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Potash Gets Upgrade; Bears Remain

Potash shares receive an upgrade from UBS, but skeptics remain.
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NEW YORK (TheStreet) -- Potash Corp. of Saskatchewan (POT) received bullish attention from UBS (UBS) - Get Report Wednesday, although opinion remains fiercely split on the prospects of the big fertilizer producer and its stock.

Analysts at the Swiss firm upgraded Potash to buy from neutral, arguing that demand looks strong enough that sales volumes and prices in 2011 will end up being better than UBS had expected.

UBS's Brian MacArthur believes crop prices could improve further, "especially if China emerges as a substantial importer," or if demand for corn increases among ethanol producers, according to a research report by the analyst on Wednesday. He lifted his price target to $112 from $106.

But other Potash watchers don't believe this outlook holds water. The bearish argument, which takes a macro-economic tack, notes that as long as the U.S. dollar remains elevated, fertilizer producers will suffer, and so will their shares. That's because their products are priced in the greenback, pushing up their cost to farmers.

"Until the euro situation repairs itself, I don't think there's much upside in this commodity," said Chris Damas, an analyst and trader based in Ontario.

Other analysts have cautioned that if 2010's growing season ends up producing bumper harvests in North America -- which some agriculture professionals have said appears likely -- crop prices suffer, reducing demand for fertilizers in 2011.

Potash shares were gaining ground on Wednesday in the wake of UBS's upgrade. In late-morning trading, the stock was changing hands at $97.73, up $3.44, or 3.7%, on volume of about 2 million shares. Daily turnover has averaged 5.7 million shares over the last three months.

Prices for potash, which is mined from deep below the Canadian Great Plains, among other remote places around the world, have disappointed industry players going back to the beginning of the recession. Only in the last few months have

potash prices bottomed out

and showed signs of a rebound.

Ever since Potash Corp. executives encouraged investors in March by lifting profit guidance, the shares have fallen sharply, retreating nearly 25%, as Europe's debt crisis and fears of slower growth in China have caused investors to flee commodities and commodity-linked equities of all stripes.

Longer-term concerns have also dogged Potash Corp., the bears note, including the ongoing push by

TheStreet Recommends

BHP Billiton

(BHP) - Get Report

, the world's largest mining concern, to enter the potash business.

On Tuesday,

BHP released the results

of reserve studies it conducted on property in Saskatchewan that it intends to mine by 2015.

Distant as that may seem, some analysts believe that, eventually, BHP will essentially flood the potash market, taking the air out of what have historically been 50% to 60% profit margins across the industry.

Bulls and Potash partisans say that BHP won't posses the kind of low-cost operation that will allow it produce the nutrient profitably enough.

Bears say that BHP doesn't care about super-wide margins; if it makes just a little on each ton and recovers its original cost, that's good enough for the mining giant. BHP, the Potash bears say, just wants volume.

-- Written by Scott Eden in New York

Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.