PDF (129 KB)

|

Replay Webcast

Potash Corporation of Saskatchewan Inc. (PotashCorp) today announced record fourth-quarter earnings of $2.56 per share¹ ($788.0 million), more than double the $1.16 per share ($376.8 million) earned in the same period last year. This represented our third-best quarter ever and pushed our 2008 earnings to $11.01 per share ($3.5 billion), more than triple the $3.40 per share ($1.1 billion) earned in 2007. This was PotashCorp’s fifth consecutive year of record earnings, reflecting the global need for fertilizer and, specifically, the increasing value of potash, our core nutrient.

Although the global economic crisis led to slower demand for all three nutrients and lower prices for phosphate and nitrogen, our potash operations drove fourth-quarter gross margin to $873.1 million, 63 percent above the $535.0 million generated in the same period last year. With all three nutrients achieving annual gross margin performance records, 2008 gross margin rose to $4.9 billion, a 161 percent increase over 2007’s $1.9 billion. Included in these results is $88.9 million in writedowns of year-end nitrogen and phosphate inventory values, which reduced earnings by $0.22 per share in the quarter. Earnings before interest, taxes, depreciation and amortization² (EBITDA) grew to $955.8 million for the quarter (compared to $526.7 million in last year’s fourth quarter) and raised full-year EBITDA to $5.0 billion, $3.1 billion higher than that of 2007. Fourth-quarter cash flow from operating activities prior to working capital changes² of $849.1 million was up from $431.9 million in the same period last year, raising the full-year total to $3.8 billion, compared to $1.5 billion in 2007.

Potash market conditions bolstered returns of our offshore investments in Arab Potash Company Ltd. (APC) in Jordan, Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile and Israel Chemicals Ltd. (ICL) in Israel, which together contributed $105.8 million to other income in the fourth quarter and, along with our investment in Sinofert Holdings Limited (Sinofert) in China, $362.8 million for the year, almost triple the 2007 total. The market value of our investments in these publicly traded companies, as of market close on January 21, 2009, was $5.1 billion, which equates to approximately $16 per PotashCorp share.

"The unprecedented global economic challenges of the fourth quarter were a sharp contrast to the positive operating environment of the first three quarters of 2008," said PotashCorp President and Chief Executive Officer Bill Doyle. “Our success over the course of the year demonstrated the resilience and adaptability of our company, as well as the effectiveness of our strategies in rapidly changing conditions. Potash, our core nutrient, holds unique advantages that enable us to deliver strong performance, even in a very difficult economic climate."

The economic crisis accelerated in the fourth quarter of 2008, affecting nearly every industry including global agriculture. Even after record harvests drew large volumes of nutrients from soils, fertilizer distributors and farmers suspended purchases in the face of the uncertainty of world markets. We believe this was largely a psychological barrier, as the economics of food production and fertilizer use remain very attractive. Although crop prices declined substantially amidst a widespread market and commodity sell-off, they rebounded to supportive levels by the end of the quarter. However, restricted access to credit due to the timing of the global financial crisis created more than a psychological barrier for farmers in South America, reducing fertilizer application rates during their primary planting season. This could have significant implications for crop production in this key exporting region.

In the US, the combination of a late harvest and uncertain economic conditions caused a deferral of fertilizer purchases. Against a backdrop of falling raw material prices and growing inventories, nitrogen and phosphate producers around the world – looking to move product or acquire cash – lowered prices. These factors contributed to farmers delaying purchases in anticipation of even lower prices. This put additional pressure on fertilizer distributors who were left holding large quantities of higher-cost inventories and in no position to purchase normal seasonal volumes.

Spot prices for nitrogen products fell sharply during the quarter. Demand for industrial nitrogen was severely impacted by the economic crisis, and with international nitrogen prices below cash production costs for many producers (including some in the US), significant worldwide capacity was shuttered by the end of the quarter. Solid phosphate fertilizers followed a similar pattern, with approximately 50 percent of world phosphate production reportedly curtailed by December 31.

Consistent with our long-held view, it was evident over the course of the quarter that the substantial lowering of prices in various key markets did not entice new demand or address farmers’ uncertainty about financial conditions.

In this environment, major spot markets for potash – North America, Brazil and Southeast Asia – were largely inactive while contract volumes continued to move to China and India at prices agreed upon in the first half of 2008. Potash inventories did not reach excessive levels due to inherently tight supply that had customers on allocation for much of 2007 and 2008, a labor strike at three of our facilities and widespread production curtailments throughout the industry in response to the global demand slowdown. During the fourth quarter, potash prices remained firm.

Fourth-quarter potash gross margin of $744.8 million was almost three times higher than the $256.4 million generated in the same quarter last year. Potash full-year gross margin was a record $3.1 billion, more than triple the $912.3 million generated in 2007.

Total realized fourth-quarter prices climbed to $625 per tonne, a 235 percent increase over fourth-quarter 2007 levels. The offshore realized price of $583 per tonne was 242 percent higher than in last year’s fourth quarter, and reflected a larger proportion of sales directed to contract markets with lower netbacks based on prices established earlier in the year. Fourth-quarter realized prices in the North American spot market reached $740 per tonne, up 246 percent from the same quarter last year and 32 percent from the trailing quarter, as a September 2008 price increase was realized.

Potash sales volumes of 1.4 million tonnes during the fourth quarter were 37 percent lower than in the same period last year and resulted in full-year 2008 potash volumes of 8.5 million tonnes, 9 percent below 2007 levels. Our offshore sales volumes of 1.1 million tonnes were down 27 percent compared to the same quarter last year, with full-year volumes of 5.6 million tonnes reflecting a 6 percent drop from 2007. During the quarter, Canpotex Limited (Canpotex), the offshore marketing company for Saskatchewan potash producers, shipped approximately 340,000 tonnes to China and 475,000 tonnes to India, the two largest contract markets. These totals were 45 percent lower and 107 percent higher, respectively, than shipments in the same quarter last year. Although spot market sales volumes declined abruptly in the fourth quarter of 2008 versus the same quarter last year, Brazil’s full-year volumes were only 3 percent lower than the previous year, reflecting the strength of spot market demand earlier in 2008. Our North American potash volumes were down 54 percent from last year’s fourth quarter, while full-year volumes of 3.0 million tonnes were 15 percent lower than 2007.

Potash cost of goods sold was approximately $33 per tonne higher quarter over quarter. This was primarily the result of increased royalties paid in Saskatchewan and New Brunswick, and strike and other labor costs that mainly resulted from work stoppages. A total of 24 mine shutdown weeks were taken in the quarter as a result of strikes at our Allan, Cory and Patience Lake facilities.

Nitrogen contributed $17.9 million of gross margin in the fourth quarter, compared to $136.7 million in the fourth quarter of 2007. This reflected the rapid decline in volumes, along with a $36.0 million writedown of inventories produced with higher cost natural gas early in the quarter. Our Trinidad operation generated $11.4 million in fourth-quarter gross margin, while our US operations added $6.5 million. Despite the weak fourth quarter, the strong global demand and pricing environment drove full-year nitrogen gross margin to a record $737.4 million, compared to $536.1 million in 2007.

Market prices for nitrogen products fell dramatically over the quarter. However, with most of our fourth-quarter nitrogen volumes sold early in the quarter when prices were at their peak, realized prices for ammonia were 42 percent above the same quarter last year. Urea prices were flat compared to last year’s fourth quarter while prices for nitrogen solutions rose 78 percent quarter over quarter on early fourth-quarter business.

The international ammonia market weakened considerably during the fourth quarter as large-scale cutbacks were made to operating rates in the phosphate and industrial sectors, which account for a significant portion of global ammonia import demand. This led to sizable curtailments in ammonia export supply (including a portion of our Trinidad operation). Our ammonia sales volumes for the quarter fell 23 percent from the same period last year and full-year ammonia sales volumes dropped 16 percent compared to 2007. Urea sales volumes were 14 percent lower than last year’s fourth quarter and contributed to full-year volumes declining 11 percent from 2007 levels. Sales volumes for nitrogen solutions were down 59 percent from the fourth quarter of 2007, pushing full-year volumes 11 percent lower than in 2007.

Our total average natural gas cost in the fourth quarter, including our hedge, was $6.16 per MMBtu, a 40 percent increase from the same quarter last year.

Due to substantially lower sales volumes, fourth-quarter phosphate gross margin of $110.4 million was 22 percent below the $141.9 million of last year’s fourth quarter. However, our unique ability to allocate phosphoric acid feedstock to a broad range of higher-netback downstream products proved beneficial to us in the quarter’s difficult market conditions. Liquid fertilizers generated $92.9 million of quarterly phosphate gross margin, industrial products added $20.0 million and feed phosphate $18.2 million. With rapidly deteriorating market demand and prices, solid fertilizers incurred a loss of $21.8 million, inclusive of a writedown of $52.9 million of inventory on hand at year-end that was produced earlier in the quarter with high-cost sulfur and ammonia. Notwithstanding the slow fourth quarter, robust demand and prices in the first three quarters led full-year phosphate gross margin to a record $1.1 billion, compared to $432.8 million in 2007.

Higher-priced sales early in the quarter led to increases in quarter-over-quarter realized prices for liquid fertilizer (+220 percent), solid fertilizers (+145 percent), feed (+153 percent) and industrial products (+91 percent). By the end of the quarter, prices for all products were negatively affected by market conditions, including rapidly declining spot prices for raw material inputs. This weakening was especially evident in the solid fertilizer sector, demonstrating the importance of our diverse phosphate product mix.

Solid fertilizer sales volumes fell 81 percent from the fourth quarter of 2007, while liquid fertilizer sales volumes dropped 42 percent. Feed sales volumes declined 53 percent as the beef, pork and poultry industries continued to suffer and many feed mills remained shut down. Sales volumes for industrial products, traditionally a more stable area of the phosphate business, declined a comparatively small 17 percent from the same quarter last year.

Although spot market prices for sulfur and ammonia, both key inputs for phosphate production, fell dramatically during the quarter, we will not realize the full benefit of these reductions until these inputs are consumed in 2009.

With higher potash prices and profitability in our potash segment, fourth-quarter provincial mining and other taxes rose to $109.0 million, or 15 percent of total potash gross margin. This was a $68.9 million increase from the same quarter last year. For the year, these taxes reached $543.4 million or 18 percent of total potash gross margin, a $408.0 million increase over 2007. Our selling and administrative expenses were $24.8 million lower quarter over quarter due to reduced compensation accruals because of a lower average share price over the period. The weakening Canadian dollar resulted in the recognition of a primarily non-cash foreign exchange gain of $62.8 million. We incurred an additional $17.5 million charge in the fourth quarter (included in other income) related to further writedowns of investments in certain auction rate securities.

Additions to property, plant and equipment were $427.7 million in the fourth quarter, a 90 percent increase over the same quarter last year, with the majority of capital spending on potash debottlenecking and expansion projects at Patience Lake, Cory, New Brunswick and Rocanville and load-out expansions at Rocanville and Allan. We repurchased for cancellation approximately 7 million common shares for $453.5 million, using additional borrowings under our credit facilities.

The duration and depth of the global economic crisis are impossible to predict, with governments, industries and individuals trying to understand and react to the current environment. This, however, does not alter the underlying fundamentals that drive long-term growth in demand for fertilizers. With world population now in excess of 6.7 billion and growing by 75 million people annually, the need to increase food production is real and immediate. In order to meet the growing necessity of sustaining and improving crop yields, proper fertilization is imperative. Successive record crops in both 2007 and 2008 did little to improve the global grain stocks-to-use ratio, which currently sits at 18.8 percent – substantially below historical levels. This concern was at the forefront early in 2008 as the potential for food shortages became evident. While attention shifted to financial issues in the second half of the year, potential food shortages remain a concern, and the problem could worsen as the economic crisis impacts farmers’ fertilizer buying patterns. This appears to be something other than an economic response, because crop prices continue to generate excellent returns for farmers. In the current environment, the payback on an appropriate fertilizer investment continues to be attractive, typically generating a return of $3 or more for every $1 invested. If farmers do not plant sufficient acreage or do not apply enough fertilizer – even for a single season – the impact on world food supply could be severe. Production decreases are already expected to occur in the exporting region of South America as a result of reduced fertilizer applications and drier weather. As farmers and dealers around the world return to more normal fertilizer purchasing practices in efforts to optimize yields and capitalize on the opportunity for strong returns, the potential exists for extremely tight supply/demand conditions.

In potash, growth in demand has exceeded increases in new supply, consuming all available potash production in recent years and leaving major markets short and on allocation through much of 2007 and 2008. While nitrogen and phosphate prices have fallen precipitously, the long-term underlying fundamentals for potash remain strong. The world’s ability to depend on continued brownfield expansions – additions of new capacity by debottlenecking or expanding existing sites – for significant new production is limited. However, the economic viability of a greenfield project depends in large part on a potash pricing environment that supports its development. A new potash facility carries financial challenges: the cost is measured in billions of dollars and the timeline for first production and any positive cash flow is at least five to seven years with subsequent lengthy ramp-up after construction completion. There are also significant qualitative issues such as the rarity of good deposits, difficulty in obtaining financing in the current credit environment, geological and geopolitical risks involved in this type of long-term project and the world’s limited amount of expertise and specialized equipment needed to successfully execute a potash project. Numerous mines have been damaged or destroyed by water inflow, an uninsurable hazard that can wash away investment capital. Despite increases, current potash prices still represent a challenge in justifying a greenfield investment.

This challenge underscores the importance and value of our Potash First strategy, as we believe the 6.2 million tonnes of brownfield operational capacity we are adding over the next four years is even more valuable today than when we announced the projects. Certain competitive potash projects in other regions have been delayed due to increased geopolitical risk and inability to secure financing. Our potash capacity expansions, which we have funded and expect to continue to fund through our strong cash flow, are progressing on schedule. We expect those at Lanigan and Patience Lake will be operational as demand returns. If for any reason demand does not materialize on the anticipated timelines, we will continue to follow our strategy of matching production to market demand to reduce volatility in our financial performance.

While we expect slow demand in all major potash markets early in 2009, the pace of sales should intensify in the second quarter. In North America, because farmers deferred fertilizer purchases in the fall when at least 40 percent of potash applications traditionally occur, we expect above-normal spring applications. This should draw inventories substantially lower by the end of the spring season and lead to considerable restocking of the system in the second half of the year.

Similarly, China produced a record crop in 2008, but was short on potash because of its late entry to the market last year. This creates a very strong agronomic need, as below-normal application rates for a second year could significantly affect yields. China entered 2009 without a contract in place and is not receiving any potash from Canpotex – a situation that could carry on through at least the first quarter. We expect China will require total imports of at least 7 million tonnes in 2009, substantially more than the 5.5 million tonnes imported in 2008. India’s contract extends to March 31, 2009 and its demand is expected to approximate 2008 levels.

In Brazil, the recent weakening of the real and the rise in soybean prices are positive for agricultural exports, but cannot correct the fertilizer applications missed during their spring planting season. Demand in this spot market is likely to be limited in the first quarter of 2009, although we expect Brazil to be largely de-stocked in the second quarter and back in the market near 2008 levels. Southeast Asian countries are now benefiting from an improvement in palm oil prices and are expected to maintain stable potash demand in 2009.

We expect 2009 gross margin for potash to be in the range of $4.5 billion to $5.5 billion, with total shipments flat to slightly below 2008 levels. With sales expected to be more heavily weighted to the last three quarters of the year, we are curtailing production from our 2009 operational capability early in the year by more than 2 million tonnes.

In nitrogen, ammonia demand is expected to remain soft due to economic conditions, with industrial demand likely to be slow at least through the first half. However, with substantial capacity offline and questions about natural gas reliability in some key producing regions, conditions could improve more quickly. For example, urea prices rose substantially in early January and, with the spring season approaching, could improve further. Until the market improves, we intend to operate our US plants at approximately 70 percent of capacity. Trinidad, with its lower-cost gas contracts, is expected to operate at full capacity for the foreseeable future.

Despite high levels of solid phosphate fertilizer inventories worldwide, phosphate rock prices have been in the $250-$290 per tonne range early in 2009, while phosphoric acid prices remain above $1,000 per tonne. We expect that the combination of significant capacity curtailments occurring around the world and strong underlying rock and acid prices will strengthen solid fertilizer markets once demand returns. Until then, we plan to curtail all production of finished phosphates at our White Springs facility through the first half of 2009, and will run Aurora at reduced rates through the first quarter.

We expect capital expenditures, excluding capitalized interest, to approximate $1.8 billion in 2009, of which $250 million will be sustaining capital. Depreciation and amortization expense is expected to be 8 percent higher than 2008 levels. We expect our consolidated reported income tax rate to be in the 27-29 percent range in 2009, with a projected current/future split of 95/5. Provincial mining and other taxes are forecast within a range of 16-20 percent of total potash gross margin, depending on potash price realizations, the Canadian/US exchange rate and the timing and amount of capital spending on potash projects in Saskatchewan. We expect other income to exceed 2008 levels by more than $100 million, while total selling and administrative expenses are forecast to be slightly above 2008 levels.

As it is difficult to predict performance in this environment, we currently estimate first-quarter net income will be in the range of $0.70-$1.00 per share, based on a $1.15 Canadian dollar relative to the US dollar. As we expect demand to return in major fertilizer markets in the second quarter, our full-year earnings are currently estimated to be in the range of $10.00-$12.00 per share, weighted heavily toward the second half, based on an average $1.10 exchange rate. In the current trading range of the Canadian dollar relative to the US dollar, each one-cent change in the Canadian dollar typically impacts our foreign exchange line by approximately $9 million, or $0.02 per share on an after-tax basis, which is primarily a non-cash item.

"Our long-held strategies, especially in potash, have been tested through periods of demand fluctuation in the past and have proven effective in leading to long-term sustainable growth," said Doyle. “With our focus on potash, the nutrient with the strongest fundamentals, we anticipate even greater opportunities ahead and will continue to build capacity to meet future growth in demand. The world needs to produce more per acre and, as global economic stability returns, we will be ready to meet the needs of our customers and deliver even stronger performance for our shareholders."

1.	All references to per-share amounts pertain to diluted net income per share.
2.	See reconciliation and description of non-GAAP measures in the attached section titled "Selected Non-GAAP Financial Measures and Reconciliations."

Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer enterprise producing the three primary plant nutrients and a leading supplier to three distinct market categories: agriculture, with the largest capacity in the world in potash, second largest in nitrogen and third largest in phosphate; animal nutrition, with the world's largest capacity in phosphate feed ingredients; and industrial chemicals, as the largest global producer of industrial nitrogen products and the world's largest capacity for production of purified industrial phosphoric acid.

View the Financial Reports (HTML)


<< back


To be notified when new IR News Releases are posted, subscribe to our Investor News feed or e-mail alert.