About one month ago, Potash Corp. (POT) reported 2008 2nd quarter results. These results have inspired numerous articles and comments, all well worth reading, as well as the report itself. 

Through these reports, it has become the practice of the CEO, William J. Doyle, to offer tremendous insights into his company, as well as the general industry trends in fertilizers.

On January 23rd, 2008, a little noticed news item was released by Potash Corp. (POT). That particular day was also the day when the stock price reached its lowest point of the year, about 120, which was about 7 dollars under the 50 day moving average. Once again, for the sake of argument, this was also the day when the historic hand off to Potash occurred, as well as the day that marked the end of the negative influence of that unlucky albatross (see Part V). So this was, all in all, a rather meaningful day for the long term investors in Potash Corp.

The news item was an announcement of a share repurchase program, involving up to 15,82 million shares, or about 5% of the outstanding 315.4 million shares. At the very low price of 120 per share, that equals $1.8984 billion! If considered advisable, these shares are to be repurchased on the open market through January 30th, 2009, at prevailing market prices. The timing and amount of purchases if any, will be dependent upon the availability and alternative uses of capital, market conditions and other factors.

The next step in this ongoing series of articles on Potash Corp (POT) is to look at the 2008 first quarter results for the total gross margin. For the period, the total gross margin was 856.0 million, which was a 131.5% increase over the the 2007 first quarter gross margin, and a 60% increase over the 2007 fourth quarter gross margin. Of this amount, an impressive 514.6 or 60% came from Potash, while 185.4 or 22% came from Nitrogen, and 156.0 or 18% came from Phosphate. So, the combined total contribution of Nitogen and Phosphate, 341.4 or 40%, could not measure up to the 514.6 or 60% contribution of Potash. Here can you see, that something important has already happened in the first quarter of 2008. Potash has suddenly made a big comeback, compared to its 2007 performance. This is what I believe will be called the historic hand-off to Potash, that marks the point when Potash first started to run with the ball. It is from this point, and not some point in 2007 or before, when Potash starts to completely dominate the other two segments, and thereby the whole game plan of this company, as management has indicated all along.

FOR THE SAKE OF ARGUMENT ONLY, I would like to take the liberty to pinpoint this hand-off event as occurring on January 23rd, 2008 at the stock price of 120, and the 50 day moving average at 127. The purpose of this exercise is to establish an easy-to-relate-to group of numbers that represent the bottom of the January 2008 panic and subsequent sell-off. The stock price was then only 94.5% of the 50 day moving average, or for those of you who like to measure things from the other side, the stock price needed to increase by 5.8% in order to equal its 50 day moving average.

As this ongoing series of articles on Potash Corp. (POT) unfolds itself (see parts I, II and III), I continue to be amazed at some of the lingering bearish attitudes towards Potash and this company, that are prevalent in various articles and blogs. As I have done my best to explain the obvious in words and numbers, apparently to no avail, I now feel reduced to try to explain it in a children's story, that the average six year old should be able to relate to and understand.

In the safety of your living room, take ten red colored blocks out of your toybox, and place them in a row on the floor, each one touching the next. Ten! That's how many fingers you have, counting both your thumbs, but not your ears. Each block represents one unit, or 100 million dollars of the 2007 gross margin for the combined Nitrogen and Potash segments.

This is part III of my analysis on Potash Corp. (POT) (see parts I and II).

The magic number to start with is 1049.2 million. This number represents the 2007 subtotal impact of volume/price/other of all three segments combined, on the total gross margin increase. From this number, 170.0 must now be subtracted as total cost to result in, the by now familiar, 879.2 gross margin increase. If you can understand the significance of this simple exercise, then consider yourself to be in the minority, as the overwhelming majority of people on this planet do not think in these terms about anything, as it is very unsettling for them to do so. The issue at stake is cost, and the simple, underlying, governing principle is that "it always costs money to earn money." The apparent innate need in mankind to deny the true impact of cost has led to the eventual and inevitable downfall of many. Therefore, the weight of the cost impacts should not be underestimated.

See: The Better Performing Half of Potash Corp. (Part I)

In order to better understand Potash Corp. (POT), it's necessary to dig deeper down to the level of, what I call the gross margin drivers and what Potash Corp calls gross margin contributers. I agree ,of course, that they contribute, but I think they contribute so much that, they either drive the company forward, or hold it back, drastically. These drivers are not the mobile machine operators that work deep down in the Potash mines, but rather the impacts of volume and price modified by the cost.

In the year 2007, which might seem like ancient history to some people by now, Potash Corp (POT) reported 1,881.2 million as total gross margin. Of this amount, 912.3 or 48.5%, came from the over-hyped potash segment, while 968,9 or 51.5%, came from the under-hyped nitrogen and phosphate segments COMBINED, making them the larger contributors to the total gross margin. In other words, in 2007, the venerable Potash did not even live up to its own name, let alone my humble expectations.

A closer look reveals that,  the total gross margin increased by 879.2, from a base of 1,002 in 2006, which equates to an 88% increase. Not bad of course, but the potash segment share of that total gross margin increase was only 351.2, up from its base of 561.1 in 2006, which equates to a 63% increase.