Q1: PotashCorp Reports Record First-Quarter Earnings on Stronger Prices and Volumes

“Tight global grain inventories, strong crop returns and the need to address nutrient deficiencies are powerful motivators for the world’s farmers, and the impact was evident in our record first-quarter results,” said PotashCorp President and Chief Executive Officer Bill Doyle. “Robust demand for all three nutrients demonstrated a global push to improve crop yields and reflected the importance of fertilizer to food production. This is especially true of potash and, as higher prices for our core nutrient continued to take hold, we began to demonstrate the earnings potential of our company.”

Market Conditions

Prices for many key crop commodities increased during the quarter, fueled by declining inventories and growing concern that farmers will be challenged to keep pace with rising demand. However, higher prices did little to temper demand for crops used for food, fiber, fuel and animal feed which kept global grain inventories at extremely low levels.

Global potash demand approached record territory during the quarter as all major potash-consuming markets actively moved to fill immediate needs. Strong demand — particularly from Latin America and Asian countries outside of China and India — helped raise offshore shipments from North American producers to a record 3.0 million tonnes, surpassing the previous mark achieved in the second quarter of 2007 and 28 percent above the first quarter of 2010. Domestic shipments from North American producers remained robust at 2.4 million tonnes in the first quarter, even on the heels of strong demand in fourth-quarter 2010. Although the first-quarter total was below the 3.0 million tonnes shipped in the same period last year — when dealers first began to address the limited movement of 2009 — it reflected continued demand strength in North America. Rising global demand reportedly left many potash producers sold out for the second quarter, even with India’s contracted shipments completed at the end of March. With global supply capabilities being tested and North American producer inventory levels falling well below the previous five-year average, realized and announced prices moved higher in nearly all markets.

Solid phosphate fertilizer markets were supported by strong domestic demand ahead of the key planting season, with first-quarter shipments from US producers to North American customers increasing 13 percent from the same period last year. Offshore shipments declined 17 percent as customers slowed their purchasing ahead of the settlement of new supply contracts with India, the world’s largest phosphate importer. The continuation of strong demand — along with rising costs for key inputs (including phosphate rock, sulfur and ammonia) and production curtailments in North Africa due to political unrest — pushed prices significantly higher compared to first-quarter 2010.

In nitrogen, healthy demand for ammonia continued, with US domestic shipments at similar levels to the first quarter of 2010. With strong global agricultural demand, improved industrial demand and higher natural gas prices in key European producing regions, including the Ukraine, prices for all nitrogen products rose significantly. Urea experienced some softness on rising supply availability, but demand and pricing began to firm by the end of the quarter. Competitive US gas prices continue to support healthy margins for domestic producers.

Potash

Higher prices and sales volumes elevated potash gross margin to a first-quarter record of $743 million, 40 percent above the previous quarterly record of $530 million generated in the same period last year.

Strong demand resulted in record first-quarter sales volumes of 2.8 million tonnes — the second-highest quarterly total in our history and 13 percent above the 2.5 million tonnes sold in the same period last year. Offshore volumes rose 42 percent to 1.7 million tonnes on the strength of record sales by Canpotex Limited (Canpotex), the offshore marketing company for Saskatchewan potash producers. Key spot markets purchased aggressively, with the majority of Canpotex shipments sent to Latin America (27 percent) and Asian countries other than China and India (45 percent), while China (16 percent) began purchasing on a six-month pricing agreement and India (7 percent) completed shipments under its previous annual contract. North American sales volumes of 1.1 million tonnes represented our third-highest quarterly total, trailing the record first quarter of 2010 when the depleted supply chain absorbed 1.3 million tonnes.

Our first-quarter average realized price of $366 per tonne was $45 per tonne higher than in the same period last year, as realizations began to reflect the shipment of tonnage booked at higher prices. By the end of the quarter, North American realized prices included both the September and October 2010 price increases, while offshore spot-market realizations reflected previously announced increases.

Strong sales pulled inventories down significantly despite near-record quarterly production, as our potash facilities operated near their full capabilities during the quarter with no shutdown weeks, compared to the 13 weeks taken in the first quarter of 2010. Higher operating rates had a favorable impact on our per-tonne cost of goods sold, but the benefits were partially offset by the translation of Canadian-dollar production costs to a weaker US dollar and higher depreciation expense.

Phosphate

Robust agricultural fundamentals helped push up prices for all phosphate products and raised gross margin for the first quarter of 2011 to $150 million, more than double the $64 million earned in the same period last year. Liquid and solid fertilizers generated $50 million and $48 million in gross margin, respectively, while industrial ($26 million) and feed phosphate ($22 million) products also made significant contributions.

Total phosphate sales volumes of 0.9 million tonnes were relatively flat on a quarter-over-quarter basis. Sales of liquid fertilizer products increased 41 percent over the same period last year as we allocated more production to capitalize on the higher-margin opportunity in this product line. This limited sales of solid, feed and industrial products for the quarter.

Our average realized phosphate price climbed to $559 per tonne, up 33 percent over the first quarter of 2010. The largest price increases were evident in liquid and solid fertilizers, which rose 49 percent and 44 percent, respectively, from last year’s first quarter on strong agricultural fundamentals and higher production costs. Prices for feed products ¬— up 23 percent from first-quarter 2010 — increased less rapidly than fertilizer prices as a result of challenging livestock feed economics, while industrial prices rose 21 percent, as these products include certain longer-term contracts that lag current market conditions.

Although higher operating levels had a favorable impact on our per-tonne fixed costs for phosphate products compared to the same period last year, this was more than offset by significantly higher sulfur and ammonia input costs.

Nitrogen

Supported by a strong pricing environment, our nitrogen gross margin climbed to a first-quarter record of $203 million. This was 50 percent higher than the $135 million generated in the same quarter of 2010 and represented the third-highest quarterly total in company history. Our Trinidad operation contributed $118 million in gross margin, while our US operations delivered $85 million.

First-quarter nitrogen sales volumes totaled 1.3 million tonnes, relatively flat compared to the same quarter last year. Ammonia sales rose 20 percent as a greater percentage of our production was allocated to this higher-margin product to meet strong industrial and agricultural demand, limiting production of downstream products.

Our first-quarter average realized nitrogen price was $368 per tonne, 32 percent higher than in the same period of 2010. Ammonia prices rose 38 percent, while urea was up 19 percent and other nitrogen products 26 percent.

The total average natural gas cost for first-quarter 2011, including our hedge position, was $5.84 per MMBtu, an increase of 19 percent over the same period last year. The majority of the increase was the result of higher Trinidad gas costs, which are primarily indexed to the Tampa ammonia price and reflected the sharp rise in this benchmark.

Financial

Our quarterly results are now being prepared based on International Financial Reporting Standards (IFRS). The new policies have been consistently applied to all of the periods presented in this news release and all prior period information has been restated or reclassified for comparative purposes unless otherwise noted. Further details on the transition to IFRS are provided in the notes to our unaudited interim condensed consolidated financial statements as well as in our Annual Report on Form 10-K for the year ended December 31, 2010.

Following the three-for-one stock split announcement in January 2011, our common shares began trading on a post-split basis on the Toronto and New York stock exchanges in February.

Higher earnings raised first-quarter income tax expense to $243 million, up from $191 million in the same quarter of 2010. Selling and administrative expenses for the quarter increased year-over-year, from $60 million to $75 million, primarily due to higher compensation expense accruals driven by a higher common share price.

Potash expansion projects at our Allan, Cory, Rocanville and New Brunswick facilities continued throughout the first quarter, and accounted for the majority of our $441 million in capital expenditures on property, plant and equipment.

Outlook

With rising demand putting pressure on global supplies of a wide range of crop commodities, we believe the need for high-yield agriculture around the world has never been greater. Higher crop prices reflect tight supply/demand fundamentals, providing farmers with significant economic opportunities and motivating them to improve soil fertility to maximize production. We believe this is a global opportunity that holds true for corn farmers in the US, produce growers in China, soybean producers in Brazil, and others.

While record or near-record prices for many crops — including $7-per-bushel corn and $14-per-bushel soybeans — are creating headlines, farmers are recognizing a business opportunity that extends beyond short-term price movements. Even at crop prices well below current levels, farmers see the opportunity to generate a significant return on their investment. This is shifting their emphasis towards maximizing yields to capitalize on the economic opportunity — and that is best achieved by improving fertilization application practices to replenish nutrients in the soil and protect its fertility for future crops. We believe that the growth in demand for food and fertilizers is supportive for our business in the current environment, and are confident that these powerful trends will lead to even greater opportunities in the years ahead, especially in potash.

Rising demand from fertilizer buyers around the world is putting pressure on the global potash industry’s supply capabilities and creating an environment of rising prices. These conditions continue to provide a powerful earnings opportunity for PotashCorp because of our unmatched ability to expand our operational capability and increase production over the next five years to meet this growing demand. Since 2003 and continuing through the darkest days of the global recession, we have been investing in new operational capability to prepare for the situation that we believe is unfolding.

We recently completed construction of the first portion of a two-phase expansion at our Cory facility and are ramping up its new production. We expect to complete major projects at New Brunswick and Allan in 2012 and at Rocanville, our largest project, by 2014, with new production from all our expansion projects ramped up by 2015. Cumulatively, these projects are expected to raise our operational capability to an estimated 17.1 million tonnes annually, an increase of more than 50 percent from 2011 levels. Our additional tonnes represent the largest percentage of new potash capacity expected to become available worldwide over the next several years, and, we believe, will be well timed to meet the rise in global demand.

The fundamental demand drivers that supported our decision to invest in our potash expansion program continue today. We believe the rising need for potash is not a product of short-term surges or inventory restocking following the deferrals of 2009, but a response to the increasing crop nutrient requirements necessary to feed a growing world. Based on current conditions, we continue to anticipate 2011 global potash demand of 55-60 million tonnes.

In North America, strong spring demand has PotashCorp fully committed through the end of May, with sales at $515 per short ton (FOB) to Midwest warehouses — a price that has yet to reflect the $45 per short ton increase announced in February. Despite adverse weather impacting the early progress of spring plantings and large volumes shipped during the past two quarters, we anticipate that high application rates will support robust second-quarter demand. We expect supportive crop economics will also lead to strong second-half demand.

Potash demand in Latin America is projected to reach a record of approximately 10 million tonnes due to strong crop economics and limited distributor inventory entering the year. Second-quarter shipments are likely to be at more seasonal levels as distributors work to move record first-quarter shipments to customers, and are expected to reflect a recently realized increase in the Canpotex delivered price to Brazil to $520 per tonne.

Rising demand from growers in Asian countries outside of China and India — many striving to address the significant potash requirements of crops such as oil palm and sugarcane to capitalize on attractive economics — is expected to account for the largest share of Canpotex sales in the second quarter. Demand in this region is now forecast to reach 7.3 million tonnes in 2011, supporting higher prices — including a $50 per tonne increase on new business announced by Canpotex in April.

China, which now purchases through six-month contracts, is expected to receive shipments under first-half agreements, although continued pressure on its domestic food supply and reduced potash inventories are expected to support higher second-half volume commitments. We anticipate 2011 potash (KCl) consumption could approach 11 million tonnes, including imports of approximately 7 million tonnes.

With strong demand in all other markets, Canpotex is expected to have limited product available to ship to India in the second quarter, even if new supply contracts are settled. With low inventory levels and significant agronomic need, we believe India’s requirements remain high. We anticipate strong pressure from fertilizer distributors and farmers to ensure potash is available for their coming planting season.

Given global conditions, we now estimate our 2011 potash segment gross margin will be between $2.7 billion and $2.9 billion and total shipments within the range of 9.6-10.0 million tonnes.

In phosphate, the recent settlement of key supply contracts with India is expected to support healthy export demand through 2011. With strong agricultural demand and higher phosphate rock and phosphoric acid prices, markets for processed phosphate products are likely to remain strong throughout 2011, although rising ammonia and sulfur prices may limit upside margin potential. Sales volumes and prices for nitrogen products should also remain relatively strong, based on continuing agricultural strength and improved industrial demand. We forecast combined 2011 gross margin for our phosphate and nitrogen segments to be in the range of $1.1 billion to $1.3 billion.

We now estimate selling and administration expenses will be slightly higher than 2010 levels and finance costs for 2011 to approximate $150-$160 million.

PotashCorp expects second-quarter net income to be in the range of $0.70 to $0.90 per share, with full-year earnings in the range of $3.00 to $3.40 per share.

Conclusion

“By operating with a long-term view, we have positioned our company to capitalize on the opportunities that are unfolding today,” said Doyle. “As global food producers tackle the challenge of feeding a growing population, PotashCorp is prepared to play an important role in meeting the rising demand for fertilizer, especially potash. We look forward to meeting the increasing needs of our customers and creating new opportunities to deliver long-term growth for our investors.”

Read the full news release here. Image of Potashcorp Potash Sales Volumes from PotashCorp.