LONDON (ICIS)--Further falls in potash prices or an increase in production costs could threaten the development of Legacy, a 2m tonne/year potash project being pursued in Canada by Germany-based fertilizer producer K+S, analyst Bernstein Research said on Wednesday.
The US-headquartered firm claims that company’s planned capital expenditure spending will be unsustainable if prices fall, which both Bernstein and K+S itself say is likely to occur.
“Any further potash price declines or delays in the start-up of Legacy will be devastating to K+S’ financial position as early as next year,” the analyst said in an investor note.
The Legacy project is currently being developed in Saskatchewan, with completion expected in 2016 and full capacity to be reached by 2017. Bernstein said that outright cancellation of the project is unlikely, but market conditions could lead to measures such as a debt issue.
K+S CEO Norbert Steiner reaffirmed the company’s commitment to the project in August 2013, but Bernstein claims that Legacy's ramp-up costs “have been underestimated all the way through to 2020” and that “further cost increases remain a downside risk.”
K+S slashed its full-year dividend by 82% to help finance Legacy after reporting a 47% year-on-year drop in group earnings for the fourth quarter of 2013. The company is also looking to cut costs by $670m between 2014 and 2016, which Bernstein predicted would hold costs constant excluding the Legacy ramp-up.
“K+S is a high-cost producer and most negatively impacted by price declines; market share overseas is especially at risk. The Legacy project offers a questionable return, which could result in its cancellation (unlikely) or another large debt issue,” Bernstein said.
“We see further risks – lower priced potash deals, falling SOP [sulphate of potash] price, project delays [and/or] cost over-runs – with few mitigating factors,” it added.
According to Bernstein, further declines in K+S’ effective potash price are likely over the next few years, as its current effective potash prices are at unsustainably high levels compared to market benchmarks, and long-term market trends are likely to further impact that issue.
K+S’ effective potash price is likely to fall from €271/tonne in the fourth quarter of 2013 to around €240/tonne in 2015.
Bernstein’s current worst-case scenario for potash pricing under the next few years is that values will fall to $250/tonne Vancouver standard and €219/tonne northwest Europe, while its base case pegs prices at $310/tonne Vancouver, and its bull case at $350/tonne. Under the bear case scenario, Bernstein would deem K+S shares worthless, the firm said.
Bernstein currently rates K+S as likely to underperform in the general market, with a target share price of €12/tonne. The producer’s shares were trading at €22.98 as or 11:39 GMT on 19 March.