Potash Corporation of Saskatchewan Inc. (POT) earned 94 cents per share in the third quarter of 2011, beating the Zacks Consensus Estimate by a penny. Earnings increased 147% from last year's 38 cents per share.
Quarterly sales shot up 47.4% to $2,321 million from $1,575 million in the third quarter of 2010.
Segment Review:
Potash: Record third-quarter sales volumes and significantly higher prices raised potash gross margin to $700 million, the second-highest third-quarter total in the company’s history and more than double $339 million generated in the same period last year. This raised gross margin for the year to $2.2 billion, well ahead of the $1.3 billion earned in the first three quarters of 2010.
In the reported quarter, sales volumes came in at 2.2 million tonnes. Offshore shipments totaled 1.4 million tonnes, up 17% year over year. Canpotex Limited (Canpotex), the offshore marketing company for Saskatchewan producers, shipped 40% of its third-quarter volumes to Asian countries (not including China and India) and 26% to Latin American markets. Shipments to China accounted for 20%, while 9% was shipped to India. Strong demand from North American customers anticipating robust fall requirements helped boost third-quarter sales volumes to 0.8 million tones, up from 0.7 million tonnes in the same period last year.
Realized potash prices in the third quarter reached $451 per tonne, reflecting continued upward movement in pricing in all major markets.
Production of 1.9 million tones, a third-quarter record, was up from 1.3 million tonnes in the same period last year.
Phosphate: Third-quarter phosphate gross margin rose $169 million, significantly above the $96 million earned in the same period last year. Higher prices were the primary drivers of improved gross margin, especially in solid fertilizer ($64 million of total gross margin) and liquid fertilizer ($57 million). Feed and industrial products contributed $24 million and $21 million, respectively.
Phosphate sales volumes of 1.1 million tonnes for the third quarter were down slightly compared with the same period last year, despite a temporary outage at its Aurora, NC facility resulting from Hurricane Irene.
Realized average phosphate prices rose to $602 per tonne, up 35% over the third quarter last year. Reflecting strong agricultural demand and tight supply, average realized prices for liquid and solid fertilizer rose by 42% over the same quarter in 2010. Prices for feed (up 25%) have been slower to respond due to a challenging livestock economics, while industrial prices (up 22%) continued to reflect a typical time lag in pricing for the segment.
Nitrogen: Gross margin in the third quarter of 2011 reached $263 million, more than double of $115 million earned in the same period last year, with its Trinidad and US operations contributing $140 million and $123 million, respectively. Gross margin for the year rose to $675 million, significantly above the $375 million generated in the first three quarters of 2010.
Third-quarter nitrogen sales volumes of 1.3 million tonnes were relatively flat compared with the same period last year. Strong ammonia and urea demand resulted in a larger share of production directed to these products rather than to other downstream nitrogen offerings.
Average realized prices for nitrogen rose to $424 per tonne, up 56% from same period last year. Strong demand and tight product supplies lifted prices for all nitrogen products, with increases of 77% for urea, 49% for ammonia and 40% for other products.
Total average natural gas cost in production, including hedge position, was $6.13 per MMBtu, an increase of 22% compared with the third quarter last year.
Financial
Cash and cash equivalent amounted to $394 million as of September 30, 2011 versus $412 million at the end of December 31, 2010. Long-term debt was $3.7 billion, same as on December 31, 2010.
Outlook
Potash expects global shipments to be approximately 57 million tonnes for 2011, reaching a record of 58-60 million tonnes in 2012. Combined phosphate and nitrogen gross margin for full-year 2011 is expected to be in the range of $1.4-$1.7 billion. In 2011, net income per share is expected to be in the range of $3.40 to $3.80.
In North America, the combination of good harvest progress and the anticipation of above-average crop returns are expected to support ongoing strength in fertilizer demand. Strong shipments ahead of the fall application season have positioned dealers well to meet customer needs, and Potash anticipates post-harvest applications to support healthy fourth-quarter demand.
Latin American markets remain on pace for record fertilizer application in 2011, including record potash imports. Brazil's burgeoning agricultural economy is creating increasing demand for potash as farmers capitalize on the opportunity to supply soybeans, sugar cane, corn and other crops, which are increasingly required for markets around the world. Despite robust potash shipments in advance of the primary planting season that is currently in full swing, Potash anticipates demand to remain seasonally strong for the fourth quarter, supported by purchasing for the Safrinha corn planting that typically begins in February.
India's growing population has put significant strain on its food supply, and improving potash applications is critical to both its short-term and long-term crop production. With Canpotex's settlement of new contracts with key Indian customers in August, sales have resumed to this important market. Shipments on remaining contract commitments will continue for the fourth quarter at a delivered price of $470 per tonne, before reflecting a $60 per tonne increase (to $530 per tonne) in volumes for first-quarter of 2012.
Potash shipments to China are expected to continue throughout the fourth quarter as Canpotex fulfils its commitment on a six-month contract that runs at the end of December 2011. Given China's growing food requirements, increasing crop production remains a top priority. With its limited ability to expand internal potash production capability and its significant nutrient requirements, Potash anticipates increased imports in 2012.
Potash consumption in other Asian markets remains strong, as farmers are generating solid returns for key crops grown in the region, including oil palm, rubber, sugar cane and rice. Each of these crops has major nutrient requirements that necessitate significant potash application. Despite shipments temporarily slowing in the fourth quarter, demand in this region is expected to continue to grow and consume record deliveries over the course of 2011.
In this environment, Potash now estimates its full-year 2011 potash segment gross margin to be in the range of $2.8-$3.1 billion. For the fourth quarter, the company anticipates a larger allocation of sales to markets for standard product compared to the typically higher-netback granular markets. Total shipments for 2011 are expected to approximate 9.5-9.7 million tonnes.
The Potash Corporation of Saskatchewan Inc., a Canadian corporation based in Saskatoon, Saskatchewan, is the world's largest fertilizer enterprise producing three primary plant nutrients – potash, phosphate and nitrogen.
The company competes with BASF (BASFY) and Mosaic Co. (MOS).
We currently maintain a Zacks #2 Rank (short-term Buy recommendation) on Potash and a long-term Neutral recommendation.
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POTASH SASK (POT): Free Stock Analysis Report
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