Thursday, January 17, 2013
Don't Root for Fertilizer Prices
Dundee lowered estimates for potash, phosphate and ammonia/urea prices.
Dundee Capital Markets
We are introducing our updated fertilizer-nutrient price deck. We have reduced our potash price forecast based on the recent China contracts and reduced pricing in the Midwest. We have increased our prices in nitrogen (although note we expect them to be down over last year). Phosphate prices have been reduced modestly. Year-on-year, we are forecasting potash prices to be down 14%, phosphate prices down 3% and ammonia/urea prices down 6%/18% in 2013.
While upside to target is narrowing, we continue to like Agrium's (ticker: AGU) (rated at Buy) exposure to North American nitrogen (expecting less volatility and relatively high margins due to sustained gas price differentials) and the Retail segment. We expect to hear more from Jana Partners as they push for continued operational improvement and insight into the Retail segment. No change to the $116 target price (sum-of-the-parts valuation, 7.3 times 2013 estimated earnings before interest, taxes, depreciation and amortization (Ebitda)); fourth-quarter and 2012 estimated earnings per share decreased modestly to $1.48 and $8.75, respectively, (were $1.57 and $8.84); 2013 estimated Ebitda and EPS relatively unchanged at $2.584 billion and $9.50, respectively, (were $2.569 billion and $9.49; consensus is $2.609 billion and $9.74).
Potash Corp. of Saskatchewan (POT) (rated at Neutral) trades at 8.5 times forward-12-months consensus enterprise value (EV)/Ebitda and 9.0x our 2013 estimated Ebitda. Multiples recently reached recent trading-range highs and we believe there is downside risk to consensus estimates. We believe volume will be stimulated by lower prices in 2013 (and is required to move inventory); however, remain cautious on fundamental demand, notably in India until the subsidy program is modified. We expect continued valuation headwinds primarily related to excess global capacity. No change to the $42 target price (8.5 times 2014 estimated Ebitda); fourth-quarter and 2012 estimated EPS increased modestly to 59 cents and $2.90, respectively, (were 55 cents and $2.86); 2013 estimated Ebitda and EPS reduced to $4.220 billion and $2.99, respectively, (were $4.529 billion and $3.26; consensus is $4.496 billion and $3.19). We are cautious on the recent rally in the stock price (up 10.3% since mid-November and 1.8% year-to-date).
Investment highlights for Elemental Minerals [traded in Toronto] (rated at Buy) include: 1) high-grade, high-purity and shallow deposit; 2) potential for upside with hangingwall-seam resource; 3) conventional mine with Sylvinite resource (proven methods); 4) proximity to coast and Brazil; and 5) infrastructure support, potential for outsourcing opportunity. Target price reduced to $1.10 Canadian (was C$1.30), based on 13.5% discount rate and 0.6 times discounted-cash-flow multiple; model continues to assume underground mine starting in 2017. We have updated our model to reflect the recent financing (US$18.1 million). The key change in our model was the reduction of our long-term potash price assumption to $415 per metric ton (was $450) free-on-board Vancouver (standard).
-- Carolyn Dennis
-- Amir Ahmad