RBC Analysts Expect Potash Corp. Stock to Double

Even as sharers of Potash Corp. of Saskatchewan Inc. (POT) are plummeting today, falling by more than 4% to under C$158 in mid-afternoon trading, RBC Capital is expecting the stock to more than double to C$375 as Chinese potash buyers begin negotiations for a pricey new contract in Seattle, Wash.

Analysts Fai Lee and Owen Martin say in a research note that Potash Corp., one of the world's largest potash producers, is currently trading at a flat realized potash price of $430 per tonne (about $530 per tonne delivered), but RBC believes this is far below market prices which range between $900 and $1,100 per tonne.

They also point out that the Belarusian Potash Company is expecting to squeeze higher contract prices out of the Chinese, while Uralkaliy OAO, a Russian potash company, predicts the negotiations will bring prices closer to spot (to about $1,000 per tonne from $640).


The analysts' report says:

(This is) consistent with our view that Potash Corp. Is very attractively valued.

Uralkaliy also made several statements in its recent second quarter conference call that will benefit Potash Corp. The Russian company plans to start production at its proposed Mine-5 greenfield potash mine in 2013, but more importantly, Urakaliy would sacrifice sales volume for higher prices.

The report said:

We believe this is a significant statement and very positive for potash prices in the long term.

On Tuesday, Uralkaliy announced that is had been awarded a tender from Bangladesh at $1,100 per tonne for October delivery, with other markets likely following suit as early as 2009.

RBC Capital derive its share price target from a valuation multiple analysis and discounted cash flow analysis based on an equity discount rate of 8.75%. The price reflects a 2009E Enterprise Value//Earnings Before Interest Depreciation Taxation and Amortization multiple of 8 and a Price/Earnings multiple of 13.5x, plus C$90 per share for future potash expansion projects.

There are numerous obstacles to achieving this growth, however. An unexpected decline in global demand, a drop in fertilizer prices, negative government intervention in China and India, and even a rail-car shortage for carrying potash could all leave Potash Corp. short of its target, the analysts say.