EUR 850.00 For Business Accounts Only

Morningstar | Trimming Our K+S FVE to EUR 17.50 as Environmental Issues Continue to Weigh on Near-Term Results

K+S continued a tough 2018 as low rivers plague its German potash operation. In its earnings release, management lowered full-year EBITDA guidance to a midpoint of EUR 600 million from the previous midpoint of EUR 700 million. Having updated our model to reflect lower near-term results, we reduce our K+S fair value estimate to EUR 17.50 per share from EUR 18. Our no-moat rating is unchanged.

During the quarter, a drought in Germany led to lower rivers, restricting K+S' ability to discharge waste at a couple of its potash mines and thus slowing production. Further, the low rivers also resulted in ships having to transport K+S' product at well below full capacity, which increased logistics expenses. The German production issues were partially offset by the continued ramp-up of the new low-cost Bethune potash mine in Saskatchewan. While we have lowered our near-term potash sales forecast to 7.5 million metric tons, we continue to forecast that K+S will be able to restore German potash production as the company begins to discharge wastewater in old mine areas, which should lower the reliance on river levels. As such, we forecast long-term potash production of 9.5 million metric tons, including Bethune, up from 6.7 million metric tons in 2017.

Potash prices continue to be supported by lower production from SQM, K+S, and Israel Chemicals, combined with a slower-than-expected production ramp from EuroChem. We continue to forecast $300 per metric ton potash price in 2019, with a long-term potash price forecast of $310 per metric ton.

On the earnings call, management noted that deicing salt prices and bid volumes will be up for the winter as strong demand in the U.S. Midwest and improved demand in Canada and Europe are partially offset by weaker demand in the U.S. East Coast. While we continue to forecast higher deicing salt prices in 2019, volumes will ultimately be determined by winter weather as contracts allow municipalities to purchase between 80% and 120% of the midpoint volume.