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Agrium costs soar due to weather-related rail-shipment delays

Argium's head office in Calgary.

Jeff McIntosh/The Canadian Press

Nasty weather is driving up costs at Agrium Inc.'s Vanscoy potash mine expansion in Saskatchewan and making it more difficult to get its product to market.

On a conference call on Friday, company executives said the cost of the Vanscoy project, southwest of Saskatoon, has risen by 25 per cent over the original estimate of $1.5-billion. That brings its price tag close to $1.9-billion.

Ron Wilkinson, who is in charge of Agrium's wholesale division, said Saskatoon suffered through temperatures colder than minus 30 degrees Celsius for much of December. And high winds made work even more difficult.

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"It's been extremely hard to make progress in those conditions while we have a full workforce on site. So productivity has been extremely poor," he said.

Construction is about 65 per cent complete on a project that is expected to boost production capacity at the mine by 40 per cent by 2015.

"We are fairly well down the path and I think we'll become more confident as we come out of winter here," said Wilkinson.

"At this point, this is our best estimate. We've got a huge focus on contractor productivity going forward and obviously there's some risk there, but we're confident we can hold it at this number."

Calgary-based Agrium (TSX:AGU) said it's keeping its eye on another weather-related challenge – getting its crop nutrients to market by rail.

Snow and cold have slowed rail shipments. That, combined with last year's bumper crop of grain in Western Canada and several other factors, has led to a traffic jam on the tracks. Farmers have argued grain shipments are not as high a priority to rail companies as oil, potash and coal.

Western Canadian growers produced 75.9 million metric tonnes of grain, nearly 40 per cent higher than the five-year average, Alberta's premier said Friday in pushing for improved rail service.

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"The weaknesses in our grain-handling transportation system need to be fixed. While this year's harvest was exceptional, higher yields are becoming the new norm in Western Canada and the problem will continue to grow unless appropriate steps are taken," Alison Redford said in a release.

Agrium relies on rail to export its product to the U.S. and overseas, via export points like the Port of Vancouver. The poor weather, and the railways' efforts to balance all of their customers' needs, means some of Agrium's crop nutrients haven't been able to move. And that's had a relatively minor impact on the amount it's been able to produce, CEO Chuck Magro told reporters.

"We're talking to all of our supply chain partners. So far, things look a little bit better in February, but it has impacted our business, not only in sales, but we have lost production because we didn't have enough movement to keep our production plants running at full rates," he said.

"So we're hopeful that the worst is behind us, but it is a balancing act that I think the railroads are really struggling with."

Farmers – Agrium's customers – have been growing increasingly frustrated as their grain piles up in bins. If they're unable to sell their grain and bring in income, it could cause some uncertainty around fertilizer purchases.

The good news about the huge harvest is that the crops soaked up a lot of nutrients from the soil, so farmers are likely going to be eager to replenish their fields with Agrium's products this spring, added Magro.

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Thursday evening, Agrium posted a drop in net earnings to US$99-million, or 66 cents per share.

That's a big drop from US$354-million, or $2.34 per share, in the same period a year earlier, as the company saw a 25 per cent price drop in potash, phosphates and nitrogen.

Magro said it was a "noisy" quarter, with a $257-million purchase gain for the Viterra acquisition and a $220-million goodwill impairment for the Landmark business in Australia, among other one-time items.

Sales dropped to US$2.867-billion from US$3.093-billion.

Agrium's retail division posted record fourth quarter sales of US$2.1-billion, up from $2-billion reported in the prior year.

"This was achieved despite the headwinds from a shortened fall application season in the U.S. and a weak nutrient price environment," Magro said.

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