Standard & Poor’s upgrades Potash Corp., sees strong demand for fertilizer

World number one fertilizer company Potash Corp, received a fillip from Standard & Poor’s on Wednesday after the ratings agency upped the company’s rating to stable from negative and reaffirmed its investment grade corporate credit rating of A-.

S&P believes Potash Corp. will benefit from strong fundamentals in the potash business and from the fact that its mines are considered low cost and have long reserve lives. Potash Corp, worth some $46bn on the stock market, has attracted renewed interest from investors on the back of rising global food prices, record earnings at the company, and after a $40bn hostile takeover bid was scuppered by the Canadian federal government in November last year.

Standard & Poor’s analyst Jatinder Mall believes:

“The stable outlook reflects Standard & Poor’s view that strong demand for
potash and fertilizers in general will lead to even greater profitability in
2011 allowing the company to use discretionary cash flows to pay down debt. We
expect leverage to improve to about 1.5x at the end of 2011, which would be in
line with our target for the company at the current rating level. Furthermore
we also expect funds from operations (FFO) to debt to improve to about 55% at
year-end 2011. We could lower the ratings if a combination of a drop in potash
sales volumes, to below 9 million metric tons, and in potash sales prices, to
an average of below US$325 per metric ton, leads to adjusted leverage of more
than 2.0x and adjusted FFO to debt below 45%. An upgrade in the near term is
constrained by the company’s business risk profile.”

For a link to the full report from Standard & Poor’s click here (registration required).

Last week reported on investment site Motley Fool putting Potash Corp. to the Warren Buffet test:

“Regardless of whether Buffett would ever buy Potash, we’ve learned that while the company’s earnings are somewhat volatile and debt it a bit higher than peers’, it does exhibit many of the other characteristics of a quintessential Buffett investment: high returns on equity, a simple industry, and tenured management.“

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