PotashCorp eyes stong 2014 finish

Despite Potash Corp. of Saskatchewan’s (TSX: POT; NYSE: POT) third-quarter profit declining 11%, it expects to finish the year on an upbeat note.

Earnings were US$317 million, or US38¢ a share, compared to last year’s US$356 million, or US41¢ a share. This came below the estimated US42¢ a share. The miss is largely blamed on higher taxes and weaker contributions from the company’s offshore investments in Jordan, Israel and Chile. 

The total gross margin was US$589 million, up 22% from the US$484 million generated in last year’s third quarter.

The firm’s potash segment contributed 50%, or US$295 million of the total gross margin, while nitrogen, which saw higher sale volumes and strong price realizations, kicked in 40%, or US$233 million. Phosphate, experiencing lower production and higher costs, added 10%, or US$61 million.

“Broadly speaking, healthy potash and nitrogen results were more than offset by weak phosphate production, higher taxes and a sharp drop in offshore equity investment income,” Raymond James analyst Steve Hansen notes.

The fundamentals in the global potash space have improved compared to 2013, which was riddled with soft demand, weak prices, growing supplies and a period of uncertainty after Russia’s Uralkali (LSE: URALL) ended a sales partnership with rival Belaruskali.

“Both sale volumes and lower costs were key drivers in potash,” Jochen Tilk, the company’s CEO, said on a conference call discussing the third-quarter results. 

Potash sales were up 29% to 2 million tonnes, as offshore sales with China, India and other Asian countries jumped 45%, and domestic sales grew 9%.

The company’s average realized potash price was US$281 per tonne, down from US$307 per tonne a year ago. The drop partly came from higher sales to lower-price offshore markets. The firm expects lower realized prices in the fourth quarter, before picking up in early 2015. 

Operating costs were down US$28 per tonne year-over-year thanks to improved workforce efficiencies, higher production levels and a weaker Canadian dollar.

“We believe the landscape has largely unfolded in potash,” Tilk said, adding that global shipments during the first nine months of 2014 were at record highs and should continue strong for the rest of the year.

As a result, PotashCorp has bumped up this year’s global shipment guidance to 58 million to 60 million tonnes. It intends to deliver 9 million to 9.2 million tonnes in 2014, up slightly from its previous forecast.

Given that the current pace of global potash sales should continue in the fourth quarter, coupled with higher expected nitrogen sales and ammonia prices, PotashCorp has narrowed its full-year 2014 profit to US$1.75 to US$1.85 per share, from US$1.70 to US$1.90 per share earlier.

This implies fourth-quarter earnings per share of US42¢ to US52¢, up 50% from a year ago, Raymond James’ Hansen notes.

While PotashCorp will release its 2015 guidance in January, it expects global potash shipments next year to be similar to 2014 levels, despite lower crop prices.

“Even with a weaker crop-pricing environment than observed in prior years, potash demand has been more responsive than anyone anticipated. While nutrient requirements drove this outcome, we also believe that improved nutrient affordability played a role,” Tilk said.

Industrial operations have not met expectations, and Tilk said this has lifted the potash price in almost all major spot markets, before bottoming earlier this year.

“While admittedly the synopsis does not provide a crystal ball for 2015, it does give us improved confidence that potash fundamentals remain supportive,” he added.

PotashCorp expects the uptick in global spot markets will translate into higher contract prices next year and improved realized prices. It anticipates a modest decline in 2015 demand from the U.S. and Brazil, with growth coming from China and India.

“While we’re inclined to agree this offshore momentum will continue, we remain decidedly more reserved on the domestic outlook in light of sharply lower crop prices, rising potash supply [capability], and improve rail network fluidity — a combination that is expected to put modest pressure on domestic pricing next year,” Hansen notes. He has a US$38.50 target price and “market perform” rating on the stock.