Tuesday, December 22, 2009

Potash (NYSE:POT): BPC Reaches Agreement on 2010 Chinese Potash Contract Price Per Industry Sources - RBC Capital

RBC Capital is out with a pretty significant call on Potash (NYSE:POT) saying industry trade publications (i.e., Fertilizer Week and FMB) are reporting that the Belarusian Potash Company (BPC) and Chinese buyers have reached an agreement regarding the 2010 Chinese potash contract.

Pricing Could Be Close to Low Case Scenario. It is understood that the price under the yet-to-be signed agreement is $350/tonne CFR (i.e., ~$320/tonne FOB Vancouver or ~$290/tonne FOB Saskatchewan) for 1 million tonnes of product. This price is approximately $70/tonne lower than the contract price implied in RBC's 2010 financial forecasts. The reported price is closer to the "Ugly" scenario than the "Not So Bad" scenario outlined in their October 21, 2009 PotashCorp Morning Comment.

Maintaining Estimates. Firm is maintaining their financial forecasts pending further review. While BPC may have reached an agreement, it is not clear yet whether Canpotex has reached a similar agreement with the Chinese buyers.

Near-term Downside Pressure on Potash Producers' Share Prices. In light of the reported contract price, the firm believes valuations for global potash producers could face some near-term downside pressure. While the pricing may be lower than market expectations, they believe the contract will establish a floor price for the potash market and thus provide certainty for investors going forward, which is positive.

Recommendation. Given the potential for a market over-reaction, RBC recommends investors look for potential buying opportunities in the event of significant share price weakness based on their outlook for an eventual rebound in potash pricing.

Notablecalls: $290/tonne FOB Saskatchewan is below market expectations. I've been pouring over the Chinese contract price expectations over the last couple of weeks and I think the expectation were in the $350-$400/tonne range (FOB Sask).

For example, yesterday CIBC was out noting there was speculation that the Chinese MOP contract could be settled shortly and we believe pricing will be settled in the ~US$375-US$400/t CFR range (previously they had assumed a price of US$400+/t CFR).

In terms of trading dynamics Goldman Sachs put POT in their Conviction Buy list yesterday in hopes of solid pricing (above $300/tonne). RBC's comments will create selling pressure from these players.

I think POT will trade towards the $105 level today and maybe even lower if the $105 level breaks with volume.

As one of my best trading buds noted this morning: 'if it breaks $105, say hello to par'

Also watch MOS, IPI on this.


notablecalls said...

With POT now in green I can officially call it a FAIL.

Did reach 105 in pre mkt but guess I underestimated the 15 pt drop from the highs and the dip-buying nature of this market.

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