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Potash Corporation of Saskatchewan Inc. (POT)

August 23, 2011 11:00 am ET

Executives

Denita Stann - Vice President of Investor & Public Relations

G. Delaney - Chief Operating Officer and Executive Vice President

Denita Stann

Good morning. Thank you for joining us, and welcome to our Ask David Online Q&A Session. My name is Denita Stann, and I'm the Vice President of Investor and Public Relations at PotashCorp. With me today is David Delaney, our Executive Vice President and Chief Operating Officer.

Before we begin, I'll quickly outline the format for today's session. I will serve as the facilitator for the conversation with David, asking questions that were submitted online by our stakeholders prior to and live during the session. We will try to get to as many questions as possible this morning.

And finally, I would like to remind everyone that today’s session may include forward-looking statements. Such statements are given as of the date of this session, which is August 23, and involve risks and uncertainties. A number of factors and assumptions were applied in the formulation of such statements, and actual results could differ materially. For additional information, we direct you to our most recent Form 10-K, which is posted on our website at potashcorp.com.

And with that, we'll begin with our first question. David, a common question. The global economy seems fragile right now. If we were to see a double-dip recession, how could that impact your business?

G. Delaney

Denita, there's a lot of pressure right now. Global equity markets are down about 15%. Unemployment's at 9.1%. So there's a lot of talk of a double-dip recession. Now while we're not immune to that, we feel like the impact to food production and our business will be minimal. In fact, we think the factors in our business have never been better. The fundamentals in our business have never been better. We have very strong commodity markets. Even with the dip in the equity markets, commodity markets have stayed strong. A lot of people want to compare what's going on right now to 2008, and really, there are a lot of differences. If you look back to 2008 in August and September, commodity prices started to dip. And right now, commodity prices are strong and getting stronger. The stocks-to-use ratio for corn is at 5%. In '08, it was 10%. Global distributor inventories were quite full. Today, they're quite empty. People are working really just in time from a management standpoint right there. So we feel like right now, the fundamentals are very strong. If we look at the NASS crop rating that just came out yesterday, the good/excellent rating for corn dropped 3 points to 57%. The USDA forecasted 153-bushel yield for this year. So we think there's going to be a lot of pressure on the S and D fundamentals as we go into 2012. And it's not just corn, it's really all commodities around the world are very snug. And we think the impact of any kind of double-dip recession or anything would be very minimal to our business right now. The demand for food has never been stronger.

Denita Stann

Great. Our second question. You commented in your earnings release that ramp up of your new Cory mill has taken longer than expected. Can you provide an update on progress at Cory?

G. Delaney

Well, the Cory expansion was a 2-phased expansion. It's 2.2 million tonnes. We modified our hand frame. It's a new mill. It's new, courser recovery, new skips, new hoist, underground development, a new electrical substation. So there's a lot going on there. We've had trouble bringing that mill up this year. We just went down for turnaround in July. We think we've addressed a lot of those issues, and we think as we go out through the balance of this year and into 2012, and when we add new mining machines, it will be fully ramped up by the end of 2012.

Denita Stann

Great. I'm going to take a second, David, to plug our website to make sure that everybody's aware. We actually launched a potash expansion site off of our homepage. And so if anybody's looking for an update on our projects, that's probably the best resource to go to.

Since I know it's a common question, David, I guess you've updated us on Cory, can you also just give a quick update on the other expansion projects as well?

G. Delaney

Sure. The Allan expansion, again, it was 2-phased. About 1.3 million tonnes, taking our capacity there to 2.7 million tonnes by 2014. Again, we've modified our head frame there, new hoist, new skips, skip size going from 25 to 45 tonnes, underground development. We've modified our mill there, new load out. So that, again, will increase that capacity to 2.7 million tonnes. At Rocanville, we're actually putting in a new shaft. We'll have one service shaft and then 2 production shafts, a new mill, a 500,000-tonne warehouse. So really a lot going on in Rocanville, taking our capacity there to 5.7 million tonnes by 2015, one of the largest mines in the world. At New Brunswick, I was there last week, they're sinking 2 new shafts, new head frames, a new mill, modifying the existing mill, new compaction building, all the infrastructure that goes with that. And we'll take that capacity up to 1.8 million tonnes by 2015, 2016.

Denita Stann

Great. A question here. Do you expect to see ongoing gas supply interruptions at Trinidad?

G. Delaney

Denita, we've had a few issues in Trinidad this year. There are 2 platforms servicing the NGC. One platform went down for planned maintenance earlier in the year. Then the second one went down unplanned. So there was some impact to our 01 and O2 plants. We've lost about 43,000 tonnes year-to-date. We may lose a little bit more throughout the balance of the year, but there is a new platform coming on in the fourth quarter. So we think Trinidad could actually be long gas in the fourth quarter.

Denita Stann

Great. Do you envision any permitting issues at your phosphate operations given recent opposition to new permits in Central Florida?

G. Delaney

We're very fortunate in that regard. We have a life-of-mine permit at White Springs and we have 30 years of permitted reserves at Aurora. So we're really in very good shape from a permit standpoint.

Denita Stann

Absolutely. Another DAP question here that I'll tag on. What are your expectations for DAP export volumes for Ma'aden in 2011 and 2012?

G. Delaney

Well, the Ma'aden project has been out there for quite some time. And I think people were very concerned when that plant came up, that it would have a huge impact on the phosphate market. We think that they will produce around 50,000 tonnes a month now through the end of the year. They actually came up in June. And we think their export capability in 2012 will be between 1 million and 2 million tonnes, and then probably ramping up in 2013 to full capacity. But what's happened between the time they announced that project in to completion today, is there have been other phosphate operations shut down. Phosphate rock prices have increased from probably $50 up to $150. So the 9 million tonnes of P2O5 made with purchased rock, their cost basis has gone up quite a bit. In addition, the Chinese are exporting less this year. And we think that the direction they're going is to shut down some of their inefficient phosphate operations for environmental reasons, so they're going to probably be less of an impact from an export standpoint. So we think the phosphate market, even with Ma'aden coming on, will stay fairly strong through 2012 and likely even further out.

Denita Stann

Great. David, I just took a quick peek at this question, and it's probably one of the more common questions that we've been answering lately, too. So it says, "Your estimate for potash supply capability in 2011 was 61 million tonnes. Last month, you mentioned that supply is likely going to limit demand this year, making it tough to hit the upper end of our demand rage, which was 55 million to 60 million tonnes. So what happened? And what do you estimate the industry capability for 2012? I think people are trying to understand what can the industry truly produce here."

G. Delaney

Sure. Hitting a 61-million tonne operating capability this year would have required just perfect production and very little downtime. And when you're pushing all these operations around the world that hard, it's really difficult to do. We've had our own issues. We had ramp up issues at Cory. We've had a few minor issues at Allan. We had geology issues at Lanigan. So hitting everyday perfect production to hit this demand is really quite difficult. If you look around the world, it's been reported that there was a strike in the Middle East. They've had issues. There were geology and logistics issues that were reported at other operations around the world. So it just shows with demand this strong, you've really got to have a capability and hit those numbers on a daily basis. As we go into 2012, we think the capability is around 63 million to 64 million tonnes. And again, it's going to be difficult, in my opinion, to hit that number. I think demand next year will grow by at least 3%, so we're going to push global supply again. Now a lot of that increase in production is going to come from PotashCorp. We should have our Cory plant ramping up in 2012, Allan will be ramping up. So our capability will go from 11 million tonnes this year to 13 million tonnes in 2012. But again, it's going to be difficult. I think with these record grain prices, record demand, low inventories, I think all the major markets, including North America, are going to be extremely strong and push the industry to supply it.

Denita Stann

Got it. Based on some announced potash projects, it appears there could be excess capacity over the next 5 years. Again, a common question. Can you comment on how you view the supply-demand outlook for potash over that term?

G. Delaney

We think 2 of the biggest misconceptions in the analyst community, one, is operating capability that we'd just discussed. The other one is how long it takes a greenfield mine to be built. Now we have 9 projects at PotashCorp. We finished 5. We have 4 underway. They're all brownfield projects. And we know from experience, it's taking us at least 7 years, and that's with all the infrastructure in place. So the 2 greenfield projects that have been announced, and they're in the early stages of development, one is in Russia, one is in Argentina. And we think the timeline that they've indicated is extremely optimistic. And if you look at potash, it's not going to sneak up on you. It takes a long time to develop. It's very expensive. And we think over the next 5 years, most of the new capacity is going to come from PotashCorp. And we're going to see very tight to balanced markets over that forecast period.

Denita Stann

Good. Can you talk about your potash cash production costs -- sorry, I'm going to reread that. Can you talk about where you think your potash cash production costs are likely to go over the coming years?

G. Delaney

One of the beauties of potash production is it is a low fixed-cost business. Once you get the plant up and built and running, it's a fairly low-cost, fixed-cost business. Our fixed cost as a percentage of cost is about 30%. So as we increase our production capability, our production cost per tonne will go down. And that's one levers that we have. Now our royalty rate will go up with higher prices, but our overall cost per tonne will go down.

Denita Stann

Right, right. What are your views on the sulfur and ammonia market over the next year or 2? And do you see upcoming pressure on margins for phosphate?

G. Delaney

Well, the sulfur market's pretty tight in North America. We're a net buyer of sulfur. The U.S. market's about 9.2 million tonnes, and we have to bring in about 1.1 million tonnes from Canada and the balance from Venezuela and Mexico. So it's a tight market. And the sulfur market normally follows the phosphate market. So we see the market pricing probably at a fairly similar level to where it is today. Not a lot of new capacity is coming online. The ammonia market also looks pretty good. We've had very strong markets this year. Export demand's been very strong. There is some new capacity coming on in North Africa and the Middle East in 2012, so there could be a little bit of pressure on the price. I don't think it will be significant. So that could, we think, from an overall input cost standpoint for phosphate, those numbers are going to stay pretty flat in 2012 compared to 2011. I think what's propelling the phosphate margin a little bit is the 9 million tonnes of P2O5 that's made with purchased rock that I mentioned earlier. With rock prices at $150 to $200, that probably puts the DAP and MAP prices at a fairly similar level to where it is today.

Denita Stann

David, what factored into your decision to not proceed with plans to construct a sulfur melting facility at Morehead City? And can you comment on alternative plans?

G. Delaney

Sure. As I mentioned, the sulfur market's pretty tight. And we, today, are relying primarily on the U.S. and Canadian suppliers and a little bit from Mexico and Venezuela. So we wanted to increase our security of supply and improve our cost position in sulfur. So our thought was to put a sulfur receiving facility in Morehead City where we could bring in dry sulfur, compete in the global market and have another source of supply, put the melter there and take that sulfur to Aurora to make us more competitive. When this project was announced, the citizens of Morehead City were concerned of the impact of that facility on tourism. So one of core values is we listen to our stakeholders, and our stakeholders are the communities that we operate in. So we decided voluntarily to withdraw that project even though we felt like it was going to bring jobs and be good for that area. So we're reevaluating our other options. Today, we're looking at the potential for putting a sulfur receiving facility in Morehead just to receive the dry product and then barge it to Aurora and melt it there. We're also looking at other alternative port facilities along the East Coast. So we're going to do something, we just have to figure out what the best option is for the company.

Denita Stann

Great. Can you provide an update on your Geismar capital project and when you expect to resume ammonia production at that facility?

G. Delaney

Well, shale gas has been a game-changer in North America, and that really drove our decision as much as anything. We think gas prices in the next 5 years are probably in that $4 to $5 range. Geismar, that plant's been idle since 2003. We can bring the plant up for $158 million, that's a 500,000-tonne ammonia plant. With that, we can make UAN, so we're very pleased to be doing that. It's great for our employees at Geismar and we think the ammonia plant will be up in July of next year, followed by urea and UAN. UAN, primarily in August and September. So we're very happy to be doing that. And we're also looking at other facilities. With shale gas at that level, if we can have a return that has a fairly quick payback, hits our internal hurdle rates, so we'll look at potential debottlenecks at Augusta, at Lima. And we also have also an idle facility in Memphis, Tennessee. So we'll continue to evaluate our opportunities for organic growth within the nitrogen group.

Denita Stann

So I'm going to tack on a question onto that because I've been asked it quite a bit. Does it make sense to do greenfield nitrogen in North America?

G. Delaney

We feel like we have a pretty good view on gas for the next 5 years, and honestly, if you look at shale gas and how efficient the shale gas producers have become from days to drill, lateral length and the amount of gas that they're pulling out, the Marcellus shale, there's just a new shale find in Ohio, the Utica shale, you get the Haynesville shale. So gas prices could stay even lower past the 5-year period. But to bring a greenfield ammonia/urea plant up, it's about $1.5 billion to $2 billion. So until we get more confidence in where the gas price is going, it's unlikely that we would build a greenfield ammonia plant in the U.S.

Denita Stann

Got it. What -- actually, do you know what, this is a question that's very similar to one we just answered, so I'm going to go ahead. You mentioned some time ago that there may be an additional 3 million to 5 million brownfield tonnes that you could explore beyond your current expansion plans. What factors will weigh into that decision?

G. Delaney

Well, again, we have 4 expansion projects underway, which will add another 5.8 million tonnes, getting our total operating capability to 17.1 million tonnes. We're really focused on finishing those projects. Now having said that, as we get toward the completion of those projects, we'll evaluate if we have further brownfield development opportunities at our existing mines. But the key is, do you need to drill a new -- do you need a new shaft? Do you have the hoisting capacity? Would you need to increase your milling capacity? So all those things would go into that decision. So we'll look at that probably later on down the road, but right now, we're focused on finishing our 4 projects that are ongoing.

Denita Stann

Absolutely. Again, a very common question in the last little bit here. Why do you think potash contracts with Indian customers were settled under 2 different pricing structures? And just as a bit of background, Canpotex's approach there was a tiered structure, different price in the fourth quarter compared to the first quarter. That's not necessarily what some other supplier's locked in at. "Are there any implications for India subsidy system?" is the question.

G. Delaney

Well, the Indian price was settled to $470 through the remainder of this year and $530 for the first quarter of 2012, which matches up with their fiscal year. And we felt like, with global demand as strong as it is and the Chinese contract that was just settled, that the $470 was reflective of the current market. But as we go forward into 2012, and with these tight markets and if you look at the price in Southeast Asia and Brazil and around the world, we felt like the $530 was more reflective of where the market's going. The Indian subsidy system seems to be loosening up just a little bit from the farmer retail standpoint. They've allowed a little bit of flexibility in that pricing. So we think they will accommodate that pricing structure. Global demand, again, is so strong, and with India importing, I think they had committed to 5.2 million tonnes and will likely need more. We know they're having trouble getting enough phosphate. Their carryover stocks are not as plush as, let's say, as China. So there's real pressure for India to have a big crop every year. And so they really can't afford to have the so-called potash holiday they indicated earlier this year. So we see a very strong market in India and really firm pricing, and they will accommodate what's happened.

Denita Stann

Great. Once you're done your massive potash expansion program in the next few years, do you think the construction labor situation will loosen up in Saskatchewan? And could costs come down for future projects?

G. Delaney

Well, we were very fortunate that our early projects were done fairly cheap. And the latter projects are a lot more expensive. I know the Rocanville expansion, it's $2.8 billion. New Brunswick is $1.7 billion. So if you look at the cost of equipment, the cost of labor, it's not getting cheaper. It's actually getting more expansive. So I would say over the next 10 years, if you look at the resource sector in Canada, the oil sands and other expansion, other industries, that I would say the labor situation will remain very firm.

Denita Stann

Got it. We'll have time just for one more question, David, here. Can you provide an update on farm economics in your key markets? And are any concerns -- are there any concerns related to demand destruction as prices for N, P and K have continued to increase?

G. Delaney

Well, if you again compare 2011 to 2008, potash prices are about 35%, 36% cheaper than they were than in June of '08. Urea is about 33% cheaper. So the contribution margin for corn, soybeans, palm oil, all the commodities around the world, are unprecedented. So we're seeing a very strong contribution margin. Fertilizer cost as a percent of revenue is about 13% for corn, and the 10-year average is about 18%. So the farmers are extremely good businessman. They understand the return on investment. So we don't see any demand destruction, and we really haven't heard of anything around the world. And that's witnessed by the record demand for all 3 nutrients that we see. So we see a strong second half and really a strong 2012. It's going to take more than 1 year to build up these grain reserves, food consumption, food production continues to grow.

Denita Stann

Great. Thanks, David. Very helpful.

Thank you, everyone. If you have further questions, or were unable to ask any questions today, please don't hesitate to give us a shout at the office. And have a great day.

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Source: Potash Corp. of Saskatchewan, Inc. Shareholder/Analyst Call
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