Potash Corp. Reports Fourth-Quarter Earnings
January 31, 2013 (Source: PRNewswire) Saskatoon — Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported fourth-quarter earnings of $0.48 per share ($421 million), which compared to $0.78 per share ($683 million) in the same period last year. Full-year earnings for 2012 of $2.37 per share ($2.1 billion) trailed the $3.51 per share ($3.1 billion) earned in 2011. Our results included a $41 million ($0.04 per share) provision for the settlement of antitrust claims in the US recorded in the fourth quarter, and a $341 million ($0.39 per share) non-cash impairment charge related to our investment in Sinofert Holdings Limited (Sinofert) in China recorded in the second quarter. With lower contributions from all three nutrients, gross margin declined to $0.6 billion from the $0.9 billion generated in the fourth quarter of 2011. This result brought our full-year gross margin to $3.4 billion, which compared to $4.3 billion earned in the previous year. Adjusted earnings before finance costs, income taxes and depreciation and amortization2 (adjusted EBITDA) totaled $0.7 billion for the quarter and $3.9 billion for the year, with both amounts trailing those of the comparative periods. Cash provided by operating activities of $0.9 billion was flat with the previous year’s fourth quarter and raised our 2012 total to $3.2 billion, the second-highest annual result in our history. Our offshore investments in Arab Potash Company (APC) in Jordan, Israel Chemicals Ltd. (ICL) in Israel and Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile contributed $94 million to earnings in the fourth quarter. For the full year, contributions from these investments – and a dividend from Sinofert – reached a record $412 million. The market value of our investments in these publicly traded companies was approximately $9.1 billion, or $10 per PotashCorp share at market close on January 30, 2013. “Our fourth-quarter results were adversely affected by weaker performance in all three nutrients as global fertilizer markets paused in the absence of significant immediate needs and amid lack of direction, particularly in phosphate and potash,” said PotashCorp President and Chief Executive Officer Bill Doyle . “Despite these temporary challenges, we operated with a consistent approach – temporarily slowing potash production and leveraging our diversified product mix in our other nutrients – to best position our company for the expected rebound in fertilizer demand in 2013.”
The typical late-season slowdown in global potash demand was more pronounced in the quarter as buyers awaited clarity on contract settlements before committing to fully engage in procuring new supply. The impact on North American potash producers was most evident in shipments to offshore markets, which declined by 43 percent in the fourth quarter of 2012 from the same period last year. In contrast to this weakness, fourth-quarter domestic shipments from North American producers outpaced those of the previous year by 38 percent as dealers continued to respond to the immediate needs of farmers capitalizing on favorable crop economics and an extended fall fertilizer application season. Despite the relative strength of this market, limited global purchasing caused prices to move lower through the quarter. Phosphate demand was affected by similar global trends. Fourth-quarter US producer sales of solid phosphate to the North American market reached the highest level of any quarter in 2012 – 33 percent above the same period last year. However, this strength was offset by weak demand in offshore markets, primarily India, which led to lower prices for most phosphate fertilizer products. In nitrogen, strong industrial and agricultural demand for ammonia, combined with global supply challenges that limited the amount of product available for trade, supported prices through much of the quarter. While prices for urea remained above 2011 levels for most of the year, a significant rise in imports into the US market and a surge in Chinese exports during the fourth quarter resulted in a weakening of prices relative to the comparative period last year.
With reduced shipments to offshore customers and lower realized prices, fourth-quarter potash gross margin of $281 million trailed the $486 million earned in the same period of 2011. Although full-year gross margin of $2.0 billion represented the third-highest total in our history, weaker sales volumes were primarily responsible for it falling below the $2.7 billion generated in the previous year. Total fourth-quarter potash sales volumes declined to 1.3 million tonnes, down 17 percent from the same period the previous year. In North America, distributors purchased to meet immediate farmer demand, which pushed North American sales volumes to 0.6 million tonnes – 39 percent above the fourth quarter of 2011. This strength was more than offset by a decline in offshore sales volumes. The absence of Canpotex3 contract shipments to China and India, along with the deferral of demand in other markets, pushed our fourth-quarter offshore sales volumes down to 0.7 million tonnes (37 percent below fourth-quarter 2011). Latin American (32 percent) and other Asian (58 percent) markets represented the majority of shipments from Canpotex. Our fourth-quarter average realized potash price was $387 per tonne, which compared to $431 per tonne in the same period of 2011. This decline reflected heightened competitive pressure in most major spot markets, as well as the impact of higher per-tonne costs for Canpotex’s fixed transportation and distribution expenses that were allocated over fewer tonnes. In response to market conditions, we reduced fourth-quarter production to 1.8 million tonnes from 2.2 million tonnes in the closing quarter of 2011. The combination of fewer tonnes produced, a rise in costs associated with product from Esterhazy and a greater percentage of production coming from higher-cost facilities negatively impacted potash cost of goods sold on a per-tonne basis.
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Fourth-quarter phosphate gross margin of $99 million was below the $163 million in the comparative period of 2011. This was largely attributable to a decline in contributions from fertilizer products, which generated $54 million, while feed and industrial product lines remained relatively strong and added $41 million in the quarter. For the year, gross margin was $469 million, which trailed the $648 million generated in 2011, mainly due to reduced volumes and lower realized fertilizer prices. Fourth-quarter sales volumes fell to 0.8 million tonnes compared to 0.9 million tonnes in the same period last year, as temporary production constraints at Aurora caused by challenging mining conditions primarily impacted saleable tonnage of fertilizer products. Average realized phosphate prices for the quarter were $577 per tonne, down from $631 per tonne in the fourth quarter of 2011, as prices for solid and liquid fertilizers declined as a result of weaker demand. This drop was tempered by comparatively stable feed and industrial realizations. Per-tonne cost of goods sold for the quarter remained relatively flat compared to the same period last year as higher ammonia and rock costs were largely offset by lower sulfur costs.
Although fourth-quarter nitrogen gross margin of $206 million was below the $241 million generated in the same period the previous year, it raised our 2012 total to a record $978 million. For the quarter, our Trinidad operations contributed $127 million in gross margin and our US operations added $79 million. Fourth-quarter nitrogen sales volumes of 1.1 million tonnes were flat compared to the same period in 2011. The loss of production at our Trinidad facility due to interruptions in natural gas supply limited product available for sale and resulted in full-year sales volumes of 4.8 million tonnes trailing the 5.0 million tonnes sold last year. A combination of strong demand and supply challenges in key producing regions resulted in higher realized ammonia prices for the quarter compared to the same period of 2011. While this environment supported higher prices for nitrogen products through most of 2012, fourth-quarter prices softened for downstream products. As a result, our average realized price of $453 per tonne in the fourth quarter declined slightly from the closing quarter of 2011. The total average cost of natural gas included in production for the fourth quarter of 2012, including our hedge position, was $7.01 per MMBtu, an increase from $6.35 in the same period the previous year. This was primarily the result of higher Trinidad gas costs related to increasing Tampa ammonia prices – the primary benchmark to which those gas costs are indexed.
We recognized a $41 million charge during the quarter – included in other expenses – for a provision related to a settlement of antitrust claims filed in the US. These claims – which were completely without merit but would have resulted in a multi-year effort in time and significant cost to defend – were settled on January 30, 2013 for $43.75 million, to avoid an unnecessary distraction from the production of potash and serving the needs of our customers. Provincial mining and other taxes were $18 million for the fourth quarter, up from the same period in 2011 when our tax expense was minimized by higher accruals recognized earlier in the year relative to our expected expense by year-end. Income taxes in the fourth quarter were down $134 million from 2011 due to lower earnings, particularly in potash. Capital-related cash expenditures, primarily associated with our potash expansion projects, totaled $628 million in the fourth quarter, bringing our 2012 total to $2.1 billion. Total anticipated spending on these projects is now more than 80 percent complete.
Agriculture is inherently an unpredictable business – from variability in weather and growing conditions to government policy changes that can affect the decisions of farmers. This reality returned to the forefront in 2012, as crop production challenges pushed prices for corn and soybeans to record highs. These rising prices created an expectation that a surge in fertilizer demand – especially for phosphate and potash – was imminent, but this failed to consider that our business is tied to growing seasons and does not necessarily move in lockstep with the rise and fall of commodity prices. As we enter 2013, farmers in many parts of the world are only now preparing for their opportunity to help meet the global need for grains and capitalize on higher crop prices. Given the importance of crop nutrients to yields and the affordability of fertilizer as a percentage of crop revenue, we believe demand is poised for a rebound.
Potash Market Outlook
Increased demand is beginning to take hold in most major potash markets. We believe buyer confidence has been bolstered by the recent settlement of new contracts with China, leading many that had temporarily delayed or stopped purchasing to re-engage. We expect demand to accelerate in 2013 and anticipate global potash shipments for the year to be between 55 million and 57 million tonnes, well above the approximately 51 million tonnes shipped in 2012. In North America, demand is expected to be strong entering the spring planting season. Supportive economics and the expectation of large planted acreage are anticipated to result in significant demand at the farm level. While dry conditions in certain regions could potentially weaken demand, we forecast 2013 shipments to this market at approximately 9.5 million tonnes. With limited inventory positioned in advance of the season, we anticipate that our ability to keep pace with just-in-time orders will be a competitive advantage in this market. Latin America is expected to remain a region of strength, with 2013 demand poised to surpass last year’s robust levels. In contrast to its slow start in 2012, Brazil is buying early in the year – in part to reduce the pressure of expected record volumes on its limited port capabilities during peak import periods. For the year, we anticipate demand in Latin America will reach approximately 10 million tonnes, and expect to be well positioned to serve this market through Canpotex and our New Brunswick facility. After delaying new contracts for seaborne deliveries during the second half of 2012, China began to secure them late in the year. By mid-January, it had settled with all major potash suppliers for delivery during the first half of 2013 – including record volumes committed with Canpotex. While these large commitments will help meet China’s significant potash requirements, we anticipate its internal needs will grow in 2013 as it works to improve lagging crop yields. We expect its demand will be in the range of 11-11.5 million tonnes for 2013, with between 6.5 million and 7.0 million tonnes coming from imports. We believe the challenges that affected Indian potash demand during 2012 – including high retail prices due to fertilizer subsidy reductions, weakened currency and fiscal uncertainty – are unlikely to improve meaningfully in 2013, but anticipate shipments to this market will surpass the depressed levels of last year. With limited inventory to draw from and the potential for improved affordability at the farm level acting as a catalyst, we anticipate India will need to begin securing new supply during the first quarter of 2013 and forecast full-year demand will be in the range of 3.5-4.5 million tonnes. While this would reflect an increase in potassium applications from recent levels, the agronomic risk of under-application continues to present a major barrier to improving yields in the long term. In other Asian countries – those outside of China and India – we anticipate the consumption strength that was masked by destocking efforts in 2012 will support demand growth. Fueled by a need to meet the demands of the region’s potassium-intensive crops, activity in this market has begun to accelerate. We forecast shipments for the year to approximate 8.5 million tonnes.
In this environment, we estimate our 2013 potash segment gross margin will be in the range of $1.9-$2.4 billion, with shipments forecast between 8.5 million and 9.2 million tonnes. While strengthened global demand is expected to translate into improved sales volumes, our gross margin guidance reflects lower prices in spot and contract markets compared to 2012 levels. We forecast 2013 operational capability of 12.4 million tonnes before the impact of market-related downtime. This total reflects available new capacity from our expansion program as well as the loss of tonnage from Esterhazy following the completion of our tolling agreement with The Mosaic Company (Mosaic). The reversion of this tonnage to Mosaic will temporarily reduce our share of 2013 Canpotex shipments, but we are positioned to complete a Canpotex allocation run for our Cory expansion during the first half of the year that is expected to partially offset this loss. Our guidance includes a successful completion of this run during the first half, and it accounts for approximately 0.2 million tonnes of our second-half sales volumes assumptions. Given our expected operational capability for 2013 and our stated sales volumes guidance, we see the need for additional market-related downtime at our facilities during the year. Based on union notifications to date, we anticipate 17 shutdown weeks in the first quarter. Despite this downtime, we expect our full-year cost of goods sold to benefit from higher operating rates as well as the absence of higher-cost tonnes from Esterhazy. In phosphate, the expectation of strong demand for fertilizer products in the North American market is likely to be offset by the continued depression in Indian requirements and result in weaker fertilizer margins than we captured in 2012. Feed and industrial demand is forecast to remain relatively strong and margins are anticipated to be near those generated last year. Although the historically high nitrogen prices experienced in 2012 are likely to ease, we anticipate that strong agricultural and industrial demand will keep margins at supportive levels. Our ammonia plant restart at Geismar, expected to add approximately 0.5 million tonnes of ammonia capacity, is now anticipated to have significant production available for sale beginning in March of this year. We believe these tonnes could help us achieve another record gross margin year in this nutrient. In this environment, we forecast our combined phosphate and nitrogen gross margin for 2013 to be in the range of $1.5 billion to $1.7 billion. Income from offshore investments by way of dividends and share of equity earnings is expected to approximate $320-$380 million in 2013, while selling and administrative expenses are forecast to be between $240 million and $260 million. We anticipate finance costs of $100-$130 million. Capital expenditures for the year – excluding capitalized interest and major maintenance and repair – are expected to be approximately $1.5 billion, with a significant portion of this total related to our remaining potash expansion projects at New Brunswick and Rocanville. Included in this estimate is approximately $500 million of sustaining capital. With reduced capital spending anticipated in potash, which impacts the calculation of the Saskatchewan potash production tax, we expect provincial mining and other taxes to be higher than 2012 levels and approximate 11-13 percent of total potash gross margin. Our 2013 annual effective tax rate is forecast to be 25-27 percent. Based on these factors, PotashCorp forecasts first-quarter net income per share in the range of $0.50-$0.65 and between $2.75 and $3.25 per share for the full year.
“The only certainties in agriculture are that the world depends on farmers for food and that increased production is required to meet the demands of a growing population,” said Doyle. “We recognize that ebbs and flows in fertilizer demand will always be part of our business, but we believe the factors that limited demand this past year – destocking and deferred purchases – will begin to drive an even greater need for our products in 2013 and beyond. We believe our approach to managing and developing our assets has PotashCorp well positioned for improved performance as we move forward.”
- All references to per-share amounts pertain to diluted net income per share.
- See reconciliation and description of non-IFRS measures in the attached section titled “Selected Non-IFRS Financial Measures and Reconciliations.”
- Canpotex Limited (Canpotex), the offshore marketing company for Saskatchewan potash producers.
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