Potashcorp Reports Third-Quarter Earnings of $0.74 per Share

Key Performance and Outlook Highlights

• Third-quarter earnings of $0.74 per share¹; 21 percent lower than third-quarter 2011
• Record third-quarter North American potash sales volumes offset by offshore sales decline
• Nine-month cash flow prior to working capital changes² reached $2.7 billion; close to record levels
• Full-year 2012 earnings guidance lowered to $2.40-$2.60 per share

Symbol: POT
Listed:  TSX, NYSE

SASKATOON, Oct. 25, 2012 /CNW/ - Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported third-quarter earnings of $0.74 per share ($645 million), which compared to $0.94 per share ($826 million) in the same period last year. Earnings for the first nine months reached $1.89 per share ($1.7 billion), a total that trailed the $2.73 per share ($2.4 billion) earned during the same period in 2011.

Gross margin of $0.9 billion was the third highest third-quarter total in our history, exceeded only by the $1.1 billion generated in 2011 and the record performance of 2008. The decline from 2011's third quarter was primarily the result of weaker phosphate margins and reduced offshore potash sales due to the delay of new supply contracts with China and India. Our gross margin for the first three quarters of 2012 reached $2.8 billion, which compared to $3.4 billion generated in the same period last year.

Earnings before finance costs, income taxes and depreciation and amortization² (EBITDA) reached $1.1 billion for the quarter - down from $1.3 billion earned in third-quarter 2011 - and raised the total for the first nine months to $2.9 billion. Although cash flow prior to working capital changes of $0.8 billion trailed the $1.0 billion generated during the same quarter last year, the nine-month total for 2012 grew to $2.7 billion, 8 percent below last year's record levels.

Offshore investments in Arab Potash Company (APC) in Jordan, Israel Chemical Ltd. (ICL) in Israel and Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile contributed $113 million to our earnings in the third quarter. Contributions in the form of share of earnings of equity-accounted investments and dividends from these investments for the first nine months of 2012 reached a record $318 million - a total which also included a dividend from Sinofert Holdings Limited (Sinofert). The market value of our investments in these publicly traded companies equated to approximately $9.2 billion, or $10 per PotashCorp share, at market close on October 24, 2012.

"Strong demand in North America and Latin America demonstrated the powerful motivators in place for farmers today, although not all global potash markets moved as quickly to capitalize on these favorable conditions," said PotashCorp President and Chief Executive Officer Bill Doyle. "While Chinese and Indian customers have not engaged consistently, their need for improved soil fertility to increase food production has not subsided. Our diversified fertilizer business and global footprint helped support our results for the quarter and we believe position us well to drive improved results as demand grows."

Market Conditions

Third-quarter potash demand was marked by varying degrees of engagement in key markets around the world. Movement to China and India was limited following the completion of existing supply contracts, while Brazil and North America purchased aggressively to meet robust farmer demand. In North America, fertilizer dealers began to prepare for their fall requirements upon the announcement of new summer-fill pricing programs. This helped push third-quarter shipments from domestic potash producers 26 percent above the same period last year. By the end of the quarter, shipments accelerated as fertilizer dealers responded to previously conservative fall application estimates, especially in regions less severely impacted by drought. Demand was further aided by a rapidly advancing harvest that was expected to create an extended North American fall fertilizer application window. In offshore markets, delays in closing new contracts with buyers in China and India more than offset strong demand from Latin America (especially Brazil) and resulted in a decrease in third-quarter shipments from North American producers to 1.9 million tonnes, 25 percent below the same period last year. As a result, rising competitive pressures in certain offshore markets moved most spot-market prices lower during the quarter.

In phosphate, strong demand and continuing supply challenges in the US kept domestic markets for solid phosphate fertilizer tight. Weaker offshore demand relative to 2011 levels resulted in lower prices on a comparative basis, but tightness in North America caused prices to move up in this market by the end of the quarter.

Nitrogen markets remained robust throughout the third quarter, driven by the expectation of high US corn acreage for the upcoming spring planting season and steady industrial demand. Continued delays in expected new capacity, as well as ongoing production issues in key exporting regions, kept inventories relatively low. The combination of strong demand and tight supply resulted in prices for ammonia at historically high levels, well above those of the same period last year.

Potash

Potash gross margin totaled $554 million for the third quarter, below the $700 million generated in the same period last year. This result brought potash gross margin for the first nine months to $1.7 billion, trailing the $2.2 billion earned in the comparative period last year.

Sales volumes for the quarter totaled 2.1 million tonnes, slightly below the 2.2 million tonnes sold in the same period of 2011. While strong demand pushed North American potash sales volumes to a third-quarter record of 1.0 million tonnes, surpassing the 0.8 million tonnes sold in the same period last year, offshore sales volumes fell to 1.1 million tonnes from 1.4 million tonnes in 2011. Shipments to Latin America outpaced last year's third quarter, but strength from this market was more than offset by the decline in sales to China and India. Shipments from Canpotex Limited (Canpotex) - the offshore marketing company for Saskatchewan potash producers - during the third quarter were heavily weighted towards Latin America and Other Asia (countries outside of China and India), which accounted for 32 percent and 41 percent of tonnes, respectively, while China represented 12 percent and India 5 percent. Total sales for the year reached 5.9 million tonnes, trailing the record 7.5 million tonnes sold through the first nine months of 2011.

Our third-quarter average realized potash price of $429 per tonne was relatively flat compared to second quarter 2012, but declined 5 percent from the same period last year on softening prices in spot markets.

Third-quarter potash production of 1.6 million tonnes reflected the impact of scheduled maintenance shutdowns, capital-related work at our Allan facility and inventory-related downtime at our Lanigan facility. Production for the quarter was 18 percent below last year's third quarter, which did not include any inventory-related downtime and contained fewer weeks of scheduled maintenance. This lower level of production - along with a greater percentage of production from higher-cost facilities, a rise in costs associated with potash tonnes from Esterhazy and increased depreciation charges - negatively impacted our cost of goods sold on a per-tonne basis.

Phosphate

Third-quarter phosphate gross margin of $122 million raised our nine-month total to $370 million, with both results lagging the $169 million and the $485 million earned in the comparable periods last year. Fertilizer products delivered $74 million in gross margin for the third quarter of 2012, while feed and industrial contributed $43 million.

The impacts of tropical storm Debby, a turnaround at our Geismar facility and challenging mining conditions in a new portion of our Aurora mine limited production during the quarter. As a result, third-quarter sales volumes of 0.9 million tonnes were below the 1.1 million tonnes sold in the same quarter last year, reflecting our decision to allocate a larger percentage of our limited phosphoric acid production to higher-margin products.

Average realized phosphate prices for the quarter totaled $537 per tonne, trailing the $602 per tonne achieved in the same quarter of 2011. This change reflected lower prices for solid and liquid fertilizers, although the relative strength of our diversified feed and industrial products - where pricing is typically less volatile than products with agricultural exposure - helped limit the overall decline.

Phosphate cost of goods sold on a per-tonne basis was positively impacted during the third quarter by lower sulfur costs and a favorable adjustment to our phosphate asset retirement obligations (due to an increase in the relative discount rate) compared to the same period last year.

Nitrogen

Our ammonia-focused nitrogen business continued to benefit from higher prices, increasing third-quarter gross margin to $251 million, and raised our total for the year to a record $772 million. These results compared to $263 million in gross margin generated in last year's third quarter and $675 million earned during the first nine months of 2011. Trinidad generated $144 million of our third-quarter 2012 gross margin, while our operations in the US (including the impact of our hedge position) contributed $107 million.

Gas interruptions in Trinidad and expansion-related downtime at our Augusta facility resulted in sales volumes for the third-quarter declining to 1.1 million tonnes from 1.3 million tonnes in the same period last year.

Average realized price for nitrogen reached $458 per tonne, up from $424 per tonne in the third quarter of 2011, as tight ammonia market fundamentals pushed prices higher relative to the same period last year.

Higher Tampa ammonia prices - the benchmark to which our Trinidad gas costs are primarily indexed - were the primary driver of the increase in cost of goods sold on a per-tonne basis in the third quarter.

Financial

In September 2012, we announced a 50 percent increase to our quarterly dividend that raised it to $0.21 per share. This was our third dividend increase since the beginning of 2011, with our quarterly dividend now more than six times its level at the start of that year.

Third-quarter capital-related expenditures, primarily related to our potash expansion projects, were $546 million, raising our total for the first nine months of 2012 to $1.5 billion.

General Outlook

The economic motivators for farmers to increase food production remain strong - a situation that, combined with the basic principles of agronomy and the need to improve crop yields around the world, typically drives fertilizer demand. Yet, as this situation unfolds, the speed and magnitude of response has varied by market. In the US and Brazil, farmers are responding more quickly to the opportunities and driving strong demand for all fertilizers, while regions with more government involvement and less-developed agricultural economies - and lagging yields - have moved more slowly. This current dichotomy has disrupted typical demand patterns and caused potash shipment expectations to fall below previously forecast levels, which are now anticipated to be in the range of 50-52 million tonnes for the year.

These conditions are not unprecedented, as growth has often occurred in uneven waves, with increases in demand sometimes punctuated by periods of contraction. PotashCorp has successfully navigated through these challenges in the past, following strategies designed to minimize the impact during periods of slower demand while delivering long-term growth.

Potash Market Update

In North America, we have witnessed improved sentiment among farmers and fertilizer dealers that is translating into rising demand to meet fall application needs. While farmers work to address their soil nutrient needs as they seek to capitalize on supportive crop economics - driven by strong crop prices and the affordability of fertilizer - we believe dealers will cautiously manage purchases through the remainder of the year in an effort to minimize inventory positions. We anticipate fourth-quarter demand in this market will be above that of the same period last year and still see the potential for second-half shipments to reach record levels.

Latin American distributors are working to keep pace with significant grower demand. Soybean and corn planting is well underway in key producing regions, which is drawing down potash supplies. We anticipate demand in this region will remain strong for the balance of the year as distributors prepare for Brazil's Safrina crop (February/March corn planting) and attempt to take advantage of the typically slower import period to help alleviate port congestion. Potash shipments for full-year 2012 are forecast to remain strong and we believe could approach last year's record levels.

Demand in Other Asia (countries outside of China and India) remains relatively strong, despite volatility in prices for oil palm, a key crop in this part of the world. We expect full-year demand to fall below that of 2011, but anticipate this market will end the year with lower inventories than a year ago.

While demand for potash in China is expected to be equal to that of 2011, delays in new contract commitments have reduced seaborne supply expectations for 2012. Demand in this market is currently being met from internal production, inventory withdrawals and tonnage via rail, but additional requirements are anticipated. We do expect a resolution prior to the end of 2012 and believe reduced Chinese inventory levels by year-end could lead to increased requirements in 2013.

In India, a number of near-term challenges are continuing to create uncertainty. High food inflation, crop yields that are well below many other countries in the developing world and the significant under-application of potash are well documented, but the path India will follow to address these critical issues remains unclear. India faces significant challenges in improving, or even maintaining, current crop production levels given existing fertility practices. The need to address this situation - along with mounting internal pressure on the government from its local fertilizer industry - fuels our confidence that policies will ultimately be modified and demand will improve. We believe an increase in demand will begin to unfold in 2013, although the extent to which that happens remains uncertain at this time.

Financial Outlook

In this environment, we now estimate our 2012 potash segment gross margin will be in the range of $2.1 billion to $2.3 billion. This revised estimate primarily reflects a reduction in our shipments estimate for 2012, which is now anticipated to be in the range of 7.6-8.3 million tonnes. The wide ranges on these estimates primarily reflect our varied timing assumptions on new supply contracts.

Inventory-related downtime at our lower-cost Lanigan and Rocanville facilities, in addition to increased depreciation charges and the impact of higher costs associated with potash tonnes from Esterhazy, is expected to result in a per-tonne cost of goods sold for the fourth quarter above those compared to the same period last year.

In phosphate, tight North American phosphoric acid markets are expected to contribute to relatively stable markets through the balance of the year, although this may be offset by higher per-tonne cost of goods sold - a product of higher rock and ammonia costs - and result in margin contraction from third-quarter 2012 levels.

The expectation of record or near-record corn plantings in 2013, along with healthy industrial demand, is likely to lead to relatively tight markets - particularly for ammonia - through the balance of 2012. We expect higher per-tonne cost of goods sold for the fourth quarter, reflecting the recent rise in North American spot gas prices and the lagging impact of sales from inventory produced with higher-cost Trinidad gas during the third quarter. We expect that our expansion project at Augusta will begin producing during the fourth quarter, and that our ammonia plant restart at Geismar will commence in January 2013.

We now forecast our combined phosphate and nitrogen gross margin for full-year 2012 to be in the range of $1.3 billion to $1.5 billion.

PotashCorp now forecasts full-year earnings between $2.40 and $2.60 per share which includes the impacts of the $0.39 per share adjustment for a Sinofert impairment charge recognized in the second-quarter of 2012.

Conclusion

"The agricultural fundamentals that drive our business - rising food demand, supportive crop prices and the scientific need to replenish nutrients - remain strong despite some disruption in deliveries to offshore potash markets." said Doyle. "We intend to follow a business strategy designed to protect the value of our enterprise while remaining steadfast in our commitment to deliver on future growth. We believe the nature of food production necessitates that fertilizer demand will return in all major markets. When it does we will be ready to meet the needs of our customers and deliver the best possible long-term returns for stakeholders."

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."

PotashCorp is the world's largest crop nutrient company and plays an integral role in global food production. The company produces the three essential nutrients required to help farmers grow healthier, more abundant crops. With global population rising and diets improving in developing countries, these nutrients offer a responsible and practical solution to meeting the long-term demand for food. PotashCorp is the largest producer, by capacity, of potash and third largest producer of nitrogen and phosphate. While agriculture is its primary market, the company also produces products for animal nutrition and industrial uses. Common shares of Potash Corporation of Saskatchewan Inc. are listed on the Toronto Stock Exchange and the New York Stock Exchange.

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; economic and political uncertainty around the world, including the European sovereign debt crisis; 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.

PotashCorp will host a Conference Call on Thursday, October 25, 2012 at 1:00 pm Eastern Time.

⁽¹⁾ Available-for-sale investments are comprised of shares in Israel Chemicals Ltd. and Sinofert Holdings Limited.
⁽²⁾ Net of income taxes of $NIL (2011 - $71) for the three months ended September 30, 2012 and $48 (2011 - $71) for the nine months ended September 30, 2012.
⁽³⁾ Cash flow hedges are comprised of natural gas derivative instruments and are net of income taxes of $1 (2011 - $11) for the three months ended September 30, 2012 and $11 (2011 - $11) for the nine months ended September 30, 2012.
⁽⁴⁾ Net of income taxes of $(8) (2011 - $(7)) for the three months ended September 30, 2012 and $(24) (2011 - $(23)) for the nine months ended September 30, 2012.

(See Notes to the Condensed Consolidated Financial Statements)  

4. Income Taxes

A separate estimated average annual effective tax rate is determined for each taxing jurisdiction and applied individually to the interim period pre-tax income of each jurisdiction.

The impairment of the company's available-for-sale investment in Sinofert is not deductible for tax purposes. Total discrete tax adjustments that impacted the rate in the three months ended September 30, 2012 resulted in an income tax expense of $14 compared to an income tax recovery of $5 in the same period last year. Total discrete tax adjustments that impacted the rate in the nine months ended September 30, 2012 resulted in an income tax expense of $17 compared to an income tax recovery of $29 in the same period last year. Significant items recorded included the following:

• In the first nine months of 2012, a tax expense of $17 (of which $12 was recorded in the third quarter) to adjust the 2011 tax provision to the income tax returns filed for that year.

• In first-quarter 2011, a current tax recovery of $21 for previously paid withholding taxes.

• In third-quarter 2011, a current tax recovery of $12 due to income tax losses in a foreign jurisdiction.

5. Net Income Per Share

Net income per share was calculated on the following weighted average number of shares:

Diluted net income per share was calculated based on the weighted average number of shares issued and outstanding during the period, incorporating the following adjustments.  The denominator was: (1) increased by the total of the additional common shares that would have been issued assuming the exercise of all stock options with exercise prices at or below the average market price for the period; and (2) decreased by the number of shares that the company could have repurchased if it had used the assumed proceeds from the exercise of stock options to repurchase them on the open market at the average share price for the period. For performance-based stock option plans, the number of contingently issuable common shares included in the calculation was based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the performance period and the effect were dilutive.

Potash Corporation of Saskatchewan Inc.
Selected Non-IFRS Financial Measures and Reconciliations
(in millions of US dollars except percentage amounts)
(unaudited)

The following information is included for convenience only. Generally, a non-IFRS financial measure is a numerical measure of a company's performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with IFRS. EBITDA, adjusted EBITDA, adjusted EBITDA margin, cash flow prior to working capital changes and free cash flow are not measures of financial performance (nor do they have standardized meanings) under IFRS. In evaluating these measures, investors should consider that the methodology applied in calculating such measures may differ among companies and analysts.

The company uses both IFRS and certain non-IFRS measures to assess performance. Management believes these non-IFRS measures provide useful supplemental information to investors in order that they may evaluate PotashCorp's financial performance using the same measures as management. Management believes that, as a result, the investor is afforded greater transparency in assessing the financial performance of the company. These non-IFRS financial measures should not be considered as a substitute for, nor superior to, measures of financial performance prepared in accordance with IFRS.


A. EBITDA, ADJUSTED EBITDA AND EBITDA MARGIN

Set forth below is a reconciliation of "EBITDA" and "adjusted EBITDA" to net income and "adjusted EBITDA margin" to net income as a percentage of sales, the most directly comparable financial measures calculated and presented in accordance with IFRS.

EBITDA is calculated as earnings before finance costs, income taxes and depreciation and amortization. Adjusted EBITDA is calculated as earnings before finance costs, income taxes, depreciation and amortization, certain gains and losses on disposal of assets and certain impairment charges. PotashCorp uses EBITDA and adjusted EBITDA as supplemental financial measures of its operational performance. Management believes EBITDA and adjusted EBITDA to be important measures as they exclude the effects of items which primarily reflect the impact of long-term investment and financing decisions, rather than the performance of the company's day-to-day operations. As compared to net income according to IFRS, these measures are limited in that they do not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues. Management evaluates such items through other financial measures such as capital expenditures and cash flow provided by operating activities. The company believes that these measurements are useful to measure a company's ability to service debt and to meet other payment obligations or as a valuation measurement.

Adjusted EBITDA margin is calculated as adjusted EBITDA divided by net sales (sales less freight, transportation and distribution). Management believes comparing the company's operations (excluding the impact of long-term investment decisions) to net sales earned (net of costs to deliver product) is an important indicator of efficiency. In addition to the limitations given above in using adjusted EBITDA as compared to net income, adjusted EBITDA margin as compared to net income as a percentage of sales is also limited in that freight, transportation and distribution costs are incurred and valued independently of sales; adjusted EBITDA also includes earnings from equity investees whose sales are not included in consolidated sales. Management evaluates these items individually on the consolidated statements of income.

Potash Corporation of Saskatchewan Inc.
Selected Non-IFRS Financial Measures and Reconciliations
(in millions of US dollars)
(unaudited)