The Daily Magic Formula Stock for 11/21/2008 is Potash Corporation of Saskatchewan Inc. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is 75-100 %.
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Potash Corporation of Saskatchewan Inc. is a corporation organized under the laws of Canada. As used in this document, the term â€śPCSâ€ť refers to Potash Corporation of Saskatchewan Inc. and the terms â€śwe,â€ť â€śus,â€ť â€śour,â€ť â€śPotashCorpâ€ť and the â€śCompanyâ€ť refer to PCS and its direct and indirect subsidiaries, individually or in any combination, as applicable.
We are the worldâ€™s largest integrated fertilizer and related industrial and feed products company. We are the largest producer of potash worldwide by capacity. In 2007, we estimate our potash operations represented 17% of global production and 22% of global potash capacity. We are the second largest nitrogen producer worldwide by ammonia capacity. In 2007, we estimate our nitrogen operations produced 2% of the worldâ€™s ammonia production. We are the third largest producer of phosphates worldwide by capacity. In 2007, we estimate our phosphate operations produced 6% of world phosphoric acid production.
Our potash is produced from six mines in Saskatchewan and one mine in New Brunswick. Of these mines, we own and operate five in Saskatchewan and the one in New Brunswick.
Our nitrogen operations involve the production of nitrogen fertilizers and nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate and nitric acid. We have nitrogen facilities in Georgia, Louisiana, Ohio and Trinidad.
Our phosphate operations include the manufacture and sale of solid and liquid phosphate fertilizers, animal feed supplements and industrial acid, which is used in food products and industrial processes. We believe that our North Carolina facility is the worldâ€™s largest integrated phosphate mine and processing plant. We also have a phosphate mine and two mineral processing plant complexes in northern Florida, six phosphate feed plants in the United States and one feed plant in Brazil. In addition, we can produce a variety of phosphate products at our Geismar, Louisiana facility.
We indirectly hold all outstanding interests in PCS Joint Venture, Ltd. (â€śPCS Joint Ventureâ€ť), which formerly manufactured, processed and distributed fertilizer and other agricultural supplies from plants located in Florida and Georgia. In 2006 and 2007, PCS Joint Venture sold virtually all of its assets and remaining inventory.
We are organized under the laws of Canada. Our principal executive offices are located at 122 â€“ 1 st Avenue South, Suite 500, Saskatoon, Saskatchewan, Canada S7K 7G3, and our telephone number is (306) 933-8500.
PCS is a corporation continued under the Canada Business Corporations Act and is the successor to a corporation without share capital established by the Province of Saskatchewan in 1975. Between 1976 and 1990, we acquired substantial interests in the Saskatchewan potash industry. We purchased the Cory mine in 1976, the Rocanville and Lanigan mines in 1977, and, by 1990, 100% of the Allan mine when we acquired all of the outstanding shares of Saskterra Fertilizers Ltd.
In 1989, the Province of Saskatchewan privatized PCS. While the Province initially retained an ownership interest in PCS, this interest had been reduced to zero by the end of 1993. Since 1993, we have made the following acquisitions of significance to the development of our Company:
â€˘ the New Brunswick potash mine and port facilities and our Patience Lake mine in Saskatchewan in 1993;
â€˘ PCS Phosphate Company, Inc. (formerly Texasgulf Inc.) and White Springs Agricultural Chemicals, Inc., phosphate fertilizer and feed producers, in 1995;
â€˘ Arcadian Corporation, a producer of nitrogen fertilizer, industrial and feed products, in 1997;
â€˘ PCS Cassidy Lake, a potash mill facility located at Clover Hill, New Brunswick, in 1998;
â€˘ approximately 9% of the outstanding shares of Israel Chemicals Ltd. (â€śICLâ€ť) pursuant to a public offering by the State of Israel in 1998. In June 2005, we acquired twenty-one million additional shares in ICL, increasing our ownership interest to 10%;
â€˘ PCS Purified Phosphates (formerly a joint venture we had with Albright & Wilson Americas Inc.), a phosphoric acid joint venture, in 2000;
â€˘ 20% of the total outstanding equity of Sociedad QuĂmica y Minera de Chile S.A. (â€śSQMâ€ť), a Chilean specialty fertilizer, iodine and lithium company, in transactions in October 2001 and April and May of 2002. In 2004, we sold a portion of this investment and subsequently acquired ICLâ€™s entire indirect interest in SQM, resulting in an indirect holding of 24.99% of the outstanding equity of SQM. In October and December 2006 and July 2007, we increased our investments in SQM to 32% of SQMâ€™s outstanding equity;
â€˘ 26% of the shares of Arab Potash Company (â€śAPCâ€ť) from Jordan Investment Corporation, an arm of the Jordanian government, in October of 2003. In June 2005, we acquired one million additional shares in APC and in April 2006, we acquired 220,100 additional shares in APC, increasing our ownership interest to approximately 28%; and
â€˘ 9.99% of the shares of Sinofert Holdings Limited (â€śSinofertâ€ť), a vertically-integrated fertilizer company and a subsidiary of Sinochem Corporation, in July 2005. In February 2006, we exercised an option to acquire an additional 10.01% of the shares of Sinofert, increasing our ownership interest to 20%. During July 2007, our ownership interest was diluted to approximately 19% due to the issuance of shares by Sinofert. In January 2008, we acquired approximately 194.3 million additional shares of Sinofert, restoring our ownership interest to approximately 20%.
Our potash operations include the mining and production of potash, which is predominantly used as fertilizer.
All potash produced by the Company in Saskatchewan is in the southern half of the Province, where extensive potash deposits are found. The potash ore is contained in a predominantly rock salt formation known as the Prairie Evaporite, which lies about 1,000 metres below the surface. The evaporite deposits, which are bounded by limestone formations, contain the potash beds of approximately 2.4 to 5.1 metres thickness. Three potash deposits of economic importance occur in the Province, the Esterhazy, Belle Plaine and Patience Lake Members. The Patience Lake Member is mined at the Lanigan, Allan, Patience Lake and Cory mines, and the Esterhazy Member is mined at the Rocanville and Esterhazy mines.
Under a mining and processing agreement effective through December 31, 2026 and subject to available reserves, Mosaic Potash Esterhazy Limited Partnership (â€śMosaicâ€ť) mines and processes our mineral rights at the Esterhazy mine. We have the option to terminate this agreement every five years. The next opportunity to terminate is December 31, 2011, for which notice must be given no later than June 30, 2011. Mosaic has the option to abandon the mine at any time after December 31, 2011, thus terminating the mining and processing agreement. Following the expansion at Esterhazy, which was completed in 2007, the maximum finished product we are permitted to take each year under the mining and processing agreement is 1,313,000 tonnes and the minimum required amount is 453,600 tonnes. For the year ending December 31, 2008, we have notified Mosaic that we require 1,125,000 tonnes of finished product. Water inflow at the Esterhazy mine has continued, to a greater or lesser degree, since December 1985. We share, on an annual basis, in such water inflow remediation costs at the Esterhazy mine. See â€śProductionâ€ť and â€śReservesâ€ť tables for additional information.
We also produce potash at our mine near Sussex, New Brunswick from the flank of an elongated salt structure. We also hold an interest in certain oil and gas rights in the vicinity of the New Brunswick mine. Natural gas has been discovered and we, in conjunction with Corridor Resources Inc., have supplied the New Brunswick facility with natural gas to meet its fuel needs since 2003. During exploration for natural gas in the vicinity of the Sussex division, potash was detected to the south and east of existing mine operations (referred to as Penobsquis), a new area of potash mineralization called the Picadilly deposit.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
POTASHCORP AND OUR BUSINESS ENVIRONMENT
PotashCorp has built a global business on the natural nutrients potash, nitrogen and phosphate. Our products serve three different markets: fertilizer, industrial and animal feed. We sell fertilizer to North American retailers, cooperatives and distributors that provide storage and application services to farmers, the end users. Our offshore customers are government agencies and private importers who buy under contract and on the spot market; spot sales are more prevalent in North America. Fertilizers are sold primarily for spring and fall application in both northern and southern hemispheres.
Transportation is an important part of the final purchase price for fertilizer so producers usually sell to the closest customers. In North America, we sell mainly on a delivered basis via rail, barge, truck and pipeline. Offshore customers purchase product either at the port where it is loaded or delivered with freight included.
Potash, nitrogen and phosphate are also used as inputs for the production of animal feed and industrial products. Most feed and industrial sales are by contract and are more evenly distributed throughout the year than fertilizer sales.
We seek to be the partner of choice, providing superior value to all our stakeholders. We strive to be the highest quality low-cost producer and sustainable gross margin leader in the products we sell and the markets we serve. Through our strategy, we attempt to minimize the natural volatility of our business. We strive for increased earnings and to outperform our peer group and other basic materials companies in total shareholder return, a key measure of any companyâ€™s value.
We link our financial performance with areas of extended responsibility that include safety, the environment and all those who have a social or economic interest in our business. We focus on increased transparency to improve our relationships with all our stakeholders, believing this gives us a competitive advantage.
To provide our stakeholders with superior value, our strategy focuses on generating long-term growth while striving to minimize fluctuations in our upward-trending earnings line. This value proposition has given our stakeholders superior value for many years. We apply this strategy by concentrating on our highest margin products. This dictates our Potash First strategy, focusing our capital â€” internally and through investments â€” to build on our world-class potash assets and meet the rising global demand for this vital nutrient. By investing in potash capacity while producing to meet market demand, we create the opportunity for significant growth while limiting downside risk. We complement our potash operations with focused nitrogen and phosphate businesses that emphasize the production of high-margin products with stable and sustainable earnings potential.
We strive to grow PotashCorp by enhancing our position as supplier of choice to our customers, delivering the highest quality products at market prices when they are needed. We seek to be the supplier of choice to high-volume, high-margin customers with the lowest credit risk. It is critical that our customers recognize our ability to create value for them based on the price they pay for our products.
As we plan our future, we carefully weigh our choices for our strong cash flow. We base all investment decisions on cash flow return materially exceeding cost of capital, evaluating the best return on any investment that matches our Potash First strategy. Most of our recent capital expenditures have gone to investments in our own potash capacity, and we look to increase our existing offshore potash investments and seek other merger and acquisition opportunities in this nutrient. We also consider share repurchase and increased dividends as ways to maximize shareholder value over the long term.
KEY PERFORMANCE DRIVERS â€” PERFORMANCE COMPARED TO GOALS
Each year we set targets to advance our long-term goals and drive results. We have developed key performance indicators to monitor our progress and measure success. As we drill down into the organization with these metrics, we believe:
â€˘ management will focus on the most important things, which will be reinforced by having the measurable, relevant results readily accessible;
â€˘ employees will understand and be able to effectively monitor their contribution to the achievement of corporate goals; and
â€˘ we will be even more effective in meeting our targets.
Our long-term goals and 2008 targets are set out on pages 25 to 27 of our 2007 financial review annual report. A summary of our progress against selected goals and representative annual targets is set out below.
This discussion and analysis is based on the companyâ€™s unaudited interim condensed consolidated financial statements reported under generally accepted accounting principles in Canada (â€śCanadian GAAPâ€ť). These principles differ in certain significant respects from accounting principles generally accepted in the United States. These differences are described and quantified in Note 17 to the unaudited interim condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. All references to per-share amounts pertain to diluted net income per share.
For an understanding of trends, events, uncertainties and the effect of critical accounting estimates on our results and financial condition, the entire document should be read carefully together with our 2007 financial review annual report.
The companyâ€™s guidance for the third quarter of 2008 was earnings per share in the range of $3.25 to $3.75 per share, assuming a period end exchange rate of 1.00 Canadian dollars per US dollar and consolidated effective income tax rate between 28-30 percent. The final result was net income of $1,236.1 million, or $3.93 per share, with a period-end exchange rate of 1.0599 Canadian dollars per US dollar, a consolidated reported income tax rate of 27 percent.
Overview of Actual Results
With higher prices for all potash, nitrogen and phosphate products, third-quarter earnings of $3.93 per share ($1,236.1 million) was a five-fold increase over the $0.75 per share ($243.1 million) earned in the same period last year. This exceeded the $3.40 per share ($1,103.6 million) earned in the full-year 2007. Earnings for the first nine months of 2008 reached $8.45 per share ($2,707.2 million) and gross margin grew to $4,034.3 million, ahead 276 percent and 101 percent of the $2.25 per share ($726.8 million) and $1,346.2 million in gross margin in last yearâ€™s first nine months, respectively.
All three nutrients contributed to record-setting quarterly gross margin of $1,741.0 million, up 266 percent from the $475.1 million generated in the third quarter of 2007. Gross margin for the first nine months of 2008 reached $4,034.3 million compared to $1,346.2 million in the first nine months of 2007 and has already exceeded the record full-year total of $1,881.2 million set last year. While grain and oilseed prices remained supportive through the third quarter, they were caught up in a broad decline in commodity prices. The global financial crisis exacerbated these conditions, damaging investor confidence and sparking sales of liquid assets. By the end of the quarter, we believe lower crop prices no longer reflected the strong underlying global grain fundamentals, and fears about access to credit for agricultural buyers had a negative effect on the psychology of the sector as a whole. In potash, producer inventories were at historically low levels entering the quarter. Reduced production due to seasonal maintenance turnarounds for all producers and ongoing strikes at three PotashCorp facilities limited the available supplies. As a result, potash fundamentals remained strong through the entire quarter. The major markets for solid nitrogen and phosphate fertilizers â€” namely the US, Brazil and India â€” appeared cautious in light of uncertain global economic conditions. In the US, late spring planting pushed back the fall season and gave distributors time to replenish inventories. In Brazil, weather delays held back planting and enabled fertilizer inventories to reach healthy levels ahead of the spring season. With a late start in other key markets, Indiaâ€™s buyers delayed purchases, opting for low inventories in the hope that weakening global trade and a precipitous drop in sulfur prices would lower fertilizer prices. These trends were offset by the continued restriction of Chinese urea and phosphate trade due to the continuation of prohibitive export taxes on these products.
Potash gross margin as a percentage of net sales rose to 83 percent in the third quarter and 78 percent in the first nine months of 2008, compared to 58 percent and 57 percent in the same periods of 2007, respectively, due to price increases being realized. Driven by higher prices for all our nitrogen products, nitrogen gross margin reached $324.1 million in the quarter and $719.5 million in the first nine months of 2008, up from $123.9 million and $399.4 million in the same periods in 2007, respectively. Price increases pushed phosphate gross margin to $507.2 million in the quarter and $1,004.1 million in the first nine months of 2008, up from $129.9 million in the third quarter of 2007 and $290.9 million in the first nine months.
Selling and administrative expenses were $12.2 million lower than in the same quarter last year though $0.6 million higher than the first nine months. A decline in the price of our common shares reduced the value of deferred share units during the third quarter and first nine months of 2008 causing selling and administrative expenses to decline as compared to the same periods in 2007 when a share price increase had the opposite effect. Provincial mining and other taxes increased more than six times quarter over quarter and more than four times year over year as potash profit per tonne increased substantially compared to the same periods last year. The Canadian dollar weakened during the third quarter and first nine months of 2008, contributing to primarily non-cash foreign exchange gains of $37.4 million and $63.2 million in those periods, respectively. This compares to a strengthening in the third quarter and first nine months of 2007 that contributed to losses of $25.9 million and $67.4 million in the same periods last year, respectively. Other income increased $110.9 million quarter over quarter and $143.9 million year over year as our investments in Arab Potash Company Ltd. (â€śAPCâ€ť), Sociedad Quimica y Minera de Chile (â€śSQMâ€ť), and Israel Chemicals Ltd. (â€śICLâ€ť) contributed an additional $115.4 million during the three-months ended September 30, 2008 compared to the prior year and, along with Sinofert Holdings Limited (â€śSinofertâ€ť), an additional $151.3 million during the first nine months of the year compared to 2007. A gain of $25.3 million on a forward purchase contract for shares of Sinofert recognized in first-quarter 2008 further increased other income. These increases were partially offset by an additional $71.3 million provision for other-than-temporary impairment of auction rate securities recorded in other income in the first nine months of 2008, of which $27.5 million was recognized in the third quarter.
Our consolidated reported income tax rate for the three months ended September 30, 2008 was 27 percent (2007 â€” 38 percent) and for the nine months ended September 30, 2008 was 27 percent (2007 â€” 33 percent). The 2008 third quarter consolidated effective income tax rate remained unchanged from the second quarter at 29 percent (2007 â€” 33 percent). An income tax recovery of $29.1 million, related to an increase in permanent deductions in the US from prior years, was recorded in the third quarter in addition to the $42.0 million that was recorded in the first quarter of 2008. The $25.3 million first-quarter 2008 gain recognized as a result of the change in fair value of the forward purchase contract for shares in Sinofert was not taxable.
Total assets were $11,227.5 million at September 30, 2008, an increase of $1,510.9 million or 16 percent over December 31, 2007. Total liabilities increased by $2,213.0 million from December 31, 2007 to $5,910.9 million at September 30, 2008, and total shareholdersâ€™ equity decreased by $702.1 million during the same period to $5,316.6 million.
Accounts receivable, inventories and property, plant and equipment were the largest contributors to the increase in assets during the first nine months of 2008. Accounts receivable increased $776.8 million or 130 percent compared to December 31, 2007 as a result of higher product prices that drove sales up 109 percent in the month of September 2008 compared to December 2007. Although the accounts receivable balance increased, our internal collection statistics indicate that customers continue to meet the terms of their purchases. During the first nine months of 2008, phosphate inventories increased by $237.8 million, nitrogen inventories increased by $78.4 million and potash inventories decreased by $0.4 million which resulted in a $743.9 million inventory balance at September 30 as compared to $428.1 million at December 31, 2007. Inventory values for phosphate have grown due to higher input costs for sulfur and ammonia and inventory volumes grew at September 30, 2008 as customers anticipate a reduction in prices, while nitrogen inventory values increased mainly due to higher natural gas costs. Additions to property, plant and equipment of $770.6 million were incurred ($549.9 million, or 71 percent, of which related to the potash segment). These increases in assets were offset by a $220.0 million decline in cash and cash equivalents that was primarily due to common share repurchases of $2,902.9 million.
Auction rate securities that are classified as available-for-sale are included in Investments. The company has determined that the fair value of the auction rate securities was $34.7 million at September 30, 2008 (face value $132.5 million), as compared to $56.0 million as of December 31, 2007, $43.1 million as at March 31, 2008 and $46.9 million as of June 30, 2008.
Market conditions at the end of 2007 that caused the investments to be illiquid had further deteriorated at the end of the third quarter of 2008. The decline in fair value from year-end reflects such illiquid or non-existent markets as well as continued concerns over defaults in the challenging sub-prime mortgage market and the ongoing corrections in the housing market that increase the probability of default in some of the underlying collateral of these investments. The increase in the proportion of the impairment that is considered other-than-temporary reflects the reduced fair values, and the fact that all six of the investments (including the two at December 31, 2007 and March 31, 2008, and the four at June 30, 2008) held in our account are now considered to fall into this category. This increase is as a result of the length of time and amount of impairment loss for such investments combined with collateral underlying the investments that is at a higher risk for default. The company is able to hold the investments in auction rate securities until liquidity improves, but does not expect this to occur in the next 12 months.
Liabilities increased primarily as a result of higher short-term debt and accounts payable and accrued charges. Short-term debt increased $1,586.3 million compared to December 31, 2007 as borrowings, together with cash on hand, were used to fund our common share repurchases during the first nine months of 2008. The $556.6 million increase in accounts payable and accrued charges was primarily attributable to: (1) taxes payable, which were up $354.9 million as a result of higher earnings despite significant payments made during the first nine months of 2008; (2) $29.2 million higher accrued provincial mining taxes; (3) accrued natural gas, sulfur and power costs that were up $99.6 million due to sulfur prices; and (4) payables associated with increased potash expansion project activity.
Contributed surplus increased at September 30, 2008 compared to December 31, 2007, while share capital, accumulated other comprehensive income (â€śAOCIâ€ť) and retained earnings decreased. AOCI decreased $479.1 million as a result of a $402.2 million decrease in net unrealized gains on available-for-sale securities (primarily Sinofert which declined $687.2 million, offset in part by an increase of $249.5 million in unrealized gains on ICL) and a $60.2 million decrease in net unrealized gains on our natural gas derivatives that qualify for hedge accounting. During the first nine months of 2008, we repurchased for cancellation 15,820,000 of our common shares at a cost of $2,902.9 million resulting in a reduction of share capital of $73.8 million. The excess of net cost over the average book value of the shares of $2,829.1 million was recorded as a reduction of retained earnings. Net income of $2,707.2 million for the first nine months of 2008 increased retained earnings while dividends declared of $92.5 million and the impact of the share repurchase program reduced the balance, for a net reduction in retained earnings of $214.4 million at September 30, 2008 compared to December 31, 2007.
Business Segment Review
Note 9 to the unaudited interim condensed consolidated financial statements provides information pertaining to our business segments. Management includes net sales in segment disclosures in the consolidated financial statements pursuant to Canadian GAAP, which requires segmentation based upon our internal organization and reporting of revenue and profit measures derived from internal accounting methods. Net sales (and the related per-tonne amounts) are the primary revenue measures we use and review in making decisions about operating matters on a business segment basis. These decisions include assessments about potash, nitrogen and phosphate performance and the resources to be allocated to these segments. We also use net sales (and the related per-tonne amounts) for business planning and monthly forecasting. Net sales are calculated as sales revenues less freight, transportation and distribution expenses.
Our discussion of segment operating performance is set out below and includes nutrient product and/or market performance where applicable to give further insight into these results. Certain of the prior periodsâ€™ figures have been reclassified to conform to the current periodsâ€™ presentation.
â€˘ Potash generated a record $909.7 million of gross margin in the third quarter of 2008, up from $221.3 million in the same quarter last year. Extremely tight supply/demand fundamentals made fulfilling volume commitments to North American and offshore customers a challenge and led to significantly higher prices and gross margin. For the first nine months of 2008, potash gross margin of $2,310.7 million was 252 percent higher than the $655.9 million generated in the first nine months of 2007.
â€˘ Third-quarter sales volumes of 1.9 million tonnes were 14 percent below the same period last year, as potash availability was limited and our quarter-end inventories were reduced to the lowest in our history. Total sales volumes of 7.1 million tonnes for the first nine months of 2008 were flat compared to the same period last year.
â€˘ Our inventories, of 212,000 tonnes are 49 percent lower than last yearâ€™s levels and 33 percent lower than June 30, 2008 levels.
â€˘ We produced 1.7 million tonnes in the third quarter of 2008 compared to 1.8 million tonnes in third-quarter 2007. In the first nine months of 2008 and 2007, we produced 6.6 million tonnes. Per-tonne cost of goods sold increased 37 percent (over $26 per tonne) quarter over quarter and 29 percent (almost $20 per tonne) year over year, due to the impact of a stronger Canadian dollar, higher royalties and additional costs for brine inflow management at New Brunswick.
â€˘ Unionized employees at the companyâ€™s Allan Division, Cory Division and Patience Lake Division potash operations commenced strike action on August 7, 2008. The labor dispute at these three facilities led to 16 additional mine shutdown weeks compared to last yearâ€™s third quarter.
Good afternoon, thank you for joining us and welcome to our third quarter earning call. In the room with us today we have William Doyle, our President and CEO; Wayne Brownlee, our Executive Vice President and Chief Financial Officer; Joseph Podwika, Senior Vice President and General Counsel; Garth Moore, President of PCS Potash; Thomas Regan, President of PCS Nitrogen and Phosphate; and David Delaney, President of PCS Sales.
Iâ€™d like to welcome the media who are listening in and remind people that we are live on our website. I would also like to remind everyone that statements made in this call that express a belief, expectation, or intention as well as those that are not historical fact, are forward-looking statements.
Such forward-looking statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were applied in drawing a conclusion or making a projection as reflected in forward-looking information and actual results could differ materially from what we think appears the most likely at this time.
For additional information with respect to forward-looking statements, factors and assumptions, we direct you to our news release and our most recent Form 10-K. Also todayâ€™s news release which is posted on our website includes a reconciliation of certain non-GAAP financial measures to the their most directly comparable GAAP measures.
Iâ€™ll now turn the call over to William Doyle, for some comments and then weâ€™ll go to questions.
Thank you Denita and good afternoon everyone and thank you for joining our discussion of Potash Corp. third quarter performance.
As you well know these are uncertain times in the financial and capital markets as fear appears to have overtaken fundamentals in the decision making process for many people. We appreciate this opportunity to bring the discussion back to a focus on measurable performance, and to the potential of Potash Corp. as we move forward.
Despite the turbulence around us, our company delivered the best quarter in our history. Our earnings of $3.93 per share were 39% higher then the record we set in the second quarter this year and greater then the $3.40 per share earned in all of 2007 which was a record year for our company.
We generated $1.7 billion in gross margin, more then triple last yearâ€™s third quarter. This included record gross margin in all three nutrients as we captured the benefits of a strong pricing environment. Our cash flow from operating activities prior to working capital changes reached $1.3 billion and raised our total for the first nine months of 2008 to $2.9 billion.
While many companies have been held hostage by over leveraged positions and restricted access to capital during this global financial crisis, we continue to advance the execution of our long-term growth strategies because of our strong cash flows and the health of our balance sheet.
This provide tremendous opportunity and flexibility for this company as we move forward. While the financial crisis did not impact our quarterly performance we are not isolated from what is happening in the world around us. No country, company or sector, has escaped this widespread crisis in confidence.
The broad sell off of commodities has hit agricultural related industries very hard. With many investors forced into deleveraging and redemptions, even strong performers have been caught up in the wave of reactionary selling.
This market correction painted most businesses in commodities with the same brush, as though fundamentals donâ€™t matter anymore. Any rational examination of the fertilizer industry makes it clear that the essential nature of our products and the long-term need to protect the worldâ€™s food supply present ongoing opportunities for growth.
Still the market is now priced as though it expects a long and very deep global recession. While no one can say for certain this will occur we do prepare for any impact it could have on our business. The good news is that the very nature of what we do provides a unique shelter.
Consumers might choose to park their car or spend less on discretionary goods but food will remain a priority. As Iâ€™ve said before, it is not a luxury item. Whether you are in North America or China or India, there is no denying that nutritious is essential to health and happiness.
This is not an area where people are willing to cut back. If absolutely squeezed those at the margin may opt for cheaper cuts of meat, but they will not return to starch based diets. That is a long-term reality for our businesses.
Our optimism at a time when others are highly uncertain is supported by the fundamentals of our business. Although crop commodity prices have been caught in the wave of reactionary selling the need for food has not declined.
Global grain inventories remain at critically low levels even though the worldâ€™s farmers have produced what is expected to be another record harvest. The worldâ€™s grain stocks to use ratio is estimated at 16.6% which compares to a 30-year average of 25.3%.
This is not a surprise to those who follow our business. As production has fallen short of consumption for most of the past decade, countries have drawn down grain inventories to dangerously low levels to satisfy growing food demand.
Now weâ€™ll take a record crop every year just to keep pace. And it will take even greater efforts by governments, farmers, and fertilizer producers to begin the slow process of replenishing global grain inventories.
This canâ€™t be resolved in a single crop year, in fact using some historically conservative assumptions about future demand for grain, coupled with continued production and yield improvements, it is expected that the global stocks to use ratio will remain at historically low levels for at least the next five years.
Food production is a long-term challenge, one with far greater power and impact then the current financial crisis. If crop prices continue to be disconnected from fundamentals, and decline material from current levels, farmers will have little incentive to increase plantings or maximize production.
That loss in production would put further pressure on the worldâ€™s food supply. Obviously that is an untenable situation and one that would warrant a return to higher crop prices. Ultimately we believe prices for crop commodities will rebound when fear subsides and rational thought returns to the marketplace.
Basic fundamentals will inevitably regain their footing. This same thought process applies to Potash as the very underlying fundamentals of our business are quite strong. Simply put it will remain a challenge to meet the worldâ€™s growing demand for potash.
For nearly two yeas the industry has been operating at or near its production limits. Markets around the world have been on allocation receiving only as much as the industry is capable of delivering. Our quarter end potash inventories were reduced to just over 200,000 tons, the lowest level in the history of our company.
Because of the essential need for our products we anticipate continued strong demand over the coming years even if global economic growth slows. As we look across our key markets for 2009 we anticipate a strong year ahead.
Chinaâ€™s lengthy delay in signing a 2008 contract reduces potash imports by more then three million tons. That put constraints on consumption during its spring season, reducing applications in some areas by as much as 20% and forcing to China to mine its soils.
To maintain yields in 2009 China will need to increase its potash applications considerably to make up for the potassium deficiency created after this years harvest. Late last week China state council passed a 10-point plan to stimulate economic growth after its GDP slowed to 9% following the Olympics.
In addition to increasing agricultural subsidies China will now be raising prices for key grains to provide higher [farming] costs. This is a major stride forward for that country in helping incentivize farmers to maximize future food production.
Feeding its ever-growing population is clearly one of the highest priorities for the Chinese government. That will take a lot more grain and along with it a lot more potash.
Similarly demand in India is expect to grow in 2009. After less then ideal weather and lackluster 2008 [karee] crop that country is expected to continue its efforts to improve productivity. In the US a late harvest has led to a shortened fall season so we are anticipating a strong spring season ahead.
This could put considerable strain on the distribution system in early 2009. The market with the greatest sensitivity to the current financial crisis is Brazil. As farmers are preparing for the spring planting season in Latin America they have been forced to factor in a more complicated global environment which is creating concerns regarding credit and profitability.
While the Brazilian government has just made available for its farmers more then 10 billion Reals, roughly $5 billion US, it may not be enough and along with suppressed crop prices could make them cautious this planting season.
If crop prices rebound by harvest time, which we anticipate will be the case, Brazilâ€™s farmers will do well.
In any event Brazilian soils are naturally potassium deficient which means there is little opportunity to reduce potash consumption without significantly impacting yields. The world is counting on Brazil as a major supplier of crop exports so any shortfall in production would further strain global grain and oil seed inventories.
One of the unknowns as we look ahead is the impact of the rapid agricultural renaissance in the former Soviet Union, as Russia is actively taking steps to revitalize its domestic food supply for the future. To accomplish this its farmers need to use more fertilizer.
The Russian government has indicated that it will require its domestic fertilizer producers to fill this demand which could remove several hundred thousand tons of potash from the international marketplace next year.
From a production standpoint we are using our strong cash flow to continue with our debottlenecking and expansion projects in Saskatchewan. This will give us the ability to increase our operating capacity from approximately 10 million tons to 18 million tons over the next five years.
We have been in the potash business for many years and we know that demand growth never follows a straight upward line. If for any reason demand doesnâ€™t materialize we will follow our long held strategy of matching our production to meet market demand.
Right now with the near-term uncertainty holding some buyers on the sidelines we have no need to actively alter our operating plans as labor issues have [curtailed] production in three of our potash facilities for the past two months.
From the beginning of negotiations weâ€™ve been clear with our Unions that we will continue to manage the company in a way that keeps our business sustainable under any market conditions. The rapid change in global financial markets might help our people to better understand our hard line on this issue.
We want them back at work but we wonâ€™t endanger the long-term health of the company in the process. In recent months the market has used a broad-brush approach in valuing companies, sectors, and commodities.
There has been little differentiation between those with poor performance or weak fundamentals and those with quality assets and real growth potential. As the market regains confidence and moves forward we anticipate that investors will be more discriminating in where they choose to invest their money.
Not all assets are created equally and potash is unlike any other commodity. Good deposits are rare. There are a limited number of producers, government involvement is minimal, and very importantly there are considerable costs and time challenges for any newcomers to the business.
With a five to seven year period for green field development we have a pretty clear picture of the supply situation in potash for the next several years.
Added to that demand growth is expected to outpace nitrogen and phosphate over the coming years as it is the nutrient that has been most under applied in developing nations. With our unmatched potash assets, proven performance, and capacity expansion plans, Potash Corp. potential for earnings growth is unparalleled in our industry.
We have a long history of delivering on what we say we will do. We have never strayed from our long-term approach to operating our business and this will not change. We demonstrated this again during our record third quarter and we look forward to meeting the expectations of our stakeholders in the future.
Thank you for your interest in Potash Corp. Iâ€™m joined today by members of our executive management team and we will be pleased to answer any questions.