Potash Corp. earnings up 147% in Q3

Potash Corporation of Saskatchewan Inc. (PotashCorp) reported third-quarter earnings of $0.94 per share ($826 million), more than double the $0.38 per share ($343 million) earned in the third quarter of 2010. Earnings for the first nine months of 2011 climbed to $2.73 per share ($2.4 billion) - nearly double the $1.39 per share ($1.3 billion) earned in the same period last year.

Third-quarter 2011 gross margin reached $1.1 billion - including $700 million from potash - double the $550 million generated in the same quarter last year. Gross margin for the first nine months reached $3.4 billion, significantly higher than the $1.9 billion generated during the same period in 2010. Earnings before finance costs, income taxes and depreciation and amortization (EBITDA) of $1.3 billion and cash flow prior to working capital changes2 of $964 million were each higher than in last year's third quarter and raised totals for the year to $3.7 billion and $2.9 billion, respectively.

Our strategic offshore investments in Arab Potash Company Ltd. (APC) in Jordan, Israel Chemicals Ltd. (ICL) in Israel and Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile contributed $109 million to earnings for the quarter, well above their $76 million total in the third quarter of 2010. The contribution for the first nine months of 2011 reached $279 million, surpassing the $261 million for the same period last year - which included a $70 million special dividend from ICL. The market value of our investments in these publicly traded companies, along with China-based Sinofert Holdings Limited (Sinofert), equated to approximately $8.7 billion, or $10 per PotashCorp share, at market close on October 26, 2011.

"Fertilizer buyers were caught between two competing forces during the quarter - one being caution driven by global economic uncertainty and the other the continued strength of global fertilizer demand," said PotashCorp President and Chief Executive Officer Bill Doyle. "Although customers prudently managed inventory risk, the undeniable need for potash, phosphate and nitrogen ensured our products moved through the system to reach farmers around the world. Our third-quarter performance reflected the unrelenting pressure on global food production - and the strength of our growing fertilizer enterprise."

Market Conditions

Despite macroeconomic concerns, the push to capitalize on strong crop economics continued to support demand for fertilizer products around the globe.

Offshore potash demand remained robust during the third quarter and on pace to achieve record levels in 2011. Ongoing strength in key offshore spot markets offset limited shipments to India - a major buyer that was largely absent from the market since the first quarter until new contracts were signed in August. Domestic dealers moved late in the quarter to restock inventories to meet an anticipated strong fall application season. This supported healthy third-quarter domestic shipments from North American producers and raised the total for the first nine months to near-record levels. Even as North American producers achieved record third-quarter production, strong demand pulled physical inventories to their lowest levels for the year. Potash prices continued to rise during the quarter, reflecting tight supply/demand fundamentals.

In phosphate, robust agricultural demand supported healthy third-quarter domestic solid fertilizer shipments from US producers. While demand remained strong in offshore markets around the globe, movements from US producers slowed compared to third-quarter 2010, primarily due to timing of shipments under new six-month DAP contracts reached in the quarter with Indian customers. Rising sulfur and ammonia input costs, coupled with tight North American producer inventories, pushed up prices for most phosphate products.

In nitrogen, the prospect of record US corn acreage in the upcoming planting season along with healthy industrial requirements drove record third-quarter US ammonia demand and helped raise US urea demand well above the same period last year. Numerous global ammonia supply outages - due to scheduled maintenance and to unexpected interruptions - along with robust demand moved prices higher for all nitrogen products.

Potash

Record third-quarter sales volumes and significantly higher prices raised potash gross margin to $700 million - the second-highest third-quarter total in company history and more than double the $339 million generated in the same period last year. This raised gross margin for the year to $2.2 billion, well ahead of the $1.3 billion earned in the first three quarters of 2010.

Sales volumes of 2.2 million tonnes in the third quarter pushed the nine-month total to a record 7.5 million tonnes. Sales accelerated throughout the quarter, culminating in record monthly volumes in September. Offshore shipments totaled 1.4 million tonnes, up 17 percent from the same quarter last year. Canpotex Limited (Canpotex), the offshore marketing company for Saskatchewan producers, shipped 40 percent of its third-quarter volumes to Asian countries (not including China and India) and 26 percent to Latin American markets. Shipments to China accounted for 20 percent, while 9 percent was shipped to India. Although product movement to India during the quarter was limited by supply availability, Canpotex was able to reroute certain vessels to meet customers' immediate needs. Strong demand from North American customers anticipating robust fall requirements helped push third-quarter sales volumes to 0.8 million tonnes - up from 0.7 million tonnes in the same period last year.

Realized potash prices in the third quarter reached $451 per tonne, reflecting the continued upward movement in pricing in all major markets. Realized prices were $145 per tonne higher than in the same quarter last year and $35 per tonne above second-quarter 2011.

Production of 1.9 million tonnes - a third-quarter record - was up from 1.3 million tonnes in the same period last year and helped keep pace with significant product requirements. While increased production had a positive impact on our per-tonne cost of goods sold, this benefit was largely offset by the translation of Canadian-dollar production (against a weaker year-over-year quarterly average US dollar) and higher depreciation costs. A total of 28 shutdown weeks was taken in the quarter for normal maintenance-related shutdowns and capital-related downtime, which resulted in lower production and higher per-tonne costs compared to 2011's second quarter.

Phosphate

Third-quarter phosphate gross margin rose to $169 million, significantly above the $96 million earned in the same period last year. Higher prices were the primary drivers of improved gross margin, especially in solid fertilizer ($64 million of total gross margin) and liquid fertilizer ($57 million). Feed and industrial products contributed $24 million and $21 million, respectively. Gross margin for the first three quarters of 2011 reached $485 million, more than double the $209 million earned in the same period last year.

Phosphate sales volumes of 1.1 million tonnes for the third quarter were down only slightly compared to the same period last year, despite a temporary outage at our Aurora, NC facility due to Hurricane Irene.

Realized average phosphate prices rose to $602 per tonne, up 35 percent over the third quarter last year. Reflecting strong agricultural demand and tight supply, average realized prices for liquid and solid fertilizer each rose by 42 percent over the same quarter in 2010. Prices for feed (up 25 percent) have been slower to respond because of challenging livestock economics, while industrial prices (up 22 percent) continued to reflect a typical time lag in pricing for the segment.

Increased sulfur and ammonia input costs were the primary driver for higher per-tonne cost of goods sold. Additionally, an adjustment to our phosphate asset retirement obligations - impacted by a decrease in applied discount rates - resulted in a $25 million charge that flowed through cost of goods sold in the quarter.

Nitrogen

Gross margin in the third quarter of 2011 reached $263 million, more than double the $115 million earned in the same period last year, with our Trinidad and US operations contributing $140 million and $123 million, respectively. Gross margin for the year rose to $675 million, significantly above the $375 million generated in the first three quarters of 2010.

Third-quarter nitrogen sales volumes of 1.3 million tonnes were relatively flat compared to the same period last year. Strong ammonia and urea demand resulted in a larger share of production directed to these products rather than to other downstream nitrogen offerings. We experienced an interruption of gas supply at our Trinidad facility during the quarter, but the impact on production was minimal.

Average realized prices for nitrogen rose to $424 per tonne, 56 percent above those of the same period last year. Strong demand and tight product supplies lifted prices for all nitrogen products, with increases of 77 percent for urea, 49 percent for ammonia and 40 percent for other products.

Total average natural gas cost included in production, including our hedge position, was $6.13 per MMBtu, an increase of 22 percent compared to the third quarter last year. The higher cost was primarily a result of an increase in Trinidad gas costs, which moved up with rising Tampa ammonia prices - the benchmark to which our Trinidad gas costs are primarily indexed.

Financial

Selling and administration expenses for the third quarter totaled $46 million, down from $71 million in the same period last year because of lower incentive accrual expenses impacted by changes in our share price. Improved earnings raised our income tax expense to $279 million, up from $152 million in the third quarter of 2010.

We continued to invest in expanding our operational capability in potash, which accounted for the majority of the $590 million in capital expenditures on property, plant and equipment for the quarter.

Outlook

Over the past quarter, investors reassessed risk in an environment of uncertainty surrounding potential European debt defaults and slower global economic growth. Equity and commodity markets quickly reflected these concerns, but our outlook for global fertilizer demand, and for our earnings, remains positive. While current economic issues cannot be ignored, we believe our business is built on fundamentals that differ from the quarter-to-quarter movements in global GDP estimates. The strength of fertilizer demand is tied to the global development story - a growing population demanding more and better food - and we believe the long-term drivers of our success continue to be strong.

Some investors have grown nervous as crop commodity prices have declined from previous highs and experienced heightened volatility in the midst of the macroeconomic uncertainty. While fertilizer demand is undeniably connected to the profitability of farmers around the world, the reality is that farmers' planting and fertility decisions are not based on day-to-day movements in these markets but on the basics of soil science and the expectation of profit at the end of their growing season. With low global grain inventories continuing to support historically high crop prices, the prospect of strong farmer returns remains. We believe this will serve as a powerful motivator to improve fertilizer applications and, ultimately, food production.

Although fertilizer dealers around the world are acting prudently to minimize their risks and inventories, robust demand continues to pressure tight global potash supplies. We believe most producers have been operating at or near their full capabilities in an attempt to keep pace. We expect global shipments to be approximately 57 million tonnes for 2011 and reach a record 58-60 million tonnes in 2012. While we expect the industry's global capacity to rise in the coming year, the majority of new capability is anticipated at our facilities. This year illustrated the difficult challenge of producing enough potash to meet demand in a tight supply market; however, we expect our capability to increase production will differentiate us from our competition.

We remain focused on the safe and successful execution of our potash expansion projects underway at Allan, Cory, New Brunswick and Rocanville. Combined with completed expansions at our other facilities, we expect to increase our operational capability in 2012. Our expansion efforts are preparing our company to better meet the world's rising potash needs.

In North America, the combination of good harvest progress and the anticipation of above-average crop returns is expected to support ongoing strength in fertilizer demand. Strong shipments ahead of the fall application season have positioned dealers well to meet customer needs, and we anticipate post-harvest applications will support healthy fourth-quarter demand.

Latin American markets remain on pace for record fertilizer application in 2011, including record potash imports. Brazil's burgeoning agricultural economy is creating increasing demand for potash as farmers capitalize on the opportunity to supply the soybeans, sugar cane, corn and other crops increasingly required by markets around the world. Despite robust potash shipments in advance of the primary planting season that is currently in full swing, we anticipate demand will remain seasonally strong for the fourth quarter, supported by purchasing for the Safrinha corn planting that typically begins in February.

India's growing population has put significant strain on its food supply, and improving potash applications is critical to both its short-term and long-term crop production. With Canpotex's settlement of new contracts with key Indian customers in August, sales have resumed to this important market. Shipments on remaining contract commitments will continue for the fourth quarter at a delivered price of $470 per tonne, before reflecting a $60 per tonne increase (to $530 per tonne) for volumes in first-quarter 2012. We anticipate rising demand in 2012.

Potash shipments to China are expected to continue throughout the fourth quarter as Canpotex fulfils its commitment on a six-month contract that runs to the end of December 2011. Given China's growing food requirements, increasing crop production remains a top priority. With its limited ability to expand internal potash production capability and its significant nutrient requirements, we anticipate increased imports in 2012.

Potash consumption in other Asian markets remains strong, as farmers are generating solid returns for key crops grown in the region, including oil palm, rubber, sugar cane and rice. Each of these crops has major nutrient requirements that necessitate significant potash application. Despite shipments temporarily slowing in the fourth quarter, demand in this region is expected to continue to grow and consume record deliveries over the course of 2011.

In this environment, we now estimate our full-year 2011 potash segment gross margin will be in the range of $2.8-$3.1 billion. For the fourth quarter, we anticipate a larger allocation of sales to markets for standard product compared to typically higher-netback granular markets. Total shipments for 2011 are expected to approximate 9.5-9.7 million tonnes. Our ability to reach the top end of the previous sales guidance range has been impacted by weather-related downtime requirements at our Patience Lake solution mine as well as limited additional capability from our Cory operation as the ramping-up of our new red product mill continues. We expect per-tonne cost of goods sold for the fourth quarter will be slightly lower than in the third quarter but still higher than normal because of previously indicated maintenance-related downtime at Rocanville (four weeks) and expansion-related downtime at Allan (six weeks).

We expect our combined phosphate and nitrogen gross margin for full-year 2011 to be in the range of $1.4-$1.7 billion.

We expect 2011 net income per share to be in the range of $3.40 to $3.80.

Conclusion

"Despite economic uncertainty around the world, a growing population has and will continue to need more food and, ultimately, more fertilizer," said Doyle. "By recognizing this powerful long-term trend and making the commitment to be prepared for growing demand, especially for potash, we anticipate new opportunities in the years ahead. Our expanding operational capability will be increasingly valuable - in helping grow global food production and in serving the interests of all stakeholders in our company."