K+S AG says a $4 billion Canadian potash mine is crucial for the 124-year-old company which was among the first to mine the fertilizer. A looming price war has investors urging it to kill the project.
The company plans to develop the Canadian plant, dubbed Legacy and its biggest investment ever, to augment and replace declining reserves at its aging, high labor-cost German mines. The project’s promised return on investment is questioned by investors after OAO Uralkali, the world’s biggest potash producer, withdrew from an export sales venture with Belarus to end output curbs in the $20 billion industry.
“It would be sensible for the market if greenfield projects were delayed or canceled,” said Gerd Schubert, a Deka Investment fund manager, who helps manage 177 billion euros ($236 billion) including almost 1 percent of K+S, according to data compiled by Bloomberg. “Management should be flexible.”
K+S shares have dropped 29 percent in Frankfurt trading since Uralkali said July 30 that the fertilizer may tumble to less than $300 a ton from more than $400 as the Russian company seeks to ramp up to full production capacity. Still, K+S Chief Executive Officer Norbert Steiner said he’s planning to push ahead with Legacy, even as the project needs a price of $420 to earn its budgeted return.
‘In Our Minds’
Steiner has said he won’t make any hasty decisions on strategy as there are no clear indications as to whether prices will drop as Uralkali predicted. Price forecasts in the crop-nutrient industry are “incomprehensible” and most of the potash turbulence “is only happening in our minds,” he said on an Aug. 13 analyst call.
Indicative prices for potash, a form of potassium that strengthens plant roots and helps crops resist drought, are set in periodic negotiations with the biggest importers, including China and India. China agreed in January on a price of $400 a ton for shipments in the first half, while India signed contracts to pay $427 a ton until January 2014.
Until the partnership’s breakup, Uralkali’s venture with a company in Belarus, and a separate group comprising Potash Corp. of Saskatchewan Inc., Mosaic Co. and Agrium Inc., limited output and exports to match demand and prevent price swings.
“Even if the Russians took everything back as fast as they announced it, the news is already in the market,” Holger Frey, a fund manager at Deutsche Asset and Wealth Management, said in an interview. “I can’t imagine the Chinese will accept a price of $400 again. The price will certainly suffer.”
DeAWM has 346 billion euros in assets under management, including a 2.5 percent stake in K+S, according to data compiled by Bloomberg.
Three days after Uralkali’s announcement, India’s biggest potash importer said it would seek to renegotiate with all its suppliers to get the best price. Industry publications Fertilizer Week and Argus FMB reported deliveries this month showed a price drop by between $40 and $50 a ton in Brazil.
Today, K+S shares rose as much as 1.5 percent to 19.15 euros in Frankfurt trading. The stock was up 1.1 percent at 19.09 euros as of 1:47 p.m. local time.
Investors have been betting on K+S’s decline since Uralkali’s announcement at the end of July. The most recent and biggest short position is held by hedge fund Viking Global Investors LP, which has a bet on 3.1 percent of the company’s shares, according to data compiled by Bloomberg. Citadel Europe LLB and Vollero Beach Capital Partners have also this week increased their bets that K+S stock will fall, the data shows.
K+S, whose roots go back to the middle of the 19th century when the first fertilizer factories were established in Germany, expanded into Canada in 2011 with the acquisition of Potash One Inc.
“On the basis of the price named by the Russians, it’s not economically feasible,” Deka’s Schubert said of Legacy.
Other potash companies are also under pressure from investors to reconsider investments plans. In Saskatchewan, BHP Billiton Ltd. is developing a mine called Jansen, which Citigroup Inc. analysts estimate may cost $16 billion.
BHP said it will proceed with Jansen even though Blackrock, the Australian company’s biggest investor, called the plans “misguided.” CEO Andrew Mackenzie said on Aug. 20 that he seeks partners for the project and the board had approved further spending of $2.6 billion over the next four years.
Uralkali CEO Detained
This week, Belarus officials detained Uralkali head Vladislav Baumgertner, who is also chairman of the countries’ joint marketing venture, after inviting him to Minsk for talks. He is charged with abusing his office and if found guilty, could face as many as 10 years in prison, according to Pavel Traulko, a spokesman for Belarus’s Investigative Committee.
The stock had slumped 40 percent in the six days following the Russian CEO’s statement, reaching 15.92 euros on Aug. 6, the lowest price since October 2006. The company’s market value has dropped to 3.6 billion euros, making K+S a potential candidate to drop out of the DAX index in September after five years in the benchmark index.
K+S’s plan to fund the development of its new Canadian mine with cash flows and debt is looking increasingly difficult, John Klein, an analyst at Berenberg Bank, said in an interview. As a result, the company needs to consider whether it should focus on other parts of its business.
“It’s time to question whether K+S can, in the long term, remain a viable potash producer,” Klein, who recommends selling the shares, said in a note to investors. “The company is the highest-cost producer among the global export producers. Given its position on the cost curve, K+S will need to rethink its strategy. It cannot simply adopt a wait-and-see approach.”
A week after Uralkali’s announcement, K+S said it won’t meet its forecast for earnings to rise “slightly” this year.
The company’s name, K+S, stands for Kali and Salz, which means potash and salt in English. The potash unit brought in about 60 percent of revenue. The salt division, bolstered by the $1.7 billion purchase of Morton International from Dow Chemical Co. in 2009, suffered last year after a mild winter led to a lack of demand for de-icing salt for roads.
Even if potash prices recover in the long-term, K+S may be forced to focus on its salt division, Berenberg’s Klein said
“S could be left without its K,” the analyst said. “Prices in the global market will eventually recover in the mid-term, as a significant part of planned capacity expansions will potentially be scrapped or delayed; but this will be too late for K+S.”