kenneth woods - concordia university potashcorp assets potash corp. financial summary pot produces 3...

1

Highest Potash Leverage & diversified Portfolio:

PotashCorp (Ticker: POT) is the largest fertilizer producer in the world by capacity giving investors exposure to all 3 fertilizer nutrients driven by top-tier assets, greatest barriers to entry and pricing power. More importantly, POT is the largest low-cost producer of Potash with 50% of the worlds deposits located in its backyard which supplies 20% of global demand while sustaining an industry leading Potash margin of 64%. POT also owns substantial investments in major global fertilizer companies (Sociedad Quimica y Minera de Chile, Israel Chemicals Ltd, Arab Potash Company Ltd, and Sinofert) which help participate in strategic global demand for fertilizer ($7.9B unrealized gain and $0.4B in dividends & equity income in 2011). High Walled Barriers to Entry with Potash Expansion Nearly Complete; Well Ahead of Peers

POT controls 50% of potential industry Potash expansion at lowest capital cost as its $8.1B Brownfield expansion will be 95% spent by the end of 2012 which positions Pot well for future demand growth even if prices weaken. As a result, Pot has an advantage over its peers that have yet to surpass steep barriers to entry as capital costs may increase (+$8.1B) and long lead times for development (over 7 years) may coincide with market corrections that may make large capital spending unattractive. Solid Strategy allows POT to also be 3

rd largest producer of Nitrogen &

Phosphate:

Pot has developed a strategy for each of its segments: Potash - disciplined production coupled with growth; Phosphate – improve earnings stability; Nitrogen - maintain low cost position to maximize margins. As a result, POT is also the 3

rd

largest Nitrogen producer & fully integrated Phosphate producer with 93% of high quality rock produced in its Aurora and White Springs mines coupled with a diversified product mix.

Low Costs and Capex should help weather a downturn:

Pot’s operating costs are very low, especially for its potash mines with 65% variable costs and a sustaining Capex of $0.5B which provides POT with a healthy cushion as demonstrated in 2009 when POT suffered from depressed fertilizer prices and a significant reduction of its operating capacity at its potash mines. Despite these headwinds, POT managed to generate $925MM in cash flow from its operations vs. losses sustained by POTs’ peers. Going forward, this strength coupled with a significantly lower capex post-2012, (accelerating FCF +2x) positions Pot as most preferable vs. other industry peers in the event of a global downturn.

Theme of oversupply created by rapid potash expansions by 2015

One of the concerns of the market regarding potash is the line up of huge capacity expansion in next 5-7 years. This will pressurise utilisation rates and then pricing as the capacity build up in next 5-7 years will lead to a fall in utilisation rates to 70% on average from historical average of 80% (2005-2011 ex 2009). However given the low cost of these mines, the utilization rate is expected to not have a significant effect on the operating margins. It also important to note that this new capacity will be driven by an oligopoly market with few existing major players which would not materially impact the "supply flexibility" for POT. Thus, new players will act as marginal suppliers in the potash trade market and thus will be price takers rather than price makers.

Valuation Currently cheap:

POT is an attractive value play with a current P/E of 13.16 trading at the lower end of its 7 Yr. avg. and between 3x to 27x over the past 5 years with an average of 16x. As a result, by applying a discounted 15x PE multiple to our 2013EPS estimate of $3.50, we derive a target price of $52.5 warranted by Pots’ industry leading potash

margins, low-cost potash business, oligopoly production capacity growth, and accelerated FCF (expected to double from 2012 to 2014) opening the window for a share Buyback program. Furthermore, the low valuation is not justified given strong growth outlook for the industry.

Potash Corp. NYSE: POT

Market Cap $37.09B

Shares Out. 859.27M

Last Closing Price $41.94

52 Week High $51.96

52 Week Low $36.73

Current P/E 13.01x

EV/EBITDA 8.00x

Source: Bloomberg

Potash Corp. Saskatchewan (POT) Buy Report Current Price: CAD $41.94

Estevan Carvajal Fund Manager, Technology and Media

[email protected]

September 12, 2012

KENNETH WOODS PORTFOLIO MANAGEMENT PROGRAM

Phosphate Producers by Nutrient

Capacity (nm metric tons), 2011

Potash Gross Margin by Company, 2008-12f

2

Table of Contents

Industry Thesis Approach .....................................................................................................................................3

Industry Macro Graphs Overview ........................................................................................................................4

Nutrient Overview ...................................................................................................................................................5

Company Description ............................................................................................................................................6

Corporate Overview & Management .....................................................................................................................7

PotashCorp Assets ................................................................................................................................................8

Potash Segment ..................................................................................................................................................8 Phosphate Assets – Integrated Producer .......................................................................................................... 17 Nitrogen Assets ................................................................................................................................................. 20

Catalysts for the Stock ......................................................................................................................................... 24

Further Positive Factors for the Stock ............................................................................................................... 29

Risk Overview ....................................................................................................................................................... 30

Effect of Extra Potash Supply Online Post 2015 ............................................................................................... 31

Valuation ............................................................................................................................................................... 33

Investment Case ................................................................................................................................................... 34

Appendix ............................................................................................................................................................... 36

*Please See Appendix to Grasp Fertilizer Overview Prior to Reading Report

3

Industry Thesis Approach Looking into structural growth — Fertilizer shares

are usually traded on short-term demand and long-term supply estimates giving the opportunity to buy structural growth at an inexpensive valuation as 1) demand should rise progressively from 2013; 2) supply looks likely to remain rational in the mid term; 3) Imports in key markets have been deferred; and 4) valuations are very cheap. Growing Appetite for Demand - Acreage expansion

opportunities are limited so rising food demand has to be met by yield improvement. Increasing population and rising protein demand coupled with a grain stocks to use ratio well below needed minimum levels stress the need for optimal application of fertilizers, providing the bull case for K and P. Supportive Fundamentals— Elevated grain prices

have led to record profitability levels for farmers which provide strong incentive to increase productivity facilitating optimal use of all fertilizers. The current drought has also decimated corn crops to record levels which means a robust planting season will make 2013 very strong in order for crop planters to satisfy unmet demand which will support corn prices at +$6.50 until at least midterm. Supply is expected to remain rational — Attractive

return in fertilizers business has led company’s to think about capacity expansion. However, Greenfield expansion is extremely expensive and although majority of projects will go ahead, the market is controlled by few players who will balance the demand/supply equation in the medium term. Imports are deferred not vanished: India and China

have limited resource bases for K and P, while India is structurally short on N as well. Both countries are already facing significant food inflation; as such they can ill-afford to delay fertilizer demand for long unless it is at the expense of local agro economics. Brazil is a key agriculture powerhouse, which is on a rising import trend, especially for K and P, driven by its agriculture boom which is very positive for the fertilizer trade.

Global NPK Fertilizer Consumption (million metric tonnes)

Indian Imports – heavy reliance on foreign production (000 t/y)

While the industry’s valuation multiples are off their recent lows…. They remain well below their peaks during times of expansion

4

Industry Macro Graphs Overview (Sources: USDA, FAO, UN, Ferticon, CitiReasearch)

5

Nutrient Overview

6

Company Description

A Diversified Giant with a Fortified Moat

Canadian based (PotashCorp) is one of the world’s largest fertilizer manufacturing enterprises involved in the

production of all 3 fertilizers nutrients with nitrogen, phosphate, and potash producing assets in Canada, the

United States, and Trinidad. Out of the 12 largest producers, it is the world’s largest manufacturer of potash

fertilizers with 20% global capacity, with 5 large, low-cost mines in Saskatchewan and one in New Brunswick. POT

is also the world’s 3rd largest producer of both nitrogen and phosphate. The company sells its products in more

than 50 countries, with half of its fertilizer sales volumes (predominantly potash and phosphate) sold internationally.

Over the past two decades, PotashCorp has undertaken a number of acquisitions, boosting its size and scale. These

acquisitions have included purchases in Chile, Jordan, Israel and China in line with its projection that much

of the anticipated potash growth will occur in emerging offshore markets. With regard to US manufacturing

facilities, the company has plants in Florida, Georgia, Louisiana, North Carolina and Ohio. The company’s

headquarters are in Saskatoon, Saskatchewan, and it has about 5,486 employees.

Source: Company Filings

7

Corporate Overview & Management

Potash Strategy: Match production to market demand

POT has a two part strategy in its potash business segment. The 1st is to match its potash production to market

demand in order to minimize downside risk and conserve the long-term value of its resources. Approx.70% of the

company’s potash operating costs are variable, which provides production flexibility during periods of lower

demand.

The 2nd strategy is to build on its position as the world’s largest potash producer by completing Brownfield

expansions and debottlenecking projects at its existing mines and investing in other global potash-related

companies.

Source: PotashCorp

Phosphate Strategy: Increase earnings stability

PotashCorp’s phosphate strategy is to produce a diversified mix of phosphate products in order to maximize

returns and increase earnings stability. The company has enhanced its position in the phosphate feed and industrial

businesses, which have historically been more stable as there are fewer global producers vs. the fertilizer segment.

Source: PotashCorp

Nitrogen Strategy: Low cost producer

PotashCorp’s nitrogen strategy is to maximize gross margins and earnings stability by being a low-cost

nitrogen producer to the US nitrogen market. This is supplemented with an emphasis on sales to industrial

customers who value long-term, secure supply.

Source: PotashCorp

8

PotashCorp Assets Potash Corp. Financial Summary

POT produces 3 primary crop nutrients: potash,

phosphate, and nitrogen. The company’s focus is on its

potash assets located in Saskatchewan and New

Brunswick, as well as strategic offshore investments in

potash-producing companies in Chile, Israel, Jordan, and

China. POT is the world’s largest potash producer with

almost 20% of global capacity. In 2011, potash

accounted for approx. 64% of the company’s gross

margin, compared to 15% for phosphate and 21% for

nitrogen. As seen below, the time period of 2008-09

showed a very quick reversal for Potash Corp where

revenues fell by nearly 60% y/y, gross margin by nearly

80%, and EBITDA by nearly 70%. Yet in contrast to so

many other companies in the commodities/materials

sector during that time, POT remained profitable – the

company earned $1.08 per diluted share for 2009.

As a result, Potash has been the primary contributor to the company’s financial results with leading gross margins

over the other 3 nutrient as illustrated in the graphs below.

POT Gross Margin by Nutrient ($billions) POT Sales by Nutrient ($ billions)

Source: Company Filings, Barclays

Potash Segment Lion’s Share of World Potash Reserves in POT’S Backyard Potash is a strategic asset with highly

concentrated production. Commercial

operations are currently located in 12

countries with approximately 90% of the

global potash reserves located in Canada,

Russia, and Belarus. The Canadian

province of Saskatchewan has almost

half of world reserves and 35% of global

capacity.

9

As a result, the major offshore consuming

markets in Asia and Latin America which

have little or no indigenous production

capability rely primarily on imports to meet

their needs. This is an important difference

between the potash business and the

other major crop nutrients. Trade typically

accounts for approximately 80% of

demand for potash, which ensures a

globally diversified marketplace. The large

producing regions of Canada and the former

Soviet Union have small domestic

requirements and therefore are significant

exporters.

Worlds Largest Producer in an Oligopoly Market

As a result of Potash reserves being highly concentrated among few nations, POT is the worlds largest producer with

capacity highly consolidated among six big market players: PotashCorp (18%), Uralkali (18%), Mosaic (13%),

Belaruskali (12%), ICL (9%) and K+S (8%), together holding around 78% of world capacity.

World Potash Producer Profile Few Players: 2012 Plant Capacity

In addition, exports are even more consolidated with BPC (owned by two of the main players in the FSU,

Belaruskali and Uralkali) and Canpotex (Canadian marketing firm owned by three main producers of Canada –

PotashCorp, Mosaic and Agrium) controlling around 70% world’s traded potash. On the other hand, consumers

(farmers) are highly fragmented, so pricing power lies with the suppliers.

As such, these major players are able to keep prices artificially high and demand plays a more important role than

supply conditions. These characteristics define 2008 price run despite abundant supply at that time. Supply is

responsive to demand and while capacity expansions are underway market supply will still be driven by major players.

Canpotex: International Offshore Potash Marketing Partnership

Potash from POT’s Saskatchewan mines that is shipped to customers outside of North

America (66%) is sold through Canpotex, the marketing organization jointly owned by POT,

MOS, and AGU. Potash Corp., as the largest Saskatchewan producer by capacity, supplies

the largest share of Canpotex sales (53.6% of the total in 2011).

In 2011, Canpotex’s annual potash sales were 8.2 million tonnes, sold mainly to the

company’s top five markets: China, India, Brazil, Indonesia, and Malaysia. In 2011, China

began purchasing potash under six-month pricing contracts with minimum annual volume

commitments, a change from its historical annual pricing contracts. In India, potash is typically

purchased through annual volume and price contracts. Latin American customers tend to

purchase potash on the spot market.

POT Sales Volume by Region

10

Canpotex Sales (2005 to 2011E)

Canpotex oversees a specialized fleet of

5,400 railcars, terminal facilities in

Vancouver and Portland and a fleet of

four ocean vessels. In preparation for the

Saskatchewan potash capacity

expansions underway, Canpotex is

investing in 11 additional ocean vessels

between 2011 and 2014 and a potential

third terminal in Price Rupert, BC on

Canada’s West Coast, which is expected

to add 11 million tonnes to its current

annual export capacity of 14MM tonnes.

Enormous Potash Mines & Still Growing

POT operates 6 potash mines in Canada: four conventional underground mines and one solution mine (Patience

Lake) in Saskatchewan and one underground mine in New Brunswick. Total “nameplate” or peak capacity was 13.3

MM tonnes as of the end of 2011, with estimated actual operational capacity of 11.3MM tonnes representing

~20% of total global potash capacity.

Potash Mine Capacity Total potash Volumes Shipped (K tonnes), 2007-12f

Source: Company Reports

The company’s potash reserves at the mines are vast, totalling 1.69 billion tons of recoverable ore as of the end

of 2011 – enough for 75 years of remaining operational life at its shortest-lived mine, Lanigan. Cory and New

Brunswick are both estimated to have over 100 years of mine life remaining.

Well Positioned to Significantly Grow Sales Volumes with Majority of Capex Behind

New potash supply will be required in coming years to

keep pace with rising demand. In 2003, POT began a

CDN $8.2 billion Brownfield Potash expansion

program designed to raise annual operational capability at

existing mines to 17.1 million tonnes by 2015. By mid

2011, 2/3 of the capex was already spent and five parts

of a nine-project program were completed, which

significantly reduces capex risk for the company and

leaves PotashCorp well positioned compared to its

competitors that have significant expenditures ahead

and face the risk of cost increases and timeline. In

addition, capex will be winding down from 2012-2014 as

the project nears completion allowing FCF to double.


11

The $8.1B Brownfield Potash Expansion is made up of the following initiatives:

Allan Potash Expansion: The first

of two expansion projects at the

Allan facility was completed in 2007

and brought an additional 400k

tonnes of previously idled potash

operational capacity back online.

The second expansion project,

which will increase operational

capacity by another 1MM tonnes, is

set to conclude in late 2012 with a

ramp up to full production by 2014.

It is currently forecasted to cost

approximately $980MM.

Cory Potash Expansion: The Cory facility is also undergoing a two-phase expansion, with the second phase

anticipated to finish by the end of 2012. The second phase encompasses the construction of a new mill that will

allow for an incremental 677,000 tonnes of operational capacity and require an anticipated total cost of $1.6B.

Rocanville Potash Expansion: The Rocanville mine expansion is also in its second phase and is one of the

largest growth initiatives. The second project will cost approximately $2.8B and involves the construction of a new

mill, a personnel and materials shaft, and a 500k tonne storage warehouse. Upon completion in 2014 and a ramp

up in 2015, approximately 2.7MM additional tonnes of operational capacity are anticipated.

New Brunswick Expansion: POT is developing a new mine (complete with two new shafts) together with a new

mill with greater compaction capacity, expansion of the existing mill, a new brine pipeline and other new

structures (resembles a Greenfield project). Completion is targeted for 2013, reaching 1.8MM tonnes of operating

capacity (up from 0.8MM today) by 2015. Total cost is expected at ~$2.2B, recently revised up from $1.7B.

Repercussion of lowered Capex = Increased Dividends & Share Buy Back Opportunity

With capex lowering down, POT announced, on September 13, 2012, a $0.07/share increase in its quarterly dividend;

which will now be $0.21/share ($0.84 annual), an increase of 50%, from $0.14/share previously. At its current price of

US$41.94 per share this equates to a yield of approximately 2.0%. The increase will raise PotashCorp’s annual

dividend payments by $241 million to $722 million with an estimated payout ratio for 2013 to rise to 22.2%, from

14.8% previously.

POT has raised its dividend twice in the last two years with the most recent increase highlighting PotashCorp’s strong

cash flow generation and the board's comfort with its financial outlook.


12

Potash-Related Investments Provide Increased Financial Value

The value of Potash Corp extends beyond individual operations and growth opportunities providing significant

financial and strategic value that may be overlooked in the current stock price. POT holds significant equity

investments in some of its global competitors: 28% of Arab Potash Company (APC), 32% of SQM of Chile, and 14%

of Israeli Chemicals Ltd (ICL) that together, on a

proportional basis, represent 2.1MM tonnes of

capacity (Note POT reports income from these

investments under the equity method). Like

PotashCorp, it is expected that these

strategic investments in producers like APC,

ICL and SQM are preparing to participate in

future demand growth by expanding their

existing operations. In addition, Sinofert,

China’s largest potash distributor is expected to

profit from increasing demand. As earnings in

these companies grow, POT can benefit

through higher dividends (ICL, Sinofert) and

greater equity earnings (APC, SQM).

As of the most recent market close, the total market value of POT’ investments are $8.9B, or $10 per POT share.

All together, these investments brought in $133MM in equity income and dividends in 2Q12 (and $396MM in

FY2011).

PotashCorps Offshore Investments provide additional Potash Leverage

23%

13

Steep Barriers to Entry - Requires Significant Investment & Time

Entry into the potash business carries substantial risk because of the significant cost to build new supply while the

development timeline can take up to 8 years. Developing the necessary infrastructure outside the plant gate

(including rail capabilities, utility system and port facilities) and the potential purchase of a deposit could push the total

cost of developing a conventional 2-million-tonne Greenfield mine in Saskatchewan above CDN $6 billion. As a

result, the very high capital cost to develop Greenfield potash mines and mills will prevent smaller

exploration companies from transitioning into producers which will inevitably help maintain the tight market

structure and the pricing power enjoyed by the largest producers.

Estimated Greenfield Potash Capital Costs Greenfield Development Timeline

Capex for Greenfield vs. Existing Brownfield Expansion

Similarly, PotashCorp highlights the high level of capex

requirement for new Greenfield projects is 2.5 times higher than

a POT Brownfield expansion. In addition, new mines available

to new players are further below ground, driving both capex and

opex costs significantly above current production costs of major

players.

Production Strategy: Swing Producer - Operate mines to meet demand

PotashCorp and its Canpotex partners are viewed globally as swing producers, whereas other producers

generally try to maintain full operational capacity. As a result, POT’s production strategy for its potash assets is to

match market demand in an effort to minimize downside price risk and conserve the long-term value of its

potash resources. As a result, capacity utilization rates have historically ranged between 50% and 80%. In 2009,

as a result of the global economic crisis, the company’s capacity utilization rate dipped as low as 26%, before

rebounding in 2010 to 60% utilization.

Potash Capacity vs. Est. Operating Rate Total Free Cash Flow, 2008-15f ($billions)

Source: Company Reports, Barclays

14

Pots’ large percentage of total global capacity (~20%) is also compounded when considered in context of Canpotex,

which currently controls around 40% of the global seaborne traded potash market. With low production costs

(approximately $148/tonne), a relatively high variable cost ratio (60-65% by the company’s estimates), and

influence over the majority of the world’s traded supply, the company is able to slow or curtail production,

take a slight hit on per-tonne costs, sell fewer shipments, but still hold the line on pricing and maintain

profitability even in highly challenging times.

Major Capacity addition will come from major 6 players (Source: Fertecon, Citi)

An increase in capacity would not undermine

POT's flexibility to adjust supply

One of the concerns of the market regarding

potash is the line up of huge capacity expansion

in next 5-7 years. This will pressurise utilisation

rates and then pricing as the capacity build up in

next 5-7 years will lead to a fall in utilisation

rates to 70% on average from historical average

of 80% (2005-2011 ex 2009).

However, most of this new capacity will be

driven by existing major players and this

additional capacity would not materially impact the

"supply flexibility" of these players including POT.

As mentioned before 65% of additional capacity

is set to come from Major 6 players with POT

contributing the most, 18% from China (from

various small players) and only 11% from other

players. Of these other players, EuroChem

Kotelnikovo's project accounts for 45% of addition

followed by Dekhanabad potash fertilizer facility

expansion by Uzbekistan government. (Thus,

these new players will act as marginal suppliers

in the potash trade market and thus will be

price takers rather than price makers.

Top Tier Gross Margin

While POT has long enjoyed a gross margin toward the top of the industry tables, Potash’s stated strategy for

years has been that the company has been positioning itself for the long term, expanding its operating

capacity even though it has been running below its maximum capability. As a result, management believes that

demand growth trends for potash fertilizers will lead to the eventual need for additional supply – supply that POT will

already have in place, ready to bring to market.

Total Potash Volumes by Company, 2008-12f (mn tonnes) Realized Potash Gross Margins by Company, 2008-12f


Global Production Capacity (000 t/y) 2005-16e

15

As a result, POT has the flexibility, and the margin “space” to absorb fluctuations in operating rates – where the

potash division has run at capacity utilization as low as 32% in 2009 and as high as 82% in 2011. Although there is

the question to whether this will continue to be as effective as it has been in the past if potash demand growth remains

moderate and the incremental production capacity that has been in process for nearly a decade becomes available

over the next several years, POT is expected to continue as it has historically – increasing production

moderately but maintaining a level of supply supportive of prices (via a lower operating rate) while absorbing

slightly higher fixed costs on an absolute basis.

India’s Role for Potash Top World Potash Users 000mT of Potash

India, the 2nd largest potash user in the

world presents itself as a challenge and an

opportunity for the fertilizer industry. The cut

in government subsidies alongside this

year’s slow monsoon rain has worked

against India’s growing population and

demand for food. The Indian government

tries to walk the line between ensuring low

cost food is produced (by controlling rice

prices, for example) while seeking to

increase food production by agronomic education programmes and subsidizing fertilizer costs to encourage its use.

However, as part of its budget deficit reduction targets, it has changed its fertilizer subsidy regime such that

the price to farmers has almost doubled for K and P this year. In addition, according to the FAO: “The use of

plant nutrients per hectare is relatively low and imbalanced, and this is one of the major reasons for low crop

yields in India.”

Corn: Correlation between Fertilizer Application Rate & Yield India’s Growing Use of Fertilizer

Government Subsidies Indian Imports – heavy reliance on foreign production

The fall in the rupee and the worsening economic

situation led India to cut its fertilizer subsidy this year,

destroying demand by 25%, according to the FAI.

Its subsidy cutbacks will have an impact on the global

market given 45% of DAP trade and 15% of all potash

trade in 2011 were sales to India. This has led to a

period of price weakness for phosphate and relative

stability for potash. Higher prices and a falling rupee in the

world currency markets have seen DAP prices in India rise

by over 180% and MOP by over 100%, since the scheme

started this year versus the average price to farmers in

2011.

16

The key issue is that India plays a major role in global fertilizer markets and the way its agricultural industry is

regulated and subsidized is unhelpful to stability of markets and the future of Indian agriculture. It needs to

substantially improve its use of fertilizers in order to boost grain output. India should be one of the key drivers of global

volume growth but its demand will decline this year.

Indian fertilizer demand is set to rise; it needs to increase in order to feed its growing population. Indian agriculture is

part of the solution to improving food production and is likely to be a key growth market. But these needed trends are

not going to be visible in 2012 although many expect a strong volume recovery in 2013 as the effects of the

changes to the fertilizer subsidies work through the system.

2013 Demand Outlook Positive

A reduction in global demand for Potash

this year is expected to be about 52m

tonnes of KCl equivalent from about 56m

tonnes in 2011. However, a strong

recovery in 2013 is expected.

The major factors to the demand

weakness, despite the high level of farm

profitability in most regions, are Indian

subsidy changes and destocking in Europe

as a result of the financial crisis. As a

result, it is believed that the market has

already factored in low level of demand

from India in 2012 and the current focus

of the market is potash demand from

Brazil, China and the US.

Farming is very profitable in geographies

that represent 75% of global import potash

demand (that is just about everywhere

except India). Even Potash at US$600-

700/tonne CFR would only slightly dent

profitability, which would still be at record

levels versus history. As such, a balanced

market is expected in 2012 and therefore

no softening in potash prices is expected.

BPC (potash alliance of Russia and

Belarus accounting for 35% of global

supply) expects all potash producers will

be able to achieve a US$550/tonne CFR

price by August in Brazil. Estimates for

year end price of $510/tonne looks conservative but from 2013 onwards, it will be difficult for India to contain its

potash demand unless it is at the expense of yield. It is expected that 4.5% growth in potash volumes for the next 3-4

years (2013+) will prevail while estimates are being conservative side.

Potash Prices holding Up despite all time high Potash inventories

Delays in Indian and Chinese contracts meant a historical build up in North American inventories this year. At the

beginning of the year, inventories were 32% higher than the 5 year average. Inventories kept on piling until March

and were seen 50% higher that 5 year levels. To tackle these conditions, several potash producers curtailed their

production. Planned shutdowns were brought forward, such as POT which announced that it will take down the

Lanigan mine for another month and will not restart the mine until mid-October. As such, North America producer

inventories dropped 462k mt during July to ~2.5mmt. However, stocks have remained flat or increased in the past

Indian fertilizer holiday for potash can last one to two years at most before all must be replenished

POT believes contracts in India will not be settled until late 3Q12 and that they will be at the lower end of previously estimated 3.5-4.5m tonnes.

Grain yields will be significantly impacted after 2 yeas of no use of Potash

India potash demand can hold until 2012

17

three months in SE Asia, Brazil, China and India (accounting for 40% of global potash demand). Stock builds and

demand destruction is being caused by buyer caution and currency depreciation in major importing markets.

North American Producers Potash Ending Inventory Std. Vancouver Price vs. North American Producers Inventory

Interesting to consider in light of these conditions is potash price movement. Prices are up 14% YoY despite

51% build up in inventories over the same period. Part of the potash strength is attributable towards strong

farming conditions in 2011 and then the run up in commodity prices indicating strong demand elsewhere

even in the absence of Asian buying.

Indian demand is still elusive despite the pick up in monsoons, which are hurting current sentiments. Prices are still

below the 5-year average potash prices of $522/MT while operating costs have picked up due to expensive labour

and energy costs. In summary, it is believed prices will remain stable at the current levels for the rest of the year

and can rise further in 2013 as demand picks up on strong fundamentals.

Phosphate Assets – Integrated Producer Phosphate Segment Facilities

PotashCorp is the 3rd largest phosphate producer in the world with about 5% of global capacity. The company

is an integrated phosphate producer with phosphate rock mines (9.6 million tonnes capacity) and liquid/solid

phosphate production facilities (8.0 million tonnes capacity) in North Carolina, Florida, and Louisiana. This creates

a competitive advantage for PotashCorp given its lower-cost, high-quality phosphate rock that is used in

producing feed and industrial grade phosphates along with solid phosphates (MAP and DAP) and liquid phosphates

(Merchant Grade Acid (MGA) and Super Phosphoric Acid (SPA).


18

Vertically Integrated Rock Supply Provides Lower-Cost Position

Prices for phosphate rock, sulfur and ammonia, the primary inputs for the production of solid phosphate fertilizers,

have increased significantly over the past 5 years. Rock prices have more than tripled since 2005, which has

resulted in higher production costs for the approx. 30% of global producers that rely on purchased rock.

Acess to lower-cost phosphate rock is the basis for success in the phosphate business and provides a

significant margin opportunity for producers like POT with their own supply of rock. Potash Corps integrated

operations at Aurora and White Springs produce 93 percent of their total phosphate rock requirements.

Integrated vs. Non-Integrated Cost of DAP Production Phosphate Rock Price, Morrocco (US$tonne)

Source: Company Report, Barclays

PotashCorp. Phosphate Facility Capacities (as of year end 2011)

The Aurora complex, located just off the Atlantic

coast of North Carolina 130 miles east of Raleigh, is

the largest combined phosphate mine/fertilizer

processing facility in the world, with a 6MM tonne

(capacity)/year rock mine, 4 phosphoric acid plants,

and granulation plants for the production of

DAP/MAP. POT’s White Springs complex, located

roughly 70 miles west of Jacksonville just south of

the Georgia state border comprises a 3.6 MM tonne

(capacity)/year rock mine as well as 2 production

centers with phosphoric acid, and sulfuric acid. A Consistently Profitable Phosphate Franchise

POTs’ phosphate sales have been an important component historically, and one that is expected to remain relatively

constant going forward. With gross margin percentages continuing to average in the low 20s and total

shipments running just below 4 million tonnes, this segment should continue to contribute $530-600 million

in gross margin per year given expectations for a modest increase in DAP/MAP pricing over the near/medium term.

Phosphate Segment Sales/Gross Margin, ($billions) Phosphate Product Volumes (k tonnes) vs. Avg Realized Price


19

Compared to other phosphate producers Potash Corp.’s operations measure up reasonably well. While volumes are

substantially less than that of Mosaic, POTs’ gross margins have been consistently higher; in contrast, the

company sells more phosphate volumes than either Agrium or CF Industries but at a slightly lower realized margin –

here Agrium leads the sector with its geographically advantaged pricing and low-cost sulfur supply.

Total Phosphate volumes by Company, 2008-12f (mn tonnes) Realized Phosphate Gross Margins by Company, 2008-12f


2012 Demand Mixed Bag – Prices Flat

Phosphate pricing has been pretty much stable, but

weak over the last 18 months. It is predicted that the

market will pick up in the second half of the year as

buyers think that the market has reached a low point and

in the medium term, prices will rise as supplies become

tighter. DAP is used by a large number of crops and

is around 42% above its trough of January 2011. It

has also historically displayed the strongest

correlation with the price of corn (R² 0.899), which

should mean prices will rise higher. However, DAP

prices have derated versus grain prices recently.

Specifically, the price of DAP is trading at a ~25%

discount to its implied price based on its historical

relationship to corn. This is due to 1) soft Indian

demand and 2) off-peak demand in NA. Therefore

prices should remain weak for the rest of the year.

The change in Indian subsidies has destroyed demand at home and is the biggest threat to demand and price over

the next two years. DAP imports to India could be as little as 2.5 mn tonnes vs. (2011: 6.83 mn).

So far, India has remained out of the market,

using its inventories of 1.5mT DAP to shield it

from the rising costs of imports (from lower

rupee) but it will need to buy eventually. If there

are no further contracts to India at all this year,

this will push down prices, especially in the US,

which accounts for 30% of exports to India. As

a result, prices should continue to be weak this

year – with Indian subsidies and the global

economic situation depressing demand. Fertecon

believes MAP will peak this year at $535/st

(2011 peak: $635), this suggests a 3% upside

on the current price.

Corn to DAP prices ratio – DAP derated vs. grain

20

2013-15 Outlook More Bullish

Brazil is to be a major driver of world growth for DAP and MAP, with 6.07% and 5% growth YoY in each,

respectively. Demand should also come from China where, despite capacity increases of 1.36% to 2015, demand is

increasing faster than production. In the long term, global demand is set to rise 2.8%, outstripping production

increases 2.27%, this should favour price increases to 2020.

Application Rates (Drought Years in dotted boxes

Further, demand is likely to

increase in the US, following

historical trends in the year after

droughts. Looking at two previous

drought years, 1983 and 1988,

helps frame how the moving parts of

nutrient use, application rates, and

acres impacts fertilizer shipments.

North American phosphate

demand actually increased in

both 1984 and 1989 (the year after

each drought), by an avg. of 8%.

Nitrogen Assets – Integrated Producer Lower-Cost Supplier of Nitrogen to the US Market

PotashCorp is the 3rd largest nitrogen fertilizer producer in the world with about 2% of global capacity. Nitrogen

markets have typically been more volatile than potash and phosphate and it is a very fragmented market, with the

top five private sector companies (Yara, CF Industries, PotashCorp, Agrium, Koch) controlling only 10% of

the global ammonia capacity, compared to potash where the top five companies (PotashCorp, Uralkali,

Mosaic, Belaruskali, K+S) control 75% of the global potash capacity, and compared to phosphate where the top

four companies (Mosaic, PotashCorp, Yuntianhua, OCP) control 37% of the global phosphoric acid capacity.

Nitrogen is largely a regional business with the US importing

more than 50% of its nitrogen based fertilizer. As a result,

accessibility to lower-cost natural gas and proximity to markets

are critical factors for success in the nitrogen business. POT

contains 3 facilities in the US and 1 in Trinidad which are well

located to serve the large US market with a total annual

ammonia capacity of just over 3.5 MM tonnes. In addition, US

plants are located in regions geographically insulated from the

highly competitive US Gulf, which allows to better serve local

agricultural markets and industrial buyers for which quality

&security of supply are key.

POT Nitrogen Facility Capacities (as of year end 2011)

21

Gas Prices Still Relatively Cheap

Because of the ramifications of the shale gas revolution the global cost curve has flipped – with North American

gas prices now toward the low end. With natural gas making up between 70-90% of a nitrogen producer’s cost

structure, the price of products such as ammonia and urea tend to track natural gas prices fairly closely.


POT also has long term natural gas supply contracts in

Trinidad for the majority of its feedstock needs which are

indexed to the spot price of ammonia in Tampa (a common

practice), which acts as a stabilizer to profitability when those

prices rise and helping protect margins if they fall. As a result,

Pot has a long-term advantage with more than 80% of their

average Trinidad natural gas volumes locked in through 2012,

and more than 60 percent secured through 2018.

As a result, by having four modern, highly efficient ammonia

plants including one in Trinidad with a short sailing distance to

the US, PotashCorp is a lower-cost exporter to this market and with the rapid development of shale gas provides

a significant cost advantage compared to nitrogen producers in Ukraine and Western Europe. The company

is expected to further leverage this position by investing $158 million to resume approximately 500,000

tonnes of ammonia production at Geismar, Louisiana in the third quarter of 2012. Nitrogen Focused to cater to the Industrial Market

Like PotashCorps phosphate business, the company’s nitrogen segment is smaller but it remains a major piece of

the overall business – important enough that the company is investing $158 million to restart ammonia

production at its Geismar facility, adding 500,000 tonnes of capacity (an increase of 14%). As mentioned above,

Potash Corp purposely aims its nitrogen sales at industrial customers in preference over agricultural (fertilizer)

sales, intending to maximize the stability of shipments and margins. As shown below, this strategy has worked

as intended – volumes have remained fairly constant across all nitrogen products and sales, while still below

the peak of $2.5 billion reached in 2008, have driven higher gross margins each year since the downturn.

Nitrogen Segment sales/Gross Margin ($ billions) Nitrogen Sales by Product (k tonnes)


22

Compared to the other major nitrogen producers, POT is behind CF Industries, the market leader, in terms of

volumes shipped, but the company’s ability to maintain a competitive margin even while supplying a more

industrial customer base is impressive. With the Geismar restart, a moderate increase is ex. in nitrogen shipments.

Total Nitrogen Product Volumes by Company (k tonnes) 2008-12f Nitrogen Segment Gross Margin % by Company


Urea & Ammonia Pricing Urea: Global Prices ($/st) 2009-2012 US urea is up 15% since the

beginning of the year and almost

20% since January 2011 to $455/st,

pushing margins above Middle East

to over $200/st. Black Sea prices are

up 5% to $375/st, while Canadian

prices are slightly down

(2%) to $575/st and Middle East

Prices have been more or less flat

since 2011.

Bullish demand at the start of the

year from good weather, an early

planting season and a tight market Urea: Gulf Ammonia

pushed prices up to the levels near

the 2008 peak.

In the near term, Chinese

production and cheap US gas

could push prices down to lower

margins. However, margins are at

their highest levels since 2008

because gas costs have come

down 50% since 2010 in the US

and this makes nitrogen still very

attractive.

23

Recent Conference Highlights China & India Deals

On September 17th, Commentary at the Fertilizer Institute (TFI) Boston conference suggests further delays in a

Chinese potash contract settlement. Trade commentary suggested that China may not settle a new potash

contract for the balance of 2012 with prospects for a settlement with key producers unlikely before mid Q412. Local

Chinese producer Qinghai Salt Lake cut domestic prices for the second straight week to $445/mt, down from

~$490/mt two weeks prior. Strong domestic production form Chinese producers, combined with inventories

from 2Q12 imports, may also be pressuring the Chinese supply/demand balance. India continues to remain a

point of concern with a demand recovery in the coming months unlikely without a change in subsidy policy, for which

visibility remains poor. Last week Russian producer Uralkali cited China, India and other global market uncertainties

as the rationale for its 2012 global potash shipment forecast cut to 49M-50M from 51-53M in its prior forecast.

Brazil prices fall for second week; spot

business below $500/mt CFR. For the second

straight week Brazilian prices were under

pressure, with transactions reported at $490/mt

CFR, down from $510/mt CFR in the prior week

and $525/mt two weeks earlier. Strong

competition between producers for September

business following a sharp seasonal fall-off in

demand was cited as the main reason for the

decline. Brazilian potash imports in July and

August were at record levels, likely at or above

1MM tonnes in both months.

Some potash sentiment improvement noted in

U.S. Midwest. Midwest spot prices remained at

$478/t CFR last week, below producer postings of

$500/t-$510/t. However, recent rains, which have

somewhat improved soil conditions, combined

with high crop prices, have reportedly

improved retailer sentiment. Although trade

commentary did not indicate a rush of product

purchases, retailers are now reportedly more

focused on having ample product available for

the fall application season and less concerned

about holding high cost inventory.

Nitrogen: The outlook for the ammonia fall application season continues to improve in light of recent Corn Belt

rains. Spring 2013 prepay also continues to look very strong with product offered at $810-$815/t vs. ~$740/t in

the 2012 Spring period. Trade commentary suggests that tight global conditions should support global

ammonia prices at or above current levels until at least December. US Midwest spot urea prices were quoted

in the $495-$500/t range with trade commentary suggesting spring prepay business also quoted at that level.

Ammonia, Tampa (US$/tonne

24

Phosphate: The coming fall application season

appears to be providing support to the U.S. market,

although there is less optimism regarding the global

market outlook. New Orleans DAP barges continued to

move higher throughout the week, moving $15/t higher

throughout the week and averaging $533/t. However,

globally the phosphate market appears to be on a bit

softer footing: 1) Brazilian demand is now slowing

seasonally with a pickup not likely until late Q4; 2)

Indian demand has declined, as evidenced by some

recent Indian cancellations of Chinese contract DAP

purchases; 3) Moroccan producer OCP will reportedly reduce utilization to 80% of capacity, for the balance of

the year, likely in response to a more tepid forward demand outlook.

Conclusion: Fertilizer prices have been on a general trend upward for the better part of the last twelve years, rising

along with the commodity complex and accelerating into 2007, peaking in mid- 2008 and then rapidly declining during

the downturn. Most spot prices are now well below the peak but still substantially above levels during the early

part of the last decade, supported by crop prices that have also been persistently elevated.

Catalysts for the Stock

Potash Intensive Crops Driving Long Term Demand

Plants need potash at different rates and, as a result, some plants need more fertilizer applied to them. This has

importance for different countries – such that Brazil and South Europe are the largest fruit producers and Brazil is the

world’s largest producer of sugar and soybean. Similarly, Chinese and Indian potash demand is driven by an increase

in the production of Fruits & Vegetables (50% and 22% of China’s and India’s potash consumption respectively).

Crop Nutrient Uptake by Crops Potash Fertilizer Application by Crop

Acreage of potash intensive crops such as F&V, corn, Rice, Oil crops and Sugarcane has increased

worldwide and the trend will continue as forecasts illustrate 3.6% growth (11-20e), well above the historical

growth of potash demand (2.8% for 1995-2007) fuelled by growth in grain production and growth of potash intensive

crops for higher calorie diets of growing middle class.

Area Harvested (GAGR 2000-10) Production of Grains & Consumption of Potash (K20)

25

Continued Strength in Crop prices would be stock-supportive

Strong prices for crops tend to create two compounded affects: 1) they encourage farmers to maximize the

amount of acreage planted to increase their total revenues, thus requiring more fertilizer; and 2) they

encourage farmers to apply fertilizer at a relatively high optimal level in order to maximize their yield – the

amount of crop produced per acre of land. The king of crop prices is the corn price; as corn (the most widely grown

crop by volume in the world) is a heavy consumer of fertilizers, the fertilizer stocks tend to follow accordingly. As a

result, crop prices are a major driver for POT’s stock, with an R-squared of 0.84 since 1989 (higher for corn).

POTs share Price tracks Crop Prices very Closely Spot Corn Prices vs. Composite of N.A Fertilizer Companies


Explosive Growth in U.S Corn Crop Prices

Current crop conditions in the U.S are at

historical lows while the crops’ demand for

nitrogen is relentless, even in a highly uncertain

world. Unlike other fertilizers, nitrogen must be

applied every season or farmers risk

substantial yield declines. With season ending

global and U.S. corn inventories projected to be

down 19% and 65%, respectively, from

forecasts in May, it is expected that persistently

elevated prices will provide farmers with heavy

incentives to plant more acres and fertilize

aggressively.

CRB Grain (1991=Grain) Corn ($/bu)

26

With the USDA again aggressively cutting yield estimates in the

Aug. wASDE report, extreme variability in crop conditions, may

introduce further downside risk in the form of elevated harvest losses

which will likely be accounted for in the Nov and Jan reports. As a

result, corn prices trade sideways in August, and is expected at

the minimum to remain sideways for some time while prices may

move even higher as the US harvest shows the final weak

numbers.

Crop Price Forecast

The consensus view of industry grain commodities analysts

(“Commodities Research Rankings: Getting more cautious on Ags,

August 3, 2012”) expects that large positive moves from current records

are unlikely expect for corn prices. However, persistence of elevated

crop prices over the next planting/harvest cycle, supported by low

global stocks-to-use ratios, should lead market expectations for

fertilizer demand/pricing higher and provide additional tailwinds

for POT. In addition, the global crop supply-demand balance

supports continued high crop prices relative to historical levels for

wheat and corn. As a result current high crop prices should

encourage global acreage and input maximization for the

upcoming fall and spring application seasons, clearly positive for

POT. This strength extends beyond the traditional grains and

oilseeds, as key fertilizer-consuming crops such as sugar, cotton

and coffee also have significantly higher prices.

Wheat ($/bu) Soybean ($/bu)

Cotton ($/bu) Sugar ($/bu)

Less US Supply as seen in Soybean Price Rally

27

As seen in the last year Soybean prices have rallied due to tight supply and the now destructive drought. As a

result, the soybean market is rapidly coming to the realization that prices don’t just have to ration demand in the front

of the curve to defer demand until the US harvest, but rather to encourage incremental planted acres in South

America. Consequently, Brazilian and Argentine aggregate soybean acreage is needed to expand by at least

3.78 mln ha (9%) YoY, just to keep S/U in those 2 countries from falling below record-tight levels.

Fertilizers Pricing a Lagging Indicator

Interestingly fertilizer pricing, though arguably of more direct importance to the earnings and cash flow performance

of PotashCorp than crop prices, is much less correlated to the industry’s stock price movements and POTs stock

price. The R-squared of PotashCorp’s stock price to potash prices is only 0.47, and shows a lagged

relationship between the two, most likely due to the structure of the company’s potash sales contracts. Potash

prices are expected to remain flattish for the near short term.

PotashCorp. Stock price has a lagged relationship to potash prices Potash Prices vs. N.A. Fertilizer Companies

Strong Farmer Economics – Fertilizer Cost below Historical Levels

One of the largest annual costs for farmers is fertilizer, representing approx. 22% of total US corn production

costs. In 2007–2008, when fertilizer prices spiked, corn farmer production costs increased by 20%. Although one of

the largest annual cost for farmers is fertilizer, analysis indicates that farmers are more sensitive to changes in

crop prices than to changes in fertilizer prices.

However strong prices for a number of crops grown globally have driven down the cost of fertilizer as a

percentage of revenue. Based on current prices for corn and fertilizer, the cost of nutrients as a percentage of crop

revenue is expected to remain well below the historical average for the 2012 crop year.

28

Fertilizer Cost Percentage of US Corn Revenue Breakdown of US Farmer Costs

Insured Farmer Incomes Mitigate Extreme Weather Events

The current US drought is one of the worst on record impacting crop yields in the US by 65% the following the

repercussions of the dry land.

However over the last decade, in the two years when

the drought index in the U.S. Midwest has spiked up

yr/yr due to dry conditions (2003 and 2006), the next

year’s nutrient consumption (2004 and 2007) has risen

for potash and nitrogen by 3-5%. Both 2004 and 2007

also ended up scoring high on the drought monitor as it

took time for moisture levels to recover.

Record Farmers Incomes & Cashflow

U.S. Farm Sector D/E ratios and Net Incomes (Source: USDA)

Excessive dryness with this year’s crop

could reduce U.S. Farmer incomes and

cash flow could be restrained this year

because of production shortfalls; however,

this year is different than 1988 widely used

as the best comp for this year’s drought-like

conditions) as the average farmer is far

more protected from crop insurance than

1988 and farmer balance sheets are far

stronger. More than 70% of U.S. planted

acres are protected (90%+ in the corn

belt).

% of Plant Acres Insured (Source: USDA)

Despite shrinking corn and soybean

yields due to the drought in the Midwest

this year, the USDA now expects that US

farmers will take in record net income this

year. Overall farm income is expected to

increase 3.7% to $122.2B (compared to a

$91.7B estimate in February 2012), due to

higher grain prices and the support of

crop insurance payments.

29

Farmers Will Have Ample Financial Flexibility for 2013 Growing Season

The ongoing US drought is poised to meaningfully reduce corn and soybean production across the Midwest, giving

farmers ample financial flexibility: 1) Approximately 85% of corn, cotton, soybeans and wheat acres are insured

and; 2) DAP and potash are still affordable on a historical basis; and 3) After several years of robust high net

income, farmer balance sheets are extremely strong and lending conditions are among the most favourable

since the late 1980s.

USDA Farmer Net Income, $ bil Agricultural Lending Conditions index

Further Positive factors for the Stock

Better-than-expected outcome from 2H12 Indian or Chinese potash importers

Near-term, any better-than-expected outcome from 2H12 Indian or Chinese potash importers will likely be constructive

for the stock price. Currently the market expects 2H12 contracts for China to be signed in late September, with many

in the industry expecting, at best, a rollover of 1H12 prices at $470/tonne CFR. India is not expected to enter

negotiations until well into the fall.

China continues to stockpile foreign

agricultural commodities. Despite

signs that growth is slowing,

Chinese purchases of many major

agricultural commodities continue

to run at record seasonal highs.

Corn imports remained strong in

July, at 721K MT, as China

continued to ship corn contracted

earlier this summer. Many expect

this volume to decline in the coming

months, however, as rising US corn

prices have caused China to sell back

some cargoes contracted previously

for MY 12/13.

Sugar imports set new seasonal

highs in July, prolonging a trend

which started in the early spring.

However, with local production

margins now reportedly at or below

breakeven and stockpiles high, the

prospects for imports in the coming

months are less rosy.

30

Confirmation of forecasts by Potash Corp

Confirmation of forecasts by Potash Corp (and other potash producers) that 2H12 will see record levels of global

shipments to re-stock the global distribution system should lift POT stock, especially as demonstrated via declining

producer inventories (North American levels reported every month, mid-month by TFI/Potash Corp).

Cancellations, delays of other Potash Producer Expansions

Cancellations, delays, reports of cost overruns from Greenfield or Brownfield potash expansions, particularly from ex-

Canpotex member companies (BHP, K+S) should have a positive lateral impact on POT.

Accelerated use of ample free cash flow

Accelerated use of ample free cash flow on share repurchases or dividends as PotashCorp. completes the major

spending on its eight year potash expansion program should also be a positive factor for the stock.

Risk Overview

Macroeconomic Uncertainty – Current US Drought

Macroeconomic uncertainty in NA and worldwide, combined with poor growing sentiment coming out of the current

U.S. drought may lead to domestic growers/farmers delaying application of fertilizers until well after the weather

improves, leaving fertilizer producers facing weaker prices and the need for production curtailments in the meantime.

India’s Withdrawal from the Market

In India, the slowing economy, weaker rupee, lack of clarity on government fertilizer subsidies, and the fallout from a

weak monsoon on the agricultural sector may limit the country’s ability, if not willingness, to bounce back into the

global market and renew sizable imports.

With India set to consume 4–4.5 million tonnes of potash this year (below trend of 6–7 million tonnes for two years in a

row now), the country is currently the main impediment to global potash demand growing as a result of both higher

prices and a weakening Rupee. Because of PotashCorp’s smaller % of sales and EBITDA stemming from India

compared to peers, the company seems to be well positioned to suffer less from the reduced demand in India as a

result of sustaining a diversified portfolio.

Recent Antitrust Ruling

The recent antitrust ruling by the 7th District Court of Appeals on North American potash producers’ market structure

(claiming inflated prices paid due to the companies’ market power) could potentially lead to some kind of weakening of

the current (advantageous) oligopoly/cooperative pricing and contracting structure.

Production Surplus

New capacity expansions in Saskatchewan could cause a production surplus. Currently there are 24.0 million tonnes

of potash capacity expansion projects announced in Saskatchewan that are expected to come on line by 2022. If all of

the expansions proceed and begin production as planned, this may create excess supply in the global potash market

that could lead to lower potash prices or lower than expected capacity utilization. POT is highly sensitive to changes in

the potash price since almost 70% of the company’s gross margin was derived from its potash business segment.

US phosphate rock permitting becoming a challenge

The mining of phosphate rock in the US is becoming more challenging due to environmental complaints that surface

during the permitting process. POT has significant phosphate reserves in Aurora, North Carolina that require a permit

from the US Army Corps of Engineers (Corps). However, as seen in the case of Mosaic—currently defending a

lawsuit for its phosphate rock permits—these permits can be contested by environmental groups. POT notes that it

has permits for its 33-year reserve life at Aurora (current production levels) and a life of mine permit at White Springs

(17 years). As a result, these permits should minimize the risks to POT shareholders.

31

Effect of Extra Potash Supply online Post 2015

Supply/Demand for all 3 Nutrients

The important element that stands out from the tables below is that none of the fertilizers should be in short

supply – there is ample aggregate nameplate capacity that even when adjusted downward to a more realistic

operational capacity global availability for N/P/K each appears sufficient to meet current demand. Total nitrogen

supply appears to have run at an effective

rate of around 90%, with phosphoric acid

and potash supply at roughly 80% of

capacity.

With excess supply, an observer might

question how the industry could sustain a

price level so clearly well above cost. This

same question could be asked when

analyzing the projections of additional

capacity that are anticipated across the

sector. For example, taking the forecast

demand/capacity outlook from the IFDC, a

theme arises that instead of a market

getting tighter (as would be most attractive

to an investor), the level of excess supply

appears to be expanding – the IFDC

anticipates that potash, arguably the fertilizer

market with the best profitability and the

highest valuation multiples, faces greater

than 25% excess supply by 2015.

More Supply Tightness than Meets the

Eye

In reality, there are a number of important

factors that offset the bearish elements

implied by a first read of supply/ demand.

1) POT is largely weighted toward a

variable cost structure as the costs of

potash mining are significantly weighted

toward energy, materials, and other inputs.

This enables the POT and other fertilizer

companies to run profitably at lower

operating rates – rates that would put

profitability pressure on more fixed-

cost/high-operating-leverage operations

(i.e., integrated steel mills).

2) The supply/demand for all nutrient in the aggregate may imply a soft market, but under real-world, quickly

shifting market conditions (weather patterns or a temporary closure of a key regional plant, both of which

have happened in 2012) fertilizer products may find their supply tight and supportive of higher prices.

3) Finally, as mentioned before the giant trade marketing consortiums for potash (Canpotex and Belarusian

Potash Corporation/BPC) exert large amounts of market power in their negotiations with the major fertilizer

importers within Brazil, China, and India and, particularly for the potash side provide a useful mechanism for

matching global supply with demand in the interest of supporting prices. Which is why one of the key reasons

that Potash Corp in particular, as the largest member of Canpotex, has enjoyed a premium valuation multiple

to the rest of the group.

Figure 1: Implied N/P/K Balanced Operating rates, 2008-10

Figure 2: IFA Projections, N/P/K Capacity Outlook, 2012-16f

32

Figure 3: Barclays Forecasts – Global Potash Supply & Demand, 2008-15E (mn tonnes)

Conclusion:

The potash market in every way has attractive elements that are crucial in a commodity market as attractive reserves

are fairly well concentrated in the hands of relatively few countries, market pricing and operational capacity utilization

discipline is heavily influenced by the coordination of Canpotex and BPC, and barriers to entry are very steep with

high capital costs (Greenfield Saskatchewan mine costs $8.1B) and long lead times for development (over 7years).

However as capacity expansions are ramping up among the existing producers it is important to note that the

majority of this new capacity is expected to be under the control of companies who are currently aligned via

the major marketing organizations of Canpotex/BPR. As they already benefit collectively from a managed

level of supply tightness, they have little incentive to disrupt the current market via actions that could take

prices down (i.e., by undermining operating discipline and rapidly bringing product from newly built capacity to

market, regardless of demand).

Therefore the prospects for POTS stock outperformance is tied to some degree to how well external supply

constraints (permitting delays, government barriers) combined with internal management discipline (keeping any

expansions realistic and targeted, resisting the temptation to accelerate development) will keep actual operating

capacity in check over the next several years. Although the supply of nitrogen is expected to be tighter in the long

term the market consensus for potash supply is expected to gradually loosen.

33

Valuation

POT is an attractive value play with a current

P/E of 13.16x trading at the lower end of its 7

Yr. avg. and below historical multiples. Pot has

traded in a range of 3x to 27x over the past five

years with an average of 16x. POT shares

receive a P/E multiple near the top end of the

NA Fertilizer Peers (Agu, CF, MOS) and an

EV/EBITDA of multiple of 8 nearly 1.5-1.9 turns

over the same peers. However, POT leads the

pack with the highest ROE of 42.4% and ROC

of 26%. Pot also commands the highest GM of

49.2% across the industry and a stellar 50%

EBITDA margin.

Investment Case – Conservative Est. at Lower End of Consensus

Company NameLast

Price

Best

Target

Price

Market

Cap ($B)P/E B. Est P/E

5 yr Avg.

P/EFCF/ Share

FCF Yield

(%)P/ FCF ROE % ROC % GM %

Agu Agrium 103,53 116,70 16 361 9,7 10,0 15,5 4,35 9,0 23,8 26,3 17,8 28,0

Cf CF Industries 222,82 233,65 14 625 8,3 8,3 11,0 26,17 12,7 8,5 38,0 28,7 47,5

MOS Mosaic 59,91 67,11 25 491 13,4 11,8 18,1 2,44 4,1 24,5 16,6 15,1 27,8

POT PotashCorp 43,55 53,88 37 421 13,9 13,1 25,0 1,49 3,0 29,2 42,4 26,0 49,2

CMP Compass Minerals 74,28 75,75 2 459 16,6 22,1 15,8 4,40 1,9 16,9 39,8 18,7 28,0

HF Hanfeng Evergreen 1,76 2,19 106 8,4 6,9 NA 0,19 -20,7 9,4 5,6 4,3 11,5

IPI Intrepid 22,99 26,33 1 730 20,7 18,9 NA 0,49 1,9 47,1 11,4 13,5 42,0

MBC MBAC 3,32 5,36 393 NA NA NA -0,40 -35,8 -8,4 -1,1 NA 25,3

MGO Migao 2,94 2,42 154 19,6 25,8 NA -0,35 -3,1 -8,4 6,0 4,8 14,8

WPX Western Potash 0,47 1,40 75 NA NA NA -0,18 -29,5 -2,6 -21,6 NA NA

UAN CVR Partners 26,56 26,50 1 940 13,6 17,3 NA 1,65 6,0 16,1 29,7 26,8 51,2

Average 9 882 13,8 14,6 17,1 3,86 -5,7 14,0 16,3 16,1 30,5

Min 75 8,3 6,9 11,0 0,40- -35,8 -8,4 -21,6 4,3 11,5

Max 37 421 20,7 25,8 25,0 26,17 12,7 47,1 42,4 28,7 49,2

Median 2 094 13,7 12,4 15,8 0,99 1,9 13,1 14,0 16,5 28,0

Fertilizer Industry

Company NameGM 3yr

Avg.%

Op

Margin%

Op. Margin

3yr Avg.

Div.

Yield

%

5yr Avg.

Sales

Growth%

EV/

EBITDA

Net Debt/

EBITDA

CAPEX

$(B)

EBITDA

Margin %

Total

BUYS

Total

SELLS

%

Buys

Agu Agrium 24,2 15,0 11,1 0,7 30,9 6,4 0,4 -663 17,5 21 1 95%

Cf CF Industries 36,5 45,0 31,3 0,7 17,6 5,1 0,1 -247 51,8 15 1 94%

MOS Mosaic 28,1 23,5 23,0 0,5 24,2 6,1 -0,9 -1639 28,1 17 1 94%

POT PotashCorp 38,6 44,9 33,2 1,0 31,8 8,0 0,9 -2176 50,5 21 2 91%

CMP Compass Minerals 31,4 19,5 22,9 2,5 7,5 8,8 1,3 -107 25,3 1 3 25%

HF Hanfeng Evergreen NA 7,7 NA 0,0 32,2 3,2 -2,2 -3 10,3 1 4 20%

IPI Intrepid 37,3 34,9 29,0 0,0 NA 6,5 -0,9 -137 42,9 5 2 71%

MBC MBAC 14,0 -233,9 -515,2 0,0 NA 10,8 NA -21 -221,2 6 1 86%

MGO Migao 20,2 7,2 12,9 0,0 37,5 6,1 2,0 -48 9,0 0 5 0%

WPX Western Potash NA NA NA 0,0 NA NA NA -18 NA 5 2 71%

UAN CVR Partners 37,7 45,0 26,6 0,0 NA 12,7 -0,7 -19 51,4 1 0 100%

28,8 -4,0 -44,0 0,5 26,0 6,8 0,1 -506 1,6

14,0 -233,9 -515,2 0,0 7,5 3,2 -2,2 -2176 -221,2

38,6 45,0 33,2 2,5 37,5 10,8 2,0 -3 51,8

29,7 19,5 23,0 0,3 30,9 6,4 0,3 -122 25,3

Fertilizer Industry

34

F2012 EPS est. is $3.34 which is toward the

lower end of management’s guidance range

of $3.20-$3.60 and consensus of $3.47.

2012 potash gross margin est. is $2.59B

which is slightly below revised guidance of

$2.6B-$2.8B while total potash volume

expectation is 8.80M toward the lower end

guidance of 8.8M-9.2M which reflects the

notion that the Indian market does not pick

up. However, the low end of volume

guidance could be hard to achieve absent a

4Q12 inventory build for the 2013 spring

season. The low end of guidance calls for

volumes of 4.945MM tonnes in 2H12 which

would be 523k tonnes higher than any 2H

on record (2H07 volumes were 4.422M

tonnes while 2H10 volumes were 4.276M

tonnes). However, as discussed before, this

year’s record destructive crop yield

regarding corn & soybeans is laying

foundation for 2013 to be the strongest crop

season in history which may be well above

our conservative 9% growth in potash

volumes for 2013 vs. 2012s already weak volume discounting an absent Indian market. Furthermore, 2013 will mark

an important year for India which has faced 2 years of reduced potash fertilizer application reducing yields by 29%.

In addition, the 2012 average North American potash price estimate is $434/mt. which is very conservative despite

being well below the 5 yr. avg. of $522 while Midwest spot prices remained at $478/t last week, below producer

postings of $500/t-$510/t. Currently the market expects 2H12 contracts for China to be signed in late September, with

many in the industry expecting, at best, a rollover of 1H12 prices at $470/tonne well above our avg. estimated price.

2012 nitrogen gross profit estimate is

$1.02B even though avg. nitrogen prices are

likely to come in higher than expectations

given continued strong market trends and

the 2013 expected record planting season.

With current Midwest spot urea prices

quoted in the $495-$500/t range and trade

commentary suggesting spring prepay

business also quoted at that level, our

avg. nitrogen price of $428, $388, and

$375 for the following 2012-14 period

FY12/13 Estimates vs. Consensus/Guidance

2011

Actual

Revised

Guidance

Previous

Guidance Est. Cons. Est. Cons. 2012 2013

EPS $3.51 $3.20-$3.60 $3.20-$3.60 $3.34 $3.41 $3.50 $3.70 -5% 5%

Potash Sales volume M tonnes 9.0 8.8-9.2 8.8-9.2 8.8 9.1 9.6 11.5 -3% 9%

Potash Gross margin $B $2.7 $2.6-$2.8 $2.6-$2.9 $2.6 $2.6 $3.0 $3.4 -4% 15%

Global Potash Shipments 53.0-54.0 53.0-56.0 53.0 53.5 55.0 55-58

Phosphate & Nitrogen Gross margin $B $1.57 $1.4-$1.6 $1.3-$1.5 $1.4 $1.5 $1.2 $1.3 -11% -15%

Capex $1.9 $2.2 $2.1 $2.2 $2.2 $1.4 $1.4 16% -36%

2012 2013 Change Y/Y

35

respectively is considered very conservative offset by higher than expected natural gas costs even though

margins are at their highest levels since 2008 as gas costs have come down 50% since 2010.

2012 phosphate gross profit is $468MM due to modestly lower volume expectations as Brazilian demand is now

slowing seasonally with a pickup not likely until late Q4 while Indian demand has declined.

Conclusion:

The potash market in every way has attractive elements that are crucial in a commodity market as large reserves are

fairly well concentrated in the hands of relatively few countries, market pricing and operational capacity utilization

discipline is heavily influenced by the coordination of Canpotex and BPC, and barriers to entry are very steep with

high capital costs (Greenfield Saskatchewan mine costs $8.1B) and long lead times for development (over 7years).

By applying a discounted 15x PE multiple to our 2013EPS estimate of $3.50 vs. POTs avg. historical PE of 16x, we

derive a price target of $52.5 implying a 19% return vs. Sept 20th

closing price of $44.08 which had already

appreciated 3% following a press release that Canpotex concluded four five year potash agreements with Indonesia

coupled with William Doyle’s assuring stance that Indian demand will escalate in 2013. As a result, the target price is

warranted by Pots’ industry leading potash margins, low-cost potash business, oligopoly production capacity growth,

and accelerated FCF opening the window for a share Buyback program.

Potash Strengths

Largest low-cost producer of the

highest potash margin with the

greatest barriers to entry, demand

and pricing potential.

Controls 50% of potential industry

potash expansion at lowest capital

cost (i.e., Brownfield) and on the

shortest timeline.

3rd largest N producer

3rd largest fully integrated Phosphate

producer with high quality rock and a

diversified product mix.

20+ year management track record of

rational competitive behaviour.

Catalysts

$50 per tonne increase in potash =

$0.40 of EPS.

Phosphate rock cost increases for

non-integrated producers.

An end to India’s Potash Holiday

Dealer re-stocking throughout the

balance of 2012/2013

Brazil, Southeast Asia, India and

China potash demand.

Corn and soybean prices persisted at

elevated prices.

M&A.

Accelerated FCF Generation

Share Buy Back with accumulated

cash

52 week Low – High Price : 36.73 – 60.42

36

APPENDIX: Forecast Summary

39

Fertilizer Introduction – Back to the Basics

What is fertilizer?

Any natural or manufactured material that contains at least 5% of one or more of the three primary nutrients -

nitrogen (N), phosphorous (P), or potassium (K) - can be considered a fertilizer. Industrially manufactured

fertilizers are also referred to as "mineral" fertilizers. As a result, the two most important sources of plant nutrients are

organic manure and mineral fertilizers. Since manure and crop residues do not contain a sufficient dose of all 3

nutrients, mineral fertilizers supply the outstanding nutrient balance needed for strong crop yields.

In simple terms, Nitrogen is a key element in protein and like the human body, plants need it to grow. On the other

hand, phosphorus is the plant world’s equivalent of carbohydrates – it provides the energy for plants to thrive

while Potassium is a mineral that helps plants grow strong stalks, in the same way that calcium gives people

strong bones.

As a result, fertilizer production consists of gathering these 3 raw materials from nature; treating them in order to

purify them or increase their concentration; converting them into plant-available forms; and often combining

them into products that contain more than one nutrient.

Are farmers highly dependent on commercial fertilizers?

Every season, plants draw from the soil the nutrients they need to grow. When a crop goes to market, so too does the

potassium, phosphorus, and nitrogen it has absorbed and used throughout the growing season. When farmers

fertilize, they put back into the soil the nutrients their next crop will require. Unfortunately, soils do not naturally

contain all the nutrients that crops need. And while some of the same nutrients in fertilizer are found in soil, they

are not present in a sufficient supply for today’s high-yield farming which makes farmers highly dependent on

commercial fertilizers since it can take 5-20 years for nutrients to build up in the levels necessary to nurture a

good crop while a single season can wipe out many years’ worth of naturally produced nutrients.

Breakdown of 3 Components of Fertilizer

1) Nitrogen Nitrogen (N) is an element essential for plant growth. Nitrogen consists of approximately 78% of the air we breathe

and the earth’s atmosphere. Since it is inert and insoluble, plants cannot utilize it. As a result, fertilizer makers take

nitrogen out of the air and combine it with hydrogen from natural gas to make ammonia. Ammonia is used in

two ways: it is applied directly to crops as a nitrogen fertilizer, or it is used as a building block to make other

nitrogen fertilizer products, including urea, ammonium nitrate, ammonium sulfate or water-based, liquid

fertilizers. Urea is the most commonly used nitrogen fertilizer product and is also the feedstock for industrial products

such as plastics, resins and adhesives. All of these different nitrogen products have different properties and levels of

nitrogen that can be used in the various climates and cropping patterns found around the world.

40

2) Phosphorous

Phosphorus (P) in the form of phosphate (a salt of phosphoric acid) is mined from naturally occurring mineral

deposits (phosphate rock) that were once sediments at the bottom of ancient seas or the earths crust. The largest

deposits occur in the United States, North Africa and China. Phosphate rock processing consists in the separation of

phosphate from the mix of sand, clay and phosphate that makes up the matrix layer.

3) Potassium

Potassium (K) used in fertilizers is found in a salt form called potash. Potash deposits are derived from evaporated

sea water. They occur in beds of sediment at only a few places in the world. The largest deposit, in Saskatchewan,

Canada is 2.7 to 23.5 meters (9 to 77.6 feet) thick and found at depths of 1000 to 10, 000 meters (3,200 to 10,000

feet). Solution mining methods are used to extract potash at greater depths. Conventional underground dry-shaft

mining methods are used in mines as great as 1100 meters (3500 feet.). The ore is extracted from potash deposits by

electrically operated mining machines and conveyed to the surface, where it is crushed. Using a flotation process, salt

and clay particles are removed, the brine solution is dried, and the potash is sized by screening. The resultant coarse

grade product is then ready for distribution. Fine particles remaining from the screening process are compacted into

sheets that are crushed and screened to particle sizes suitable for blending.

41

Industry Export/Import Profile Overview (Sources: Company Filings)

Nitrogen (K)

Phosphorous (P)

42

Potassium (Potash) (K)

Crop Profiles (Sources: Company Filings)

43

Planting Season Schedule

44

Potash Corps Planting Season Schedule

45

POT Management & Directors

William Doyle, director, president and chief executive officer

Mr. Doyle has been president and chief executive officer of PotashCorp since June 1999 after 12 years as a key

member of the PotashCorp senior management team. He has 36 years of experience in the fertilizer industry,

beginning his career with International Minerals and Chemical Corporation. Mr. Doyle is on the boards of Canpotex

Limited, The Fertilizer Institute and International Plant Nutrition Institute, and is a member of the Executive

Management group of the International Fertilizer Industry Association.

Wayne Brownlee, executive vice president and chief financial officer

Mr. Brownlee has been in his current role at PotashCorp since 2006 after seven years as Sr. VP, treasurer and CFO.

He coordinated the privatization of PotashCorp, transforming it from a provincial Crown corporation to a publicly

traded company in 1989. As head of expansion and development efforts in the 1990s, he was influential in the

acquisition of more than US$4 billion in assets. Prior to joining PotashCorp, Mr. Brownlee served in the Saskatchewan

Department of Finance. David Delaney, executive vice president and chief operating officer

Mr. Delaney was appointed to his current role in June 2010 after 10 years as president of PCS Sales. Previously, he

was vice president, agricultural sales for Arcadian Corporation’s eastern territory. Mr. Delaney is a director of the Arab

Potash Company.

Stephen Dowdle, president, PCS Sales

Mr. Dowdle was appointed to President, PCS Sales in June 2010 after 11 years with the Fertilizer Sales division. He

has held several positions within PotashCorp since 1999, most recently as Senior Vice President, Fertilizer Sales. Mr.

Dowdle is on the board of Canpotex Limited, PhosChem, Sinofert, and the International Plant Nutrition Institute.

Garth Moore, president, PCS Potash

Mr. Moore has been in his current role since 1997. He has 37 years of experience in the potash industry and 28 years

with PotashCorp directing the company’s potash mining operations. Prior to PotashCorp, Mr. Moore held increasingly

senior management positions with Noranda, Central Canada Potash and International Minerals and Chemical

Corporation.

Brent Heimann, president, PCS Phosphate and PCS Nitrogen

Mr. Heimann was appointed to his current role in March 2011 after four years as VP, Operations for Phosphate and

Nitrogen. He has over 20 years of experience in nitrogen, phosphate and potash operations.

kenneth woods - concordia university potashcorp assets potash corp. financial summary pot produces 3...

Documents