(Recasts with merger details, adds investor and analyst comment and share activity)
By Rod Nickel and Ismail Shakil
Oct 27 (Reuters) - Potash Corp of Saskatchewan , the world's biggest fertilizer company by capacity, said early votes by shareholders supported a proposed merger with rival Agrium Inc as it posted a smaller-than-expected drop in quarterly profit.
The Canadian company on Thursday also lowered its profit outlook for the year, warning that significant recovery in the potash market would happen only late this year or in early 2017.
Potash Corp in September agreed to combine with Agrium to navigate a severe industry slump by boosting efficiency and cutting costs. Potash prices dropped to decade lows this year due to excessive mining capacity and weak crop prices.
"Support expressed by shareholders has been very encouraging, with early vote results overwhelmingly in favor of the merger," Potash Chief Executive Officer Jochen Tilk said.
Shareholders of each company will meet separately on Nov. 3 to complete voting.
Potash shares rose 1.1 percent to $16.96 in New York and have gained nearly 8 percent in the past 10 days.
"Investors know the macro backdrop is negative for the potash sector and there are very low expectations. From this point, it really is all about the upcoming merger with Agrium," said Michael Underhill, chief investment officer of Capital Innovations LLC.
Capital Innovations will vote its shares in both companies for the merger because it provides scale and diversification to weather a slumping market, Underhill said.
In the third quarter, Potash net income fell to $81 million, or 10 cents per share, from $282 million, or 34 cents, a year earlier. It was the second smallest profit per share in nearly 12 years, according to Thomson Reuters data.
Sales dropped 26 percent to $1.14 billion, but beat the average analyst estimate of $1.04 billion, according to Thomson Reuters I/B/E/S.
Excluding items, the company earned 11 cents per share, above the 9 cents that analysts expected, on average.
The beat was due to lower-than-expected taxes, and investors may be disappointed with results, given that potash spot prices have recently risen, Citi analyst P.J. Juvekar said in a note.
Potash Corp's average realized price for potash in the quarter was $150 per tonne, down from $250 a year earlier.
Potash sales volumes rose 16 percent to a record 2.5 million tonnes, as shipments resumed to Chinese and Indian buyers.
The company cut the upper end of its full-year earnings forecast to 45 cents per share from 55 cents. The company retained the lower end at 40 cents. (Reporting by Ismail Shakil in Bengaluru and Rod Nickel in Winnipeg, Manitoba; Editing by Shounak Dasgupta and Jeffrey Benkoe)