Agrium to proceed with Egyptian project, reports 1Q loss, expects record 2nd half

Agrium Inc. said May 1 that it and its project co-owners are proceeding with the construction of a world-scale nitrogen facility to be located in Damietta, Egypt, with completion expected in 2010. The plant will be designed and built by Uhde GmbH and consist of two ammonia and urea trains with a combined capacity of 1.3 million mt of urea and 100,000 mt of net ammonia. Agrium has been eyeing the project for a long time and has been waiting to pull the trigger.

“This is an outstanding opportunity for Agrium to construct and operate a facility in an area with long-term, competitively priced gas, prime access to world markets, and an efficient, well-educated workforce. Our project co-owners bring local business knowledge, energy supply and distribution expertise, which combined with our expertise in marketing and operations, positions this project very well, and we expect the facility to have one of the lowest operating costs in the world,” said Mike Wilson, Agrium President and CEO.

Agrium will have a 60 percent interest in the EAgrium joint venture. Egyptian government-owned entities EChem and EGAS will hold a 24 percent interest in the joint venture, and GASCO, the national operator of the gas distribution grid, will hold a nine percent interest. The Arab Petroleum Investment Corporation (APICORP) will hold the remaining seven percent interest. Agrium is to be the exclusive marketer of the nitrogen products exported from this facility.

The lump sum turn-key project is scheduled to commence by May 15, 2007, with the first train expected to be complete the first half of 2010 and the second train to be complete by the end of 2010. The construction cost of the facility and related infrastructure is forecast to be approximately $1.2-billion. The majority of the project is expected to be financed through nonrecourse debt, with the remainder funded by equity contributions from the co-owners. The project is conditional on a lender financing commitment.

Wilson told analysts May 3 that the $1.2 billion is fixed. He also praised Uhde for having excellent experience in Egypt and for having delivered similar projects early. Wilson said the plant will have one of the lowest operating costs in the world. It will have a 25-year gas contract in line with others in the region, with margins similar to Agrium’s co-owned Profertil plant in Argentina.

Agrium said the new plant would likely cause it to adjust its marketing to have an office in Europe, where a portion of the product would go. It also expects the product to find a home in the U.S. and nearby markets.

Agrium reported a net loss of $11 million ($.08 per diluted share) on sales of $861 million for the first quarter ending March 31, compared to a year-ago loss of $48 million ($.37 per share) on sales of $688 million. Wilson noted that the company traditionally has a loss in the first quarter. It was also impacted by a largely non-cash charge for stock-based compensation expenses of $28 million given the strength of Agrium’s share price.

Wilson said first-quarter activity was focused on positioning the company to benefit from the very strong industry conditions. “We expect the spring of 2007 to be the best we have ever seen, despite some impact from weather issues and rail service disruptions.” As evidence of this, Wilson told analysts that the company has seen a 60 percent increase in corn seed sales through April 23.

Wilson touted Agrium’s distribution system when analysts raised concerns regarding the late corn crop, saying this was one advantage Agrium would have over some of its competitors.

Agrium is working to whip its phosphate operations back into shape. Problems at the Kapukasing mine have caused the company to import 60,000 mt of Moroccan rock, and imports are expected to continue as Kapukasing is improved. Agrium said mining is moving into a better grade of ore. Rail service out of the mine has been an issue, and the company did lose some 20 days of lost rock shipments from the mine. Overall, the Canadian Pacific Railway strike impacted phosphate shipments as well as about 60,000 mt of potash. Additional near-term rail strikes would likely impact potash exports more than other commodities, according to the company. Agrium said it expects its phosphate to get back to a 9-10 on a scale of 10 this year. Also on the phosphate side, Wilson believes prices are sustainable, at least until the new 3 million mt/y Saudi project comes online in over three years – and even then, demand could absorb the impact. Likewise, he was optimistic that new world nitrogen capacity or more imports into the U.S. would be needed.

Agrium said the Kenai nitrogen plant was late coming back up due to cold weather. However, the gas not used went into storage, giving the company a buffer for later in the year.

In Argentina, Agrium has discussed the removal of the $300/mt cap on domestic urea prices with the government; however, no changes are expected through the second quarter.