"Broader emerging market concerns have weighed on customer sentiment, contributing to a weaker fertilizer environment in the second half of 2015," said PotashCorp President and Chief Executive Officer Jochen Tilk. "In response, we are moving forward the permanent closure date of our Penobsquis, New Brunswick mine and planning inventory shutdowns in December at three of our Saskatchewan mines. While we anticipate production in the fourth quarter to be reduced by nearly 500,000 tonnes, we do not expect employee layoffs."
"Despite challenges over recent months, we are seeing signs of a shift in focus by distributors and farmers to 2016," Tilk said. "We believe the need for increased global agricultural production – coupled with supportive crop prices – provides a compelling opportunity for farmers."
Saskatoon, Saskatchewan – Potash Corporation of Saskatchewan Inc. (PotashCorp) reported third-quarter earnings of $0.34 per share ($282 million), bringing the nine-month total to $1.28 per share ($1.1 billion). Earnings for both the quarter and the first nine months modestly trailed 2014's comparable period amounts of $0.38 per share ($317 million) and $1.33 per share ($1.1 billion), respectively.
Gross margin for the quarter totaled $505 million, below the $589 million generated during the third quarter of 2014, primarily due to weaker nitrogen contributions. For the first nine months, improved potash and phosphate contributions largely offset weaker nitrogen performance, as gross margin totaled $1.9 billion, relatively flat compared to the same period in 2014.
Cash from operating activities of $358 million in the third quarter and $1.7 billion for the first nine months of 2015 were below last year's comparable totals of $574 million and $1.9 billion, respectively. Earnings before finance costs, income taxes, and depreciation and amortization (EBITDA)2 of $593 million for the quarter and $2.1 billion for the first nine months were also below 2014's comparative figures.
Investments in Arab Potash Company (APC) in Jordan, Israel Chemicals Ltd. (ICL) in Israel and Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile contributed $37 million to our quarterly earnings, exceeding the $24 million earned in third-quarter 2014. Our nine-month total of $134 million, which included a dividend from Sinofert Holdings Limited (Sinofert) in China, was down from last year's total of $179 million when we received a $69 million special dividend from ICL. The market value of our investments in these four publicly traded companies equated to approximately $4 billion, or $5 per PotashCorp share, at market close on October 28, 2015.
Global potash demand remained strong during the quarter as higher volumes to Brazil, India and China helped offset slower purchasing in other markets. With many buyers moving cautiously amidst economic headwinds and significant currency volatility, prices declined in most key potash markets.
In nitrogen, prices for nearly all products were lower compared to third-quarter 2014 as market fundamentals weakened. Rising global supply due in part to lower energy prices – combined with weaker shipments to Latin America – largely overshadowed strong demand from India compared to 2014.
In phosphate, markets for solid fertilizer remained relatively stable. Increased Chinese exports and weaker demand in Latin America more than offset stronger Indian demand and resulted in relatively flat pricing. Other phosphate products were supported by strong demand in North America and India, driving prices for liquid fertilizers, feed and industrial products above those of 2014's third quarter.
Potash gross margin of $294 million for 2015's third quarter was relatively flat compared to the same period last year. This result raised our total for the first nine months to $1.1 billion, 15 percent higher than the comparable period of 2014, primarily due to slightly higher realized prices and lower costs.
Shipments for the quarter reached 2.2 million tonnes, increasing the total for the first nine months of 2015 to 7.0 million tonnes driven largely by offshore demand. Sales volumes for both the quarter and the full year surpassed the results for the comparable periods in 2014. Offshore shipments reached 1.5 million tonnes in the third quarter, with the majority of Canpotex's3 volumes to Latin America (40 percent) and Other Asian markets (29 percent), while India and China accounted for 15 percent and 11 percent, respectively. North American sales totaled 0.7 million tonnes.
Our average realized potash price of $250 per tonne in the third quarter was down from $281 per tonne in the same period last year due to declining prices in North America and a higher percentage of sales volumes to lower-netback offshore markets.
Cost of goods sold of $113 per tonne in the third quarter was 14 percent lower than the same period last year due to the favorable impact of a weakened Canadian dollar and the deferral of annual maintenance at certain locations to the fourth quarter of 2015.
Weaker nitrogen prices and lower sales volumes resulted in third-quarter gross margin of $161 million, 31 percent below 2014's comparable period. These factors also caused our nine-month total of $564 million to trail last year's record level. Our US operations accounted for 60 percent of our nitrogen gross margin for the quarter, with Trinidad providing the remainder.
Weaker demand, mechanical issues and a planned turnaround at our recently expanded Lima facility kept third-quarter and nine-month sales volumes (1.4 million and 4.4 million tonnes, respectively) below the comparable periods in 2014.
Our average realized price of $319 per tonne during the quarter declined from $356 per tonne in the same period last year as lower energy prices and increased global supply weighed on benchmark prices and realizations for all our products.
Cost of goods sold for the third quarter was $210 per tonne, relatively flat compared to the same period of 2014. The negative impact of reduced sales volumes was partly offset by lower natural gas costs in the US and Trinidad.
Third-quarter phosphate gross margin totaled $50 million, trailing the $61 million earned during the same period last year as higher sales volumes and prices were more than offset by increased costs. For the first nine months, gross margin totaled $180 million, exceeding the $135 million generated in the same period of 2014, which included accelerated depreciation charges related to the closure of our Suwannee River chemical plant.
Sales volumes of 0.8 million tonnes for the quarter were slightly above the same period in 2014, while the 2.1 million tonnes sold in the first nine months of 2015 was 11 percent lower than the previous year's total due primarily to the absence of production from Suwannee River.
Our average realized phosphate price for the third quarter was $538 per tonne, up from the $517 per tonne realized in the same period last year, primarily reflecting higher netbacks for liquid fertilizer products.
Cost of goods sold of $475 per tonne in the third quarter was 9 percent higher than the same period in 2014. Increased reliability maintenance, a negative adjustment to our asset retirement obligations and other period costs exceeded the notable charges taken in last year's third quarter and more than offset the positive impact of increased sales volumes.
Provincial mining and other taxes for the third quarter increased to $79 million from the $52 million recorded in 2014, reflecting the impact of a weaker Canadian dollar and lower deductible costs due to changes in Saskatchewan's potash taxation regulations in early 2015.
Lower total earnings and a discrete tax recovery resulted in income tax expense declining to $90 million in the third quarter, down from $156 million during 2014's comparable period which included a discrete tax expense.
In August, we closed the acquisition of our 9.5 percent stake in Brazil-based Fertilizantes Heringer S.A. and entered into a long-term potash supply agreement with the company.
Despite broad economic uncertainty, we continue to see strong underlying consumption trends across most key potash markets. We maintain our forecast for 2015 global shipments of 58 to 60 million tonnes, although we no longer expect they will reach the high end of this range.
In North America, cautious buying patterns in the third quarter are expected to keep total potash shipments for the year below 2014 levels. Although we anticipate healthy fall application demand will support fourth-quarter shipments, we now forecast total 2015 deliveries of 8.5-9.0 million tonnes.
In Latin America, while we expect potash shipments will remain at historically strong levels, credit challenges and currency volatility are likely to result in demand below last year's record level. For the full year, we forecast shipments of 10.5-11.0 million tonnes.
In China, we anticipate that encouraging consumption trends for compound fertilizers and bulk blends will support healthy demand through the fourth quarter. We have slightly lowered our total potash shipment range for 2015 to 14.0-14.5 million tonnes to reflect modestly lower deliveries due to the recently implemented value-added tax on fertilizer sales.
In India, we remain encouraged by rising consumption trends for compound fertilizers, even in the absence of subsidy reform. Despite this trend, we have lowered our full-year potash shipment estimate to 4.2-4.5 million tonnes due to currency volatility and a weaker-than-normal monsoon.
In Other Asian markets (outside of China and India), we have slightly lowered our estimate for potash shipments to 8.3-8.7 million tonnes to reflect lower demand caused by weaker local currencies and adverse weather conditions affecting application requirements in certain regions.
In light of these market factors, we have revised full-year expectations for our potash business. We have lowered our sales volume guidance to a range of 9.0-9.2 million tonnes and now expect potash gross margin of $1.4-$1.5 billion, reflecting weaker volumes and pricing.
Consistent with our long-held strategy of matching supply to demand, we are accelerating the permanent closure date of our Penobsquis mine in New Brunswick to the end of November (annual operational capability of approximately 800,000 tonnes). While this will reduce available production levels until our new Picadilly mine is fully ramped up, it is expected to improve our cost profile and help manage inventories.
We are also preparing to take three-week inventory shutdowns at our Allan, Cory and Lanigan operations in Saskatchewan, beginning in mid-December. The combination of these shutdowns and the closure of Penobsquis is expected to reduce fourth-quarter production by nearly 500,000 tonnes and lead to slightly higher per-tonne cost of goods sold. We expect there will be no impact on our employment levels at these locations.
We have lowered the top end of our previous combined nitrogen and phosphate gross margin guidance range and now estimate we will generate between $1.0-$1.1 billion. In nitrogen, we expect total gross margin below last year's record as increased global supply is expected to keep prices for most products below 2014 levels. Additionally, weaker North American demand, reduced production due to mechanical challenges and an expansion-related turnaround at Lima are expected to keep sales volumes below last year's levels. In phosphate, supportive market fundamentals and our higher-netback product mix are expected to support gross margin above 2014 levels.
We have increased our estimate for provincial mining and other taxes to a range of 21-23 percent of potash gross margin due to a weaker Canadian dollar and lower deductible costs.
We have lowered our range for income from offshore equity investments to $165-$175 million due to a weaker-than-expected potash earnings environment and we have also slightly increased our estimate for selling and administrative expenses to a range of $245-$250 million.
Due to the continued strength of the US dollar, we have revised our full-year foreign exchange rate assumption to CDN$1.26 per US dollar.
As a result of the noted changes, we have revised our full-year 2015 earnings guidance to $1.55-$1.65 per share.
Other annual guidance numbers – including those noted above – are outlined in the table below.
|Earnings per share||Annual: $1.55-$1.65|
|Potash sales volumes||9.0-9.2 million tonnes|
|Potash gross margin||$1.4-$1.5 billion|
|Nitrogen and phosphate gross margin||$1.0-$1.1 billion|
|Capital expenditures*||~$1.2 billion|
|Effective tax rate||26-28 percent|
|Provincial mining and other taxes**||21-23 percent|
|Selling and administrative expenses||$245-$250 million|
|Finance costs||$190-$200 million|
|Income from offshore equity investments***||$165-$175 million|
|Annual Foreign Exchange Rate||CDN$1.26 per US$|
|Annual EPS sensitivity to Foreign Exchange||US$ strengthens vs. CDN$ by $0.02 = +$0.01 EPS|
|* Does not include capitalized interest
** As a percentage of potash gross margin
*** Includes income from dividends and share of equity earnings
|1.||All references to per-share amounts pertain to diluted net income per share.|
|2.||See reconciliation and description of non-IFRS measures in the attached section titled "Selected Non-IFRS Financial Measures and Reconciliations."|
|3.||Canpotex Limited (Canpotex), the offshore marketing company for Saskatchewan potash producers.|
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