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A good quarter for Potash, with more to come

There were a lot of big deals announced in August, but nothing close to BHP Billiton Ltd.’s $39-billion bid for Potash Corp. of Saskatchewan.

DAVID STOBBE/David Stobbe/Reuters

Strong demand in Latin America and Asia has sparked a surge in Potash Corp. of Saskatchewan 's profits.

The commodities boom that has been pushing up prices of precious and base metals has finally boosted the earnings of the Canadian agriculture giant, which on Thursday hit a profit level not seen since before the downturn.

The company reported first-quarter profit of $732-million, or 84 cents per share, topping analyst expectations of 80 cents per share. It was the first time the company's quarterly profits crept above the $700-million threshold since 2008, and they were 71-per-cent higher than the same period in 2010.

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That jump isn't solely driven by growing demand in China, which is the case for so many commodities. Almost 75 per cent of Potash Corp.'s sales last quarter were made in Latin America and in Asian countries outside of China and India, and the highest continental demand for all of 2010 came from North America.

Much of that demand is driven by corn, a specialty of farmers in the United States. "Given the current crop economics, we believe that North American farmers will have added incentive to seed and fertilize every possible acre this spring," chief executive officer Bill Doyle said on a conference call. "In the aftermath of the downturn, the world has witnessed that the underlying drivers of food demand have not abated."

Add to that his expectation that little new supply will come on the market, and the industry's fundamentals look strong.

New entrants are unlikely because the cost of building a mine with terminals and rail connections is too high, at around $5.5-billion, Mr. Doyle said. And today's potash market price isn't high enough to generate a decent return on that investment, he added. In fact, those logistics are the key reason BHP Billiton sought to buy Potash Corp. rather than expand its own Jansen mine in Saskatchewan.

The future also looks promising for Potash Corp. Spot potash prices have been on the rise, jumping from $392.50 (U.S.) per pound in February to $409 per pound in March. Bank of Nova Scotia commodities analyst Patricia Mohr expects them to jump another $50 by May.

That still leaves prices well off their highs north of $800 per pound in 2008, but Mr. Doyle is insistent that potash producers will be "very challenged to keep pace with demand" and that should give them strength.

Mr. Doyle dismisses fears that potash prices could move so high that they destroy demand. "We're so far away from demand destruction when you think about pricing," he said. "If you just take corn for example, at $7 [per bushel]corn, fertilizer represents just a little over 12 per cent of the cost, so that is just a very low level."

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Potash Corp's average realized potash price in the quarter rose to $366 per tonne, up from $321 a tonne a year earlier. The company reported similar gains in both its nitrogen and phosphate segments.

The company expects second-quarter profit to be in the range of 70 cents to 90 cents per share, while analysts consensus comes in around 86 cents, according to Capital IQ.

In the first quarter, Potash Corp. split its shares three-for-one and doubled its quarterly dividend to seven cents per share.

Potash Corp. (POT)

Close: $52.69, down $1.49

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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