PotashCorp’s Q4 earnings fall 46%

Potash Corp. of Saskatchewan (TSX: POT; NYSE: POT) has posted a 46% drop in its fourth-quarter 2013 earnings and a weaker-than-expected 2014 guidance, as tough market conditions linger for crop nutrients.

Fourth-quarter earnings were US$230 million, or US26¢ per share, which include a US$60-million severance-related charge due to staff reductions and operational changes announced last December to lower operating costs. In comparison, the Saskatoon-based firm earned US48¢ per share in the same period of 2012.

Once adjusted for the one-time charge, earnings per share were US31¢, which is below the US33¢ consensus analyst estimate.

“It was a challenging quarter,” William Doyle, PotashCorp’s CEO, said on a conference call. “Pricing headwinds — most notably in potash — persisted as global markets struggled to find stability.”

The company, like many other fertilizer producers, is still reeling from the sharp drop in potash prices that occurred after Russia’s Uralkali (LSE: URALL), the world’s biggest potash producer, pulled out of its sales partnership with Belarus’ state-owned firm Belaruskali last July.

Looking to keep costs down, PotashCorp scaled back its workforce by 18% in late 2013 and reduced output from its higher-cost operations. It plans to shut some down entirely.

Total gross margins fell 21% for the December quarter to US$460 million, as lower prices in all three nutrient products — potash, nitrogen and phosphate — offset improved costs and stronger sale volumes.

Compared to the year earlier, the averaged realized prices during the quarter declined 27% to US$282 per tonne for potash, 29% for nitrogen and 21% for phosphate.

As a result, quarterly gross profit fell 19% to US$228 million for potash, despite sales increasing 34% to 1.8 million tonnes and cash costs falling 27% to US$109 per tonne, owing to the declining Canadian dollar and reduced higher-cost tonnes.

PotashCorp’s nitrogen and phosphate segments also contributed less than they did in 2012, with quarterly gross profits of US$188 million and US$44 million. 

This dragged the producer’s annual gross margin down 18% to US$2.8 billion, of which potash delivered US$1.6 billion, down US$390 million from 2012, despite shipments climbing 10% to 8.1 million tonnes. The average realized potash price for the year was US$332 per tonne.

Nitrogen and phosphate kicked in US$913 million and US$304 million in gross profits, down US$65 million and US$165 million from 2012.

With the depressed margins, full-year earnings fell 14% to US$2.04 per share.

And the outlook for 2014 doesn’t appear brighter.

“The full impact of the significant price erosion in 2013 will have a lingering effect on our realizations and results through the first part of 2014,” Doyle said.

The impact is expected to stifle this year’s profits. Earnings per share for the first quarter are estimated at US30¢ to US35¢, and for the full year at US$1.40 to US$1.80, missing the US$2 estimate.

“We expect little upside to potash demand and prices in 2014 as the supply–demand balance deteriorates,” writes BMO analyst Joel Jackson. He adds that PotashCorp is “attempting to hold market share while focusing on cutting costs and shuttering capacity, looking to other global producers to show discipline too — but risks getting neither price nor volume.”

Jackson has a $30 target and “market perform rating” on the stock.

The producer estimates 2014 gross margins for potash of US$1 billion to US$1.3 billion and shipments of 8.25 million tonnes, both below last year’s levels. Phosphate and nitrogen are expected to contribute a combined US$1 billion to US$1.2 billion in gross margins.

Despite the conservative guidance, Doyle says the fundamental drivers remain “supportive.” Because of last year’s record crop production, farmers will need to replenish important soil nutrients, leading to more buying, he notes.

CIBC analyst Jacob Bout says the Chinese contracts for the first half of 2014 are encouraging.

Recently Canpotex — the international marketing arm for PotashCorp and fertilizer producers Agrium (TSX: AGU; NYSE: AGU) and Mosaic (NYSE: MOS) — signed a deal to sell 700,000 tonnes of potash to China’s Sinofert. While the price wasn’t disclosed, Bout estimates it should be US$305 per tonne, similar to what the Chinese firm offered Uralkali.

Given the lower 2014 earnings, Bout estimates the company’s free cash flow may slide 8% to US$1.2 billion this year, leaving not a lot of room to finish its US$2-billion stock buyback by August.

PotashCorp bought back 14.14 million shares for US$445 million at an average price of US$31.46 per share in 2013.

“With little funds available from the free cash, POT will have to use its balance sheet to continue with the share-purchase program in 2014,” he writes. Bout has a $35 price target and rates the stock as a “sector performer.”

PotashCorp closed Jan. 31 — the day after releasing the year-end results — at $34.92, down 23% from its 52-week high of $45.13 reached last May.