OREANDA-NEWS. Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported earnings of USD 0.40 per share (USD 340 million) for the first quarter of 2014, a total that included a USD 69 million (USD 0.06 per share) special dividend from our investment in Israel Chemicals Ltd. (ICL) as well as a USD 38 million (USD 0.04 per share) non-cash impairment charge related to our investment in Sinofert Holdings Limited (Sinofert). This result compares to the USD 0.63 per share (USD 556 million) earned in the same period last year.

Gross margin for the quarter totaled USD 565 million, below the USD 867 million generated during the first quarter of 2013. Despite an improving environment for both demand and pricing compared to the final quarter of 2013, realizations in all three nutrient segments lagged behind those of the first quarter last year and negatively impacted our earnings.

Adjusted earnings before finance costs, income taxes, depreciation and amortization and certain impairment charges2 (adjusted EBITDA) of USD 745 million and cash from operating activities of USD 539 million declined 23 percent and 27 percent, respectively from first-quarter 2013.

Contributions from dividends and our share of equity earnings from investments in Arab Potash Company (APC), ICL and Sociedad Quimica y Minera de Chile S.A. (SQM) totaled USD 100 million for this year's first quarter, including the ICL special dividend. The market value of our investments in these publicly traded companies, as well as Sinofert, was approximately USD 5.4 billion or USD 6 per PotashCorp share at market close on April 23, 2014.

"After an especially challenging environment in the second half of 2013, greater demand and stability emerged early in the year," said PotashCorp President and Chief Executive Officer Bill Doyle. "We saw strong customer engagement ahead of the spring planting season, particularly in potash. Despite weather-related issues that impacted our results, especially in phosphate, we were able to deliver earnings above our quarterly guidance range."

Market Conditions
Potash demand and spot market pricing strengthened throughout the first quarter. In North America, demand was robust as fertilizer distributors worked to position product ahead of the spring planting season. Even as shipments from domestic producers climbed 48 percent above those during the same period last year, ongoing rail constraints – precipitated by difficult winter conditions and a record grain harvest in Canada – kept dealer supplies tight. Although demand from Brazil and Southeast Asian countries strengthened, North American producers' offshore shipments fell slightly below those of the same period last year as logistical challenges constrained their abilities to satisfy all demands for product. Offshore sales were further impacted by delayed supply contracts with Chinese and Indian buyers relative to 2013. Amidst strengthening market fundamentals, potash prices in all spot markets increased from the beginning of 2014 – most notably for granular product – but remained well below those of the comparative period in 2013.

In nitrogen, first-quarter ammonia production in the US reached its highest level in more than a decade as additional capacity came online and producers responded to strong agricultural and industrial demand. While ammonia prices trailed the historically high levels of 2013 – a period characterized by especially strong demand and supply challenges in key producing regions – they moved up sharply as the quarter came to a close. Demand for urea was also robust ahead of the North American spring planting season. With imports lower than those of the previous year, North American supply tightened and urea prices strengthened over the course of the quarter, although key benchmarks remained below those of the same period in 2013.

Production and logistical challenges also impacted global phosphate markets. This was especially true in North America where a combination of supply disruptions and an improved demand environment caused prices for all phosphate fertilizer products to strengthen during the quarter. Despite this move upward, weak market fundamentals through the second half of 2013 kept pricing levels for the quarter below those of the comparative period last year.

First-quarter 2014 potash gross margin of USD 300 million was below the USD 504 million generated during the comparable period last year as the favorable impact of lower per-tonne costs and slightly higher sales volumes was more than offset by lower prices.

Strong buyer engagement in key markets pushed our total sales volumes for the first quarter to 2.3 million tonnes, slightly above the 2.2 million tonnes sold during the first three months of 2013. North American totals reached 1.0 million tonnes, 24 percent higher than the same period last year as we leveraged our extensive warehousing and distribution capabilities to meet strong demand. Our offshore sales volumes of 1.3 million tonnes fell below 2013's first-quarter total of 1.4 million tonnes as delayed Chinese and Indian contracts and rail constraints limited shipments. The majority of Canpotex3 sales for the quarter were to Other Asian countries (47 percent) and Latin America (27 percent), while China and India accounted for 16 percent and 3 percent, respectively.

Potash prices began to trend upward in key markets as the quarter progressed, but the sharp decline during the second half of 2013 weighed on realizations. As a result, our first-quarter average realized potash price of USD 250 per tonne was well below the USD 363 per tonne of the same period last year.

With improved demand, potash production reached 2.4 million tonnes, exceeding the 2.0 million tonnes produced in 2013's first quarter. Higher operating rates, savings from workforce changes, optimization of tonnage from our lower-cost facilities and a favorable impact from a weakened Canadian dollar improved our per-tonne costs by 13 percent compared to the same period last year.

In nitrogen, gross margin for the first quarter totaled USD 239 million compared to USD 271 million in the same period of 2013 as the positive impact of increased sales volumes was more than offset by weaker price realizations. Our US operations generated USD 146 million of gross margin for the quarter, while our facility in Trinidad contributed USD 93 million.

First-quarter sales volumes of 1.6 million tonnes exceeded the 1.5 million tonnes sold during the same period of 2013. Strong operating rates across all our nitrogen facilities and the benefit of a full quarter of production at our Geismar ammonia plant (which was restarted in late-February 2013) were the primary contributors.

Prices for all three nitrogen product categories declined as weaker market fundamentals kept benchmark prices (and our realizations) below those of first-quarter 2013. As a result, our average realized price of USD 344 per tonne in the first quarter was below the USD 436 per tonne earned last year.

The total average cost of natural gas used in production for the first quarter, including the impact of our hedge position, was USD 5.40 per MMBtu, an 11 percent decrease from the same period last year. Our diversified production profile helped contribute to a 22 percent improvement in our per-tonne cost of goods sold compared to last year's first quarter as lower gas costs in Trinidad – the result of pricing linked largely to ammonia – helped offset higher spot prices in the US.

First-quarter phosphate gross margin totaled USD 26 million, generated almost entirely from our feed and industrial business. Beyond the market and operating headwinds we faced, other accounting items recognized in our costs of goods sold totaled USD 29 million, including those related to accelerated depreciation and asset retirement obligations. As a result, first-quarter gross margin was well below the USD 92 million earned in the comparable period last year.

Weather-related production issues reduced operating rates across all our facilities and constrained our sales for the quarter. Sales volumes totaled 0.8 million tonnes in this year's first quarter, below the 0.9 million tonnes sold during the comparative period in 2013.

Our average realized phosphate price for the quarter was USD 484 per tonne, down from the USD 549 per tonne realized in the same period last year. Weaker fertilizer market conditions through the second half of 2013 weighed on our first-quarter realizations and led to a 17 percent decline compared to last year, while our historically more stable feed and industrial products fell by 4 percent.

Per-tonne cost of goods sold remained relatively flat compared to the first quarter of last year as the favorable impact of lower input costs for sulfur and ammonia – as well as efficiencies achieved through our previously announced workforce and operational changes – were offset by lower production volumes and accelerated depreciation and asset retirement obligation adjustments noted above.

First-quarter provincial mining and other taxes totaled USD 54 million, below the USD 63 million during the same period last year because of weaker potash gross margin. Due to lower earnings, our first-quarter income tax expense of USD 144 million was down from USD 226 million in the comparative period last year.

Capital-related cash expenditures totaled USD 224 million for the quarter compared to USD 496 million in the same period last year as spending related to our multi-year potash expansion program nears completion.

Through our previously announced share repurchase program, we repurchased a total of 11.7 million common shares during the first quarter at an average price of USD 34.00 per share. This program – which expires on August 1, 2014 – is now approximately 60 percent complete.

In March, we issued USD 750 million in 10-year notes at a rate of 3.625 percent. The proceeds were used to redeem USD 500 million of 5.25 percent notes (in April) which were due in May 2014, as well as for general corporate purposes.

Market Outlook
Recent potash contracts in China and India as well as a strong order book in key spot markets are expected to create an environment that should support robust shipment levels through at least the next two quarters. While we are beginning to see an improvement in rail deliveries help address the backlog of orders from the first quarter, significant product demands are expected to keep pressure on North American carriers. We continue to work closely with our transportation partners to minimize disruptions although these conditions are expected to result in ongoing tight global market fundamentals. For the full year, we maintain our view that global potash shipments could be in the range of 55-57 million tonnes.

In North America, we expect strong demand at the farm level to continue and securing potash to remain a top priority for distributors. With rail carrier backlogs limiting producers' ability to recharge warehouse systems, sales volumes for the second quarter could be constrained – although the delayed start to the spring planting season is expected to provide some relief. For the full year, we maintain our view that total shipments to North America could approximate 9-9.5 million tonnes.

Potash demand in Latin America is expected to remain strong as farmers strive to increase crop production by planting more acres and enhancing soil fertility. We anticipate imports to this market will accelerate through the second quarter and remain robust through the seasonally strong July to October period. For the year, we forecast potash shipments to Latin America of approximately 10.5 million tonnes, including what could be record demand from Brazil.

With first-half Chinese contracts in place for all major global potash suppliers – including Canpotex – shipments to this market are expected to accelerate through the second quarter. First-half volume commitments are likely to meet a significant portion of China's estimated import needs for 2014, and we anticipate a modest level of additional seaborne imports will be required during the second half. For the full year, we forecast total demand will approximate 11.5 million tonnes.

In India, the recent settlement of new supply contracts – including a 1 million tonne agreement with Canpotex – is expected to provide a base load of tonnage through the remaining three quarters of 2014. While fertilizer subsidies continue to remain a near-term challenge in achieving more robust demand levels, we expect 2014 shipments to India will approximate 3.5-4.0 million tonnes, exceeding the 2013 total.

In Other Asian countries (outside of China and India), low inventories and supportive crop prices are expected to help generate stronger demand in 2014. We forecast total potash shipments in the range of 8.0-8.3 million tonnes, exceeding those of 2013.

Financial Outlook
Given a slightly improved potash pricing and demand outlook, we have increased our annual estimate for potash gross margin to USD 1.1-USD 1.3 billion and sales volumes to 8.3-8.7 million tonnes.

Our estimates include the benefit of our Canpotex allocation run at Allan, which is nearing completion. With results to this point surpassing our initial expectations, we anticipate our Canpotex entitlement will exceed 53 percent for the second half of 2014. Additionally, operational changes at our potash facilities have begun to reduce our per-tonne cost of goods sold and we anticipate further improvement during the second quarter. While we expect slightly elevated per-tonne costs in the third quarter due to our planned maintenance shutdowns, we remain on track to achieve our targeted USD 15-USD 20 per-tonne reduction in cash costs from 2013 levels.

In nitrogen, recent pricing strength has improved the near-term outlook. We anticipate typical seasonal trends will result in slightly weaker margins through the second half of 2014, although our higher sales volumes expectations should partially offset this impact. For the full year, we anticipate total gross margin will remain historically high but trail 2013's total.

In phosphate, we expect prices for all products to be below those of 2013. While the weather-related operating challenges we recently faced appear to be behind us, weaker gross margin contributions during the first quarter have lowered our full-year expectations. The planned closure of a chemical plant at our White Springs operation is anticipated to result in slightly lower sales volumes in the second half of the year (approximately 0.1 million tonnes of P2O5) and keep our non-cash costs elevated as we accelerate depreciation for these assets (anticipated at USD 43 million for full-year 2014).

We have increased our annual estimate of income from offshore investments to a range of USD 230-USD 240 million to include the special dividend received from ICL during the first quarter.