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PotashCorp Reports Record Q2 Earnings

01 August 2011

GLOBAL - Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported record second-quarter earnings of $0.96 per share ($840 million) - the second-highest total for any quarter in our history and 81 per cent above the $0.53 per share ($480 million) earned in the same period last year.

Second-Quarter 2011 and Outlook Highlights:
  • Record second-quarter earnings of $0.961 per share; 81 per cent above second-quarter 2010
  • Strong demand and pricing across potash, phosphate and nitrogen
  • Record second-quarter potash production of 2.6 million tonnes
  • Capital expenditures of $492 million for the quarter, primarily related to potash expansion program
  • Third-quarter 2011 earnings guidance of $0.80-$1.00 per share
  • Full-year 2011 earnings guidance raised to $3.40-$3.80 per share

This result raised earnings for the first half of 2011 to a record $1.79 per share, 18 per cent above the previous high set in 2008 and significantly above the $1.01 per share earned in the first half of 2010.

Higher prices for all three nutrients and continuing strong demand, especially for potash and phosphate, pushed second-quarter gross margin to $1.2 billion, double the $0.6 billion generated in the same quarter of 2010. Gross margin for the first six months of 2011 reached $2.3 billion, a substantial increase over the $1.3 billion earned in the same period last year. Earnings before finance costs, income taxes and depreciation and amortization (EBITDA)2 of $1.3 billion and cash flow prior to working capital changes2 of $1.1 billion significantly exceeded totals for the same quarter in 2010, driving record results for the first six months of the year.

Our strategic offshore investments in Arab Potash Company Ltd. (APC) in Jordan, Israel Chemicals Ltd. (ICL) in Israel, Sinofert Holdings Limited (Sinofert) in China and Sociedad Química y Minera de Chile S.A. (SQM) in Chile benefited from the same strong fertilizer market conditions and contributed $119 million to our second-quarter earnings, raising the total for the first half of the year to $170 million. This compared to earnings contributions of $159 million in the second quarter last year, when ICL paid a $70 million special dividend, and $185 million for the first six months of 2010. The market value of our investments in these publicly traded companies as at market close July 27, 2011 equated to approximately $10.3 billion or $12 per PotashCorp share.

"The continuation of strong fertilizer demand combined with the limitations of global production, especially in potash, resulted in tight fertilizer markets and rising prices for our products," said PotashCorp President and Chief Executive Officer Bill Doyle. "With farmers committed to increasing yields and capitalizing on the unprecedented economic opportunity, we worked to keep pace with growing demand, which resulted in a record quarter for our company. We believe our ongoing investment in expanding potash operational capability is playing an integral role in the world's food story, and we demonstrated our increased ability to deliver â€" for our customers and our shareholders."

Market Conditions

Despite volatility in commodity markets, crop economics remained attractive throughout the second quarter, giving farmers the incentive to improve nutrient applications, which resulted in rising fertilizer demand and pricing.

During the quarter, key spot-market potash buyers moved aggressively to secure sufficient volumes to fill immediate needs. With demand putting pressure on global supply capabilities, producers operated at or near record production levels in an attempt to keep pace. Offshore potash shipments from North American producers for the second quarter were 23 per cent higher than in the same period in 2010 and reached a record 5.9 million tonnes for the first half of 2011.

This was achieved on the strength of demand in Latin America and spot markets in Asia, which more than offset the absence of India, where there has been no contract since the end of the first quarter of 2011. Despite a late planting season, domestic shipments from North American producers during the quarter rose 39 per cent from the same period last year.

Combined with a strong first quarter, first-half domestic shipments reached 4.6 million tonnes, similar to totals for the same period last year. By the end of the second quarter, North American producer inventories were reduced to their lowest levels of the year â€" 26 per cent below the average of the last five years. Tightening supply/demand conditions continued to push prices higher in most major markets, including China, which signed new supply commitments late in the second quarter.

In phosphate, second-quarter solid fertilizer shipments from US producers climbed 9 per cent from the same quarter last year, buoyed by strong export demand. Following the settlement of six-month commitments with India in late March, exports from US producers rose 19 per cent compared to the second quarter of 2010. By the end of June, US solid phosphate producer inventories were 28 per cent below the previous five-year average. The combination of strong demand, higher raw material costs and the expectation of lower phosphate exports from China exerted upward pressure on pricing.

In nitrogen, demand remained robust, with second-quarter US domestic shipments of ammonia and urea comparable to 2010 levels. US producer inventories for both products tightened in the quarter, pushing up prices for all nitrogen products. After lagging ammonia through the first quarter of 2011, prices for urea moved sharply higher on strong agricultural demand and an expectation of lower urea exports from China. Competitive US gas prices continued to support healthy margins for domestic nitrogen producers.

Potash

Higher sales volumes and rising prices pushed second-quarter potash gross margin to $793 million, nearly double the $411 million earned in the same period of 2010. With consecutive strong quarters, our potash gross margin for the first half of 2011 reached a record $1.5 billion.

Second-quarter sales volumes totaled 2.5 million tonnes â€" 32 per cent higher than in the same period of 2010 â€"and boosted first-half potash sales to 5.3 million tonnes, a company record. Canpotex Limited (Canpotex), the offshore marketing company for Saskatchewan potash producers, shipped at near-record levels, which helped push our offshore sales volumes to 1.7 million tonnes, significantly above the 1.3 million tonnes sold in the second quarter of 2010.

The strongest demand came from Asian countries (other than China and India) and from Latin America. Shipments to these regions accounted for 51 per cent and 32 per cent, respectively, of Canpotex's shipments during the quarter, while China represented 14 per cent. Second-quarter North American sales volumes of 0.8 million tonnes were up from 0.6 million tonnes in the same period last year and raised our first-half North American shipments to 1.9 million tonnes.

Prices continued to move higher as previously announced increases began to be reflected in results, with our average second-quarter realized price climbing to $416 per tonne, up $107 per tonne from last year's second quarter and $50 per tonne from first-quarter 2011.

Even as we achieved record second-quarter production of 2.6 million tonnes, inventories remained low because of the ongoing strength in potash demand. While higher production had favorable impacts on our per-tonne cost of goods sold, the benefits were largely offset by higher depreciation costs, increased royalty payments (due to higher potash prices) and the translation of Canadian production costs to a weaker US dollar.

Phosphate

Robust fertilizer markets resulted in second-quarter phosphate gross margin of $166 million, more than triple the $49 million earned in the same period last year. While all phosphate products benefited from improved sales volumes and prices, solid fertilizer ($61 million) and liquid fertilizer ($50 million) were the largest contributors. Industrial and feed products contributed $28 million and $23 million, respectively. Gross margin for the first six months of 2011 rose to $316 million, significantly above the first-half 2010 total of $113 million.

Phosphate sales volumes grew to 1.0 million tonnes in the second quarter, significantly ahead of the 0.7 million tonnes sold in the same period last year. Strong agricultural fundamentals drove higher demand for fertilizer products â€" both liquids and solids â€" resulting in a larger allocation of sales volumes to these products.

Our average realized phosphate price of $578 per tonne in the second quarter was 26 per cent higher than in the same quarter last year. Realized prices for liquid and solid fertilizer were up 42 per cent and 29 per cent, respectively, as the prices of these products reflected the strength in global demand and the tight supply. Prices for feed products were up 16 per cent, responding less rapidly as a result of challenging livestock economics, while industrial prices, influenced by certain longer-term contracts that lag current conditions, rose 15 per cent.

Higher ammonia and sulfur input costs more than offset the favorable impacts that higher operating levels had on per-tonne cost of goods sold.

Nitrogen

Rising prices for all nitrogen products drove second-quarter nitrogen gross margin of $209 million, 67 per cent above the $125 million earned in the same period last year and nearly equal to the second-quarter record achieved in 2008. Through the first six months of 2011, our nitrogen segment generated $412 million in gross margin, substantially above the first-half 2010 total of $260 million. Our US nitrogen operations delivered $105 million in gross margin during the second quarter, while our Trinidad operations contributed $104 million.

Nitrogen sales volumes of 1.3 million tonnes were relatively flat compared to the second quarter last year. Strong industrial and agricultural demand for ammonia resulted in a larger share of production being allocated to this higher-margin product, limiting production of other downstream products.

Our second-quarter average realized nitrogen price was $400 per tonne, 39 per cent higher than in the same period last year. Ammonia prices rose 42 per cent, and realized prices for urea increased 33 per cent. Prices for other nitrogen products were up by 23 per cent.

The total average natural gas cost for second-quarter 2011, including our hedge position, was $6.21 per MMBtu, an increase of 30 per cent over the same period last year. Most of the increase was the result of higher Trinidad gas costs, which are primarily indexed to the Tampa ammonia price.

Financial

Selling and administrative expenses for the second quarter of 2011 increased quarter-over-quarter, from $33 million to $55 million, primarily due to higher compensation expense accruals. Higher earnings raised income tax expense for the quarter to $297 million, up from $165 million in second-quarter 2010.

Ongoing expansion projects at our Allan, Cory, Rocanville and New Brunswick facilities accounted for the majority of the $492 million in quarterly capital expenditures on property, plant and equipment. At the end of second-quarter 2011, approximately two-thirds of the capital required for our estimated $7.5 billion potash expansion program had been spent.

During the quarter, $600 million in bonds matured and were repaid out of operating cash flow and proceeds from our commercial paper program.

Outlook

Even with uncertainty around macroeconomic issues â€" including US and European sovereign debt concerns â€" weighing on equity markets and investors' tolerance for risk, the strength of agricultural fundamentals continues to provide a highly favorable environment for our business. The pursuit of higher crop yields is essential to meeting the world's immediate and long-term food needs and is driving strong demand for all three nutrients, especially potash.

While no industry is fully immune to external economic forces, the need to meet the world's ever-increasing food supply requirements is an important challenge and a powerful force. We see evidence of this today. When investors back away from agricultural commodities, commercial buyers quickly step in to secure a share of the world's crop production. Although crop prices are likely to fluctuate, we anticipate they will remain at levels that provide farmers with the motivation to maximize production and the confidence to invest in their most important asset - their soil.

The ability to meet the anticipated increase in potash needs of the world's farmers is made more challenging by a void in the supply chain that was triggered by demand deferrals amidst the economic downturn. Inventories at the distributor level remain limited, as purchased tonnes are moving quickly to farmers for use on their crops. Inventories of North American producers are also well below historical levels as we enter the traditional period for maintenance-related shutdowns. Many potash buyers globally are recognizing the tightness of world supply and are moving to secure product â€" a trend that we expect to continue in 2012, especially with the anticipated return of India and China to the market in a more substantial way.

These are some of the conditions we anticipated when we launched our potash expansion program in 2003. While some competitors are still working through the planning and feasibility of potential expansions, several of our projects â€" largely initiated and advanced during a period of lower construction and materials costs â€" are now completed or in advanced stages of construction. We believe they will give us the ability to increase production in a time of rising demand and higher prices and expect our expanded operational capability to be a competitive advantage for years to come.

While seldom considered by those outside the potash business, operating facilities at full capability can be a challenge as disruptions from logistical, operational and geological issues are common. We continue to estimate global demand will approximate 55-60 million tonnes in 2011, but now anticipate that meeting the upper end of the range will be constrained by what we estimate is the industry's ability to produce.

In North America, we anticipate that robust potash demand will continue through the second half of 2011, with the majority of our product already committed for the third quarter at the previously announced price of $560 per short ton ($617 per tonne) FOB US Midwest warehouses. We expect the $30 per short ton price increase announced at the end of June will begin to be reflected in our realizations during the fourth quarter. Shipments to North American customers from all suppliers are expected to approximate 10-10.5 million tonnes for the full year.

Latin American distributors continue to move aggressively to secure potash supplies to meet strong farmer demand, with the majority of third-quarter sales volumes booked at a delivered price of $550 per tonne. We anticipate total demand in this market will reach 10-10.5 million tonnes for 2011 (including 7-7.5 million tonnes of imports to Brazil), with record consumption expected to result in low distributor inventories after its primary planting season.

Ongoing strength in demand from Asian markets outside of China and India is likely to continue as growers strive to capitalize on historically high returns for key crops such as oil palm, sugar, rice and rubber. We expect potash sales for the third quarter to reflect the previously announced price of $510 per tonne on a delivered basis and demand in this region to approximate 7.7-8.2 million tonnes this year.

China's second-half 2011 contract with Canpotex, which included a $70-per-tonne price increase from previous contract levels, is expected to provide a steady flow of potash to this market. We anticipate China's consumption will approximate 10.5 million tonnes this year, including imports of approximately 6-6.5 million tonnes. With limited product available to satisfy its pent-up demand through the remainder of 2011, we expect this market will end the year with reduced inventories.

India has a high agronomic need for potash and its inventories have been reduced to critically low levels, which is creating strong pressure from commercial buyers and farmers to secure new supply. Given the delay in settling new contracts and limited product availability in the second half of 2011, we now anticipate India's annual imports will total 4-4.5 million tonnes. With its pressing need to increase crop productivity and restock depleted inventories, we expect significant Indian demand requirements in 2012.

In this environment, we forecast our 2011 potash segment gross margin will be in the range of $2.9 billion to $3.2 billion and our total shipments within the range of 9.6-10 million tonnes. Scheduled summer maintenance shutdowns and extended expansion-related downtime at our Allan facility will limit our supply of product in the second half of the year. Although we experienced a longer than expected ramp-up at our new Cory mill in the first half of 2011, we expect to begin operating at improved rates during the third quarter.

Phosphate markets are projected to remain strong through 2011, given robust fertilizer demand, the expectation of reduced Chinese exports and higher prices for phosphate rock and phosphoric acid. We anticipate improved margins for all downstream phosphate products although higher prices for input costs are expected to limit margin upside. In nitrogen, we anticipate that strong agricultural and industrial demand will support higher prices through the remainder of 2011. Given these conditions, we expect our combined phosphate and nitrogen gross margin for 2011 to be in the range of $1.4 billion to $1.6 billion.

In addition, we believe the strength of global potash market fundamentals will increase other sources of income for 2011 to a range of $330-$360 million. We now expect capital expenditures (excluding capitalized interest) for 2011 to approximate $2.2 billion, with $1.6 billion relating to our ongoing potash expansion projects.

We expect third-quarter net income per share to approximate $0.80-$1.00 per share and have raised our full-year earnings guidance to the range of $3.40-$3.80 per share.

Conclusion

"As we look ahead, we see unprecedented opportunities to fulfill our mission of helping the world's farmers meet the growing global demand for food," said Doyle. "Our expansion projects are improving our ability to meet the growth in potash demand and enhancing our strong position in the industry. Our long-term approach, supported by the patience and capital of our investors, is enabling us to play a meaningful role in the global food chain and we look forward to delivering on our potential for our customers, investors and other stakeholders."

TheCropSite News Desk



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