Potash Corp. (POT): Potash inventory update - market remains tight despite modest rise - Goldman Sachs - March 16, 2008 Canada
News
Following historical patterns, North American potash producers' inventories increased modestly in February, with inventory levels up nearly 93,000 metric tons (or 6%) from January levels (which, in turn, declined 3% or 53,000 tons from December). Global and North American inventories remain low, with North American levels (~1.6 million tons) down 33% yr/yr and 34% below the 5-year average. This is occurring despite zero shipments to China (contract has expired). The modest increase in February is not a reflection of demand trends as global demand remains extremely strong with buyers remaining on allocation.
Analysis
The continued tightness in the potash market validates our positive stance on PotashCorp (POT) and Mosaic (MOS). No new news on the Chinese and Indian contract negotiations. In the domestic market, a series of price increases had been announced and implemented since October/ November, with the last one to be implemented by mid-April. Our latest channel checks indicate that buyers are bracing themselves for another round of price increases and it's a similar story in Brazil and Southeast Asia.
Implications
We remain aggressive buyers of POT and MOS at current levels. We reiterate our Conviction Buy on POT and our 12-month PT of $180 based on 14X our conservative 2009E EV/EBITDA. We believe the greatest long-term opportunity for POT lies in its growing potash capacity. With most global producers at full capacity and limited opportunity for expansion, POT is in the best position to supply capacity for growing potash demand and will benefit from volume and pricing leverage. Similarly, as the second-largest producer of potash, our Buy-rated MOS will benefit from the tight fundamentals and we reiterate our 12-month PT of $135 based on 11.5X our CY2009E EV/EBITDA. Risks to our price targets are significantly lower ag commodity prices. |
