K+S Downgraded Amid Poor Potash Economics

November 6, 2013 05:34 AM

Potash producers just cannot catch a break. Germany's K+S Potash's credit has been downgraded as the stock has been the worst performer on Germany's DAX this year. The downgrade was related to debt accrued during construction of its unfinished Canadian greenfield Legacy Mine Project, northeast of Buffalo Pound Lake in Saskatchewan.potashusgov l

Yesterday, we reported on Koch's increased holdings in Intrepid Potash as a means to spread risk and wait out the storm. Vale SA made headlines by exiting a South American play earlier this year, and the current economics of fertilizer production make the present day one of the worst times in years to start new projects.

But the Germans have a curious faith in potash. Uralkali recently acquired a huge loan for sinking two new potash shafts -- a loan with insurance coverage from Germany.

The operation underway at the Legacy Mine site has been compared to an oil drilling operation with two rigs running simultaneously in an effort to go operational sometime in 2017. Earlier this year, T+S forwarded a project budget totaling $3.25 billion but that number has been revised $850 million higher. Much of the added cost is related to infrastructure to support mine traffic.

Potash prices remain uncertain, but supply features coupled with tepid demand from end users is limiting any price strength potash might muster. The idea has been forwarded that the potash industry is getting its 'come-uppins' for years of inflated pricing, but U.S. crop prices are doing as much to keep buyers out of the market as any rumor from the Eastern Bloc.

Until corn futures recover, buyers will likely make purchases at the last possible moment. Nitrogen pricing at retail locations confirms that hand to mouth purchases rule the day, and in a climate of sliding prices, growers will hold out as long as they can before pulling the trigger.

MosaicCo reported yesterday that its operations are running below 65% of potash production capacity to combat overhang and to manage production costs. The downgrade to K+S's credit rating comes as a shock to that company, but as potash economics continue to erode profits for manufacturers, the future of the Legacy Mine Project may be left to the company's cash reserves.

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