JAN 26 2012
Key Quarter and Outlook Highlights:
  • Fourth-quarter earnings of $0.78 per share; 39 percent higher than fourth-quarter 2010
  • Full-year earnings of $3.51 per share up 80 percent over 2010; second highest in company history
  • Full-year cash provided by operating activities reaches record $3.5 billion
  • 2012 earnings guidance of $0.55-$0.75 per share for first quarter; $3.40-$4.00 per share for full year

Saskatoon, Saskatchewan - Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported fourth-quarter earnings of $0.78 per share ($683 million), surpassing the $0.56 per share ($508 million) earned in the same quarter of 2010. Earnings for full-year 2011 reached $3.51 per share ($3.1 billion), representing the second-highest total in company history and an 80 percent increase over the $1.95 per share ($1.8 billion) earned in 2010.

Gross margin for the fourth quarter totaled $890 million, exceeding the $826 million earned in 2010's final quarter. This raised the 2011 total to $4.3 billion, well above the $2.7 billion in gross margin generated in 2010. Earnings before finance costs, income taxes and depreciation and amortization (EBITDA) of $1.1 billion and cash flow prior to working capital changes of $771 million for the fourth quarter raised annual totals to $4.8 billion and $3.7 billion, respectively. Each total surpassed those for the comparative period.

Our strategic offshore investments in Arab Potash Company Ltd. (APC) in Jordan, Israel Chemicals Ltd. (ICL) in Israel and Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile added $116 million to fourth-quarter earnings. Contributions from our investments for 2011 totaled $396 million, which includes dividend income from Sinofert Holdings Limited (Sinofert) in China received earlier in the year. The market value of our investments in these publicly traded companies equated to approximately $8.4 billion, or $10 per PotashCorp share, at market close on January 25, 2012.

"The drag of global economic concerns shook the confidence of fertilizer buyers and caused a greater decline in fourth-quarter demand than we had anticipated," said PotashCorp President and Chief Executive Officer Bill Doyle. "However, we believe these short-term challenges do not change the more powerful drivers of our business. The return on fertilizer investment continues to be attractive to farmers world-wide and is expected to result in greater demand in the quarters ahead."

Market Conditions

A typical seasonal slowdown in global fertilizer demand during the fourth quarter was exacerbated by near-term macroeconomic uncertainty. As phosphate and nitrogen fertilizer prices declined significantly late in the quarter from previously established annual highs, buyers of all three nutrients paused to assess market conditions before positioning product ahead of the upcoming planting season in key growing regions.

In this cautious environment, fourth-quarter potash shipments slowed from the record levels achieved through the first nine months of 2011. While the strength of demand in Latin American and Southeast Asian countries helped push offshore shipments from North American producers to a record 10.6 million tonnes for the year, movements for the fourth quarter were relatively flat compared to the same period in 2010. A significant portion of shipments for the quarter fulfilled previously committed contract volumes with China and India. In North America, dealers worked from existing inventories to meet immediate needs, which resulted in fourth-quarter movement from North American producers falling well below the comparative period in 2010. While pricing remained relatively stable in most major markets, the North American market pulled back slightly on weak demand and increased pressure from record offshore imports.

Similar conditions affected phosphate and nitrogen markets. Shipments of solid phosphate fertilizer from North American producers and US demand for urea and ammonia products slowed during the quarter from the same period in 2010. While strong agricultural fundamentals and tighter global supply pushed up prices through the first nine months of 2011, weaker demand during the fourth quarter led phosphate and nitrogen benchmark prices to decline from previous highs earlier in the year.

Potash

Despite higher realized prices, significantly lower sales volumes in fourth-quarter 2011 resulted in potash gross margin of $486 million, down from $536 million in the same quarter of the previous year. For the year, potash gross margin reached $2.7 billion - the second highest in our history and 50 percent higher than in 2010.

With dealers limiting purchases, fourth-quarter potash sales volumes of 1.6 million tonnes fell well short of the 2.4 million tonnes sold during the final quarter of 2010. Full-year totals climbed to 9 million tonnes, primarily on the strength of record shipments by Canpotex Limited (Canpotex), the offshore marketing agency for Saskatchewan potash producers. For the quarter, shipments to fulfill contract commitments to China and India accounted for 20 percent and 23 percent, respectively, of Canpotex's volumes, a larger portion than in the previous year. Shipments to other Asian and Latin American markets represented 35 percent and 15 percent, respectively, of Canpotex's sales volumes. North American buyers were especially cautious, as our fourth-quarter shipments fell to 0.4 million tonnes from 0.8 million tonnes in the same period of 2010.

Our average realized price of $431 per tonne for the fourth quarter was $108 per tonne higher than in the same period of 2010, but declined from the trailing quarter - a product of a higher percentage of sales shipped to lower-netback offshore contract markets, increased fixed transportation and distribution costs per tonne (as a result of lower North American volumes) and pressure from offshore imports in certain regions of the US.

Cost of goods sold on a per-tonne basis rose compared to fourth-quarter 2010, 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 negatively affected per-tonne operating costs.

Phosphate

Fourth-quarter phosphate gross margin of $163 million - generated largely by liquid fertilizers ($78 million), solid fertilizers ($33 million), feed ($29 million) and industrial products ($19 million) - surpassed the $137 million earned in the same period of the previous year. This raised the full-year total to $648 million, an increase of nearly 90 percent over the $346 million recorded in 2010.

Phosphate sales volumes for the fourth quarter totaled 0.9 million tonnes, down from the 1 million tonnes sold in the same period of 2010. Slower demand for solid fertilizer products was partially offset by stable volumes in other product lines, highlighting the value of our diversified production.

Despite the softening of spot markets during the fourth quarter, average realized phosphate prices of $631 per tonne remained well above those in the fourth quarter of 2010.

Increased sulfur and ammonia input costs were the primary drivers of higher per-tonne cost of goods sold.

Nitrogen

Gross margin of $241 million for fourth-quarter 2011 surpassed the $153 million generated in the same period of the previous year and raised our full-year total to a record $916 million, well above the 2010 total of $528 million. Our Trinidad operation contributed $129 million to the fourth-quarter total, while our 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 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 this facility in third-quarter 2012.

While key benchmark prices declined by the end of the quarter, our average realized nitrogen price of $461 per tonne remained well above that of fourth-quarter 2010. Strong industrial and agricultural demand paired with tight product supplies through much of 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 13 percent higher than during the same period a year earlier. Much of the increase was due to rising Trinidad gas costs, which reflected higher Tampa ammonia prices - the benchmark to which our Trinidad gas cost is indexed.

Financial

Selling and administration expenses for the quarter totaled $41 million, down from $64 million in the same period of 2010, primarily as a result of lower incentive accruals.

Improved earnings raised our income tax expense for the quarter to $247 million, up from $193 million in the final quarter of 2010. Fourth-quarter provincial mining taxes were lower, as accruals made earlier in the year were reduced during the quarter in conjunction with lower gross margin results.

We continued to invest in growing our potash capacity, which accounted for the majority of the $653 million expended on property, plant and equipment during the quarter and raised totals for the year to $2.2 billion. We have now spent more than 70 percent of the estimated capital required to complete our multi-year potash expansion program.

Outlook

The underlying fundamentals that drive fertilizer demand - including rising food requirements, historically low grain and oilseed stocks-to-use ratios and supportive grower economics - continue to encourage long-term growth for our business. While nutrient demand is built on the basics of soil science and supported by the expectation of profits for farmers, distributor confidence plays a role in the short-term movements of the market. Fertilizer buyers typically move aggressively when the product is needed and prices are rising, as evidenced through much of 2011, and pause in periods of market uncertainty and limited immediate demand, which occurred during the fourth quarter. These factors can impact the timing of demand for our products, but we believe they cannot alter the important role those products play in food production.

The demand slowdown we are witnessing today in the wake of macroeconomic concerns was not easily predictable as we entered the fourth quarter of 2011, but we believe the past year - and the current estimate for 2012 - is best viewed from a broader perspective. Global potash shipments for 2011 are estimated at approximately 55 million tonnes, marking the second consecutive year of significant growth. While the majority of demand occurred in the first nine months of 2011, fertilizer applications are believed to have remained robust throughout the year, even when dealer purchasing slowed in the fourth quarter.

We view the current year as the reverse of 2011, which started quickly but ended with weakened demand. Restocking of distributor inventories ahead of major application seasons has yet to begin in earnest, but is expected to accelerate as buyers move more aggressively to secure product to meet farmers' demands. Although the lull in purchasing for the new year has resulted in lower estimates of annual global shipments, we still see potential for a record year in 2012, with shipments estimated to be 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 below those of the opening quarter of 2011. Given supportive crop economics and the prospect of record corn and soybean plantings, we anticipate demand will 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. We anticipate buyers in this region will engage more aggressively by late in the first quarter, with rising farmer demand fueled by increasing acreage and strong crop economics for soybeans, corn and sugar cane. We estimate shipments to Latin America will be 10-10.5 million tonnes in 2012, potentially surpassing 2011 record levels.

Countries in other Asian markets (not including China and India) slowed potash purchases in the fourth quarter after record shipments during the first nine months of 2011, but demand is expected to pick up more significantly by the end of this quarter. Prices for palm oil, produced from potash-intensive oil palm, remain at high levels over concerns around tight supply. This, along with healthy returns for other key crops grown in this region, is expected to support robust demand throughout 2012. Shipments for the year 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, we believe Canpotex negotiations should not be unduly prolonged. We anticipate China's 2012 consumption will be in the range of 10.5-11 million tonnes, including imports of approximately 6.5 million tonnes.

While the long-term need for potash is significant in India, near-term demand is likely to face similar challenges to those presented in 2011. Uncertainty over government subsidy levels, a weakened rupee, higher retail potash prices and congestion at port facilities could limit near-term growth in this market. Canpotex shipments are expected to continue based on previously contracted volumes and pricing agreed to through first-quarter 2012, although deliveries will now likely carry over into the second quarter. For 2012, we anticipate total shipments to India will be in the range of 4-5 million tonnes. 

While growth in potash demand is expected to remain robust in 2012, the slow start to the year means we will not fully utilize our operational capability. As in previous periods of slower demand, we intend to follow our long-held strategy of matching our production to market demand. This does not change our commitment to building new capacity or our conviction that the world will need more potash in the future.

We remain firm in our belief that growing pressure on the global food supply and the need to improve crop yields will increase the importance of potash over the next several years and we will continue to develop our operations - and our markets - with that long-term view. Although the growth of markets like India and China has been slower in recent years due to what we believe are short-term challenges, we recognize the tremendous pressure on the food supply in these countries and the important role that proper fertilization - and our company - will play in meeting their long-term requirements.

Building new potash capacity - or expansion of existing facilities - cannot happen quickly when demand grows. This unique aspect of our business makes it imperative that we operate with foresight and make the investment of capital and time to be ready when new supply is needed. We choose to prepare for the future, managing through short-term fluctuations, knowing few companies have the same time and cost advantages in adding capacity.

We see 2012 as another step forward for PotashCorp. Based on current conditions, we estimate our 2012 potash segment gross margin will approximate $2.9-$3.3 billion. Total shipments for the year are expected to be in the range of 9.2-10 million tonnes. Inventory-related downtime at our Allan, Lanigan and Rocanville facilities in the first quarter of 2012 is expected to result in first-quarter cost of goods sold above that achieved in the first quarter of 2011. Based on our 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.

Although prices for nitrogen and phosphate fertilizers appear to have bottomed out and be strengthening as we move into the Northern Hemisphere's main planting season, recent declines in key benchmark prices are expected to weigh on realized prices for these products through at least the first quarter. Higher realizations on phosphoric acid industrial contracts, which are time-lagged to input costs, are expected to improve margins for this product over 2011 levels. We anticipate first-quarter volumes for our phosphate and nitrogen business should rise from the final quarter of 2011 and full-year demand is expected to remain at or higher than 2011 totals. In this environment, we forecast our 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 at between $400 million and $450 million, while selling and administrative expenses are forecast to be $225-$245 million. We anticipate that finance costs will approximate $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.

Our 2012 annual effective tax rate is forecast to be 25-27 percent and provincial mining and other taxes are expected to approximate 10-12 percent of total potash gross margin.

PotashCorp forecasts first-quarter net income per share to be in the range of $0.55-$0.75 and earnings for the full year between $3.40 and $4.00 per share.

Conclusion

"Although fertilizer purchasing patterns can shift for short periods, the need to improve crop yields and the science of fertilizer demand do not change," said Doyle. "With our history in this business, we understand the necessity of looking beyond short-term market fluctuations and preparing for the long-term growth that typically follows. It is through this patient approach that we have built our company and we believe it will continue to best serve the interests of our shareholders and other stakeholders."

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.

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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 amount 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 inflow; imprecision in reserve estimates; adverse developments in new and pending legal proceedings or government investigations; acquisitions we may undertake; strikes and other forms of work stoppage or slowdowns; changes in and the effects of, government policies and regulations; 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, 2010 under 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.