October 22, 2012 / 6:25 PM / 6 years ago

Flagging sales sting Potash, nitrogen boosts Agrium

WINNIPEG, Manitoba (Reuters) - Canadian fertilizer companies Potash Corporation of Saskatchewan Inc and Agrium Inc appear likely to tell significantly different stories when they release third-quarter earnings.

Potash Corp’s POT.TO POT.N profits look to fall sharply from last year as a standoff with China and India hampers sales.

Agrium AGU.TO AGU.N, meanwhile, will benefit from its greater exposure to nitrogen, a soil nutrient farmers apply annually that is enjoying rich margins due to low costs of the key ingredient, natural gas.

Potash Corp flagged its concerns last week about sales to the world’s two biggest potash consumers, cutting its full year 2012 guidance and pegging third-quarter earnings per share at the low end of the 70- to 90-cent range it had previously offered.

“They’ve just got a volume issue right now, which you might argue is a price issue,” said Charles Neivert, analyst at Dahlman Rose & Co. “Either way, they’re just not selling any product and India and China are out of the market.”

New deals were originally expected by late summer. But they are now are not seen until December or early 2013. North American supplies have piled up to 39 percent over the five-year average as of September.

Potash Corp, the world’s biggest producer of its namesake nutrient, will report third-quarter earnings on October 25, followed by Agrium on November 7. The two companies, along with Mosaic Co (MOS.N) sell their Saskatchewan-produced potash offshore through the marketing agency Canpotex.

Signing contracts with China and India will not solve all problems. Potash prices are currently skewed higher because those lowest-cost buyers aren’t in the market, Neivert said.

“Don’t be surprised if the price is not that attractive,” said analyst Robert Winslow of National Bank Financial. “I can’t imagine that Potash Corp and Canpotex and the group are going to get (both) high prices and high demand. We’ve seen that’s inconsistent with Economics 101.”

Potash Corp’s quarter was helped by better performance in nitrogen, but its phosphate division could also suffer from pressure on exports, Neivert said.

Analysts, on average, expect Potash Corp to report earnings per share of 78 cents for the July-September quarter, according to Thomson Reuters I/B/E/S.

A year ago, Potash Corp notched up earnings per share of 96 cents for the quarter.


Agrium won’t absorb the same blow from stalled contract talks in the July-September quarter as Potash, because of its well-timed maintenance shutdown of its Vanscoy, Saskatchewan mine, said analyst Edlain Rodriguez of Lazard Capital Markets.

Nitrogen, not potash, is its most important product, accounting for about one-third of its EBITDA (earnings before interest, taxes, depreciation and amortization).

Nitrogen is the most widely-used fertilizer, and one that farmers generally apply every year to foster plant growth and improve yields, unlike potash and phosphate that U.S. farmers may taper back following a devastating drought.

On Friday, Yara International ASA (YAR.OL) beat third-quarter earnings expectations, and its performance was helped by above-average nitrogen prices from a strong U.S. autumn application season, said Scotia Capital analyst Ben Isaacson.

Shares of Agrium, the world’s No. 3 nitrogen producer, and CF Industries Holdings Inc (CF.N) have outperformed the fertilizer sector this year, jumping 59 and 43 percent so far.

Agrium also has its stable retail business of selling seed, chemicals and fertilizer to farmers in the United States, Australia and Canada, which should fare well in the quarter, Neivert said.

Agrium, which is under pressure from its biggest shareholder to split its wholesale and retail divisions, is expected to report earnings of $1.83 per share, down slightly from $1.85 a year ago.

Both Potash Corp and Agrium could feel pressure to some extent by the worst U.S. drought in a half-century, analysts say, although the brunt would be felt in the fourth quarter, when U.S. farmers apply fertilizer.

Still, as U.S. farmers saw their crops wither this summer, it is likely that some held off on ordering potash and phosphate fertilizer for the fall, since a poor crop would leave more nutrients in the soil, Neivert said.

Fifteen of 30 brokers rate Potash a buy or strong buy, down from 17 a month ago, according to Thomson Reuters I/B/E/S. Twenty of 29 analysts rate Agrium as a buy or strong buy, unchanged from last month.

Reporting by Rod Nickel in Winnipeg, Manitoba; Editing by Janet Guttsman and Bob Burgdorfer

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