Potash Corporation of Saskatchewan Inc. Q3 2008 (Qtr End 09/30/08) Earnings Call Transcript

| About: Potash Corporation (POT)

Potash Corporation of Saskatchewan Inc. (NYSE:POT)

Q3 2008 Earnings Call

October 23, 2008 1:00 pm ET


William Doyle – President & CEO

Wayne Brownlee – EVP & CFO

Joseph Podwika – Sr. VP & General Counsel

David Delaney – President, PCS Sales

Garth Moore – President, PCS Potash

Thomas Regan – President, PCS Nitrogen & Phosphate

Denita Stann – Director IR


Jacob Bout - CIBC World Markets

Vincent Andrews – Morgan Stanley

Fai Lee - RBC Capital Markets

Brian Yu - Citigroup

Mark Connelly - Credit Suisse

David Silver - JP Morgan

Edlain Rodriguez - Goldman Sachs

Don Carson - Merrill Lynch

Neil Miller – Fidelity Investments

Michael Piken - Cleveland Research

Paul D’Amico - TD Newcrest

Charlie Rentschler - Wall Street Access


Good afternoon ladies and gentlemen and welcome to the Potash Corp. third quarter earnings conference call. (Operator Instructions) I will now turn the conference over the Denita Stann, Director Investor Relations; please go ahead.

Denita Stann

Good afternoon, thank you for joining us and welcome to our third quarter earning call. In the room with us today we have William Doyle, our President and CEO; Wayne Brownlee, our Executive Vice President and Chief Financial Officer; Joseph Podwika, Senior Vice President and General Counsel; Garth Moore, President of PCS Potash; Thomas Regan, President of PCS Nitrogen and Phosphate; and David Delaney, President of PCS Sales.

I’d like to welcome the media who are listening in and remind people that we are live on our website. I would also like to remind everyone that statements made in this call that express a belief, expectation, or intention as well as those that are not historical fact, are forward-looking statements.

Such forward-looking statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were applied in drawing a conclusion or making a projection as reflected in forward-looking information and actual results could differ materially from what we think appears the most likely at this time.

For additional information with respect to forward-looking statements, factors and assumptions, we direct you to our news release and our most recent Form 10-K. Also today’s news release which is posted on our website includes a reconciliation of certain non-GAAP financial measures to the their most directly comparable GAAP measures.

I’ll now turn the call over to William Doyle, for some comments and then we’ll go to questions.

William Doyle

Thank you Denita and good afternoon everyone and thank you for joining our discussion of Potash Corp. third quarter performance.

As you well know these are uncertain times in the financial and capital markets as fear appears to have overtaken fundamentals in the decision making process for many people. We appreciate this opportunity to bring the discussion back to a focus on measurable performance, and to the potential of Potash Corp. as we move forward.

Despite the turbulence around us, our company delivered the best quarter in our history. Our earnings of $3.93 per share were 39% higher then the record we set in the second quarter this year and greater then the $3.40 per share earned in all of 2007 which was a record year for our company.

We generated $1.7 billion in gross margin, more then triple last year’s third quarter. This included record gross margin in all three nutrients as we captured the benefits of a strong pricing environment. Our cash flow from operating activities prior to working capital changes reached $1.3 billion and raised our total for the first nine months of 2008 to $2.9 billion.

While many companies have been held hostage by over leveraged positions and restricted access to capital during this global financial crisis, we continue to advance the execution of our long-term growth strategies because of our strong cash flows and the health of our balance sheet.

This provide tremendous opportunity and flexibility for this company as we move forward. While the financial crisis did not impact our quarterly performance we are not isolated from what is happening in the world around us. No country, company or sector, has escaped this widespread crisis in confidence.

The broad sell off of commodities has hit agricultural related industries very hard. With many investors forced into deleveraging and redemptions, even strong performers have been caught up in the wave of reactionary selling.

This market correction painted most businesses in commodities with the same brush, as though fundamentals don’t matter anymore. Any rational examination of the fertilizer industry makes it clear that the essential nature of our products and the long-term need to protect the world’s food supply present ongoing opportunities for growth.

Still the market is now priced as though it expects a long and very deep global recession. While no one can say for certain this will occur we do prepare for any impact it could have on our business. The good news is that the very nature of what we do provides a unique shelter.

Consumers might choose to park their car or spend less on discretionary goods but food will remain a priority. As I’ve said before, it is not a luxury item. Whether you are in North America or China or India, there is no denying that nutritious is essential to health and happiness.

This is not an area where people are willing to cut back. If absolutely squeezed those at the margin may opt for cheaper cuts of meat, but they will not return to starch based diets. That is a long-term reality for our businesses.

Our optimism at a time when others are highly uncertain is supported by the fundamentals of our business. Although crop commodity prices have been caught in the wave of reactionary selling the need for food has not declined.

Global grain inventories remain at critically low levels even though the world’s farmers have produced what is expected to be another record harvest. The world’s grain stocks to use ratio is estimated at 16.6% which compares to a 30-year average of 25.3%.

This is not a surprise to those who follow our business. As production has fallen short of consumption for most of the past decade, countries have drawn down grain inventories to dangerously low levels to satisfy growing food demand.

Now we’ll take a record crop every year just to keep pace. And it will take even greater efforts by governments, farmers, and fertilizer producers to begin the slow process of replenishing global grain inventories.

This can’t be resolved in a single crop year, in fact using some historically conservative assumptions about future demand for grain, coupled with continued production and yield improvements, it is expected that the global stocks to use ratio will remain at historically low levels for at least the next five years.

Food production is a long-term challenge, one with far greater power and impact then the current financial crisis. If crop prices continue to be disconnected from fundamentals, and decline material from current levels, farmers will have little incentive to increase plantings or maximize production.

That loss in production would put further pressure on the world’s food supply. Obviously that is an untenable situation and one that would warrant a return to higher crop prices. Ultimately we believe prices for crop commodities will rebound when fear subsides and rational thought returns to the marketplace.

Basic fundamentals will inevitably regain their footing. This same thought process applies to Potash as the very underlying fundamentals of our business are quite strong. Simply put it will remain a challenge to meet the world’s growing demand for potash.

For nearly two yeas the industry has been operating at or near its production limits. Markets around the world have been on allocation receiving only as much as the industry is capable of delivering. Our quarter end potash inventories were reduced to just over 200,000 tons, the lowest level in the history of our company.

Because of the essential need for our products we anticipate continued strong demand over the coming years even if global economic growth slows. As we look across our key markets for 2009 we anticipate a strong year ahead.

China’s lengthy delay in signing a 2008 contract reduces potash imports by more then three million tons. That put constraints on consumption during its spring season, reducing applications in some areas by as much as 20% and forcing to China to mine its soils.

To maintain yields in 2009 China will need to increase its potash applications considerably to make up for the potassium deficiency created after this years harvest. Late last week China state council passed a 10-point plan to stimulate economic growth after its GDP slowed to 9% following the Olympics.

In addition to increasing agricultural subsidies China will now be raising prices for key grains to provide higher [farming] costs. This is a major stride forward for that country in helping incentivize farmers to maximize future food production.

Feeding its ever-growing population is clearly one of the highest priorities for the Chinese government. That will take a lot more grain and along with it a lot more potash.

Similarly demand in India is expect to grow in 2009. After less then ideal weather and lackluster 2008 [karee] crop that country is expected to continue its efforts to improve productivity. In the US a late harvest has led to a shortened fall season so we are anticipating a strong spring season ahead.

This could put considerable strain on the distribution system in early 2009. The market with the greatest sensitivity to the current financial crisis is Brazil. As farmers are preparing for the spring planting season in Latin America they have been forced to factor in a more complicated global environment which is creating concerns regarding credit and profitability.

While the Brazilian government has just made available for its farmers more then 10 billion Reals, roughly $5 billion US, it may not be enough and along with suppressed crop prices could make them cautious this planting season.

If crop prices rebound by harvest time, which we anticipate will be the case, Brazil’s farmers will do well.

In any event Brazilian soils are naturally potassium deficient which means there is little opportunity to reduce potash consumption without significantly impacting yields. The world is counting on Brazil as a major supplier of crop exports so any shortfall in production would further strain global grain and oil seed inventories.

One of the unknowns as we look ahead is the impact of the rapid agricultural renaissance in the former Soviet Union, as Russia is actively taking steps to revitalize its domestic food supply for the future. To accomplish this its farmers need to use more fertilizer.

The Russian government has indicated that it will require its domestic fertilizer producers to fill this demand which could remove several hundred thousand tons of potash from the international marketplace next year.

From a production standpoint we are using our strong cash flow to continue with our debottlenecking and expansion projects in Saskatchewan. This will give us the ability to increase our operating capacity from approximately 10 million tons to 18 million tons over the next five years.

We have been in the potash business for many years and we know that demand growth never follows a straight upward line. If for any reason demand doesn’t materialize we will follow our long held strategy of matching our production to meet market demand.

Right now with the near-term uncertainty holding some buyers on the sidelines we have no need to actively alter our operating plans as labor issues have [curtailed] production in three of our potash facilities for the past two months.

From the beginning of negotiations we’ve been clear with our Unions that we will continue to manage the company in a way that keeps our business sustainable under any market conditions. The rapid change in global financial markets might help our people to better understand our hard line on this issue.

We want them back at work but we won’t endanger the long-term health of the company in the process. In recent months the market has used a broad-brush approach in valuing companies, sectors, and commodities.

There has been little differentiation between those with poor performance or weak fundamentals and those with quality assets and real growth potential. As the market regains confidence and moves forward we anticipate that investors will be more discriminating in where they choose to invest their money.

Not all assets are created equally and potash is unlike any other commodity. Good deposits are rare. There are a limited number of producers, government involvement is minimal, and very importantly there are considerable costs and time challenges for any newcomers to the business.

With a five to seven year period for green field development we have a pretty clear picture of the supply situation in potash for the next several years.

Added to that demand growth is expected to outpace nitrogen and phosphate over the coming years as it is the nutrient that has been most under applied in developing nations. With our unmatched potash assets, proven performance, and capacity expansion plans, Potash Corp. potential for earnings growth is unparalleled in our industry.

We have a long history of delivering on what we say we will do. We have never strayed from our long-term approach to operating our business and this will not change. We demonstrated this again during our record third quarter and we look forward to meeting the expectations of our stakeholders in the future.

Thank you for your interest in Potash Corp. I’m joined today by members of our executive management team and we will be pleased to answer any questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Jacob Bout - CIBC World Markets

Jacob Bout - CIBC World Markets

Looking for a comment on the Chinese potash negotiation, specifically looking at when is the next scheduled meeting between the two sides, what is the bid ask here, what do you think the current Chinese inventory levels are like and then finally maybe just talk a bit about the resolve of [inaudible] and Belarus especially if China plays hardball here and this doesn’t get settled until the spring of 2009?

William Doyle

First of all we’re in the very preliminary stages of negotiations with the Chinese. The next meeting from our side, Canpotex meeting with them will be at the end of November. In terms of inventories, our best guess at the current time is they have been 1.8 and 2 million tons at the ports facilities and our guess is that somewhere around one million tons within their domestic distribution system so total of about three million tons of inventory.

As you know China was constrained this year due to availability of material and consumption is down about 20%. They are going to have to replenish potassium levels, they had a wonderful harvest this year, and pulling off a big crop so they know the nutrient harvest was huge and they need to replenish that. The long-term compound annual growth rate for potash consumption in China has not been disrupted, that’s 7% a year, so we think you’ll see greater potash importations into China in 2009 then you saw in 2008 and we think they will be much quicker to conclude then they were in 2008.

Our best guess is that certainly it would be done by the end of the first quarter and may well be done by the end of this calendar year. In terms of [Euro County] and Belarus I have no idea what they’re going to do.


Your next question comes from the line of Vincent Andrews – Morgan Stanley

Vincent Andrews – Morgan Stanley

Just wondering if you could comment on, with your stock where it is and you did execute more of the buyback in this quarter, what should we be thinking about if your share price remains like this and that buyback is completed, on schedule or before schedule?

William Doyle

What I would say to you is if you think about where our share price is today, we are priced for global depression, not just recession. Its though corn prices have collapsed and farm credits dried up and the US farmers are going to mine phosphate and potash from the soils and China is going to drag negotiations on to the end of 2009, and we’re going to see demand destruction and ethanol is going to go by the wayside, in general people around the world are going to eat bark off of trees.

We don’t think that’s the case. We think we have a short-term delay caused by this general fear that has been gripping the world. Farmers are no different then consumers of cars, or clothes, consumers in general. If they’re afraid they will hold off on the buy so we think we have a four month to six-month problem here which is a slowdown but the thing about food production is you’ve got to plant a crop. And so the 2009 crop year is not that far away and we know for example in North America with the late harvest coming off this year which we knew we had because of late planting it compresses what would normally be an eight week fall season into about three weeks and with the current state of the market and the fear which exists in the general community and certainly also within the farm community, we think we’re going to have a very slow fall.

But that is going to put a lot of pressure on the spring because everybody is going to be doing the same thing at the same time. People are going to be lining up their fertilizer needs for that 2009 crop whether its in Europe or in China or in the United States, Canada, you’ll even see Brazil back in the market to get themselves in position here as that 2009 crop becomes a reality. So what I tell you is that we think at the current share price obviously we have a very attractive buyback opportunity and we will pursue that. We’ve been in blackout period since the end of September. We will pursue it starting shortly here through the end of January.


Your next question comes from the line of Fai Lee - RBC Capital Markets

Fai Lee - RBC Capital Markets

I was wondering if you could comment on the current operating rate at the Allan mine and could you potentially restart land again in the event of a labor disruption early next year? Also do your customers, i.e. China, India appreciate that almost 20% of global potash production could be affected by potential labor disruptions in the first half of 2009?

Garth Moore

As far as the Allan production goes, we’re running it at a reduced rate with staff right now and we plan on ramping up that production as we go forward in the fourth quarter and we expect to get a labor agreement in due course. I don’t want to comment on what may happen in the future next year in that particular operation.

William Doyle

What I would say if the union leaders hadn’t led our folks out on strike, we’d probably would have taken some shutdowns anyway just to anticipate the slowness of the market so in a certain sense they’ve done that for us. In terms of potential disruption to the customer base out there, I think certainly the strike has helped solidify pricing during the third quarter. We operated the third quarter, those results that we show was with those mines on strike for over half the quarter. So despite the fact that they were on strike, we delivered record results.

And as I said it helped strengthen the market so the timing in terms of appreciation of it by customers around the world they certainly recognize what happened during the third quarter and it remains to be seen what will happen in the new year.


Your next question comes from the line of Brian Yu - Citigroup

Brian Yu - Citigroup

We’ve see phosphates catch [inaudible] with Mosaic taking shut ins and also news yesterday that Morocco might be doing the same thing, can you provide some thoughts on what you think where phosphate margins could go or are they sustainable at current levels for 2009 and then on the sulfur cost side I think there was news that you would sell at a higher cost and Mosaic is at a much lower cost. How does all the contracts work with sulfur, does everybody hone in on particular price when everything is said and done.

William Doyle

In terms of phosphate we have seen reductions announced by competitors around the world. Some people see that as bad news, I just can’t figure that out for the life of me. I think that that is good news from our point of view. We also have reduced our DAB production. We’re moving that P205 into other areas. We have as you know the most flexible phosphate operations in the world and we can move the P205 into liquids which have been very strong for us both poly phosphates and merchant grade acid and certainly into purified acid.

And if we saw a need to reduce P205 production we would certainly do that as well. We are big believers in producing what the market requires and not building inventory unnecessarily. We just think it’s a good way to run business in general. Some people have the opposite approach. We don’t think that’s particularly smart.

In terms of sulfur we’ve seen a rapid deterioration in sulfur price, actually came much quicker then we thought. We thought it would be second half 2009 looking back a couple of years ago. Its come quicker. We did book one piece of business at $300 a ton reduction, that was for 7% of our total business. The rest of our sulfur business we will book at lower costs more in tune with what you’re seeing out there with other purchases from sulfur suppliers.

I think the sulfur market is not unlike other markets, it tends to follow to a conclusion that’s common because you set the price out there for that particular nutrient so its not surprising that we’re going to all end up purchasers of sulfur certainly within North America are within a shoebox of one another.


Your next question comes from the line of Mark Connelly - Credit Suisse

Mark Connelly - Credit Suisse

We certainly agree that people are going to eat but when you go back to the Asia currency crisis 1997, 1998 Russia protein consumption fell double-digits, South Korea was down, Singapore, Malaysia, China wasn’t as affected I guess, so the impact there was clearly temporary, but how different do you think the situation is this time if we are seeing a similar financially driven problem around the world?

William Doyle

I clearly remember those days and of course we’re in different days now with hundreds of millions of more consumers of protein, what I’d say about 1997, 1998 was the recovery of protein consumption. It happened very quickly so, you’re talking 1%, 1.5% in some countries down in terms of major impact on us, on potash which is in short supply around the world when you look at the ability of the industry over the last two years when we’re on allocation to supply the needs of the world and then looking forward, over the next five years of where we think is potash is going and clearly we don’t think that the, I know that some of the television personalities are talking about selling everything you own for the next five years.

We clearly don’t think that the world is going to stop eating protein to any substantial degree at all. We think it’s a very minor impact and we think that with the tremendous growth in numbers of people who are consuming protein and by the way still moving into the era of protein consumption for the first time in their lives, a lot of people, you look at GDP growth and you say, oh my god, China is the end of the world, they’ve gone down to 9% in the third quarter, that’s still 9% growth.

And this whole concept that the whole world spins around the United States and the rest of the world is just going to go into the same sheer panic that some of the financial community has gone to in this country when quite frankly they don’t care. They don’t know anyone on Wall Street, or Bay Street and they’re just trying to eat better. It’s a real fundamental thing. I just don’t see an impact, a very substantial impact from this financial crisis on protein consumption.


Your next question comes from the line of David Silver - JP Morgan

David Silver - JP Morgan

I was hoping to just pick up on the very last sentence of the text portion of your earnings release where you say we also view this as an opportunity to look for additional ways to increase the strength of our potash business which will provide long-term rewards, when I think of your company over a longer period of time, it’s a company that I believe you could say has been built on a string of opportunistic acquisitions. A lot of the things you said about the financial markets would indicate to me that you think private market values are greater then the public market values right now. Could you maybe expand on that final comment and tell us what you’re seeing out there in terms of the potential to build on your potash business?

William Doyle

With any change in the marketplace you have opportunities and I would say one of the things about our company and our management team is that we don’t get too excited when times are good and we don’t get too excited when times are bad and we don’t manage the company for the share price. I know some people would like us to do that but we don’t. What we do is we try to build a company at opportune times and what I would say is that we think that there are opportune times right now. And certain competitors of ours may find themselves to be in a leverage position, unexpectedly and there may be opportunity for us to take advantage of that.

And so to expand that any further I’d have to give you names which I won’t do but I do think that there are significant opportunities for us. We’re doing some things right now—

Wayne Brownlee

We did take a small increased position in [Instra] Chemicals overnight and we’re about $115 million, so we have increased ownership in that company where we had an opportunity that there was a seller looking to exit the stock.

William Doyle

That’s just one example but there are others and we try to always have, when people have criticized us over the years for not unlocking the leverage of our balance sheet I can’t tell you how many bankers have come to talk to us about that over the last three years or so, some multiple times and every time they’d leave I just shake my head, its just not our business. We’ve always managed the company to have the ability to have firepower to be able to pull the trigger when we need to to take advantage of opportunities.

We like to buy cheap, everybody knows that we like to buy cheap. We’re cheapskates. We admit it. But we think it’s the way to build a company and so when you have these type of times and people get themselves in trouble its Darwin’s’ theory proved.


Your next question comes from the line of Edlain Rodriguez - Goldman Sachs

Edlain Rodriguez - Goldman Sachs

We understand how potash is different from the other nutrients but is it reasonable to expect potash prices to remain at those current levels when everything else is dropping? Why shouldn’t it drop?

William Doyle

What I’d say is if you think about potash it has a completely different structure then the other two nutrients. For all the reasons that you know and I went over a few of those in my remarks, there are 12 countries which produce it, 160 countries which consume it. If you look at nitrogen, over 60 countries produce nitrogen so when you have that many players in the nitrogen game, and then the barriers to entry certainly time being the greatest in potash and time being the least in nitrogen, you can get in and out of that business or certainly in it, a lot quicker then you can potash.

The amount of government control in the business creates less economic driven decisions and so our focus in potash has always been to match supply to demand. We want to produce exactly what the world requires but we don’t produce more then the market requires so we don’t tie up working capital and we don’t let the tail wag the dog. We respond to the market when the market needs our potash and by the way our expansions are going to be what we think perfectly timed and we’re not backing off one bit on our expansions.

We’re just going to push ahead because first of all the majority of them are brown field expansions and we can do it cheaper then anybody else and we do it quicker then anybody else and the world is going to need that potash and that’s why our growth opportunities are far greater then any other producer in the world in the fertilizer industry. And so your question kind of leads me to think about that broad brush I talked about in terms of the way the market has treated the various players in the industry. And we think that there really has been very little diligent analysis I would say of the playing field for fertilizers. Someone that has the asset base that we do to be compared and trade at exactly the same multiples as someone that doesn’t have any potash, you begin to wonder about how clever some of the analysis that we’ve seen is.

Potash, the pricing has been more stable because the structure of the industry is different then those other industries and in our case for whatever influence we have on the marketplace we match supply to demand, that’s just the 21 year track record of how we do things so anybody planning on potash prices coming down, I just don’t thing they’re right and we think we’re going to see increases in China. We think we’re going to see increases in India and a very stable potash pricing environment going forward. That’s our view of the future.


Your next question comes from the line of Don Carson - Merrill Lynch

Don Carson - Merrill Lynch

You talked about how consumption of potash was down in China this year, as we look forward to next year and then the need to rebuild nutrients, what do you see as consumption globally focusing on both major markets like China as well as the US and what’s your sense, you mentioned corn prices don’t reflect current fundamentals of supply/demand, what’s your view as to where corn prices should trend up to?

William Doyle

When I see corn come back to a $4 floor, which is really where I think the floor is, but we were for 30 years at a $2 floor in corn and so I think you definitely seen with the demand cycle for grains around the world take hold which by the way isn’t going away. It’s a long-term change in grain demand. We are in a demand driven cycle for the first time ever and we’re going to stay in it despite this financial contagion that’s going on but corn prices have definitely increased the floor from $2 to $4.

I think at $4 I think you’re at the bottom of the floor and its just going to be very tight supply/demand for corn. We’re producing a heck of a crop in the world this year but stock to use ratio for corn is still 13.5% which as you know is a very low global inventory for corn. And so farmers around the world are going to need to plant corn acres in 2009, we think more corn acres, and the price is going to have to be sufficient to entice them to do that. So we think between now and spring planting 2009 you’re going to see a rebound in corn prices.

Corn prices got hung up just like potash stock price got hung up. Everything got thrown out of the bus at the same time and it was an over reaction deleveraging taking place on an unprecedented scale and so you’ve seen some things that are really an aberration but when you look at what the requirement for corn is as people consume more meat around the world, we’re very bullish on corn. We think you’re going to see a response to corn that it will be higher priced by the time those spring planting decisions are made otherwise you’ve got real problems because you’re going to have less corn planted which means even higher prices and then you get into a crisis situation. So I don’t see that happening. I think farmers are going to have the incentive to plant.

David Delaney

On the potash side in the US right now we’re calling US consumption down probably 5% to 10% and that’s the worst-case scenario. That’s from 5.2 million tons estimated this part year to 4.8 this year. Part of the reason for that is we’re down 400,000 potash business second half primarily due to our strikes and low inventory. So we’re going into the year as a system relatively low. We do think with increased corn acres and an improvement in the corn price that this potash number could trend up.

In Brazil this year we’re calling potash import at 6.8. We think right now with the soybean price where it is and the credit situation that number could trend down to maybe 6.3 in 2008, 2009 as a forecast, I should say a 2009 calendar year. China will be up. We think they’ll be up quite a bit based on their need to replenish the nutrients as we indicated. India will be close to 5 million tons this year. As you know that’s a subsidized system and we think the need for fertility and to raise yields that they are on course to maintain that kind of number and likely higher in 2009.

Southeast Asia, Indonesia, Malaysia, [inaudible] well prices have come off. They have a little bit of inventory. They’ll be right at 3.5 million tons this year. We think that number could be up slightly going into 2009. Year-over-year some minuses in a few places but I do think offset by growth in China and continued growth in India.


Your next question comes from the line of Neil Miller – Fidelity Investments

Neil Miller – Fidelity Investments

On potash inventories I’m wondering, or the ability of the market to respond, its my understanding that between January and May of 2009 that maybe 12% of labor negotiations are taking place that could impact 12% of the industries production and so I’m wondering whether that’s an accurate assessment, and then is there a unification that the ranks are kind of similar in their feeling in the negotiations as you’ve expressed and I’m wondering whether there are any inventory levels hiding around that could offset that shortfall in production?

Garth Moore

There are several negotiations are going to come up in Saskatchewan next spring but we think that calmer minds are going to prevail and the workforce is going to consider the offer that’s out there. There’s going to be some tight times as we mentioned over the next four to six months, and I think that may bring some reality back to the negotiating tables and I guess time will tell what will develop next year. But there’s definitely no extra inventory sitting around anywhere to cover that off but we think things will work themselves out in the next three to six months.

William Doyle

One of the things you learn in a strike is that giving a union leadership a strike mandate is a dangerous thing because as soon as they get that from the rank and file basically union leadership has proved that it can do whatever it wants so all transparency and accountability goes out the window and the union members are left in the dark. In our case with the three mines that we have on strike at the moment, the local union leader actually did a heck of a job negotiating for the members during the, we had almost 40 negotiating sessions with the union prior to the strike. And she was tough and smart and fair and came away with a heck of a contract. But before she could deliver it to her members she lost control of the process to the national leadership and at this point this idea of a commodity bonus was introduced and since that point the negotiating process has been paralyzed.

This commodity bonus really is a net income bonus and the proposal that they gave us would equate to $157,000 per worker this year based on current earnings projections. Essentially the union leadership wants to take credit for all the potash earnings as well as our record earnings in phosphate and our record earnings in nitrogen and they want to take credit for the earning for our offshore investments and for the overall strategic direction of the company over the last 21 years.

In any negotiation you want to stick to the realm of what’s possible and if you look at their ask, common laborer under their proposal this year, their ask would make $244,447. Now in the real world if you look at our company what we pay a senior vice president with a Masters in Engineering and 25 years of work experience, that $244,000 might fit that person. But it sure doesn’t fit an 18-year-old coming out of high school with no training in mining or safety skills. Its just not the real world. And I can tell you we don’t have one significant shareholder who thinks that that’s a good idea. So when you get into the realm of the impossible in negotiations which I think is where the leadership of the union is with this net income bonus or commodity bonus idea, you mislead the people that you represent. So the leadership of the union professes to experts in a number of areas and they’ve given tax advice to the Provincial government and also seem to be an expert in executive compensation but unfortunately they haven’t seemed to have much expertise in concluding a labor agreement and there’s been a lot of conversation coming out of the union leadership, they’ve done a lot of talking during this strike.

We have been very reserved, we’ve let them do the talking, and they’re really tried to poison the relations between the company and our union workers, many who have been with us for 20 to 30 years. But there’s two things that they’ve said which really stand out to me. One the union leader said that he had the best interest of the company at heart. Well I can tell you that’s simply not true because his proposal for a commodity or net income bonus would destroy the company.

We would eventually be forced to shut down the mines because we’d be uncompetitive and all of our miners would lose their jobs. And the other thing he said was that the union leadership was going to win. Well anybody that knows anything about strikes knows that no one wins in a strike and to say such a thing shows that he has his own agenda and its not what’s in the best interest for our workforce and our workers in their hearts, they know that.

So we think calmer more rational minds are going to prevail here. Right at the moment this strike is absolutely having no impact on us. As I said we would be taking shutdowns if they weren’t on strike. So with the financial contagion around the world hopefully people will come to some recognition that the offer that’s on the table is a heck of an offer and simply out of respect for our workforce, we haven’t pulled this offer off the table because we’d like them to know what it is and hopefully they’ll recognize that soon.


Your next question comes from the line of Michael Piken - Cleveland Research

Michael Piken - Cleveland Research

Regarding the longer term outlook for potash and in particular I know you’ve thrown out a $2.8 billion number for the cost of a new mine and I’m wondering if steel costs come down material next year, what would that mean in terms of the cost of building a new plan and then have you heard anything in terms of some of your competitors with respect to that and over the near-term if you could comment on the latest sinkhole that’s developed near the [Silvaney] mine?

Garth Moore

As far as the capital costs of a new operation goes, we’re not seeing the steel pricing come down. I think what’s going to happen is the steel fabricators, steel manufacturers are going to reduce their short-term production output to meet the demand and maintain the price of the fairly decent grade, decent rate. And I also feel that the $2.8 million price tag may be a little stale by now and I’ve seen some numbers from some of the other people that are looking at green field operations and the numbers are getting a little bit higher then that now but there’s still at this point in time no one out there that’s announced a green field operation and nothing going forward at this time that would make one come into effect within the next five to seven years.

William Doyle

In terms of the sinkhole in Russia, this is an ongoing saga. The public news is that they do have a new crack that’s heading to the second bypass lines. The last report was 64 meters away and they’re arguing about who’s going to build the next bypass, who’s going to pay for it is the question. If it were me I’d be putting spikes in the ground right now. But we tend to do things ahead of time as opposed to be reactive. So we’re just going to keep tuned in to that one as I’m sure many of you are.


Your next question comes from the line of Paul D’Amico - TD Newcrest

Paul D’Amico - TD Newcrest

Canpotex, similar to last year but for different reasons, is it possible or is there potential advantage to actually negotiating with India ahead of China in order to pressure China to not delay again? In the past Canpotex typically has about a third of the freight forward agreements in place for about six months or more, is that still the case or we should assume that maybe the net backs probably are about two quarters away from seeing the full effect?

David Delaney

About 80% of our sales in the third quarter were on a CRF basis, average freight on that was about $75. going forward we do have about half of that on a long-term COA basis and we expect with rates coming down after the quarter to see the benefit and rates have come off a lot and I don’t know the exact answer if our COA cost is at the low end of where the market is today but it is pretty close.

William Doyle

On the which one of the two big buyers comes in first, I can tell you that the Chinese don’t want to be last. They clearly have recognized in conversations that I’ve had with them, they don’t want to be last in line in 2009 and that’s why I say there could be a real chance this could conclude by the end of December. We think certainly by the end of the first quarter but could be by the end of December. They need to increase their potash consumption in 2009 and that means increase their imports. The Indians did jump the Q last year, can they be smart two years in a row? I don’t know, but clearly people who are in the know who know this business they’re worried about long-term supply for potash over the next five-year period and they’ve got to be careful to make sure they get that supply.

You through in this crack which would interrupt rail to China, there’s a lot of things that can go wrong in the equation that you can’t necessarily depend on and I know the Chinese are watching that sinkhole from Google Earth and tracking it daily to make sure that they’re on top of it but you’re going to see the Chinese move a lot quicker then last year. I see a more traditional China coming first and India second.


Your final question comes from the line of Charlie Rentschler - Wall Street Access

Charlie Rentschler - Wall Street Access

Can you comment on the recently announced land reforms in China where the land it can’t be bought but the rights to use it can be transferred, is that a positive in your mind and if so when would that kick in?

William Doyle

Just talking about that now and it is a positive. I think this new 10 point program that they just introduced clearly what it says is that they are going to incentivize farmers to plant more grain and they’re recognizing the pressure on what meat consumption is doing to the pressure on grain and the need to improve yields from the red line of what they call not going below 300 million acres of crop land that they’ve got to improve the yields coming out of that crop land, so that they can grow the grain required to keep pace with protein demand. So we start to see them make these land reforms where you can actually potentially get you bigger farms and then also deliver farm subsidies. The big problem in China has been low grain prices. And farmers in China, Chinese being naturally the greatest entrepreneurs in the world in my opinion, they respond to that incentive and so to see these incentives now coming from the Chinese government to recognize that they have to improve income levels rural income levels, which is what they stated in their plan, I think is a very healthy signal for our business down the road.

We think China is really going to be explosive in potash demand here over the next five years and the good news for us is that we’re going to be in a position to supply the lion share of that growth with our expansions.

Denita Stann

Thank you everybody for joining us.

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