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By G C Mays

When Potash Corporation (POT) released its 2012 forecast a year ago, the company said it expected 2012 sales and earnings to "mirror" 2011, a clever way of saying that revenues and profits would be flat for the year. As we look back on the first three quarters of 2012, we find that even that seemingly conservative estimate was tough to meet. When 2012 began, the company estimated full-year earnings of $3.40-$4.00 per share. The company then proceeded to lower its full-year guidance in each quarter that followed. The most recent full-year estimate was for $2.40-$2.60 per share. The company will report actual earnings for 2012 on Thursday, Jan. 31.

One key reason for the miss was slumping international shipments caused by both India and China seeking lower prices for potash with Canpotex, the marketing arm for Potash, Mosaic (MOS), and Agrium (AGU). Canpotex was unwilling to cede pricing until the end of Q4, when it agreed to a $400 per ton contract with China for 2013, which was $70 less than the previous contract.

Additionally, in a trend that began a year ago, fertilizer dealers in North America remain reluctant to accept inventory risk for both potash and phosphate at what they perceive as cyclically high price levels. After rising to a cyclical high of $453 per ton in Q3 of Potash's fiscal 2011, potash prices fell about $20 a ton in Q4 of that year before firming throughout 2012. Producer reluctance to lower prices, combined with a global aversion to price risk, caused potash inventories to soar to well above their five-year average in 2012.

Click to enlarge image.

Although phosphate inventories are below year-ago levels, risk aversion has nevertheless caused prices to decline nearly 30% between Q4 of the company's fiscal 2011 and the end of Q3 of the current fiscal year. Prices seemed to firm a bit in the most recent quarter.

For the full year, the company estimates it will sell between 7.6 million and 8.3 million tons of Potash. Through the first three quarters of the year, the company sold 5.9 million tons, so that leaves a range of 1.7 million to 2.4 million tons based on its full-year estimate. In Mosaic's Q2, which overlaps two-thirds of Potash's Q4, the company sold 1.5 million tons of potash at an average selling price of $433 per ton. This should equate to roughly 2.0 million to 2.2 million tons for Potash, which falls within its stated range.

Compared to Q4 of fiscal 2011, when the company only sold 1.5 million tons of potash, this year will look as if the company made huge gains in tons sold. However, it is important to bear in mind that the fourth quarter of 2011 was the first time the company reported reluctance by dealers to take on inventory risk. A better comparison would be the company's Q4 of fiscal 2010, when the company sold 2.3 million tons.

Including dividends, the stock returned a negative 5.6% in 2012, in stark contrast with its fellow Canpotex members Mosaic and Agrium, which posted returns of 9.6% and 41.5%, respectively. Recently, the stock has moved in near lockstep with a market surging toward all-time highs. In my opinion, the stock remains overpriced compared to its peer group and will continue to underperform the group for the foreseeable future. In 2012, the company failed to meet its own conservative expectations. In business, as in life, there are times when even the best laid plans come up short.

Source: Potash Corp. Full-Year Earnings Preview - Things Don't Always Go As Planned