PotashCorp reported the second-best third quarter in company history, only falling short to the stellar quarter achieved in 2008. The company said rapidly rising prices for all three major nutrients boosted net income to $402.7 million ($1.32 per diluted share) on sales of $1.57 billion, up from the year-ago $247.9 million ($.82 per share) on sales of $1.10 billion.
Nine-month net income was $1.3 billion ($4.34 per share) on sales of $4.7 billion, up from the year-ago $741.5 million ($2.44 per share) on sales of $2.9 billion.
“The process of replenishing nutrients accelerated quickly and tangibly in the third quarter,” said PotashCorp President and CEO Bill Doyle. “Rapidly rising prices for a number of key crop commodities pushed our industry past the inflection point, as demonstrated by stronger demand and the beginning of pricing momentum for all nutrients, including potash later in the quarter. Given the ongoing need to improve global food productivity and the significant void that must be filled after two years of reduced fertilizer movement and applications, we believe this quarter represented a meaningful step in our long history of value creation for our shareholders.”
Third-quarter potash gross margins were $363.5 million on sales of $637.5 million, compared to the year-ago $251.4 million on sales of $423.4 million. Third-quarter sales were 1.9 million mt at an average price of $305.60/mt, versus the year-ago 1 million mt and $389.24/mt. North American volumes were 710,000 mt at an average price of $354.12/mt, versus the year-ago 266,000 mt and $417.38/mt. Offshore volumes were 1.18 million mt at $276.56/mt, versus the year-ago 748,000 mt at $379.24/mt.
The company noted that inventories of North American producers declined by 41 percent during the quarter and were 17 percent below the previous five-year average at its end. Tightening supplies caused shipping delays and shortfalls, and by the end of the quarter, some suppliers – including Canpotex ?Çô had largely allocated all available product through the end of the year.
PotashCorp said that pricing momentum escalated due to tightening fundamentals, and the company raised its North American posting by $50/st in September and another $75/st this past week.
Nine-month potash margins were $1.28 billion on sales of $2.17 billion, up from the year-ago $524.2 million on sales of $903.3 million. Nine-month sales volumes were a whopping 6.3 million mt at an average price of $312.70/mt, compared to the year-ago 1.9 million mt at $443.34/mt. North American sales were 2.55 million mt, up from 599,000 mt, with a price of $358.19/mt versus the year-ago $519.95/mt. Offshore sales were 3.7 million mt at $281.46/mt, versus the year-ago 1.28 million mt and $407.57/mt.
Third-quarter phosphate gross margins were $99.5 million on sales of $536.0 million, versus the year-ago $42.7 million and $357.4 million. Some 1.1 million mt of phosphate products were sold during the quarter at an average price of $445.77/mt, up from the year-ago 882,000 mt and $356.24/mt.
Nine-month phosphate margins were $227.6 million on sales of $1.3 billion, up from the year-ago $69 million and $1.0 billion. Volumes sold were 2.67 million mt at an average price of $440.37/mt for the period, up from the year-ago 2.2 million mt and $411.72/mt.
Third-quarter nitrogen gross margins were $100.3 million on sales of $401.8 million, versus the year-ago $50.6 million and $318.3 million. The company sold 1.29 million mt of nitrogen products during the quarter at an average price of $271.40/mt, compared to the year-ago 1.38 million mt and $203.73/mt.
Nine-month nitrogen margins were $357.9 million on sales of $1.25 billion, up from the year-ago $148.7 million on sales of $962.3 million. Nine-month nitrogen volumes were 3.9 million mt at an average price of $278.79/mt, up from the year-ago 3.8 million mt and $222.19/mt.
PotashCorp upgrades guidance
The company now says its 2010 potash segment gross margin will be between $1.65-$1.75 billion on total shipments, in the range of 8.3-8.5 million mt. 2010 phosphate and nitrogen gross margins are now put between $750-$850 million.
The company expects 2010 net income to be in the range of $5.75-$6.00 per share. For 2011, PotashCorp sees global potash trade between 55-60 million mt and puts its earnings guidance at $8.00-$8.75 per share.
Doyle told analysts that he does not expect the same kind of price increases as 2008, when potash prices rose some $500/mt in one month. “But you are going to see prices ratchet up and you’re going to get back to prices that are supportive of greenfield economics in my estimation by 2013.” He said prices of $600/mt FOB mine will be needed to start the ten-year process to develop a new mine.
Underpinning Doyle’s optimism are higher commodity prices, as he said $6.00/bushel corn is just around the corner – with it potentially going higher. He noted China’s corn imports as being the highest in 15 years, and said that country only has about one-month’s worth of corn supply. He said that would put substantial pressure on the corn market, and expectations are for China to import more corn and potash.
Stephen Dowdle, president, PCS Sales, told analysts that for every $100 increase in potash prices, it equals to only a $.03 cost increase per bushel of corn.
As for the run-up in potash prices, Doyle said it was the largest summer fill season on record as buyers sought to fill depleted inventories. Add to that heavy demand from Brazil, which is enjoying $12.00 bushel soybeans.
Doyle ready to put the pedal to the metal
Doyle told analysts that many have heard him compare PotashCorp to a brand new Maserati. “It can be very powerful when we get a chance to put the pedal to the metal and shift into high gear.
“But you have to know how to drive,” said Doyle. “We haven’t let it loose over the past two years as you don’t drive at top speed when you’re on a bumpy road. That’s not how you treat a world-class asset when you want to keep it in tip top condition and preserve its value for the long-term. But today, we see an open road that extends a long way out, and we have the horsepower and we’re ready to hit the gas.
“As we demonstrated in this third quarter,” added Doyle, “we will not allow anything, including a hostile takeover attempt, to distract us from delivering the best possible performance for all of our shareholders.”
Takeover attempt holding back stock price
Doyle told analysts that absent the attempt by BHP Billiton to take over PotashCorp, the company’s stock would be selling at $155 per share or higher.
Recent analysts’ assessments back up Doyle, with Morgan Stanley valuing the company at $160-$180 per share, and CLSA Asia Pacific Markets saying $170-$190 per share.
In a recent report, CLSA said it expects a “no” vote on the BHP deal by Investment Canada will be the final nail in the coffin for BHP. A decision is expected in early November. The Province of Saskatchewan has already said no to the deal (GM Oct. 25, p. 1) and has been pressing that stance with the national government, also seeking the support of the Province of New Brunswick. BHP, however, says it can properly address Saskatchewan’s concerns.
CLSA says if Canada does say “yes” that BHP would have to quickly come forward with a much higher bid, which would require shareholder approval.
“We believe that BHP waited far too long to make its offer,” said CLSA. “Fertilizer markets are getting tighter, and potash prices are rising faster than consensus has anticipated as late as mid-summer.” CLSA said BHP’s “let’s run full out and not worry about prices” strategy is not playing well with investors or Canada, which much prefer Doyle’s “let’s be disciplined and make a lot of money,” strategy.
New Canpotex deals shore up that entity
Just this week, Canpotex Ltd. inked another long-term agreement to supply potash to a major buyer (see potash markets, p. 9). This five-year deal to India’s Coromandel International Ltd. follows quickly on the heels of a three-year deal with China’s Sinofert and a five-year deal to supply Indonesian buyers.
While Doyle notes that these buyers recognize Canpotex has the brownfield capacity to fulfill their needs three-to-five years down the road, the deals also help cement the future of Canpotex. BHP, should it buy PotashCorp, might find it harder to bust up an entity with such long-term commitments