October 27, 2009 / 6:29 PM / 8 years ago

BUY OR SELL-Conflicting scenarios seen for Potash Corp

* Potash demand will rebound in 2010, boosting shares

* Potash pricing likely to fall further, weigh on stock

TORONTO, Oct 27 (Reuters) - Potash Corp of Saskatchewan (POT.TO) recently reported an 80 percent decline in quarterly profit, as fertilizer demand and pricing have collapsed from year-earlier levels.

The company, the world’s largest producer of potash, still sees a rebound in demand for the crop nutrient in 2010, but cautioned that some of its potash production capacity will remain idle in 2010. [IDnN22505738]

Most analysts agree that the steepest decline in potash demand ever recorded is behind us, but questions on the viability of current pricing still linger.

Two analysts who recently initiated coverage of Potash Corp have conflicting views on the near-term prospects of the company’s stock.

ROOM TO GROW

Genuity analyst Christine Healy has initiated coverage of Potash Corp with a “buy” rating and a C$130.00 price target.

“We believe Potash Corp’s shares will move higher over the next 12 months, largely due to positive long-term industry fundamentals and an expected recovery in potash demand in 2010.”

Healy believes that developing economies will increase their potash usage in coming years, resulting in greater demand growth for the crop nutrient.

“We believe the significant potash production cutbacks in 2009, strong consumption growth and the escalated time and cost required to build a greenfield project are supportive of a ‘stronger for longer’ thesis for potash prices.”

“The recent increase in Chicago Board of Trade corn and wheat prices, lower-than-expected Indian grain production in 2009, a pending potash contract with China and low potash inventories around the globe are all supportive of a turnaround.”

DOWNSIDE RISKS WEIGH

Dahlman Rose & Co analyst Charles Neivert is bearish on Potash Corp’s near-term prospects, as he expects potash prices to remain under pressure.

“We see downside risk for Potash Corp shares into 2010 based on our belief that another price reset is in store for potash. In addition, we see the recovery in demand for potash being weaker than the current consensus view.”

“The combination of weakening price and a less constructive volume outlook may lead to lower margins.”

Neivert, who has a “sell” rating on the company, notes that Potash Corp’s long-held strategy of controlling supply to meet demand poses a problem for the company, given current demand conditions and the level of excess capacity.

”In the current market, almost every producer of significance has slack capacity, oversized inventory and some capacity expansion at reasonable cost available to them. Therefore, holding back production until the market clears up may take years of lower operating rates.

“This becomes a more expensive proposition than it was historically as the company may be forced to leave recently expanded capacity idle or underutilized.” (Reporting by Euan Rocha; Editing by Frank McGurty)

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