Scotia Capital Upgrades Potash Corp. (POT) to Sector Outperform; Time for Shorts to Cover

Scotia Capital upgraded Potash Corp. (NYSE: POT) from Sector Perform to Sector Outperform with a price target of $18.00 (from $24.00). The firm said shorts should cover and they see a tactical buying opportunity.

The firm's long-term thesis is unchanged. "We still see a widening supply/demand gap, with prices falling toward marginal cost in 2017+. We think POT's 34% divvy cut to $1 is insufficient beyond 2016, with flexibility now limited for M&A and/or buybacks (without leverage). Also, POT will likely announce further curtailments at some point in 2016. Finally, we believe the NB closure has curbed POT's strategic optionality, despite the move lowering cash costs and helping the overall industry in 2017+."

That said, "when POT "kitchen sinks" its own outlook (the right thing to do), and the market doesn't care at all, even the bears have to take notice."

"At the start of the year, we provided several reasons why we weren't ready to pull the trigger on POT. Today we are, and we explain why we're only now more comfortable with a tactical long position. Once the market has digested an ugly Q4 for the space, we expect potash demand to re-emerge slowly, especially on the back of a Chinese contract ($250 to $270?). While the market looks slightly long in 2016, the majors can clean up the excess and stabilize prices for a year. Who are the incremental sellers and what are they waiting for to sell?"

With an $18 target and a $1 dividend, they see a ~25% return available in 2016.

For an analyst ratings summary and ratings history on Potash Corp. click here. For more ratings news on Potash Corp. click here.

Shares of Potash Corp. closed at $15.47 yesterday.

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