Potash profits A Crock of Dividend

K+S, a leading potash and the world's largest salt producer, has coped better than expected with the global slump in potassium prices. Cost-cutting helped contain its profit decline and it is predicting a return to growth this year.
Digging deep to sell valuable potash and salt: K+S's core business.

Shareholders in K+S, the European Union’s biggest producer of potash for use in fertilizer, will be treated to a sharp dividend hike at Tuesday’s annual general meeting.

The payout of €0.90 per share, or $1.01, after €0.25 for 2013 is still some way off past dividend levels but it heralds a sense of optimism in the smallest member of Germany’s 30 leading DAX blue chip stocks.

The group, which is also the world's biggest salt mining firm, has weathered two difficult years since “Black Tuesday” at the end of July 2013, when one of the two big cartels controlling the potash market, consisting of world potash producer Uralkali and Belarusian Potash Co., fell apart. It sent world potash prices plummeting.

The drop continued to impact K+S results last year because potash prices were still down seven percent at €274 per ton on average from the previous year. As a result, K+S reported another decline in revenue and profit in its main division of potash and magnesium products.

A total of €120 million was saved in 2014 and the group aims for a similar saving this year.

K+S, which letters stand for "Kali + Salz", or "Potassium + Salt", is the fifth-largest company in the potash market and has been mining and processing mineral raw materials for 125 years. Its products are used not just in farming but in food, for gritting roads and in industry.

Despite the drop in potash prices, the group performed better than many analysts and the chief executive, Norbert Steiner, himself, had expected. The share price has jumped by more than a third since the start this year, returning to levels before the July 2013 potash shock.

Group revenue slipped by just three percent to €3.82 billion in 2014, despite the price slump. Operating profit fell just 2.3 percent to €641 million, a smaller decline than predicted. The price-related setbacks in the potash business were almost completely offset by rising income from the group’s salt production business and by the positive impact of a savings program launched in 2012.

Including profits from hedging deals, earnings before interest and tax even grew by six percent.

Group net profit fell by almost eight percent to €381 million, which was in line with the industry trend. The drop was partly due to increased tax payments in 2014 following a tax reform in Chile, where K+S has a subsidiary. The bottom line was also squeezed by a sharp rise in interest payments, largely related to the so-called “Legacy project”, the construction of a new potash mine in Canada.

Despite the market turbulence, potash remains the main pillar for the group. Salt production is almost as big now in terms of revenues but it generated only 27 percent of group operating profit last year, despite a big increase in earnings. The severe winter in North America boosted demand for road salt. But in Europe, the mild weather hit sales, especially in the first quarter of last year.

 

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Chief executive Mr. Steiner said the biggest boost to group earnings came from an efficiency program launched after “Black Tuesday.” A total of €120 million was saved in 2014 and the group aims for a similar saving this year.

But despite the efficiency gains, the group’s production costs, amounting to 58 percent of revenues in 2014, are high by comparison with just 26 percent at its biggest competitor, Russia’s Uralkali, which has far lower energy and labor costs. Potash Corporation, a Canadian competitor, also produces more cheaply, with a ratio of 54 percent.

In the Canadian province of Saskatchewan, potash is mined more cheaply through a process of solution mining whereby potash is flushed to the surface by injecting a solution consisting of water and salt into the ground. The production costs are lower than with conventional underground mining, and K+S has been investing heavily in Saskatchewan to boost its profits. The Legacy project, which is costing $4.1 billion Canadian dollars, or $3.39 billion, is due to go into operation in the summer of 2016.

The group invested €600 million in the project in 2013 and a further €1 billion in 2014. That has pushed its free cash flow into negative territory, to minus €312 million in 2014 from €36 million in 2013. K+S obtained the necessary funds in 2013 by issuing two bonds. The investments drove net debt up 60 percent to €1.68 billion last year. Unlike many of its peers, the company includes mining-related provisions and pension reserves in that figure. At 1.9 times earnings before interest, tax, depreciation and amortization the debt level is still moderate.

The investment in Canada will continue to burden the balance sheet this year and won’t start generating profits for a few more years yet. Meanwhile, the market price for potash will remain a source of uncertainty because the industry, effectively an oligopoly, has surplus capacity, according to some market analysts. But Mr. Steiner remains confident about prices. “We assume none of the big suppliers has an interest in starting a price war in the potash market,” he said in March.

And he’s upbeat for 2015, forecasting a slight rise in revenue and a significant increase in profit. The company is benefiting from higher prices in both its business segments, potash and salt, and from the stronger dollar. At an exchange rate of $1.05 to the euro, for example, operating profit would even show double-digit growth.

 

Maike Telgheder is an editor at Handelsblatt, covering the health economy, pharmaceutical companies and chemistry. To contact the author: [email protected]