Chris McKay, PotashCorp load-out supervisor at the Cory Mine, examines potash inside one of the storage facilities near Saskatoon, Saskatchewan October 10, 2013.DAVID STOBBE/Reuters
During the two weeks ending Oct. 31, short selling in shares in Potash Corp. of Saskatchewan Inc. soared by 15.3 million, the largest increase on the Toronto Stock Exchange (POT-T). This jump doubled short interest to 30.4-million shares, signalling a substantial escalation in bearish sentiment for the Saskatoon-based supplier of potash, nitrogen and phosphate fertilizers.
Potash Corp. also trades on the New York Stock Exchange (POT-N). If short selling there is added to the TSX position, the total comes to more than 42 million (estimated), the highest level in 2015, so far.
The catalyst for the bearish breakout was the release of the company's third-quarter financial report at the end of October. Ahead of the report's release, short sellers likely raised their bets in anticipation of the company missing the consensus earnings forecast from analysts. After all, the company fell short of analysts' projections in three of the past four quarters, according to Zacks.com.
As it turned out, the third-quarter report (in U.S. dollars) did come in below expectations, triggering a sell-off in the stock. Profits slipped by 10 per cent to 34 cents a share, missing Zacks.com's consensus estimate of 38 cents a share.
Management provided additional fodder for the short sellers by announcing a downward revision in the outlook for its markets, and a cut of 500,000 tonnes in potash output. Profit projections for 2015 were also lowered.
In short, Potash Corp. is facing a number of headwinds:
· sluggish economic growth is lowering demand for fertilizers globally
· the market is oversupplied due to new mines opening in response to past high prices for potash
· a new Chinese value-added tax makes potash more expensive to its farmers
· changes in the taxation of Saskatchewan producers impacts profits and competitiveness
· lower prices and reduced acreages for corn in North America; dry crop conditions in India
· pricing power has been weakened by the 2013 dissolution of the potash cartel (members include Belarusian Potash Co., OAO Uralkali and Canadian firms).
Potash Corp. took steps toward reigning in excess supply earlier this year by launching a takeover bid for K+S Aktiengesellschaft. However, in the face of stiff resistance from the company's executives, along with deteriorating market conditions, the bid was withdrawn in early October. Short sellers were likely emboldened by this failed attempt at reducing competition levels in the industry.
The year 2015 has been good to the short sellers: Potash Corp.'s share price has cratered by about a third since January. But the world's largest integrated fertilizer company has a competitive edge thanks to its low cost structure and strong balance sheet. Its stock could begin to receive support from value investors attracted to valuations near trough levels, and a dividend yielding more than 7 per cent.
S&P Capital IQ analyst Christopher Muir recently upgraded his recommendation on Potash Corp. from "hold" to "buy". He sees it "benefiting from increased demand for fertilizers over the long term, driven by a combination of population growth and improved diets worldwide.
Potash Corp. "is better positioned than most peers to meet this increased demand on account of the location of its reserves and generally lower capital costs tied to its capacity expansion plans," adds Mr. Muir. "However, in the short term, we see challenges relating to a weakening overseas economy."