July 15, 2008 / 8:40 AM / in 9 years

UPDATE 3-Yara Q2 tops forecasts, energy cost fears hit shares

(Adds details, quotes; updates share price)

By John Acher

OSLO, July 15 (Reuters) - Norwegian fertiliser group Yara (YAR.OL) reported a forecast-beating jump in profits for the second quarter and said business fundamentals remain “very, very strong”, but its stock was hit by fears of rising energy costs.

Tuesday’s results followed news overnight that Yara would buy Canadian nitrogen producer Saskferco for C$1.6 billion ($1.6 billion). Yara called this a “landmark growth initiative”, although some analysts said the acquisition was pricey.

Pretax earnings at Yara, one of the world’s biggest fertiliser producers and riding strong global grain markets, rose to 5.83 billion crowns ($1.14 billion) in the three months to the end of June from 1.89 billion in the same quarter last year.

The result beat all forecasts in a Reuters poll of 12 analysts whose estimates ranged from 4.57 billion to 5.66 billion crowns.

“These are good figures,” said analyst Einar Kilde Evensen at DnB NOR Markets.

Yara shares dropped more than 5 percent before paring losses to trade down 3.3 percent at 391.50 crowns by 0857 GMT, valuing the company at about $22.5 billion. The stock underperformed a 1.8 percent drop in the Oslo bourse benchmark index .OSEBX.

Some analysts said the results were not as strong as they seemed at first glance because they included one-off gains.

Some said the price for Yara’s Canadian acquisition looked steep, and others said Yara’s guidance for higher energy costs would hit earnings estimates.

Third-quarter energy costs would be around 1.5 billion crowns higher and fourth-quarter energy costs about 1.9 billion higher than a year earlier, Yara said. Fertiliser production is energy-intensive with gas prices particularly important.

Analyst Christian Must at Fondsfinans said the deal for the Saskatchewan plant valued it at eight times earnings before interest, tax, depreciation and amortisation (EBITDA) for the past 12 months which he said was above prices being paid for many North American fertiliser producers.

But DnB NOR Markets’ Evensen said, “The acquisition looks very accretive (for earnings).”

Yara said it agreed to buy the Saskferco plant from U.S. fertiliser producer Mosaic (MOS.N) and the province of Saskatchewan to boost commercial opportunities in the agricultural heartland of the Midwest.

The plant, one of the world’s largest, will add 650,000 tonnes of ammonia, 980,000 tonnes of urea and 230,000 tonnes of urea ammonium nitrate (UAN) in annual production capacity.

“The Midwest is one of the largest agricultural areas in the world,” Chief Executive Thorleif Enger said. “We have had a hole there, and we have looked to how we can fill that hole, and this is a very good opportunity for us.”

“VERY, VERY STRONG”

The improvement in the second quarter was mainly driven by strong demand giving higher fertiliser prices, only partly offset by increased raw material costs, Enger said in a statement, calling it the company’s best quarter ever.

“I think the fundamentals remain very, very strong,” Enger told a news conference, presenting his last quarterly report before he retires in September.

Enger said that earlier, when prospects were bright, he had also seen some dark clouds on the horizon. This time, he said, “I don’t see the dark clouds.”

Fertiliser markets tightened further in the second quarter, as the supply-demand balance for grains remained stretched, fuelling global import demand particularly in Asia, Yara said.

All product prices rose significantly from a year earlier, with the strongest increases coming in urea, NPK (nitrogen, phosphorous and potassium) compounds and nitrates, Yara said.

“Higher grain prices continue to encourage farmers to expand acreage and increase fertiliser application rates,” it said.

“The new season for nitrates in Europe has started strongly. Deliveries are running well, enabling stronger price increases than in the past,” Yara said. (Additional reporting by Richard Solem; Editing by Louise Ireland)

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