Higher Prices Drive PotashCorp's Net Income and Gross Margin To Record Levels Listed: TSX, NYSE Symbol: POT SASKATOON, SK, July 28 /PRNewswire/ -- Potash Corporation of Saskatchewan Inc. (PotashCorp) today announced that higher second-quarter prices for potash, phosphate and nitrogen products resulted in quarterly records for both net income and gross margin. This is the third consecutive quarter for record net income and the fourth consecutive quarter for record gross margin. Net income of $164.2 million ($1.46 per diluted share) was up from $72.6 million ($0.67 per diluted share) in second quarter 2004, raising 2005 first-half income to $295.5 million from $123.3 million in last year's same period. Second-quarter net income would have been $0.13 per diluted share higher, except for a non- cash accelerated expensing of stock options granted during the quarter. Gross margin of $344.8 million more than doubled the $170.7 million in the same quarter last year, with second-quarter potash gross margin of $223.3 million alone exceeding second-quarter 2004 gross margin performance for the entire company. Cash flow from operating activities rose to $348.4 million from $182.8 million quarter over quarter. Equity investments in Arab Potash Company (APC) and Sociedad Quimica y Minera (SQM) combined to provide $13.4 million to second-quarter income. Realized potash prices were up 49 percent quarter over quarter and 13 percent from the first quarter of 2005. Ammonia and urea prices increased by 34 percent and 42 percent respectively quarter over quarter and 19 percent and 11 percent from the trailing quarter. In phosphate, prices for solid fertilizer products climbed 9 percent from last year's second quarter, while liquid fertilizer and feed products showed 10 percent and 19 percent gains respectively. "These higher prices, especially in potash, reflect tight world supply/demand fundamentals as consumption continues to grow," said PotashCorp President and CEO Bill Doyle. "While we had record-breaking potash sales volumes in the first half of 2004, we have surpassed those volumes this year putting us on track to make 2005 another record year for potash sales volumes and earnings. We have an unmatched ability to bring on idle potash capacity and we are reinvesting in our core business at home and around the world to build on this advantage." Market Conditions Tight supply/demand in potash has made product availability the primary concern for many customers, reducing Canadian producer inventories from their five-year average of approximately 2 million tonnes, to a total of 1.1 million tonnes. This spurred prices to unprecedented levels in offshore and North American markets. Canpotex, the offshore marketing agency for Saskatchewan producers, remains on pace for another record year, reflecting strong global demand. World demand for phosphate fertilizer grew as well, as an early summer fill and the potential for higher prices led to increased second-quarter volumes. India and Pakistan significantly increased their demand in the quarter which led to a dramatic tightening of the DAP market. As a result, ending inventories for US DAP producers were 11 percent below the five-year average while prices rose. Continued curtailments at North American nitrogen facilities, combined with strong offshore demand that is limiting the growth of ammonia imports, tightened nitrogen fundamentals. These factors, supported by higher North American natural gas prices, raised nitrogen prices, reinforcing the value of lower-cost gas at PotashCorp's Trinidad asset. Potash Operations Record potash gross margin of $223.3 million was 84 percent higher than the $121.4 million in last year's second quarter, raising year-to-date gross margin in this nutrient to $399.5 million. Higher prices improved gross margin as a percentage of net sales to 63 percent, compared to 46 percent in last year's second quarter and 58 percent in the trailing quarter. Second-quarter offshore realized prices rose by more than $43 per tonne over the same period last year, as prices increased and ocean freight rates fell. North American realized prices were up nearly $55 quarter over quarter, as previously announced price increases took hold. An additional $11-per-tonne increase effective June 1 is also being realized. The pricing gap between the two markets is the result of offshore customers purchasing under contracts that are lagging behind North American spot-market increases. The difference also reflects product mix, as North American customers prefer granular products that command a premium of $15 to $20 per tonne over standard products, which are more typically consumed offshore. Healthy first-half potash sales volumes surpassed the record volumes achieved in the same period last year. In North America, second-quarter volumes fell below the record of last year's same quarter, but were flat for the six months ended June 30, as customers purchased large amounts in advance of price increases. Second-quarter offshore volumes were down slightly in 2005 after a slow start from Brazil, which reduced shipments from New Brunswick. Sales to other key customers were strong, as China's quarter-over-quarter volumes rose 15 percent, India's 27 percent (although it was out of the market for May and June) and Indonesia's 12 percent. PotashCorp achieved record first- half shipments to the offshore market in spite of a reduced take from Brazil, the company's largest customer in 2004, demonstrating the strength and diversity of the company's customer base. PotashCorp's total quarterly production increased by approximately 173,000 tonnes. However, costs on a per-tonne basis were up slightly compared to the same quarter last year as a result of minor unplanned downtime, higher energy costs in New Brunswick, and a stronger Canadian dollar. The company's potash inventories declined by roughly 150,000 tonnes from the same period last year. Phosphate Operations Improvement in phosphate continued, as it contributed $22.1 million in gross margin compared to $5.7 million in the same quarter last year and $17.0 million in the first quarter of 2005. Industrial products remained the strongest-performing area of the phosphate business, accounting for about 71 percent of phosphate gross margin in the second quarter. The improvement in overall margin was due to higher prices for phosphate products, including a 9-percent increase in realized prices for solid fertilizer and a 10-percent jump in liquid fertilizer prices. Prices for industrial phosphate rose 4 percent and feed phosphate was up 19 percent. Sales volumes increased in all major phosphate categories, with DAP and MAP volumes up 9 percent quarter over quarter. However, costs on a per-tonne basis were up 4 percent quarter over quarter. This is primarily due to a 29-percent increase in ammonia prices, which more than offset the gains achieved from higher operating rates. Sulfur and phosphate rock costs remained flat through the quarter. Nitrogen Operations Nitrogen gross margin of $99.4 million was 128 percent higher than in last year's second quarter, reflecting higher prices and strong performance in both Trinidad and the United States. Trinidad accounted for approximately 60 percent of nitrogen gross margin, contributing $35 million more than in second quarter 2004. PotashCorp also realized in the second quarter $14 million of the first-quarter unrealized gain on the sale of the natural gas hedge, which is recognized as nitrogen tonnes are sold throughout the year and will add a total of approximately $48 million in gross margin in 2005. Realized prices for ammonia rose $73 per tonne quarter over quarter and urea was up nearly $82 per tonne. Sales volumes were consistent with last year's second quarter and up 7 percent from the first quarter of 2005. Ammonia production at Trinidad was down quarter over quarter, due primarily to a 32-day shutdown of one plant for expansion installations. Although the company paid higher prices for natural gas, even larger increases in nitrogen prices pushed margins up. Financial Strong cash flow was utilized to further enhance PotashCorp's leadership position in potash. In the second quarter, the company repurchased 2.5 million PotashCorp shares for $219.6 million; invested $18.6 million in APC and now owns 28 percent of that company; and increased ownership in Israel Chemicals Ltd. (ICL) to 10 percent with a $74.9-million investment. The market value of the APC and ICL investments, along with the investment in SQM, now exceeds the company's cost by over $1.0 billion on a pre-tax basis. PotashCorp also spent $74.5 million on capital expenditures during the quarter, with a significant portion related to bringing back idle potash capacity. On July 27, 2005, the reorganization of Sinochem Corporation's fertilizer business and institutional placement of Sinochem Hong Kong Holdings Limited was completed. Upon closing, PotashCorp invested $97.1 million to purchase a 9.99 percent stake in the newly reorganized company to be known as Sinofert. PotashCorp also holds an option to purchase an additional 10.01 percent of the company within three years. PotashCorp realized a $6.1 million gain as the Canadian dollar weakened from $1.2096 at March 31, 2005 to $1.2256 at June 30, 2005. Each one-cent change in the Canadian dollar has an impact of approximately $3.5 million on the foreign-exchange line, although this is primarily a non-cash item. Selling, general and administrative expenses were up $29.5 million over the same quarter last year. This change is due primarily to the non-cash expense associated with performance stock options granted to employees in the second-quarter of 2005. In accordance with accounting standards, compensation expense recognition was accelerated for stock options granted to employees whose retirement eligibility preceded the plan's vesting period. This is expected to result in a total pre-tax expense of $24.8 million in 2005, $22.0 million of which was recognized in the second quarter. The remainder of the increase was principally due to higher accruals for other performance- based variable compensation plans. The company's effective income tax rate was 33 percent for the quarter. The total tax provision increased due to significantly higher profitability of potash operations in Canada. The current/future split was 90/10 percent for the quarter. Provincial mining taxes continued to increase, driven directly by increasing potash margins. Outlook Tight supply/demand fundamentals are expected to continue for all three nutrients, most significantly in potash. Brazil returned to the potash market in the second quarter and is expected to purchase more aggressively before the end of the year, although it will likely still fall short of its 2004 purchases. India is also expected to come back into the market strongly as contract negotiations are now being completed. Potash sales volumes to offshore and North American markets in the second half of the year are expected to outpace the same period in 2004, with the offshore market setting another record. These volumes, along with expected further price increases, could push potash gross margin through the $800 million level this year. In North America, the $11-per-tonne price increase from June 1, 2005 should be fully realized in the third quarter and an additional $11-per-tonne increase has been announced for September 1, 2005. New offshore contract prices are expected to increase as well, although realized prices can be impacted by changing ocean freight rates. The company expects the provincial mining tax rate on potash gross margin to approximate 20 percent through 2005. Production from PotashCorp mineral rights at Esterhazy is carried out by Mosaic under a mining and processing agreement that allows PotashCorp to acquire up to 25 percent participation in any expansion. In April, Mosaic announced plans to expand capacity at Esterhazy by 360,000 tonnes at a cost of $28 million. PotashCorp will participate in this expansion, investing 25 percent of the cost for 25 percent of the additional tonnage, on top of our current maximum annual entitlement of 953,000 tonnes. These new tonnes are expected to be available in the fourth quarter of 2006. Assuming maximum annual take under the mining and processing agreement, the company currently expects its mineral rights at Esterhazy to support continuation of the agreement with Mosaic until the first quarter of 2013. In phosphate, the short-term outlook is positive as both North American and offshore demand are strong and prices are at 10-year highs. The benefits, however, are partially offset by higher costs for ammonia, sulfur, energy, labor and rock that are suppressing margins well below where they were the last time prices were at this level. Production and inventories of phosphoric acid are tight globally and sales to India are expected to remain strong. Strong market fundamentals are also expected to continue in feed phosphate supplements, strengthening prices and margins. Industrial products are expected to continue providing the highest and most stable gross margin in phosphate. The tight supply/demand in nitrogen is now expected to continue well into 2006. World demand is growing, while supply is expected to be kept in check as producers - especially those requiring high-cost natural gas in the US and Europe - curtail unprofitable production. North American natural gas strip prices through 2007 indicate gas will remain in excess of $7 per MMBtu, which benefits PotashCorp and our lower-cost Trinidad nitrogen production. Capital expenditures for 2005 are now estimated to be $410 million, of which $135 million is related to sustaining capital. Given the continued positive industry fundamentals, and based on a $1.20 Canadian dollar, PotashCorp is now expecting third-quarter net income to be in the range of $1.15 to $1.35 per diluted share. Net income for the full year is expected to be in the range of $5.00 to $5.50 per diluted share. The company's cash position at the end of 2005 is expected to be similar to that at the beginning of the year, even after additional investments in potash capacity, expanded ownership in global potash company investments and the repurchase of up to 5 percent of outstanding shares. Conclusion "Our second-quarter performance shows the continuing momentum of our company and the competitive advantage that we have in potash, the foundation of our business," said Doyle. "As we look ahead, we expect this to be amplified. US net cash farm income is expected to be a record for the third consecutive year and strong economic conditions around the world should continue to support growing fertilizer demand. Unlike last year when growing conditions were ideal in almost all regions, farmers are facing drought in many areas. The world's grain stocks-to-use ratio is expected to fall to 18.6 percent, meaning there will be more pressure on farmers to increase production. This is a challenge to potash supply that we are ideally positioned to meet, making us a primary beneficiary of these strong fundamentals, to the benefit of all of our stakeholders." Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer enterprise producing the three primary plant nutrients and a leading supplier to three distinct market categories: agriculture, with the largest capacity in the world in potash, third largest in phosphate and fourth largest in nitrogen; animal nutrition, with the world's largest capacity in phosphate feed ingredients; and industrial chemicals, as the largest global producer of industrial nitrogen products and one of only three North American suppliers of industrial phosphates. This release contains forward-looking statements, which involve risks and uncertainties, including those referred to in the company's annual report to shareholders for 2004 and in filings with the U.S. Securities and Exchange Commission and Canadian provincial securities commissions. A number of factors could cause actual results to differ materially from those in the forward- looking statements, including, but not limited to: fluctuation in supply and demand in fertilizer, sulfur, transportation and petrochemical markets; changes in competitive pressures, including pricing pressures; risks associated with natural gas and other hedging activities; changes in capital markets; changes in currency and exchange rates; unexpected geological or environmental conditions; and government policy changes. ------------------------------------------------------------------------ PotashCorp will host a conference call on Thursday, July 28, 2005, at 1:00 p.m. Eastern Time. To join the call, dial (706) 643-3329 at least 10 minutes prior to the start time. Alternatively, visit http://www.potashcorp.com/ for a live webcast of the conference call in a listen-only mode. This news release is also available at this same website.