Potash Corp. of Saskatchewan Inc., the world's largest fertilizer producer, posted a disappointing slip in profits for the second quarter on Thursday.
Net income sunk 38 per cent from a year earlier, but was largely the result of a single non-cash impairment charge on the Saskatoon-based company's investment in Chinese fertilizer maker Sinofert Holdings Ltd.
The writedown of $341-million (U.S.) resulted in profits of $522-million, or 60 cents per share, compared with $840-million, or 96 cents per share for the same quarter last year.
The company also trimmed forecasts, expecting earnings-per-share of between $2.80 and $3.20 for 2012, down from a previous estimate of between $3.20 and $3.60 per share.
But the impairment was a one-time event. "If you exclude it, their earnings were in line with consensus," said Joel Jackson, an analyst at Bank of Montreal.
Excluding the writedown, profit was $1.01 per share, roughly the same as a year earlier. The second quarter actually saw record earnings before the impairment charge, the company said in a statement.
These kind of writedowns are not uncommon, Mr. Jackson said, when companies are required to mark their investments to market.
"It's an investment … not a part of their core business," he said.
The company's main operations are in the production and sale of three nutrients used in fertilizers: potash, phosphate and nitrogen, each of which were profitable over the quarter.
Lower prices for natural gas padded profits in the nitrogen segment, but smaller volumes and decreasing prices for phosphate-based nutrients put a strain on margins in that business area. The company's namesake nutrient enjoyed higher prices over the quarter, which more than offset an increase in production costs for potash, the company said.
The fertilizer business could see a surge in demand in the wake of the drought in the U.S. Midwest.
"[The drought] reinforces the importance of farmers focusing on the things that can be controlled," Potash chief executive officer Bill Doyle said in a conference call with analysts and investors. "Soil fertility is at the top of that list."
Mr. Doyle pointed to historical trends that show U.S. fertilizer use spiked after declines in corn yields. Data the company compiled from the Association of American Plant Food Control Officials and the U.S. Department of Agriculture show fertilizer use was up 20 per cent following a drop in corn crops in the early 1980s.
But that data is not necessarily indicative of the future, Mr. Jackson said. A more reliable outcome of the drought will be more demand for fertilizers from South America and Latin America.
A drought-related drop in production in the U.S., where about one-third of the world's corn in produced, has sent crop prices soaring. Farmers in the southern hemisphere are likely to boost production to take advantage of higher prices, Mr. Jackson said. That means they're likely to purchase more fertilizer to maximize their output.
This could be a boon for Potash Corp. in the months ahead while it waits to see if demand from Indian farmers will pick up.
The Indian market has been the largest challenge for global potash and phosphate markets recently, Mr. Jackson said, as subsidies for potash and phosphate from the Indian government have been reduced. Against the backdrop of a depreciating rupee and higher potash prices, Indian farmers are struggling to afford fertilizer.
Heading in to an election year in India in 2014, Mr. Doyle said he is optimistic the government will support farmers by boosting subsidies, but that is far from certain, Mr. Jackson said.
It's hard to know if that problem will be solved soon, he said, but even without Indian subsidies, Potash Corp is managing fine. Mr. Jackson still expects the company's stock to outperform the market.