PotashCorps Second-Highest Fourth-Quarter Earnings Reflect Growing Demand

Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported fourth-quarter earnings of $1.61 per share1 ($482.3 million), the highest quarterly total for 2010 and more than double the $0.79 per share ($239.2 million) earned in the same period last year. This result raised full-year earnings to $5.95 per share ($1.8 billion) – the second-highest total in company history – and surpassed the $3.23 per share ($980.7 million) earned in 2009. Performance was impacted by takeover response costs (included in other income), which reduced earnings for the fourth quarter and full year by $0.16 per share and $0.18 per share, respectively.

Driven by significantly improved demand and strong price momentum across all three nutrients, fourth-quarter 2010 gross margin climbed to $763.0 million, nearly triple the $272.7 million generated in the same period last year. Gross margin for the full year reached $2.6 billion, with potash, our core nutrient, contributing almost 70 percent of the total. Fourth-quarter earnings before interest, taxes, depreciation and amortization2 of $791.1 million and cash flow prior to working capital changes2 of $726.0 million were significantly above the same period last year and raised our 2010 totals to $3.0 billion and $2.4 billion, respectively.

Strong fertilizer demand also helped drive solid contributions from our strategic investments in offshore potash-related companies, as Arab Potash Company Ltd. (APC) in Jordan, Israel Chemicals Ltd. (ICL) in Israel and Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile added $76.3 million to our overall performance for the quarter, raising their 2010 contributions to $336.9 million. The market value of these investments, along with our position in Sinofert Holdings Limited (Sinofert) in China, increased by $1.1 billion since the end of third-quarter 2010 and reached $10.1 billion as of market close on January 26, 2011, which equates to approximately $34 per PotashCorp share.

“Our industry moved past an important inflection point in the third quarter and, as farmers around the world became more active in addressing the critical issue of soil fertility, we demonstrated our ability to deliver in a strengthening market environment,” said PotashCorp President and Chief Executive Officer Bill Doyle. “With global food demand as the powerful engine, we believe we have moved into the next stage of growth for our business. Our company stands poised to capitalize on that growth and we believe our fourth-quarter results provide a glimpse of the capabilities and earning potential of our expanding world-class operations.”

Market Conditions

Estimates of global grain and oilseed supplies declined under the weight of rising food demand and crop production concerns in certain producing regions. Prices for many crop commodities rose to record or near-record levels as grains and oilseeds rallied to compete for a larger share of the world’s limited arable land. This environment provided the important and necessary economic motivation for farmers to increase production through improved yields and act with greater urgency to address depleted soil nutrient levels. As a result, fertilizer demand accelerated and pricing – particularly for potash – increased as the quarter progressed.

Farmers in the US moved aggressively to take advantage of a wider fall application window, which drove domestic potash shipments from North American producers to 2.2 million tonnes in the quarter, making it the second-highest fourth-quarter total on record and the largest since 2004. Demand in offshore markets also approached record levels for the fourth quarter as shipments from North American producers reached 2.3 million tonnes, 85 percent above 2009 levels. North American producer inventories fell below the previous five-year average and, globally, potash producers were challenged to keep pace with accelerating demand. With commitments testing global supply limitations, price increases announced during the quarter took firm hold. We believe the majority of product shipped went straight to the field and limited dealer inventory restocking occurred.

Strong domestic phosphate demand drove North American producer shipments 13 percent above prior-year totals, reducing available tonnes for offshore customers and depleting inventories to record-low levels during the quarter. In nitrogen, the expectation of near-record corn plantings in the US as well as improved industrial demand lifted domestic shipments of ammonia and nitrogen solutions by 15 percent and 21 percent, respectively, compared to fourth-quarter 2009. Prices for phosphate and nitrogen products moved higher, reflecting improved demand and tight inventories.

Potash

Record fourth-quarter sales volumes of 2.4 million tonnes pushed potash gross margin to $519.5 million, the highest quarterly total for 2010. This raised full-year gross margin to $1.8 billion and sales volumes to 8.6 million tonnes, each the second highest in company history and well above the previous year.

Robust global demand lifted offshore sales volumes to 1.6 million tonnes, a fourth-quarter record and more than double the same period last year. Offshore volumes accelerated over the course of the quarter as sales by Canpotex Limited (Canpotex), the offshore marketing agency for Saskatchewan potash producers, reached record levels in December. The strength in demand was widespread, with Latin America (27 percent of Canpotex shipments) and other Asian countries (38 percent) the largest buyers in the quarter while China and India represented 20 percent and 12 percent, respectively. For the year, our offshore sales volumes grew to 5.3 million tonnes, nearly triple 2009 levels.

In North America, fourth-quarter sales volumes of 0.8 million tonnes rose 63 percent above the total for the same period last year – the third consecutive quarter of improved volumes into this market. Full-year volumes rose to 3.4 million tonnes, more than triple 2009 levels and only slightly less than the 2007 record of 3.5 million tonnes.

Our average realized price for the fourth quarter of $323 per tonne was lower than in the same quarter of 2009 but improved by $18 per tonne from third-quarter 2010 levels, reflecting positive pricing movement in both North American and offshore spot markets.

With limited product inventory and strong demand, especially for granular potash, we took only six shutdown weeks during the fourth quarter, all related to our capital projects. The increased operating time, along with greater operational capability from completed expansions, resulted in record production of 2.6 million tonnes for the quarter. This had a favorable impact on potash cost of goods sold on a per-tonne basis, although that was partially offset by the translation of Canadian-dollar production costs to a weaker functional US dollar and higher depreciation costs as our expansion projects came online.

Phosphate

Fourth-quarter phosphate gross margin reached $91.6 million, almost quadruple the $23.4 million earned in the fourth quarter of 2009. Solid fertilizers, typically the first of our diversified phosphate products to respond to market changes, generated $35.5 million in gross margin, while liquid fertilizers, feed and industrial products contributed $19.9 million, $17.0 million and $16.2 million, respectively. For the year, phosphate gross margin climbed to $319.2 million, more than triple the amount generated in 2009.

Fourth-quarter phosphate sales volumes of 1.0 million tonnes were 13 percent higher than in the same quarter last year, reflecting robust domestic demand and higher production levels. This raised full-year volumes to 3.6 million tonnes, which exceeded 2009 levels by 19 percent.

Our average realized phosphate price rose to $495 per tonne, 28 percent over the fourth quarter of 2009, driven by significantly higher prices for solid fertilizers (up 74 percent) as well as increases in liquid fertilizers (up 36 percent) and feed products (up 16 percent). Prices for our industrial products, which are primarily based on contracts that lag current market conditions, were 10 percent lower.

Phosphate cost of goods sold increased on a per-tonne basis, primarily as a result of higher input costs for sulfur and ammonia that more than offset the favorable impact of higher production on per-tonne fixed costs.

Nitrogen

Improved demand and significantly higher prices for all nitrogen products lifted fourth-quarter nitrogen gross margin to $151.9 million, more than triple that of the same quarter in 2009. The strength of this quarter – the highest quarterly total for the year – raised total 2010 gross margin to $509.8 million, more than double the previous year’s total. Gross margin from our Trinidad operation totaled $87.6 million during the quarter, while our US operations contributed $64.3 million.

Nitrogen sales volumes for the fourth quarter increased to 1.3 million tonnes, 13 percent above the same period in 2009. Improved demand resulted in higher sales volumes across all product lines except for urea, which was impacted by a maintenance shutdown at our Lima, Ohio plant and the allocation of available nitrogen production to products providing higher gross margin. Total sales volumes for the year reached 5.2 million tonnes, up 5 percent from 2009.

Our fourth-quarter average realized price reached $325 per tonne, 34 percent higher than in the same quarter of 2009. The realized price for ammonia increased by 47 percent, while urea rose 33 percent and other nitrogen products 40 percent.

Total average natural gas cost, including our hedge, rose to $5.62 per MMBtu in the fourth quarter, 24 percent above the same period in 2009. Most of the increase was due to higher gas costs in Trinidad, which are primarily indexed to the Tampa ammonia price and reflected the rise in this benchmark.

Financial

With significantly improved earnings, fourth-quarter income tax expense rose to $166.1 million, substantially higher than in the same period last year. Other income declined by $75.4 million compared to fourth-quarter 2009, due primarily to $64.2 million in costs associated with the unsolicited takeover attempt by BHP Billiton, which was withdrawn in November.

During the quarter, we announced and completed a $2 billion share repurchase program in which we bought back approximately 14.1 million shares at an average cost of $142 per share. Our ongoing investments in raising our potash operating capability continued, and made up most of the $584.2 million invested during the quarter in capital expenditures on property, plant and equipment.

Outlook

Several forces have converged to create an exceptionally positive environment for global agriculture – one that we believe will support powerful growth in the years ahead. Ongoing increases in world food demand have proven to be a constant driver for agriculture and we believe this will continue, as the needs of an ever-expanding population and improving economies in developing countries have transcended short-term economic shifts. This means that crop productivity must continue to improve and that maintaining historical trends in yield growth is not enough to keep pace. As an example, the United States – the world’s largest agricultural exporter – produced the largest corn and soybean crops in its history during the past four years, yet stocks have continued to decline because of escalating demand. More importantly, global grain supplies have been drawn down to levels that cannot handle short-term supply shocks. Overcoming this challenge will require a sustained commitment to increase food production, including improved fertility practices.

Rising crop prices are a reflection of the global priority now placed on agriculture. Today, farmers in nearly every country, growing almost every crop, have an important economic incentive to increase production. As they make decisions on planting and crop inputs, they recognize that the opportunities are unprecedented and that improving fertilizer applications can help optimize production and maintain the strength of their soils for future years.

While we see potential across all three primary nutrients, we believe potash represents the greatest opportunity – especially for PotashCorp. More than eight years ago, we began planning and investing to raise operational capability, knowing it takes many years to build the facilities and infrastructure necessary to increase production. Now, as we enter an environment in which global potash demand is expected to pressure existing operational capabilities, we believe we are uniquely positioned to introduce our new production as the world needs it. While some saw our decision to launch these projects before demand arrived as a risk, we were unwavering in our conviction that the long-term trends driving demand would continue and that these investments would deliver exceptional value in coming years. We also invested in PotashCorp’s future growth through the swift execution of a $2 billion share repurchase program in the fourth quarter. This marked the third time in six years that we have bought back shares in our company. We invested $6.2 billion over this period to purchase more than 65.4 million shares at an average price of $95 per share. This strategic use of capital has created value for our long-term investors by providing them with a greater opportunity to benefit as demand for our products grows.

Our confidence in the future is buoyed by the transition that took hold in 2010, when global potash shipments reached an estimated 52.0 million tonnes. We believe this is only the beginning of the rebound and that shipments in 2011 could reach 55.0-60.0 million tonnes, depending on how aggressively farmers and fertilizer dealers move to replenish depleted inventories in the soil and supply chain.

North American demand is expected to remain strong – our first-quarter volumes are already fully committed – as farmers are moving quickly to capitalize on favorable crop economics. We anticipate demand in this market will be near historical highs, and reach approximately 10.0 million tonnes in 2011.

Farmers in Latin America are responding to strong grower economics, leading to robust demand for all fertilizer products. We believe fertilizer shipments to this market will reach record levels with potash demand of approximately 10.0 million tonnes, including Brazilian imports of 7.0 million tonnes.

India, coming off a year of record potash demand, is expected to move quickly to secure new supply contracts and ensure product is available to meet its growing needs. Given the country’s rising food requirements and government support programs, we believe its potash demand this year could reach record levels of approximately 6.5 million tonnes. Other Asian countries (not including China and India) are expected to import around 6.5 million tonnes in 2011.

China’s consumption of food and potash is driven by the powerful multiplier of hundreds of millions of people gaining access to higher incomes and the ability to purchase more nutritious food. Although its demand recovery was slower than most markets in 2010, we believe China is committed to improving the fertility of its soils and increasing crop yields. Early in first-quarter 2011, it signed a six-month contract at higher prices with Canpotex for shipment of 600,000 tonnes – a contract that allows Canpotex to remain agile in a tightening potash environment. We believe China could make larger volume commitments in the latter half of the year, and anticipate that its consumption could approach 11.0 million tonnes in 2011, including imports of 7.0-7.5 million tonnes.

With our current estimate of global potash operational capability at 61 million tonnes, we expect supply to remain under pressure throughout 2011. Given the tightening fundamentals, prices to all markets have begun to move higher. This has taken effect more quickly in the US, as market-focused farmers and fertilizer buyers secured the potash needed to capitalize on strong agricultural returns. We see the potential for similar trends in offshore spot and contract markets as the year progresses.

In this environment, we estimate our 2011 potash gross margin between $2.5 billion and $2.8 billion and record potash shipments within the range of 9.5-10.0 million tonnes.

In phosphate, we believe strong demand coupled with historically low inventories will result in relatively strong market conditions for both solid and liquid fertilizers through the first half of 2011. Phosphate feed prices are expected to move higher early in the year, reflecting an announced average $50 per ton price increase for the first quarter. Higher realizations on phosphoric acid industrial contracts, which are time-lagged to input costs, are expected to improve industrial margins as the year progresses. In nitrogen, the expectation of increased US corn plantings and rising industrial demand is likely to result in strong prices through at least the spring season. We forecast phosphate and nitrogen will combine to generate 2011 gross margin in the range of $1.0-$1.2 billion.

We expect capital expenditures for 2011 to approximate $2.0 billion, with $1.4 billion relating to our ongoing potash expansion projects.

Our 2011 annual effective tax rate is forecast to be 25-27 percent and provincial mining and other taxes are expected to approximate 4-6 percent of total potash gross margin. Other income is forecast to exceed 2010 levels and be between $300 million and $350 million, while total selling and administrative expenses are estimated to be in line with 2010 levels. We expect interest expense to approximate $120-$130 million.

PotashCorp expects first-quarter net income to be in the range of $2.10-$2.70 per share (pre-split), with forecast full-year earnings in the range of $8.40-$9.60 per share (pre-split). After giving effect to the previously announced three-for-one stock split that will be effective in February 2011, these totals will approximate $0.70-$0.90 per share (first quarter) and $2.80-$3.20 per share (full year), respectively.