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• Potash Corporation of Saskatchewan (USA) (NYSE: POT) shares have declined 46.43 percent year-to-date, trading almost at their 52-week low on December 4.

• Steve Byrne of Bank of America Merrill Lynch has reinitiated coverage of the company with an Underperform rating and price target of $20.

• With the industry seeing double digit ROIC in potash over the past decade, there has been an increase in capex, which Byrne expects to “progressively depress” operating rates over the coming few years.

According to the Bank of America report, “Due to the confluence of: 1) potash prices above marginal cost of production; 2) economics that are continuing to incentivize brownfield expansion; and 3) weakening outlook in farm income levels, we see risk that potash price discipline cracks as new capacity competes for market share.”

Analyst Steve Byrne believes that there could be near-term upside from inventory restocking in Spring 2016, along with M&A that improves global nutrient control and unanticipated outages at potash mines.

Canadian producers have led global potash industry discipline, while reaffirming recent cutbacks in production. However, Byrne expects this to be tested with the launch of K+S’ Legacy mine in Saskatchewan.

Byrne believes that the current dividend yield of 7.5 percent, which Potash Corp is committed to, is attractive. However, there is expected to be “near cash flow breakeven in 2016 with an estimated $250/mt realized potash price.”

In case the price erodes towards $200/t, Byrne believes that competitive forces could lead to prices being pushed further below this threshold.

“In this scenario, we estimate POT would be able to maintain its dividend only if it meaningfully cuts capex or increases production rates, which could further exacerbate price declines,” Byrne added.

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