Potash Corporation of Saskatchewan Inc. (POT) earned 78 cents per share in the fourth quarter of 2011, considerably lagging the Zacks Consensus Estimate of 89 cents per share. However, reported earnings increased 39% year over year.
For full-year 2011, earnings came in at $3.51 per share, up 80% year over year.
Fourth quarter 2011 sales were $1,865 million versus $1,813 million in the fourth quarter of 2010. Fiscal 2011 sales were $8,715 million versus $6,539 million in 2010.
Segment Review
Potash: Despite higher realized prices, significantly lower sales volumes in fourth-quarter 2011 resulted in a gross margin of $486 million, down from $536 million in the prior-year quarter. However, for 2011, potash gross margin reached $2.7 billion, up 50% year over year.
Fourth-quarter potash sales volumes were 1.6 million tonnes, down from 2.4 million tonnes sold in the prior-year quarter. Full-year 2011, sales volume increased to 9 million tonnes, primarily on the strength of record shipments by Canpotex Limited (Canpotex), the offshore marketing agency for Saskatchewan potash producers.
The average realized price of $431 per tonne in the fourth quarter was $108 per tonne higher than the year-ago level.
Cost of goods sold on a per-tonne basis rose year over year, primarily as a result of increased labor and depreciation expenses as well as higher royalty payments. Nineteen shutdown weeks were incurred during the quarter related to scheduled downtime for maintenance and inventory adjustments at Rocanville and expansion-related work at Allan. Additionally, a larger allocation of tonnage sold from higher-cost facilities affected per-tonne operating costs.
Phosphate: Fourth-quarter phosphate gross margin was $163 million, ahead of $137 million earned in the same period last year. Higher prices primarily fueled the gross margin, especially solid fertilizer ($33 million of total gross margin) and liquid fertilizer ($78 million). Feed and industrial products contributed $29 million and $19 million, respectively. Full-year 2011 gross margin was $648 million, up nearly 90% year over year.
Phosphate sales volumes of 0.9 million tonnes in the fourth quarter were down from $1 million tonnes sold in the same period last year. Softer demand for solid fertilizer products was partially offset by stable volumes in other product lines, highlighting the value of its diversified production.
Despite the softening of spot markets during the fourth quarter, average realized phosphate prices of $631 per tonne remained well above the year-ago level.
Increased sulfur and ammonia input costs were the primary drivers of higher per-tonne cost of goods sold.
Nitrogen: Gross margin in the fourth quarter of 2011 was $241 million, up from $153 million earned in the same period last year. For fiscal 2011, gross margin stood at a record $916 million, well above the 2010 total of $528 million. Trinidad operation contributed $129 million to the fourth-quarter total, while the US operations generated $112 million.
Sales volumes of 1.1 million tonnes for the quarter trailed the 1.3 million tonnes sold in fourth-quarter 2010. Nitrogen solutions volumes at Geismar continued to be negatively impacted by the limited availability of carbon dioxide necessary for production – an issue that will be rectified with the resumption of production at a previously idled ammonia plant at the facility in third-quarter 2012.
The average realized nitrogen price of $461 per tonne remained well above the fourth-quarter 2010. Strong industrial and agricultural demand paired with tight product supplies throughout the year led to higher prices across all nitrogen products relative to the same period in 2010.
The total average cost of gas included in production (including our hedge position) for the fourth quarter was up 13% year over year. Much of the increase was due to rising Trinidad gas costs, which reflected higher Tampa ammonia prices – the benchmark to which the company’s Trinidad gas cost is indexed.
Financial
Cash and cash equivalent amounted to $430 million as of December 31, 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
Although 2011 started on a positive note, it ended with weakened demand. Potash Corp. expects shipments in the range of 55-58 million tonnes.
In North America, the current cautious approach of dealers managing their potash inventories is expected to keep shipments for the first quarter of 2012 below the year-ago level. Given supportive crop economics and the prospect of record corn and soybean plantings, PotashCorp anticipates demand to strengthen as the year progresses, with total shipments in the range of 9.5-10 million tonnes for 2012.
Latin America is expected to remain a region of strength, following a year of record fertilizer imports by Brazil that included an estimated 7.5 million tonnes of potash. Potash Corp estimates shipments to Latin America to be 10-10.5 million tonnes in 2012, potentially surpassing the record level of 2011.
Shipments to countries in other Asian markets (not including China and India) are estimated to be 8-8.5 million tonnes, similar to levels achieved in 2011.
Following the completion of Canpotex shipments to China in fourth-quarter 2011, preliminary discussions have begun on a new supply contract for the first half of 2012. With inventories estimated at normal levels, Potash Corp believes Canpotex negotiations will not be unduly prolonged. The company anticipates China’s 2012 consumption to be in the range of 10.5-11 million tonnes, including imports of approximately 6.5 million tonnes.
For 2012, Potash Corp. expects total shipments to India to be in the range of 4-5 million tonnes.
For 2012, Potash Corp. projects potash segment gross margin to be in the $2.9-$3.3 billion range. Total shipments for the year are expected to be in the range of 9.2-10 million tonnes. Inventory-related downtime at Allan, Lanigan and Rocanville facilities in the first quarter of 2012 is expected to result in higher first-quarter cost of goods sold compared with the first quarter of 2011. Based on the estimated annual sales volumes guidance and operational capability of close to 12 million tonnes (before the impact of inventory-related downtime), additional curtailments may be necessary in 2012.
Potash Corp. anticipates first-quarter 2012 volumes for phosphate and nitrogen business to rise sequentially and full-year demand to remain at par or higher than 2011. For 2012, the company forecasts combined phosphate and nitrogen gross margin for 2012 to be in the range of $1.3-$1.6 billion.
Other income is expected to exceed 2011 levels of between $400 million and $450 million, while selling and administrative expenses are forecasted to be $225-$245 million. Finance costs are anticipated to be approximately $100-$120 million.
Capital expenditures for the year – excluding capitalized interest – are expected to be approximately $2.1 billion, of which approximately $400 million will relate to sustaining capital.
2012 annual effective tax rate is forecast to be 25-27% and provincial mining and other taxes are expected to approximate 10-12% of total potash gross margin.
Potash Corp. forecasts first-quarter 2012 net income per share to be in the range of 55 cents to 75 cents and earnings for the full year 2012 to be between $3.40 and $4.00 per share.
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 #3 Rank (short-term Hold recommendation) on Potash.
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