SASKATOON, Oct. 22 /CNW/ -- Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported third-quarter earnings of $0.82 per share(1), or $248.8 million, compared to $3.93 per share, or $1.2 billion, in the same period last year. This result raised year-to-date earnings to $2.45 per share, or $744.2 million. The quarter-over-quarter decline reflects the continuing caution among fertilizer buyers around the world, which has negatively affected sales volumes and prices for all three nutrients. Despite substantially lower volumes, potash generated 73 percent of our total third-quarter gross margin of $346.2 million, compared to 52 percent of $1.7 billion in the same period last year, and raised our year-to-date total to $746.4 million. Earnings before interest, taxes, depreciation and amortization(2) (EBITDA) of $441.8 million and cash flow prior to working capital changes(2) of $359.8 million were both significantly lower on a quarter-over-quarter basis. EBITDA for the first nine months of 2009 reached $1.1 billion and cash flow prior to working capital changes totaled $847.4 million.

Our offshore investments in Arab Potash Company Ltd. (APC) in Jordan, Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile and Israel Chemicals Ltd. (ICL) in Israel, which were impacted by the same challenging conditions, contributed $43.9 million in other income this quarter compared to $139.6 million in the third quarter of 2008. These investments, as well as our position in Sinofert Holdings Limited (Sinofert) in China, continue to provide PotashCorp with significant strategic and financial value. The market value of our investments in these publicly traded companies was $7.0 billion as of market close on October 21, 2009, equating to approximately $23 per PotashCorp share.

"This quarter was a reminder of the contrast between long-term fundamentals and short-term uncertainties," said PotashCorp President and Chief Executive Officer Bill Doyle. "Even though the science of food production and fundamentals of global development dictate that more fertilizer, especially potash, is needed around the world, the impact of the global financial crisis remained a difficult hurdle in the third quarter. The uncertainty among fertilizer buyers has lasted far longer than we anticipated, but cannot continue indefinitely. Our focus is on preparing for the demand rebound that we believe will inevitably follow. We will be ready to serve our customers and deliver returns for our investors."

Market Conditions

While fertilizer buyers remained cautious in the wake of economic uncertainty, growth in demand for food continued unabated and concerns over global grain supplies were reflected in rallying prices for crop commodities toward the end of the quarter. Issues related to grain and oilseed production began to emerge as the combination of low potash and phosphate levels in the soil and less-than-ideal growing conditions in key agricultural regions muted crop yields. Although a record corn yield is predicted in the US, this is one of the few regions that is expected to experience yield growth in 2009.

North American potash producer shipments improved from the previous quarter, but third-quarter volumes were still more than 50 percent below the same quarter in 2008 and year-to-date totals were nearly 70 percent lower than in the first nine months of last year. In July, India signed new contracts with global potash producers, which we believed would inspire buyer confidence in other markets. This failed to materialize, as potash buyers appeared to respond instead to their perception of market conditions and risks, including healthy producer inventories, lack of engagement by Chinese buyers and a late US harvest. Moreover, large inventory writedowns in nitrogen and phosphate taken by dealers over the past year limited the appetite for additional inventory risk. As a result, dealers and farmers continued to buy potash only on an as-needed basis, putting pressure on spot market pricing.

In phosphate, US producer solid fertilizer domestic sales volumes moved closer to historical levels, while offshore volumes rose slightly as India continued to import significant quantities and shipments to Brazil increased in advance of its key planting season. In nitrogen, lower domestic natural gas costs allowed North American producers to be more competitive, contributing to a 24 percent decline in ammonia imports to the US compared to last year's third quarter. Lower winter wheat plantings and continued deferral by fertilizer buyers reduced urea demand and prices in the quarter.

Potash

Potash remained a strong gross margin business, although a decline in third-quarter sales volumes - from 1.9 million tonnes in 2008 to 1.0 million tonnes this year - brought this quarter's gross margin to $251.4 million compared to $909.7 million in the same period last year. Our year-to-date potash gross margin totaled $524.2 million, compared to $2.3 billion for the first nine months of 2008. This decline was primarily driven by slower potash movement, and, to a lesser extent, by lower realized prices and higher per-tonne cost of goods sold.

Offshore shipments in the third quarter fell to 0.7 million tonnes from 1.3 million tonnes in the same period last year, bringing our year-to-date total to 1.3 million tonnes in 2009 versus 4.5 million tonnes in the same period of 2008. Following the July contract settlement between India and Canpotex Limited, the offshore marketing company for Saskatchewan potash producers, 39 percent of total offshore volumes for the quarter were directed to this market. Brazil and Southeast Asia - two major spot markets - accounted for 14 percent and 23 percent of Canpotex's third-quarter volumes, respectively. North American sales volumes of 0.3 million tonnes in the third quarter compared to 0.5 million tonnes in the same period last year, bringing our nine-month total in 2009 to 0.6 million tonnes, compared to 2.6 million tonnes in this market in 2008.

Realized potash prices for the quarter were 34 percent below third-quarter 2008 levels and 18 percent behind this year's second quarter, as declines in offshore contract prices led to a recalibration of spot market prices. Additionally, fixed transportation and distribution costs allocated over substantially fewer sales tonnes continued to impact 2009 realized prices.

In response to slow product movement, we continued to match our production to market demand. We produced 0.6 million tonnes during the third quarter compared to 1.7 million tonnes in the same period last year, when production was limited by a strike at three Saskatchewan facilities. Potash per-tonne cost of goods sold in the third quarter continued to be impacted by the allocation of shutdown and other fixed costs over greatly reduced volumes.

Phosphate

Of the $44.2 million in third-quarter phosphate gross margin (compared to $507.2 million in the same quarter last year), industrial products generated $40.5 million. Year-to-date phosphate gross margin totaled $73.5 million compared to $1.0 billion in the first nine months of 2008. Industrial products benefited from cost-plus and market-index contract provisions, which supported gross margin even as sales volumes declined 21 percent quarter over quarter. Although the decline in sales volumes for solid and liquid fertilizers was less significant, a sharp drop in prices resulted in negative gross margin in these product categories.

Phosphate cost of goods sold was reduced dramatically in third-quarter 2009, as input costs for sulfur and ammonia were 80 percent and 29 percent lower, respectively, than in the same period last year.

Nitrogen

Nitrogen generated $50.6 million of gross margin in the third quarter of 2009 compared to $324.1 million in last year's third quarter. Our Trinidad operation, where we produce under long-term, lower-cost natural gas contracts, generated $33.2 million in gross margin - almost two-thirds of our third-quarter total. Our US operations, which benefited from lower natural gas prices, provided $17.4 million of gross margin in the quarter. Year-to-date nitrogen gross margin of $148.7 million compared to $719.5 million in the same period in 2008.

Realized average nitrogen prices in the third quarter were 63 percent lower than in the same period last year. Natural gas prices declined significantly and netbacks for ammonia, urea and nitrogen solutions were down 65-67 percent quarter over quarter. Nitrogen sales volumes were relatively flat compared to the same period last year. Our total average cost for natural gas used in production, including our hedge, was $3.70 per MMBtu, 60 percent lower than in the same quarter of 2008.

Financial

In the third quarter, we capitalized on favorable interest rates available in the debt market and issued $500.0 million of senior notes bearing interest of 3.75 percent due September 30, 2015, and $500.0 million of senior notes bearing interest of 4.875 percent due March 30, 2020. The net proceeds from the offering were primarily used to repay outstanding indebtedness under our revolving credit facilities and for general corporate purposes.

Capital expenditures on property, plant and equipment totaled $424.5 million in the third quarter, with the majority allocated to our potash expansion projects. The combination of lower potash sales volumes and prices reduced our mining and other taxes for the quarter to $2.1 million, compared to $172.0 million for the same quarter last year.

Other income in the third quarter of 2009 decreased $98.8 million from the same period last year, primarily as a result of lower equity earnings and dividends from our offshore potash investments.

Outlook

While the global recession has severely impacted the fertilizer industry over the past year, the science of food production has not changed. The significant volumes of potash and phosphate that have been mined from the soil for crop production must be replaced. Historically, potash has been under-applied in nearly every major offshore market and a proper nutrient balance in soils has never been attained. In more mature markets like the US and Western Europe, farmers have generated large harvests in recent years that have removed more nutrients from the soil than fertilizer applications have replaced. While the negative impacts of these practices can be masked in the short term by excellent growing conditions - near-perfect weather and lower insect or disease pressure - crop science has proven that continuing a pattern of under-application ultimately lowers yields.

PotashCorp has consistently focused on the world's long-term needs and followed strategies designed to protect and enhance the value of our assets, particularly potash, over time. Convinced that this is the right approach, we will not chase short-term solutions in response to the unprecedented temporary decline in fertilizer demand. Even as we curtailed our 2009 production rather than force product into the current market, we continued to work on our capacity expansions in Saskatchewan and New Brunswick, building not for the months ahead but for decades to come. The impact of events like the economic crisis and resulting caution among fertilizer buyers continues to be difficult to accurately predict, but we believe the long-term opportunity is clear.

The rationale behind our approach is supported by decades of rising food consumption. According to the Food and Agriculture Organization of the United Nations, global population is forecast to grow from its current 6.8 billion to more than 9 billion by 2050, which will necessitate a 70 percent increase in world food production, including doubling of production in developing countries. Cereal crop production will need to grow from approximately 2 billion tonnes per year today to 3 billion tonnes in 2050, while meat production needs to rise from less than 270 million tonnes to 470 million tonnes annually over the same time period. An estimated 90 percent of the increase in food production will need to be achieved by increasing yields on existing arable land - a considerable challenge given that the average annual rate of yield growth declined from 2.3 percent in the 1960s to 1.3 percent this decade. It is estimated that more than 40 percent of the world's current food production can be attributed to adequate fertilization, so the importance - and future value - of our products is clear.

Advancing agricultural production and fertilization practices, however, is a process of continuous improvement, not one that is addressed in a single growing season or financial quarter. Similarly, growth in demand for food - or fertilizer - is best measured over time. For example, global consumption of cereal grains and oilseeds over the past decade has risen by 320 million tonnes (equivalent to the size of the current US corn crop) and 112 million tonnes (1.3 times the size of the current US soybean crop), respectively. We believe this pattern of growth is unlikely to change. Even as the world works through the economic crisis, the International Monetary Fund is projecting 2010 economic growth of 5.1 percent in emerging countries, led by China (9.0 percent) and India (6.4 percent). We expect this growth will continue to drive demand for more high-quality food in many countries.

As this global story evolves, we believe fertilizer distributors and farmers around the world are closely watching current crop yields and prices, assessing potash producer inventories and waiting for a clearer signal of demand and price levels - including new contracts between China and producers - before committing to their own purchases. While this situation has led to significant declines in potash inventories throughout the distribution chain and in the world's soils, those declines must inevitably reverse.

We expect that one of the catalysts of increased fertilizer demand will be supportive crop prices coming into the spring season. With lower yields in many parts of the world putting pressure on global grain supplies, and frost and poor weather negatively impacting the US harvest, we believe that crop prices are likely to remain well above historical levels through the fall and winter. The return of other major markets in advance of their spring planting seasons and settlement of a potash contract in China should also give buyers the motivation to begin rebuilding potash inventories. We are not far removed from the potash shortages that had customers on allocation through much of 2007 and 2008. As a result, we may see buyers move quickly when the process of restocking begins.

We anticipate global potash demand in 2010 will approximate 50 million tonnes. Continued strong crop economics and significant engagement of all key markets by early next year could raise demand above our forecast. Weaker crop prices and slower buyer engagement could keep it below this level. However, we view the return of markets as only a timing issue and will continue to adjust our operating rate to any demand scenario that unfolds. This strategy necessitates that we balance production curtailments with labor contract commitments which can result in small short-term potash inventory builds, as we anticipate in fourth-quarter 2009. This global forecast reflects the expectation of a sizable rebound in demand next year, but with our expected annual operating capacity in 2010 of about 12 million tonnes, continued curtailments are anticipated.

We now expect our 2009 potash gross margin to fall within the range of $0.7-$0.9 billion and total shipments to be 3.0-3.2 million tonnes.

With lower forecast potash volumes, we now anticipate our 2009 annual effective tax rate will be in the range of 10-12 percent, with the fourth quarter at approximately 26-27 percent. Provincial mining and other taxes are forecast within a range of 3-4 percent of total potash gross margin in the year as a result of lower volumes and pricing.

PotashCorp expects fourth-quarter net income per share to be in the range of $0.65-0.85, bringing our net income per share for the full year at the low end of the annual guidance range we previously provided.

Conclusion

"Challenging times are a test of our strategies and our commitment," said Doyle. "The fertilizer business - and potash in particular - may look like an easy business, but it requires patience and resolve during periods of short-term volatility. Throughout our history, we have demonstrated that we will make decisions that protect and enhance long-term shareholder value. We will not stray from that approach, rewarding those who share our interest in maximizing the value of our assets over time."

Notes
-----
1.  All references to per-share amounts pertain to diluted net income per
share.
2.  See reconciliation and description of non-GAAP measures in the
attached section titled "Selected Non-GAAP Financial Measures and
Reconciliations."

Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer enterprise by capacity producing the three primary plant nutrients and a leading supplier to three distinct market categories: agriculture, with the largest capacity in the world in potash, third largest in phosphate and nitrogen; animal nutrition, with the world's largest capacity in phosphate feed ingredients; and industrial chemicals, as the largest global producer of industrial nitrogen products and the world's largest capacity for production of purified industrial phosphoric acid.

This release contains forward-looking statements. These statements are based on certain factors and assumptions including foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities and effective income tax rates. While the company considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Several factors could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to: fluctuations in supply and demand in fertilizer, sulfur, transportation and petrochemical markets; changes in competitive pressures, including pricing pressures; the current global financial crisis and conditions and changes in credit markets; the results of negotiations with China; timing and amount of capital expenditures; risks associated with natural gas and other hedging activities; changes in capital markets and corresponding effects on the company's investments; changes in currency and exchange rates; unexpected geological or environmental conditions, including water inflow; strikes and other forms of work stoppage or slowdowns; changes in and the effects of, government policy and regulations; and earnings, exchange rates and the decisions of taxing authorities, all of which could affect our effective tax rates. Additional risks and uncertainties can be found in our Form 10-K for the fiscal year ended December 31, 2008 under captions "Forward-Looking Statements" and "Item 1A - Risk Factors" and in our other filings with the US Securities and Exchange Commission and Canadian provincial securities commissions. Forward-looking statements are given only as at the date of this release and the company disclaims any obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

-------------------------------------------------------------------------
PotashCorp will host a conference call on Thursday, October 22, 2009,
at 1:00 p.m.