2011 was a mixed year for chemical giant PotashCorp (NYSE: POT). The company's operational performance was impressive, but its shares surprisingly failed to do justice, ending the year down 20%.
But Potash had a lot of things going in its favor last year, and being the world's largest fertilizer producer definitely has its advantages. Here's a recap of how Potash fared in 2011, and what could work for it this year.
Great numbers throughout
PotashCorp's revenue grew solidly throughout the year. After posting year-over-year top-line growth of 29% in its first quarter, Potash's revenue surged a staggering 65% in the second quarter. The superb pace of growth continued in the third quarter, with sales rising 47%.
To investors' delight, growing top line even prompted the company to raise its full-year earnings guidance from a range of $3 to $3.40 per share projected in the first quarter to $3.40 to $3.80 per share in the second quarter.
The great power in Potash's hands
2011 was in fact a significant year for PotashCorp because of the deals Canpotex bagged. Canpotex is a three-member cartel consisting of Potash, Mosaic (NYSE: MOS), and Agrium (NYSE: AGU), that controls all potash exports out of Saskatchewan, with a major portion of it being owned by PotashCorp. This obviously gives Potash a distinct competitive advantage over peers who deal in the chemical potash.
Canpotex grabbed headlines when India agreed to import potash at the prevailing high prices; something the country was not keen on doing earlier. The supply under the contract, which started from October, will carry through till March this year. To top that, Canpotex also signed a contract with Chinese agricultural company Sinofert to supply higher-priced potash during the second half of 2011.
These contracts are significant because they lock in a good portion of the expected potash sales for the three companies. How significant Canpotex's contribution is to these companies' potash sales can be gauged from the fact that 51% of Mosaic's first-quarter potash sales came from Canpotex alone.
This cartel is undoubtedly one of the biggest powers in PotashCorp's hands. It gave the company a great push last year and is expected to continue doing so. In fact, shipments to India and China under the contracts will be at much higher rates in 2012. So it won't be wrong to expect good revenue from Potash this year, especially in the forthcoming quarter.
India keeps the hopes alive
I wouldn't be surprised if Canpotex bags more orders this year. What makes me say this is the fact that emerging economies like India are growing rapidly, and their need for food to feed the burgeoning population should keep the demand for fertilizers and chemicals high.
In fact, I'd also like to draw your attention to a recent development that can work in Potash's favor. A few days back, the Indian government hinted at possible reintroduction of controls on fertilizer prices (primarily potash and phosphate- the two nutrients Potash deals in). This move, if it comes through, could boost the use of fertilizers in India, resulting in more business for PotashCorp.
Getting ready to grab opportunities
Given the robust and rising demand for chemicals, it isn't surprising to see companies unveiling big expansion plans. Mosaic is already busy with its 5 million tonne potash expansion program, which is also accounting for a major chunk of the company's capital expenditure. Not wanting to stay behind in the race, Agrium also announced a major expansion program at its potash facility in Saskatchewan last month. The program will begin this year and is expected to increase Agrium's annual production capacity by almost 50% once it gets completed in 2014.
Obviously, the potash king couldn't stay quiet. PotashCorp is undertaking major expansions at its potash mines in Saskatchewan and New Brunswick. What Fools need to keep track of is how some of these projects are expected to be completed this year, resulting in increased operational capabilities for the company. This should definitely be a great value addition to Potash's business in 2012.
Optimistic outlook
Things look just as bright the other nutrient Potash deals in -- phosphate and nitrogen. Prices of both the nutrients surged in 2011, boosting bottom lines for most companies dealing in them. Nitrogen products were particularly in high demand, evident from the way nitrogen kings like Terra Nitrogen (NYSE: TNH) performed last year. In the first nine months of 2011, prices of ammonia and UAN shot up by 32% and 48%, respectively, resulting in a solid 42% jump in Terra's sales.
With Terra expecting record plantations this year, things look as optimistic as it did in 2011. Mosaic might have planned a reduction in phosphate production for the next three months in anticipation of softening markets, but it's not that people will stop eating. Global demand for food isn't going to slump suddenly, and I choose to remain positive on the fertilizer front for the full year.
The Foolish bottom line
Potash expects record potash industry shipments in 2012, which is a good enough reason to remain optimistic on the company. I expect 2012 to turn out to be as good a year for Potash as 2011. To stay updated on how 2012 unfurls for Potash, simply add it to your stock watchlist. It's a free, personalized stock-tracking service brought to you by The Motley Fool.
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