Truce in Potash Dispute Could Cause This Stock Could Surge 18%

For many consumers, the notion of a “cartel” can seem quite scary. The OPEC cartel spooked the oil markets so badly in the 1970s that gasoline prices surged as supplies grew scarce. Yet for industry producers, a cartel can be a wonderful thing. Controlled supply can help insulate them from price wars seen in most competitive industries.

So when news that a cartel of potash producers was unraveling hit the headlines, shares of Potash Corp. of Saskatchewan (NYSE: POT) quickly plunged from $40 to $30. News that the cartel may be back in place might quickly push this stock back up to the $40 mark.

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Potash is a key fertilizer ingredient that helps boost crop yields. It’s used on small farm plots and massive agribusiness tracts around the world. Roughly 70% is controlled by two regional consortiums: Belarusian Potash Company and Canpotex. Potash of Saskatchewan is a member of Canpotex and controls more than half the output, while Mosaic (NYSE: MOS) and Agrium (NYSE: AGU) account for the remainder.

Canpotex’s peer — the Belarusian Potash Company — has thrown this boring yet highly profitable market into turmoil. In late July, Russia’s OAO Uralkali decided to exit the Belarusian Potash Company cartel and fight for increased market share. Analysts quickly braced for a 25% plunge in potash prices as an uncompetitive market suddenly became competitive.

POT shares took a swift hit as analysts trimmed 2013 EPS profits by nearly 20% for 2013 and by nearly 30% for 2014.

Yet in the murky world of global cartels, such eventful moves rarely come without aftershocks. According to Bloomberg, in subsequent weeks the Belarusian government detained Uralkali’s general director, Vladislav Baumgertner, for “rolling out a criminal scheme to control potash exports” and issued an arrest warrant for Uralkali’s largest shareholder, billionaire Suleiman Kerimov.

By this point, analysts who follow the industry could only express exasperation. “Belarus’ action could heighten tension between Uralkali and Belaruskali and further diminish whatever slim hope there might have been for an expeditious reconciliation between these two members of BPC,” noted Merrill Lynch analysts in a note to clients on Aug. 26.

Still, a face-saving resolution to the crisis still looked to be the best strategy. “Potash accounts for 8% of [Belarus’] gross exports, so the country has much to lose in the event of a collapse in global potash prices. Consequently, we suspect that prospects for reconciliation and/or reconstitution of a cooperative marketing arrangement could improve over the longer term as rationality prevails,” added the Merrill Lynch analysts.

More than a month after the crisis first erupted, a resolution may be at hand. According to Russian news agency RIA Novosti, Uralkali’s Kerimov is seeking to unload his 22% stake in the company. That has led to speculation that the cartel will be pieced back together, which was the original desire of rival/partner Belaruskali.

And that would be great news for Potash Corp. of Saskatchewan. Though analysts have yet to comment on the rumors of a resolution, look for earnings estimates and price targets to move back to where they stood before the turmoil. And look for POT to move back up to the $40 mark once the entire issue has passed.

Recommended Trade Setup:

— Buy POT up to $34
— Set stop-loss at $28
— Set initial price target at $40 for a potential 18% gain in six months