UBS analyst Brian MacArthur and team explain why they upgraded Potash Corporation of Saskatchewan (POT) to Buy from Neutral today:
Potash Corp Potash Corp is positioned to benefit from a significant ramp-up of low cost production through 2017 as its new Rocanville and Picadilly operations enter production. In the near-term the planned closure of Mosaic’s (MOS) Carlsbad operations in January 2015 and the current flood at Uralkali’s Solikamsk-2 mine could remove up to 2.4-3.4Mts of combined capacity from the market and provides the opportunity for Potash Corp to gain more volumes. Furthermore, this could also lead to higher pricing.
The current expansion at Rocanville and ramp-up at Picadilly will increase Potash Corp’s production capacity by nearly 4Mts and should contribute to materially lower costs. In addition, as these mines ramp-up through 2017 capex will decline and free cash flow should increase. In 2015 we expect free cash flow of ~$1.4B but even assuming flat pricing this could grow to $2.3B by 2017 as sustaining capex will drop to $800M per year.
Potash Corp’s dividend currently yields ~4% and we believe it provides downside protection given that the dividend can be funded even if potash prices remain flat. In fact over time we believe management may be able to return excess cash to shareholders through an increased dividend or further share repurchases.
Shares of Potash Corporation of Saskatchewan have gained 1.5% to $35.81 at 2:46 p.m. today, while Mosaic has risen 1.8% to $46.
No comments:
Post a Comment