EUR 850.00 For Business Accounts Only

Morningstar | Trimming Our K+S FVE to EUR 18 as Geological Issues Will Increase Potash Production Costs. See Updated Analyst Note from 14 Aug 2018

As detailed in its second-quarter results, K+S continues to be plagued by German potash production issues that will reduce volumes and increase unit production costs. Having updated our valuation model for lower volumes and higher costs in both the near term and long term, our fair value estimate falls to EUR 18 per share from EUR 19. Our no-moat rating remains intact.

In potash, K+S continues to deal with production issues at its older German mines, and some of the challenges are related to geology. Although management is hiring consultants to lead cost-cutting projects at its German operations, we doubt the cost savings will offset the geological issues. As such, we have increased our near-term and long-term unit production costs for the company's German potash production. Further, as the nutrient content continues to decline, we expect the company's potash production volumes to be reduced. We've lowered our long-term German potash production assumptions to 7 million metric tons per year from 7.5 million.

In salt, the company is expecting higher deicing salt prices in the upcoming winter, which is consistent with the outlook provided by competitor Compass Minerals. Following the harsh 2017-18 winter, we had previously assumed K+S would be able to realize only a mid-single-digit pricing increase, but a larger increase now appears likely. However, we note that at least half of the price increase will be offset by higher transportation costs. Regardless, our long-term outlook for the salt segment is unchanged. We continue to expect K+S to sell around 23 million metric tons of salt per year, assuming normal winter conditions.