up 10.2% year-to-date


Potash’s Positive Fundamentals Fertilize Agribusiness ETF
It’s been a nice day for both potash producers and agricultural ETFs.

A Goldman Sachs analyst said prices for the fertilizer are rising as a result of global demand and limited availability, since few countries produce it, reports the Associated Press. Farmers want to maximize their yield and profit, and the analyst says it’s all pointing to positive fundamentals. In North America, prices have shot up 45.9% year-to-date.

The top potash-producing countries are Canada (32%), Russia (31%) and Western Europe (19%).

The strongest consumers of potash are the BRIC countries (Brazil, Russia, India, China), which account for 43% of the global potash market, and demand is growing at 5% per year. Prices could double over the next two to three years as food demand increases, too, reports Theresa Tang for Bloomberg.

Potash is an impure form of potassium carbonate, and has been used since the 1300s in the manufacture of glass and soap, and as a fertilizer. Fertilizers that contain it improve crop yield by assisting plants in absorbing nitrogen and using water and sunlight more efficiently. It also helps plants fight insects and disease.

Companies highly tied to potash include Mosaic (MOS), Agrium (AGU), Intrepid Potash and Potash Corp. (POT).

Market Vectors Global Agribusiness (MOO) traded higher today, based largely on the analyst’s forecast, as the fund’s top two holdings are potash companies: Mosaic is 8.1%, while Potash Corp. is 8.4%. MOO is down 2.1% year-to-date. - Tom Lydon in seeking alpha

Potash still to go up

Potash Corp of Saskatchewan (POT) is poised for significant growth in the next five years as soaring grain prices give farmers the means to pay more for fertilizer, the company's chief executive said on Wednesday.

"We have a lot of pricing power. We're nowhere near peak pricing," Bill Doyle told investors at a Toronto conference held by RBC Capital Markets.

"We clearly aren't experiencing any demand destruction," he said, noting high grain prices support fertilizer hikes.

U.S. corn hit a record high of $7.56-1/4 per bushel for July SN9 futures on Wednesday because of concerns about flooding and excess rain in the U.S. corn belt.

Potash stock hit a fresh top of C$232.93 at the Toronto Stock Exchange on Wednesday, up more than 8 percent.

Potash, the world's largest fertilizer company, has seen its stock soar almost 200 percent over the past year as investors took note of concerns about world food shortages.