Potash Corp.’S Financial Results ‘Below Potential’

Potash Corp. of Saskatchewan’s (POT-T, POT-N) sales volumes of potash last year were the lowest since it became a publicly-traded company in 1989.

That’s concerning because potash is the biggest contributor to the company’s gross margins; in 2009 potash made up 71% of the $1 billion the company generated, with phosphate and nitrogen laying claim to the rest.

For the full year, earnings fell to US$987.8 million or US$3.25 per share, well below 2008’s US$3.5 billion or US$11.01 per share, but still the third highest in the company’s history. In the fourth quarter, earnings stood at US$243.6 million or US80¢ per share, down from US$788 million or US$2.56 per share in the year-earlier quarter.

Earnings before interest, taxes, depreciation and amortization (or EBITDA) totalled US$414.2 million in the fourth quarter and US$1.5 billion for the year, while cash flow prior to working capital changes reached US$503.5- million for the quarter and US$1.4 billion for the year. “With the substantial decline in global fertilizer demand, both measures trailed the performance of the previous year,” the company said.

The good news is that the fourth quarter marked “the beginning” of a recovery in fertilizers, Potash Corp. asserts. After nearly 18 months of limited purchasing, stronger crop margins “appeared to re-focus farmers and fertilizer dealers on the need to address nutrient shortfalls in the soils and distribution chain,” the company explained.

“Domestic shipments from North American producers were up 10% over the fourth quarter of 2008, as fertilizer buyers responded to immediate demand from farmers,” the company stated. “Offshore, India continued to receive contracted volumes from global potash suppliers and Brazilian customers purchased product to meet their immediate needs.”

China also reached a settlement at the end of the year with a major potash supplier after nearly a year without a contract, which “appeared to renew buyer confidence that further downside pricing risk was limited.”

Looking ahead, the company says it is optimistic about the long-term drivers of its business: population growth and stronger economies in developing nations, lead to greater demand for food. As evidence, it points to global grain consumption last year, which rose a year-on- year 2%.

“Rising demand for food places pressure on the world’s grain supplies and, as a result, crop prices remain well above historical levels,” Potash Corp. outlined in a press release. “This has created a favourable situation for many farmers, whose planting decisions are influenced by the ability to generate a return on their investment. We believe crop prices will remain strong over the coming years, providing farmers with the financial incentive to strive for increased production.

“Replenishing nutrients in the soil is a long-term exercise,” it added. “Recognizing the opportunity that comes with strong margins, farmers appear to be gradually returning to normal fertilization practices and are expected to demand more fertilizer in the years ahead.”

According to Potash Corp.’s forecasts, India will resume potash imports under a new contract in the first half of this year and import between 5.5-6 million tonnes, while Brazil will import between 5.5-6.5 million tonnes and Southeast Asia 4-5 million tonnes.

The company anticipates that China will consume 8-9 million tonnes and import 4.5-5 million tonnes, while demand in North America for potash will hit 8.5-9.5 million tonnes.

Potash Corp. expects its 2010 potash gross margin to tally $1.4- 1.8 billion and the company’s total shipments to reach 7-8 million tonnes.

In terms of other nutrients, greater demand and higher prices could push combined phosphate and nitrogen gross margin in 2010 to US$400-$500 million.

Capital expenditures, excluding capitalized interest, are anticipated to be about $1.9 billion this year, of which $300 million will be sustaining capital.

Potash Corp. is forecasting 2010 net income per share in the range of US$4-5, including US70¢-$1 in the first quarter.