PotashCorp’s Q1 misses the mark

Potash Corp. of Saskatchewan’s (POT-T, POT-N) first-quarter profits disappointed with lower potash sales, curtailed production and increased costs. But after trimming its 2012 earnings guidance, the Saskatoon-based company expects “near-record” earnings for the second quarter.  

Following three strong quarters in 2011, PotashCorp came to a “screeching halt” in the fourth quarter, and tumbled even further during the three months ended March 31, 2012, reporting earnings per share of 56¢. This is well below the consensus of 63¢, and last year’s record first-quarter earnings of 84¢ per share.

The period’s earnings before finance costs, income taxes, depreciation and amortization of US$813 million slipped below the US$1.1 billion earned a year ago. 

“We came into the year facing the same challenging conditions we saw at the close of 2011, with fertilizer buyers around the world moving cautiously, choosing to defer purchases rather than positioning inventory,” PotashCorp’s president and CEO Bill Doyle said in a conference call. 

While the company anticipated a cautious start, it didn’t expect it would take until the end of the first quarter for potash and phosphate demand to increase.

Quarterly sales equalled 1.2 million tonnes of potash, down from the 2.8 million tonnes sold a year ago. 

This marks the lowest potash sales volume since the fourth quarter of 2009, notes Joel Jackson, an analyst at BMO Capital Markets. 

“North American dealers worked down inventories and purchased only to meet immediate needs of farmers, who delayed their own buying decisions to the last possible minute before the planting season arrived,” Doyle explained. 

Domestic shipment totalled 400,000 tonnes, compared to 1.1 million tonnes a year ago. 

For international markets, potash shipments plummeted as China settled new supply contracts in late March with Canpotex — the offshore marketer for the big-three Saskatchewan potash producers — and Chinese fertilizer firm Sinofert. 

In India, customers deferred shipment for most of the remaining tonnage on the existing contracts into the second quarter, as “reduced potash subsidy levels and higher retail pricing” destroyed demand, Doyle notes. 

“Even in markets like Latin America and Southeast Asia where potash consumption remained strong, dealers met demand by drawing down inventories built in 2011,” he said. 

In total 849,000 tonnes were shipped overseas, compared to 1.7 million tonnes a year ago.  

Slower sales led to lower potash production, and first-quarter output totalled 1.6 million tonnes, down from 2.6 million tonnes a year ago. 

This led to 29 inventory-related downtime weeks at the company’s Lanigan, Rocanville and Allan facilities. 

Average realized potash price was US$435 per tonne, up 19% from last year’s first quarter reflecting lower sales shipped to offshore contract markets. 

PotashCorp also reported first-quarter gross margins of US$219 million for nitrogen, which was a record, and US$152 million for phosphate — a slight miss. 

Overall, the slowdown in first-quarter shipments led the company to scale back its 2012 earnings guidance to US$3.20 to US$3.60 per share, from US$3.40 to US$4 previously. 

This revision mainly resulted from “lower expectations [about 600,000 tonnes] for potash shipments, with a reduction in expectations from North America and India,” BMO’s Jackson says. 

PotashCorp notes Canpotex should complete deliveries under existing contracts with Indian customers by late June.   

“Despite the bumps on the road over recent months, the reality of our business is that the void created today must be filled tomorrow,” Doyle said, adding that record global potash consumption is projected between 53 million and 56 million tonnes for 2012. 

“Dealers who defer purchases must eventually restock to meet the needs of their customers,” he said.

PotashCorp anticipates near-record earnings of US90¢ to US$1.10 per share for the second quarter. 

It expects to ship up to 9.2 million tonnes of potash for the year.

On the first-quarter news, PotashCorp closed down 3% to $42.25 per share, as 2.5 million shares changed hands.