Potash Corporation of Saskatchewan Inc. (PotashCorp) reported record second-quarter earnings of $2.82 per share ($905.1 million), a 220 percent increase over the $0.88 per share ($285.7 million) earned in last year's second quarter. This represents the highest quarterly earnings in company history - 62 percent above the record $1.74 per share ($566.0 million) set in first-quarter 2008 - and reflects rising global fertilizer demand and the impact of significantly higher prices for potash, nitrogen and phosphate products. Record quarterly gross margin of $1.4 billion was up 187 percent from the $501.4 million generated in the second quarter of 2007, with all three nutrients making record contributions. Earnings for the first six months of 2008 were $4.54 per share ($1.5 billion), more than triple the $1.50 per share ($483.7 million) earned in the first half of last year and higher than the record $3.40 per share ($1.1 billion) earned for the full year 2007. First-half gross margin reached $2.3 billion, compared to $871.1 million in the first six months of 2007, and has already exceeded the record full-year total of $1.9 billion set last year.
Cash flow from operating activities prior to working capital changes(2) reached $1.1 billion for the quarter and $1.7 billion for the first six months of 2008, compared to $473.7 million for the second quarter of 2007 and $756.7 million for the first half of that year. Earnings before interest, taxes, depreciation and amortization(2) in the quarter grew to $1.4 billion from $496.4 million in last year's second quarter, raising first-half EBITDA to $2.2 billion compared to $877.4 million in the same period of 2007.
This strong performance was enhanced by our offshore investments in Arab Potash Company Ltd. (APC) in Jordan, Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile, Israel Chemical Ltd. (ICL) in Israel and Sinofert Holdings Limited (Sinofert) in China, which added $94.0 million to our before-tax earnings in the quarter. Year to date, these investments have contributed $117.4 million to our other income and the total market value of our investments today is $9.8 billion, roughly equivalent to $30 per PotashCorp share.
"This quarter established a new standard of performance for our company," said PotashCorp President and Chief Executive Officer Bill Doyle. "We are experiencing strong growth in demand and are capturing the value of higher prices in all three nutrients, especially in potash. With farmers around the world striving to maximize yields and placing a priority on fertilization, this quarter provided a glimpse of the future potential of our company."
Outlook
We believe the recent attention to issues of food production and food security is a necessary and positive development, as those issues are a long-term reality underpinning growth in the fertilizer industry. Global population continues to rise by an estimated 77 million people per year, with the largest portion of that growth occurring in countries with increasing economic strength such as China and India. Improving diets, specifically adding more protein from animal sources, is a priority in these regions and is putting considerable pressure on global grain supply.
The world's farmers must produce record volumes of grain and oilseeds every year just to meet the growing need for food, animal feed, fiber and fuel. This does not even begin to address the issue of restoring severely depleted global grain inventories, now down to less than two months of supply. That presents farmers with a significant challenge - one that becomes greater as population covers a larger portion of the world's agricultural spaces, leaving less land for food production.
Producing record crops globally year after year is difficult and unpredictable for many reasons, particularly the weather. Due to cool wet weather, more than half of the US corn crop was seeded after May 10th this year -much later than usual - which could reduce crop production. Flooding in the Midwest further impacted production potential and total harvested acreage. The result is higher corn prices, signaling farmers to plant a very large corn crop in 2009. The potential for higher corn plantings has increased competition for acres from other crops, such as soybeans, and has raised futures prices for those crops.
These conditions, in turn, underpin demand for fertilizers, which are essential to maximize the quality and quantity of crop yields. Research has established that without fertilizer, at least 40 percent of the world's annual crop production would be lost. If nutrients in the soil are not replaced following harvest, future production suffers. Thus, the world's ability to produce more grain is tied directly to best farming practices, which include appropriate application of fertilizer, especially in developing regions that continue to under-apply.
The evidence about the financial benefits of proper fertilizer application is powerful. Sensitivity analyses estimate that an average US farmer planting fertilizer-intensive corn - with short ton costs of $1,000 for potash, $1,200 for DAP and $1,000 for urea - and receiving farmgate corn prices of $5.50 per bushel would generate a return of approximately $435 per acre over and above variable costs. This is nearly four times the estimated per-acre returns of US farmers in 2005, the year before crop prices began their strong advance. Of the three nutrients, potash has the smallest per-acre impact on cost, so assuming even higher potash prices in the analysis, the farmer will still generate historically exceptional returns. Although corn futures continue to fluctuate, short-term volatility does not change the long-term equation: proper fertilizer application equals greater return. This holds true for fertilizer investment on other global crops, even at much lower crop prices than are being achieved today. Farmers understand this, which is why higher fertilizer prices have not reduced demand.
Supply and demand will continue to be the drivers of the potash business for the foreseeable future, barring an improbable collapse in crop commodity prices, as an estimated 3-4 million tonnes of annual global potash demand today remains unmet. As a result, delivered offshore spot prices have reached or exceeded $1,000 per tonne. The situation could tighten further, as China's 2008 potash imports are expected to be less than 70 percent of 2007 levels, which should significantly reduce its inventories by the end of the year. While we expect global supply to grow by about 2.5 million tonnes in 2009, with more than half of that coming from our Lanigan and Patience Lake debottlenecks, an increase in demand from China in a short potash market - even a return to its 2007 level of purchases - would leave the world facing even larger potash shortages. None of the buyers in other major potash-consuming markets - including North America, Brazil, India and Southeast Asia - are expected to reduce consumption at a time of tight food supply and high crop prices.
The world's soils will be increasingly deficient in potassium if the unmet demand continues to grow. This will reduce future yield potential, an untenable situation that makes PotashCorp's ongoing capacity expansion program essential to filling the large potash supply/demand gap. On July 17, we announced plans to invest a further $1.6 billion to add a combined 2.7 million tonnes of operational capacity at Allan, Cory and Rocanville. This follows previously completed capacity expansion initiatives at Rocanville (2005), Allan and Esterhazy (2007) and Lanigan (2008), as well as in-progress projects scheduled for completion at Patience Lake (2008), Cory (2010), New Brunswick (2011) and Rocanville (2012). In total, we expect to raise our operational capacity by almost 8 million tonnes between now and the end of 2012. Developing potash capacity is a long-term initiative and requires significant foresight, expertise and understanding of global demand patterns. Just as previous projects announced as long ago as 2003 are today providing increased volumes for our customers and record returns for our company, we anticipate that our projects currently underway will be needed to meet growing global demand. When they come online over the next five years, we expect them to continue generating strong returns for PotashCorp. If demand for any reason is less than expected, we plan to match our production to meet market demand to minimize downside risk, as we have done for the past 21 years.
For the remainder of this year, both PotashCorp and Canpotex are in a sold-out volume position and will continue to ship to North American and offshore customers on an allocation basis. We recently announced a $250-per-short-ton price increase in the North American market effective September 1 through November 30, while Canpotex announced that delivered prices to Brazil and Southeast Asia are now $1,000 per tonne for standard product and $1,025 for granular product. We expect to realize these price increases in the fourth quarter. As a result, we are now forecasting 2008 potash gross margin more than 300 percent higher than that achieved in 2007.
In nitrogen and phosphate, a strong fall season in the US appears likely, driven by the prospect of large 2009 corn plantings and farmers' strong desire to prepare in advance after a difficult wet 2008 spring. High costs for sulfur and phosphate rock are unlikely to abate, and industry consultants expect that contracts for Moroccan rock could reach $450-$500 per tonne in the third quarter. The impact of reduced urea and DAP exports from China is expected to become clearer, with consultants' reports suggesting the 135 percent tax on phosphate exports could be extended through at least the end of 2008. Under these conditions, delivered solid phosphate fertilizer prices to offshore markets could rise in the fourth quarter beyond the current $1,270 per tonne. Urea could be sustained at current high levels for the remainder of 2008 and ammonia is likely to play catch-up and climb substantially in the third quarter. In liquid phosphate, our North American fertilizer-year-based contracts that begin in July will carry realized prices more than 80 percent higher than those achieved in the second quarter, while industrial prices established under longer-term customer contracts will rise slowly through 2008 and should see substantial catch-up in early 2009. As a result, our nitrogen and phosphate gross margins are now forecast to exceed 2007 levels by more than 85 percent and 200 percent, respectively.
Capital expenditures, excluding capitalized interest, are expected to be approximately $1.4 billion for 2008, of which $270 million will relate to sustaining capital. We estimate our consolidated effective income tax rate to be 29 percent in 2008, but it could fall within a range of 28-30 percent, with a current/future split of 90/10. Due to higher potash prices and margins, provincial mining taxes are forecast to be 16.5 percent of total potash gross margin for the year, but could fall within a range of 15-18 percent depending on price realizations, Canadian/US exchange rate and the timing and amount of capital spending on potash projects in Saskatchewan.
With higher expected overall gross margin, which will be partially offset by increased royalties, provincial mining and corporate income taxes, and assuming parity between the Canadian and US dollar, PotashCorp is raising full-year net income guidance from $9.50-$10.50 per share to $12.00-$13.00 per share. We expect third-quarter net income to be in the range of $3.25-$3.75 per share. In the current trading range of the Canadian dollar relative to the US dollar, each one-cent change in the Canadian dollar typically impacts our foreign exchange line by approximately $10.0 million, or $0.02 per share on an after-tax basis, and is primarily a non-cash item.
Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer enterprise 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, second largest in nitrogen and third largest in 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.
For more information, visit http://www.potashcorp.com/