Agrium 2Q income more than doubles; talks with Egypt continue; Profertil eyes turnaround

Agrium Inc. reported its highest ever quarterly earnings for the second quarter ending June 30, 2008, more than doubling the year-ago results,which had been the previous record. Second-quarter net earnings were $636 million ($4.00 per diluted share) on sales of $3.94 billion, versus the year-ago $229 million ($1.70 per share) on sales of $2.1 billion.

“Agrium’s exceptional second quarter earnings are a result of strong performance across all business units, and the outlook for all our product lines continues to strengthen,” said Agrium President and CEO Mike Wilson. “I am especially pleased with the contribution from our UAP acquisition. The timing of this acquisition couldn’t be better given continued strength in the industry fundamentals. This quarter’s results are a reflection both of the quality of our assets and the benefit of diversifying throughout the agricultural value chain.”

Agrium will report its second-half guidance when it reports third-quarter results. However, Wilson gave a long list of positives in speaking with analysts last week. “It is clear that the market fundamentals will be very strong in the second half of ’08 and in ’09. Over the past three months domestic and international urea prices have risen dramatically, North American gas prices have declined, India remains an active buyer of urea and there are reports out of China that the current fertilizer export tax may further increase. Likewise, the tight global supply demand balance for potash has resulted in prices continuing to move higher, with domestic potash prices increasing by $250 per ton and international spot prices currently in excess of $1,000 per ton. The phosphate demand from India and Brazil has intensified and kept prices at levels well over 1,000 per ton. Record farm incomes for grain producers are anticipated as per acre returns remained extremely attractive to farmers.”

Richard Gearheard, Agrium senior vice president and president of Agrium Retail, told analysts the difficult spring will remind people that they need to get as much done in the fall as possible.

Wilson was not deterred by concerns about lower corn prices. “We’ve always maintained we don’t need and do not require $8.00 corn prices to support the strong global nutrient demand. In fact, we think corn prices in the $5-$6 range represent healthy returns for the farmers, which in turn supports long-term demand for crop inputs.” He said margins for corn and soybean farmers remain more than three times historical levels, even at today’s higher fertilizer prices, and the sensitivity of farmer cash margins to higher fertilizer prices is very low. He added that using a typical cash margin model, fertilizer prices would have to average over $2,000 per ton before higher nutrient prices would push farmer margins back to historic levels with corn at $6.00.

Wilson also touted Agrium’s cost advantage in raw materials for phosphate production. He said the company’s cost for making phosphate rose $46 per ton during the quarter, while U.S. competitors saw an increase of over $100 per ton.

Wilson said Agrium continues to negotiate with the Government of Egypt over its decision to halt the building of the EAgrium nitrogen plant. Options include the merger of EAgrium with an existing fertilizer company, relocation, and/or a buy-out of EAgrium’s shareholders. He said the company’s preference would be to continue to have a presence in Egypt. The company said its maximum exposure over EAgrium is not expected to exceed $280 million plus cumulative realized and unrealized net hedging gains of $45 million.

Agrium also told analysts that its joint venture Profertil plant in Argentina will need to take a 45-day turnaround between now and early next year. The catalyst and ammonia converter basket will need to be replaced. Currently, the company plans to operate the facility and do the project early next year. However, it has contingency plans in place if it needs to come down earlier.

Wilson was hopeful that by the end of the year the company would make a decision as to where to site a new greenfield potash mine in Saskatchewan and Manitoba, having spent some $50 million to study these reserves.

Six-month net earnings were $831 million ($5.24 per share) on sales of $5.1 billion, versus the year-ago $218 million ($1.63 per share) and $2.95 billion, respectively.

Second-quarter wholesale gross profits were $582 million on sales of $1.4 billion, up from the year-ago $277 million and $890 million. Six-month profits were $855 million on sales of $2.1 billion, versus the year-ago $373 million and $1.37 billion.

Second-quarter retail gross profits were $667 million on sales of $2.5 billion, up from the year-ago $278 million and $1.15 billion. Six-month profits were $782 million on sales of $2.9 billion, versus the year-ago $363 million and $1.48 billion.

Gross profits for second quarter advanced technologies were $20 million on sales of $107 million, up from the year-ago $18 million and $81 million, respectively. Six-month profits were $37 million on sales of $186 million, versus the year-ago $29 million and $133 million.

* sales and profits in millions; average selling price in $/mt