WILLIAM J. DOYLE, PRESIDENT AND CEO
The successes your company enjoyed in 2007 can be traced back to our visits to China more than two decades ago. That is when the seeds of opportunity for our fertilizer business were planted and where the roots of PotashCorp's long-term strategy took hold.
Particularly vivid are memories of the hospitality and ambitions of our hosts, as we were offered the finest food available in the country at that time. It was abundantly clear that few in China were then able to enjoy the quality of food we had come to expect in North America – a situation the country was eager to remedy. We knew this would be a foothold on which to build our fertilizer business and would have an impact on long-term issues of global food production and human development.
Today when we visit China, we see people enjoying beef, pork, poultry and fish that can rival food produced anywhere in the world. This reflects a fundamental shift that is taking hold, most notably among the growing populations in China, India and Southeast Asia. With strengthening economies in these regions, more people have higher incomes and their first opportunity to improve their standard of living – and, specifically, the quality of their diets.
These changing conditions are increasing the demand for crops used for food, animal feed, fiber and, more recently, fuel. With that demand comes a growing need for fertilizer ingredients – especially potash. This has spurred a surge of demand-driven growth for PotashCorp.
After years of patient and steady steps forward, we are now growing by significant leaps. In 2007, we achieved:
- earnings of more than $1.1 billion, a fourth consecutive annual record;
- record gross margin in each of our three nutrients; and
- a 201 percent increase in our share price.
More importantly, we are operating from a foundation that puts us on solid footing for an extended period of growth and success.
The desire for better food in developing countries is not a fad. People who have been introduced to more nutritious, protein-rich foods will not return to starch-based diets and the hundreds of millions of people still waiting to make this shift will not be denied.
As we recognized many years ago, this represents a significant continuing opportunity for your company – today and tomorrow – and we are well positioned to capitalize on it.
A Platform for Growth
The best insight into our changing business environment is found in the markets of cities like Shanghai, Seoul, Mumbai and Jakarta – where people now expect better food – and in agricultural fields around the world.
Farmers are seeking to maximize the productivity of their land and they understand that the best way to do this is to improve the nutrient content in their soil. In India, you will see hundreds of farmers waiting in line for hours to purchase a single bag of fertilizer, with this scene being repeated all over the country.
Even though this use of fertilizer helped the world's farmers grow record crops last year, food supply remains a pressing issue. Production of wheat and coarse grains in the 2007/2008 crop year is expected to fall short of consumption for the eighth time in nine years, straining already record-low inventories. Sustainable increases in food production must be achieved to feed the world's rising population, now and over the long term.
Our life-giving products play an essential role in that productivity. In many regions, farmers have failed to adequately replenish the nutrients drawn from the soil by previous crops. That is one of the reasons corn yields in Asia are typically between one-quarter and one-half those achieved in North America.
While many countries have begun to increase their nutrient applications, they still have a long way to go. On a combined basis farmers in China, India and Brazil need to more than double potash application rates to attain scientifically recommended levels. Growing economic strength, together with higher prices for crop commodities, is now providing motivation and money for farmers to invest in the necessary fertilizer products.
At PotashCorp, we are preparing to deliver on that need.
Bridging Today to Tomorrow
Potash, the foundation of our company, is the ingredient with the greatest growth potential. While all three nutrients have been under-applied in many regions, this has been most pronounced in potash.
Farmers striving to correct that deficiency have pushed the world's potash producers to their limits. As a result, supply is tight – with limited opportunity for our competitors to increase production at existing facilities.
Developing a greenfield mine takes five to seven years and presents many economic and logistical challenges. With no new significant mines announced, we have a pretty clear picture of global supply fundamentals for at least the next five years – and we like what we see. Potash supply is likely to remain tight, and much of the expected new capacity will be ours.
The Potash First strategy that has set our direction for many years has prepared us for these conditions. In a supply-driven market, we patiently and dutifully managed our production to minimize downside. Now we are in a position to demonstrate the power and potential of our potash capacity in a demand-driven market.
In 2007, we announced plans to invest $4.5 billion in expansion and debottlenecking projects at our potash operations. The increases in supply will come on stream incrementally over the next five years, allowing us to capture a significant share of growth in global demand as it occurs. We expect this will lead to robust returns for your company for years to come.
In addition to our own Canadian operations, our potash-related investments in Jordan, Israel, Chile and China are increasingly valuable – not only for their financial contribution but for the additional insight we gain into emerging markets.
The Potential of PotashCorp
As pleased as we are with our performance in 2007, including a record $912 million in potash gross margin, we are far from reaching our full potential.
In 2007, tight supply/demand fundamentals led to significant potash price increases, with global spot markets nearly doubling. While we captured a portion of the benefit, rapidly rising ocean freight rates and a strengthening Canadian dollar had a noticeable impact on our performance. As a result, our growth was driven more by volumes than by margins for much of the year. By the third quarter, however, higher prices began to take hold and we expect the combination of greater margins and volumes to drive our business in 2008 and beyond.
In addition, volume increases reduce our per-tonne fixed production costs and mining taxes, further expanding our earnings. Our investments in offshore potash companies enhance our results even more, as these businesses benefit from the same market conditions and are expected to deliver increased earnings.
Our strength in potash is complemented by world-class assets and improving fundamentals in nitrogen and phosphate, which combined to contribute $969 million in gross margin in 2007. Rising demand for nitrogen tightened the market at the same time as higher ocean freight rates and European gas prices added pressure by diverting trade from the US market, increasing our nitrogen margins. We continued to generate significant nitrogen gross margin from our facility in Trinidad, with its lower-cost gas and easy access to the United States.
In phosphate, rising demand for fertilizers tightened markets while world prices for rock and sulfur inputs increased substantially, benefiting producers like PotashCorp with their own rock and lower sulfur costs. In addition to our strength in feed and industrial phosphate products, we capitalized on improved conditions in fertilizers.
Even after a year of record gross margin in all three nutrients, we believe this is only the beginning. Increasing our gross margin performance will be our focus as we move forward.
Delivering on Stakeholder Expectations
As we continue to build our business, we remain firmly grounded by the expectations of our stakeholders. We operate with a long-term view and know that our success is built on strong partnerships with customers, employees, investors, suppliers and the communities where we live and do business. We will continue to work closely with these groups to contribute to their success – and ultimately enhance our operations.
Our Board of Directors understands the importance of our stakeholders and continues to lead us to deliver exceptional performance for the people who have put their trust, effort and capital behind this company.
Your company is in an unrivaled position to capitalize on growth in demand for fertilizer ingredients, especially potash. Yesterday, we dreamed about and planned for ways to maximize the value of PotashCorp's incredible resources. Today, we are able to measure the results.
We move forward into tomorrow with a tremendous sense of excitement and optimism about our ability to deliver even greater performance.
William J. Doyle, President and Chief Executive Officer
February 20, 2008
