Saskatoon, Saskatchewan – Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported first-quarter earnings of $0.56 per share ($491 million), which trailed the $0.84 per share ($732 million) in earnings during a record first quarter last year. Gross margin for the quarter totaled $698 million, compared to the $1.1 billion generated in first-quarter 2011. The results largely reflected lower potash sales and production volumes, which resulted in higher costs. Buyers entered the year with the same cautious mindset they had when 2011 ended.

Earnings before finance costs, income taxes, and depreciation and amortization² (EBITDA) of $813 million fell below the $1.1 billion earned in the first quarter of 2011, while cash flow prior to working capital changes² of $625 million trailed the $899 million generated in the same period last year.

Our offshore investments in Arab Potash Company Ltd. (APC) in Jordan and Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile contributed $72 million to our first-quarter earnings. The market value of our investments in these publicly traded companies, along with our positions in Israel Chemicals Ltd. (ICL) in Israel and Sinofert Holdings Limited (Sinofert) in China, equated to approximately $8.5 billion, or $10 per PotashCorp share at market close on April 25, 2012.

“Fertilizer buyers continued to move cautiously at the beginning of the year, especially with potash purchases, which impacted our performance during the quarter,” said PotashCorp President and Chief Executive Officer Bill Doyle. “Although we anticipated that an increase in global fertilizer purchasing would not take hold until the latter half of the first quarter, it took longer than we expected for demand to emerge. While the timing of that change was difficult to predict, the direction was not. We expect the acceleration in potash demand that began at the very end of the quarter will continue, supporting increased volumes through the remainder of the year.”

Market Conditions

Buyers in all major potash markets were slow to commit to new purchases through most of the first quarter. Shipments from North American producers reflected this pause, declining 48 percent from the record level of last year’s first quarter. While underlying consumption at the farm level was expected to be strong globally, most dealers chose to defer major purchasing decisions rather than build inventory. In North America, distributors felt little pressure to act quickly in light of elevated producer inventories and greater availability of offshore product. Offshore buyers slowed purchasing in the absence of new Chinese potash supply contracts and the deferral of shipments to India for previously contracted volumes with global suppliers. Although potash prices avoided the pricing volatility of solid phosphate fertilizer and nitrogen products in previous months, they pulled back slightly on limited demand and increased competitive pressures. In this environment, many buyers focused on consuming inventory and awaited greater certainty before committing to new purchases.

By quarter-end, the global potash market strengthened. China settled new supply contracts late in March – including a contract between Canpotex Limited (Canpotex), the offshore marketing organization for Saskatchewan potash producers, and Sinofert. After this development and the gathering momentum of the North American planting season, customers in most major markets were actively securing new supply to satisfy pent-up demand for potash.

The North American solid phosphate market was impacted by similar caution among dealers, as domestic shipments of solid fertilizers declined from first-quarter 2011 levels. Shipments to offshore markets more than offset weak North American demand, largely as a result of strong movement to India, which had been limited in the first quarter of last year due to the early completion of contract deliveries. The slower demand environment that carried over from late 2011 resulted in solid phosphate fertilizer prices lower than in the first quarter of last year.

In nitrogen, purchasing patterns were markedly better than those of the other nutrients. After the general slowdown in fertilizer markets late in 2011, nitrogen buyers moved quickly to place new orders – buoyed by the prospect of large US corn plantings and concerned about product availability given a reduction in North American import volumes and certain unplanned domestic plant outages. These tight supply/demand fundamentals were most pronounced in urea, which pushed prices higher during the quarter.

Potash

Lower potash sales volumes offset the positive impact of higher prices and resulted in potash gross margin of $327 million for first-quarter 2012, well below the first-quarter record of $743 million generated in 2011.

Sales volumes of 1.2 million tonnes fell below the record 2.8 million tonnes sold in the same quarter last year. Offshore shipments totaled 0.8 million tonnes, compared to 1.7 million tonnes sold in the first quarter of 2011. This change reflected slower movement to all major markets, including China, which did not settle its new contract with Canpotex until late March, and India, which delayed shipments of most remaining tonnage on existing contracts until the second quarter of 2012. Shipments to these markets were a smaller portion of Canpotex’s quarterly sales volumes, 7 percent and 4 percent, respectively. While demand in other Asian markets slowed compared to the record first quarter of 2011, it remained a region of relative strength, taking 70 percent of Canpotex shipments. Buyers in Latin America worked through inventories to meet continued strong consumption and accounted for 12 percent of Canpotex shipments; this was in addition to PotashCorp sales there from our New Brunswick facility. In North America, where distributors deferred major purchasing ahead of the spring planting season, our sales volumes totaled 0.4 million tonnes, well below the seasonally strong 1.1 million tonnes sold in first-quarter 2011.

Our average realized potash price of $435 per tonne was up 19 percent from last year’s first quarter, reflecting price gains in spot and contract markets achieved throughout 2011. Although prices in most major spot markets declined slightly from fourth-quarter 2011, our average realized price moved higher and reflected a lower percentage of sales shipped to offshore contract markets.

Slower sales led to reduced production, which resulted in a total of 29 inventory-related downtime weeks at our Lanigan, Rocanville and Allan facilities. During this downtime, we opted to allocate resources to non-production activities rather than lay off employees, which resulted in higher shutdown costs. These factors, along with a larger allocation of tonnes coming from higher-cost facilities and increased brine inflow and depreciation charges related to our Esterhazy tolling agreement, led to higher per-tonne cost of goods sold.

Phosphate

First-quarter phosphate gross margin totaled $152 million, slightly above the $150 million generated in the same quarter last year. The strength of our diversified product offering offset general weakness in the solid fertilizer segment. Fueled primarily by strong margins for liquid products, our fertilizer segment generated $98 million in gross margin for the quarter, while feed and industrial products contributed $50 million.

Phosphate sales volumes totaled 0.9 million tonnes, up slightly from last year’s first quarter. A larger percentage of sales allocated to meet offshore fertilizer demand, combined with strong feed and industrial volumes, helped offset weakness in North American fertilizer markets.

Our average realized phosphate price climbed to $607 per tonne for the quarter, 9 percent above that of the same period last year. Results were supported by the typically more stable pricing environment in feed and industrial products, combined with the ability of liquid fertilizer products to attract a premium relative to solid fertilizers and the benefit of a time lag on quarterly contract sales.

Increased input costs – primarily sulfur – as well as slightly lower operating levels during the first quarter relative to the same period last year negatively impacted our per-tonne cost of phosphate goods sold.

Nitrogen

Nitrogen gross margin climbed to a first-quarter record of $219 million, exceeding the $203 million earned in the same period last year. Our US operations delivered $129 million in gross margin, while our Trinidad operation contributed $90 million.

Sales volumes of 1.3 million tonnes were slightly below the same period last year, largely as a result of reduced production at Geismar.

Average realized prices for nitrogen products rose to $383 per tonne, 4 percent above the same period last year. Strong demand for urea, nitrogen solutions, nitric acid and ammonium nitrate, combined with limited supply, pushed prices for these products higher. While ammonia prices strengthened towards the end of the quarter, key benchmark prices were below that of the same period last year.

Total average natural gas cost in production for the quarter, including our hedge position, fell 19 per cent from last year’s first quarter to $4.75 per MMBtu. Declines in US spot prices for natural gas and a lower Trinidad gas cost – a result of the decline in Tampa ammonia prices, the benchmark to which our Trinidad gas costs are primarily indexed – were the main contributors.

Financial

Selling and administration expenses for the quarter were reduced to $57 million from $75 million in first-quarter 2011, primarily as a result of lower incentive accruals.

With lower quarterly earnings, income tax expense declined to $160 million from $243 million in the same period last year. Our provincial mining and other taxes also fell compared to first-quarter 2011, dropping 18 percent to $28 million with our reduced potash sales revenues.

Our potash expansion projects continued during the quarter, with expenditures in Saskatchewan and New Brunswick accounting for much of the $476 million in capital spending on property, plant and equipment.

Outlook

The most basic driver of global fertilizer demand is fundamental soil science, as a commitment to proper soil fertility is necessary for the ongoing production of healthy, abundant crops. While the science is indisputable, the timing of fertilizer purchasing can vary, leading to short-term fluctuations in global demand. Supply-chain stocking and destocking provide a snapshot of near-term market trends, but the more accurate measure of fertilizer demand is the underlying consumption required to meet the world’s food production needs. In a global marketplace with hundreds of millions of farmers, this is difficult to measure on a real-time basis, but we believe that the powerful economic drivers behind agriculture and the importance of crop fertility are continuing to support increased fertilizer consumption in most major markets.

After remaining on the sidelines through the end of 2011 and the beginning of this year, fertilizer dealers are now beginning to secure products to meet strong demand at the farm level. While the initial focus for many was on acquiring nitrogen to meet their immediate requirements, purchasing of potash and phosphate products accelerated as we entered the second quarter.

Dealers have largely worked through existing potash inventories and are purchasing additional volumes for immediate needs – an important transition with key growing regions in the midst of their primary planting seasons and farmers motivated to capture the economic incentives of proper fertilization. While the degree of caution experienced in the first quarter exceeded our expectations (especially in North America), all key markets are now engaged and we continue to believe that demand will be more robust as 2012 progresses. Operating rates for global potash producers have increased to meet the strength in demand, a measure of growing confidence following significant production curtailments in the first quarter.

In North America, we anticipate improved demand through the remainder of 2012. This should be evident in the second quarter, although it may not match the level of demand experienced in the same period last year when dealers moved earlier to begin restocking for fall. We believe that dealers will attempt to finish the spring planting season with limited inventory and begin the process of restocking in the third quarter. With the prospect of an early harvest and the expectation of limited dealer inventory, we anticipate a strong second half and total 2012 demand in the range of 8.5-9.0 million tonnes.

Healthy farm economics and the expansion of crop acreage continue to support strong consumption of all fertilizers in Latin America. Dealers are now moving aggressively to secure potash supply and are committing to significant new purchases. We estimate total demand in this region will be between 9.8 million and 10.3 million tonnes in 2012, similar to the record level of 2011.

A new supply contract between Sinofert and Canpotex, signed in March, will result in significant shipments to China during the second quarter. With its increasing internal needs, we anticipate 2012 global potash demand in this market will be in the range of 10.5-11 million tonnes, including imports of approximately 6.5 million tonnes.

India’s potash situation remains complex. The drivers of long-term potash demand are clear – rising food requirements, nutrient-deficient soils and lagging crop yields – yet near-term challenges remain. Fertilizer subsidy changes are leading to higher retail prices, reducing demand in the short term. Given the delays of shipments for contracted volumes through to the end of the second quarter, we now estimate that Indian demand is unlikely to exceed the levels of 2011. We anticipate total 2012 demand in this market will be in the range of 3.5-4.5 million tonnes. 

Other Asian countries – those outside China and India – used the first quarter to draw down inventories built by record 2011 shipments. This drawdown disguised the strength of underlying consumption created by the excellent returns for a wide range of crops grown in this region. We estimate total demand will be between 8.2 million and 8.7 million tonnes in 2012, down slightly from record purchases in 2011. 

In this environment, we now forecast total global potash demand will approximate 53-56 million tonnes in 2012 and expect PotashCorp sales volumes for the year to be in the range of 8.8-9.2 million tonnes. We estimate our 2012 potash segment gross margin will be in the range of $2.6-$2.9 billion. Given our large order book – including what we believe could represent a second-quarter sales volumes record – we do not anticipate any inventory-related downtime in the current quarter.

Relatively stable realizations on phosphoric acid industrial contracts, which are time-lagged to input costs, and phosphate feed products should support stable margins for this segment throughout 2012. In nitrogen, strong agricultural demand and tight supply have raised key benchmark prices that are expected to support higher realized prices through the second quarter. PotashCorp nitrogen sales volumes for full-year 2012 are anticipated to be slightly lower than the previous year as we now expect our Geismar ammonia plant restart will not have significant production available until January 2013. We now forecast our combined phosphate and nitrogen gross margin for 2012 to be in the range of $1.3-$1.5 billion.

We anticipate the 2012 contribution from our equity investments (comprised of dividend income and our share of equity-accounted investee earnings) to approximate $375-$425 million. Our 2012 annual effective tax rate is forecast to be 24-26 percent while we expect provincial mining and other taxes to be in the range of 9-10 percent of total potash gross margin.

PotashCorp expects record or near-record second-quarter earnings, with net income per share to approximate $0.90-$1.10. We now forecast earnings for the full year to be in the range of $3.20-$3.60 per share. 

All of our other previous guidance ranges remain in place, including selling and administrative expenses (forecast to be $225-$245 million); finance costs (forecast to be $100-$120 million); and capital expenditures excluding capitalized interest (forecast to be approximately $2.1 billion).

We note that the fair value of our investment in Sinofert as at March 31, 2012 was below its originally recorded cost. While there was not any objective evidence of impairment, it will be assessed again in future reporting periods. Although not included in our guidance, if the decline in fair value becomes significant or prolonged, the unrealized loss would be recognized in net income.

Conclusion

“Despite a just-in-time buying pattern that slowed demand over recent months, fertilizer buyers are now fully engaged and demand for our products, especially potash, is expected to improve as the year progresses,” said Doyle. “We are prepared not only to meet that demand as we have in the past, but to showcase our increasing capability to fulfill the needs of a growing potash market in the years to come.”

Notes

1. All references to per-share amounts pertain to diluted net income per share. 2. See reconciliation and description of non-IFRS measures in the attached section titled “Selected Non-IFRS Financial Measures and Reconciliations.”

Potash Corporation of Saskatchewan Inc. is the world’s largest fertilizer enterprise by capacity producing the three primary plant nutrients and a leading supplier to three distinct market categories: agriculture, with the largest capacity in the world in potash, third largest in each of nitrogen and phosphate; animal nutrition, with the world’s largest capacity in phosphate feed ingredients; and industrial chemicals, as the largest global producer of industrial nitrogen products and the world’s largest capacity for production of purified industrial phosphoric acid. PotashCorp's common shares are listed on the Toronto Stock Exchange and the New York Stock Exchange.

For further information please contact:

Investors Media Denita Stann
Vice President, Investor and Public Relations
Phone: (306) 933-8521
Fax: (306) 933-8844
E-mail Denita Bill Johnson
Senior Director, Public Affairs
Phone: (306) 933-8849
Fax: (306) 933-8844
E-mail Bill

This release contains forward-looking statements or forward-looking information (forward-looking statements). These statements can be identified by expressions of belief, expectation or intention, as well as those statements that are not historical fact. These statements are based on certain factors and assumptions including with respect to foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities and effective tax rates. While the company considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Several factors could cause actual results to differ materially from those expressed in the forward-looking statements, including, but not limited to: variations from our assumptions with respect to foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, and effective tax rates; fluctuations in supply and demand in the fertilizer, sulfur, transportation and petrochemical markets; costs and availability of transportation and distribution for our raw materials and products, including railcars and ocean freight; changes in competitive pressures, including pricing pressures; adverse or uncertain economic conditions and changes in credit and financial markets; the results of sales contract negotiations with major markets; the European sovereign debt crisis and the recent downgrade of US sovereign debt and political concerns over budgetary matters; timing and impact of capital expenditures; risks associated with natural gas and other hedging activities; changes in capital markets and corresponding effects on the company’s investments; unexpected or adverse weather conditions; changes in currency and exchange rates; unexpected geological or environmental conditions, including water inflows; imprecision in reserve estimates; adverse developments in new and pending legal proceedings or government investigations; acquisitions we may undertake; strikes or other forms of work stoppage or slowdowns; changes in and the effects of, government policies and regulations; security risks related to our information technology systems; and earnings, exchange rates and the decisions of taxing authorities, all of which could affect our effective tax rates. Additional risks and uncertainties can be found in our Form 10-K for the fiscal year ended December 31, 2011 under the captions “Forward-Looking Statements” and “Item 1A – Risk Factors” and in our other filings with the US Securities and Exchange Commission and the Canadian provincial securities commissions. Forward-looking statements are given only as at the date of this release and the company disclaims any obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.