Potash Corp. of Saskatchewan enjoys record year — Company’s potash sales and profits go through the roof

Record fourth-quarter earnings helped make 1997 the seventh consecutive year of improved earnings for Potash Corp. of Saskatchewan (POT-T).

PCS is the world’s largest potash company by capacity, the third-largest phosphate producer and the second-largest producer of nitrogen. It pulls product from eight potash mines in Saskatchewan, New Brunswick and Utah. Its phosphate plants are in Florida, North Carolina and Louisiana. Its nitrogen production comes from seven U.S. states, plus the Caribbean nation of Trinidad and Tobago.

PCS earned US$72.4 million (or US$1.35 per share) in the fourth quarter, compared with US$46.2 million (US$1.01 per share) in the same quarter of 1996, according to a report based on preliminary, unaudited figures.

Three of the four quarters of 1997 were records for the company; total net income for the year was US$297.1 million (US$5.68 per share), 42% above the USUS$209 million (US$4.59 per share) earned in 1996.

Net sales of US$2.3 billion for the year exceeded, by 66%, sales of US$1.4 billion in 1996. Cash flow from operations, exclusive of changes in working capital, totalled US$503.1 million. The company attributes these improved results to its acquisition, in March, of nitrogen producer Arcadian Corp., along with high potash volumes sold at higher prices.

States PCS Chairman Charles Childers: “By building on a strong operating and acquisition strategy, PCS has grown its earnings per share at an annual compounded growth rate of 50% over the past four years, demonstrating the good balance our product line provides.”

At US$585.2 million, the company’s gross margin in 1997 was 52% higher than in 1996 (US$384 million). On a percentage basis for 1997, potash, phosphate and nitrogen contributed 44%, 33% and 23%, respectively, of total gross margin.

World potash markets were strong in 1997. China, India and Brazil increased their purchases, and the North American market was healthy, reflecting new U.S. legislation that allows farmers to plant more acres.

PCS responded to the increased demand by producing a record 6.48 million tonnes, 12% above the 1996 total of 5.78 million tonnes. This higher production lowered the company’s cost per tonne, which also benefited from 8.2 fewer weeks of shutdown in 1997.

The company entered 1998 with historically low inventories. Current plans call for fewer shutdowns in this year’s first quarter than in the same quarter last year, in order to meet the market’s needs.

Strong offshore and domestic market conditions were reflected by an increase in prices of 6% on a year-over-year basis. Offshore prices were affected by a large order from China in the fourth quarter at higher prices, and by the highest volumes sold to Brazil since 1980.

Fourth-quarter potash sales volumes were up by 26% over the same quarter of 1996, whereas prices rose by 15%. China’s order helped raise offshore volumes and prices by 13% each. PCS reports that domestic volumes and prices jumped 46% and 21%, respectively, because customers purchased in anticipation of a good spring season and ahead of expected price increases.

PCS issued a new domestic price list on Jan. 12, 1998, reflecting an increase of US$6 per short ton effective March 1.

The strong demand in 1997 was coupled with restricted supply in the wake of the closure (due to flooding) of two competing mines — the Eddy in New Mexico and the Potacan in New Brunswick.

PCS continues to negotiate the acquisition of the Potacan property, and plans to use its mill to upgrade standard-grade potash from Saskatchewan to granular product for markets in Eastern Canada and the U.S.

The company sold 4.4 million tonnes of phosphate products, 3% more than in 1996, keeping pace with world phosphate consumption. The addition of the phosphate facilities at Geismar, La. (part of the acquisition of Arcadian Corp.) helped to boost production.

Phosphate production costs benefited from lower ammonia costs, but were negatively affected by lower ore recoveries at Aurora in North Carolina and by higher sulphur costs.

Almost three-quarters of PCS phosphate production went to fertilizer customers, while phosphate animal feed sales accounted for most of the remainder. Sales to the industrial market jumped 68%, to a record 363,000 tonnes, and of the total phosphate gross margin, 47% came from feed and industrial products.

Liquid fertilizer prices were higher in 1997 than in 1996, while prices for DAP, the major solid fertilizer, were below 1996 levels in both offshore and domestic markets. PCS chose to cut back on offshore liquid sales in 1997 and upgrade its phosphoric acid sales in North America, where prices were better.

Fourth-quarter phosphate revenue was up 8.5% over the same period in 1996, with greater revenue from liquid and industrial sales. On a year-over-year basis, fourth-quarter prices for liquids and feed supplements were up, whereas prices for DAP were down, confirming the value of the company’s diversified product mix, PCS reports. The average industrial price was down because of changes in product mix due to the addition of Geismar.

Fourth-quarter domestic DAP volumes were lower than in the same quarter of the previous year, with winter wheat plantings in the U.S. hitting a 25-year low, but offshore DAP volumes reached record heights. Fourth-quarter domestic liquid sales were robust, with purchases going to fall application and to storage for starter fertilizers in the spring.

Record export levels were reported for feed phosphates. In addition to existing markets, the company sold to new markets in Brazil and Southeast Asia in 1997. Following its policy of keeping most of its phosphate rock for its own purposes, PCS sold less rock, but at higher prices.

In 1997, PCS sold more than 6 million tonnes of manufactured and purchased nitrogen products (70% fertilizer and 30% industrial). On a gross-margin basis, fertilizer contributed 49%; industrial, 51%.

The nitrogen market struggled in the second half of 1997, with China’s embargo on imports of urea (a compound containing nitrogen) depressing sales and prices of that product and spreading into markets for ammonia and other products. Faced with lower urea prices, producers upgraded less ammonia, increasing market supplies of ammonia and pulling prices down by the end of 1997. Prices for nitrogen solutions were also affected by new U.S. supply coming on stream, competitive imports and weak fall demand, PCS reports.

In 1997, industrial customers took 75% of the urea, ammonia and ammonium nitrate PCS produced in the U.S., and all the nitric acid. Additional capacity coming on stream at Geismar in late 1998 should increase sales.

Fourth-quarter natural gas costs were up 7.6% over the third quarter. PCS continues to benefit from its hedging program and favorable gas contracts in Trinidad, which tie the price of natural gas to the price of ammonia. When PCS’s fourth plant there begins operating in the second quarter of 1998, nearly 45% of PCS ammonia will be produced under these conditions.

Overall, PCS’s operating activities earned the company US$467.8 million in 1997, 58% more than the US$296.2 million of 1996. The company paid dividends of US$55.3 million and made capital expenditures on plants and equipment of US$160.3 million, excluding capitalized turnarounds in nitrogen.

The acquisition of Arcadian Corp. increased interest expense by US$34.7 million. The company made long-term debt payments of US$300 million, and ended the year with US$1.1 billion in long-term debt. Its debt-to-capital ratio, which rose to 42.7% at the end of the first quarter (after the purchase of Arcadian), had dropped to 35.7% by the end of the year.