PotashCorp beats Q1 earnings estimates

Potash Corp. of Saskatchewan (TSX: POT; NYSE: POT) is off to a good start, as it has reported strong first-quarter 2014 earnings, beating the company’s guidance and analyst expectations and bumping up its full-year forecast.

During the first quarter, the Saskatoon-based firm earned US$340 million, or US40¢ per share. This includes a US$69-million special dividend from the company’s investment in Israel Chemicals and a US$38-million non-cash impairment charge related to its share in Sinofert Holdings Ltd.

Adjusted earnings per share were US38¢ — above PotashCorp’s US30¢ to US35¢ target and the US35¢ consensus analyst estimate. Compared to the same period last year profits declined 39%, but were above US26¢ per share in the fourth quarter, owing to rising demand and prices for the company’s three nutrient products.

“After volatility in the back half of 2013, we entered this year with a much improved and more stable environment. Our first-quarter earnings of US40¢ climbed sharply from the fourth quarter of 2013 and surpassed the upper-end of the guidance range we provided in January,” Bill Doyle, the company’s outgoing CEO, said on a conference call.

He added that though prices for potash, nitrogen and phosphate picked up during the quarter, they were still much lower than the prices seen in the first quarter last year. In comparison, average realized prices declined 31% to US$250 per tonne for potash, 21% for nitrogen and 12% for phosphate.

This led to lower gross margins of US$565 million, down from US$867 million a year ago.

For potash, the gross profit fell 40.5% to US$300 million, as lower prices negated higher output, sales and declining costs. Compared to a year ago, potash production grew 20% to 2.4 million tonnes on higher demand and sales slightly increased to 2.3 million tonnes, despite some shipping problems.

PotashCorp notes that last year’s organizational changes — which included reducing high-cost production and cutting its workforce by 18% — led to a 13% drop in per-tonne costs, with more improvements expected this quarter.

The company’s nitrogen and phosphate segments also contributed less than they did a year ago. Gross profits were down 12% to US$239 million for nitrogen, and 72% to US$26 million for phosphate.

Doyle says the phosphate margin was well below expectations, with several operating headwinds reducing output during the quarter, although the problems have subsided. “The production challenges that we faced earlier in the year appear to be behind us. Our plants are now operating in full capacity,” he said on the call.

The company expects that the potash market will improve as shipments to key markets — including China and India — pick up. As result PotashCorp has lifted its full-year earnings guidance by US10¢ to US$1.50 to US$1.80 per share, and anticipates second-quarter earnings of US40¢ to US45¢ per share.

The firm says it is on track to reach its targeted US$15- to US$20-per-tonne savings in potash cash costs during the year, along with finishing its US$2-billion share-purchase program in August.

Former Inmet Mining CEO Jochen Tilk will replace PotashCorp’s retiring CEO in July, with Doyle staying on as a senior advisor until June 2015.

On the financial news, PotashCorp shares stayed relatively flat at C$39.02 and US$35.43.

Raymond James analysts have increased their target price to US$38.50 from US$36 — mainly due to the better outlook for the global potash market — and have an “outperform” rating on the stock.