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Potash profit falls on charges, outlook trimmed

The Potash Corp logo at the entrance of the company's office tower in downtown Saskatoon, SK. on November 3rd, 2010.

Liam Richards/The Globe and Mail

Potash Corp. of Saskatchewan Inc., the world's largest fertilizer maker, on Thursday reported a 38-per-cent drop in it s second-quarter profit and forecast weaker-than-expected earnings for the latter half of 2012.

The Saskatoon, Saskatchewan-based company said it trimmed its full-year earnings forecast largely to reflect the impact of an impairment charge that hurt its second-quarter results.

Potash Corp now expects 2012 earnings to range from $2.80 (U.S.) to $3.20 a share, down from a prior forecast of $3.20 to $3.60 per share. Analysts, on average, were expecting earnings of $3.47 a share, according to Thomson Reuters I/B/E/S.

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The company also said it expects third-quarter earnings in the range of 70 cents to 90 cents a share. The forecast is well shy of Wall Street's expectations of 95 cents a share.

The lackluster outlook sent shares of Potash Corp down 2.7 per cent to $43.31 in trading before the morning bell in the United States on Thursday.

The fertilizer sector has been one of the few bright spots for investors in recent weeks, as drought conditions in many key corn growing areas in the United States have led to a surge in crop prices. Although the drought may dent near-term fertilizer sales, the spike in corn prices bodes well for nutrient demand ahead of next year's planting season in the United States – the world's largest corn grower and a huge buyer of fertilizers.

Potash Corp said the crop shortfalls expected this year will support crop prices and encourage farmers to boost fertilizer use next year.

Potash said net income in the second-quarter fell to $522-million, or 60 cents per share, from $840-million, or 96 cents per share, a year earlier.

Along with other one-time items, results in the latest quarter were hurt by a $341-million impairment recorded on its investment in Chinese fertilizer maker Sinofert Holdings Ltd.

Although strong overseas demand boosted production and sales of its namesake nutrient in the quarter, higher costs led to a slight narrowing of profit margins in its potash business.

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The company expects gross profits from its potash business in 2012 to be in the range of $2.6-billion and $2.8-billion. It earlier forecast a range of $2.6-billion to $2.9-billion.

Lower volumes and prices for its phosphate-based nutrients hurt profit margins in that business, while lower natural gas prices helped boost profits from its nitrogen business.

Potash Corp boosted its forecast for combined phosphate and nitrogen gross margin in 2012 to a range of $1.4-billion to $1.6-billion, up from a prior range of $1.3-billion to $1.5-billion.

Free cash flow, an indicator of its ability to service its debt and make strategic investments, rose to $797-million in the quarter, from $575-million, a year ago.

The results come just a week after, Potash Corp's smaller Canadian rival Agrium Inc raised its second-quarter earnings forecast. Agrium, which is also the top North American farm products retailer, is set to report second-quarter results on August 2.

Last week, U.S. fertilizer maker Mosaic Co. also came out with better-than-expected quarterly results. The fertilizer maker said it expects sales to remain strong despite drought conditions in many parts of the United States.

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