Potash Corporation of Saskatchewan is an integrated fertilizer and related industrial and feed products company. During the year ended December 31, 2005, the Company's potash operations represented an estimated 17% of global production, 22% of global potash capacity and 75% of global potash excess capacity. In 2005, its phosphate operations represented an estimated 6% of world phosphoric acid production. During 2005, Potash’s nitrogen operations represented an estimated 2% of world ammonia production. The Company's potash is produced from six mines in Saskatchewan and one mine in New Brunswick. Of these mines, it owns and operates five in Saskatchewan and the one in New Brunswick.
Market Cap (intraday): 8.88B
Enterprise Value (13-Jul-06) 10.80B
Trailing P/E 17.35
The Capitalization structure fulfills investment grade criteria. There are no areas that suggest imprudent practice.
Profit Margin 15.70%
Operating Margin 23.81%
There has been a marked improvement within profitability by comparison with the aggregate. It is this rather marked improvement that delineates the potential for a successful investment, or a speculative operation that may not play out quite as planned.
Total Cash 172.70M
Total Cash Per Share 1.666
Total Debt 1.86B
Total Debt/Equity 0.829
Current Ratio 0.955
Book Value Per Share 21.677999
I would be concerned with regards to the Current ratio. This weakness in the Working Capital limits the flexibility of the company to respond to either adverse or positive opportunities. The weakness of the Current Assets in relation to total debt is also very weak. The issue is currently priced to reflect only positive outcomes.
The management is excellent controlling costs and margins very well. In some regards this may balance or offset to some degree the weakness within the Balance Sheet. Cost controls improved adding to the bottom line, but there is probably little improvement available for increasing earnings any further in this manner. [Earnings via cost reductions were in any case marginal]
There are no discretionary or hidden cash-flows available in the future to bolster or maintain earnings, the ship is running very lean currently, any surprises would be to the downside.
So what’s the story?
The story is Ethanol. With the shift of US energy policy towards the reduction of oil within GDP, there has been a huge move towards Ethanol based securities. This move started actually some twelve to eighteen months ago. POT as a producer of potash, which is the primary fertilizer utilized to replenish soils where corn is grown, benefited tremendously from this speculative surge.
The question really becomes twofold; in the first instance will corn based Ethanol become the predominant Ethanol fuel, or will sugar based Ethanol win the majority share of the market? The second component of the question becomes, if, corn Ethanol wins market predominant market share, how is this currently reflected in the market price for POT?
The first question is difficult to answer and can be considered pure conjecture at this point in time.
However, assuming for the moment that corn Ethanol does dominate, we can value the shares currently based on this intangible component, thus coming to a rational investment decision.
Currently the Market, in its wisdom is valuing the productive assets as requiring a 13.85% return to maintain the earning power.
This exceeds the best returns achieved by a factor of almost two. Therefore, should corn Ethanol not dominate the market in the future, we can safely conclude that the earnings will not support the current market price.
The earnings currently required by the market on the Intangible component are some 2.56%. Should corn Ethanol fail to command dominant market share, we can safely conclude that the Market’s requirement will rise, thus necessitating a fall in the share price.
On that basis, we can conclude that should Corn Ethanol not actually pan out, there will be a rather drastic revaluation.
What if Corn Ethanol does dominate the market?
Again, the return being valued into the Tangible assets have not ever....come remotely close to that return. Thus, the market must continue to value the Intangibles at this remarkable level. This is most unlikely.
I have calculated two scenarios, each based on a different assumption.
Based on Corn Ethanol being superseded by Sugar Ethanol;
Value range $35.02 to $48.54
Based on Corn Ethanol being market dominant;
Value range $71.20 to $96.24
Based upon the speculative nature of the business prospects currently I would recommend only a small speculative position if, you believe that Corn Ethanol will win market share, buying as close to the low seventies [or lower] as possible.
I would personally only purchase if I could purchase on the basis of established earning power independent of speculative pricing.