Potash Cuts Back Production, Plenty of Profit Remains

Potash Corp. of Saskatchewan Inc.'s (POT) decision to cut back potash production will hit the bottom line but analysts say there will still be plenty of profit left to help drive the stock higher in 2009.

Shares in Potash were up 7% to C$84.25 in Wednesday's mid-afternoon trading.

"PotashCorp's production announcement is consistent with its strategy to match supply to market demand," said RBC Capital Markets analyst Fai Lee, following the news that Potash will cut potash output by 2 million tonnes in 2009.

He said PotashCorp will have about 11 to 11.5-million tonnes of effective production capacity in 2009 and potash sales volumes in the year will be around 9 million tonnes versus the previous estimate of 9.7 million tonnes.

The analyst wrote:

Based on an assumed realized potash price of C$800/tonne, a reduction in potash sales volumes of 700,000 tonnes has an estimated 2009 EPS impact of approximately C$1.00.

He reduced his 2009 EPS estimate from C$18.13 to C$15.02 to reflect the lower forecast potash sales volumes and his lower estimate for phosphate prices next year. Mr. Lee dropped his price target on the stock from C$175 to C$145 and maintained his "buy" rating.

Canaccord Adams analyst Keith Carpenter also maintained his "buy" rating and left his $130 price target unchanged.

Just a little over two weeks ago, Mr. Carpenter called for a potash output reduction of just 1 million tonnes to 10.2-million. While the cut was larger than he expected, Mr. Carpenter said he was not surprised by the announcement, remaining bullish on the prospects for Potash Corp., particularly in the second half of this year.

The analyst said:

With 70% exposure to potash and their growth profile beyond 2009, we remain constructive on Potash Corp. going forward. We reiterate that catalysts will remain absent from the fertilizer producers until March 2009, when we expect Chinese potash negotiation to be completed and the demand for fertilizers in the northern hemisphere to begin to pick up.