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Understanding how PotashCorp makes money

Jose de la Puente, Jr Agriculture Associate

PotashCorp: an investor's guide to the fertilizer giant (Part 3 of 9)

(Continued from Part 2)

In 2013 PotashCorp (POT) had sales of $7.3 billion and gross profits of $2.8 billion. Unlike most of its peers, PotashCorp manufactures and sells all three types of fertilizers, situating itself in a less risky position due to diversification. Mosaic (MOS), for example manufactures potash and phosphate, excluding Nitrogen. Intrepid Potash (IPI) only sell Potash and CF Industries (CF) sell mostly nitrogen and a small amount of phosphate. This is especially beneficial in a commodity market such as the fertilizer industry.

As we can see from the graph, net sales (net of transportation costs), seem to be divided evenly between potash, nitrogen and phosphate with some weight in potash. However, gross profit shows a different scenario. Gross profit is the gains (or loses), after the cost of producing the product has been deducted from sales. In the end, profit is what really matters to investors.

As we can see, potash is the main source of profits for PotashCorp representing 56% of gross profit, while nitrogen represents 33%, and phosphate 11%. This change is because the potash has a higher profitability.

Fertilizers are commodities

As commodities, the two main key metrics that affect revenues are sales volume and sales price.  Sales volume is the amount of fertilizers (in tonnes or metric tons) that a company sells. Volume sales increase when a company increases production, often because of higher overall demand for the commodity from end markets such as the crop industry, industrials and feed. Fertilizer demand often rises under higher crop prices and plantation.

Price might be considered a more relevant indicator because it is affected by supply as well as demand. Naturally, prices rise with increasing demand, but companies can support prices by lowering production, which is easier to do in the potash industry because only a few companies make up a large share of industry supply. We will breakdown this topic for each type of fertilizer in the next articles.

Costs are an important factor for profitability

Costs of producing fertilizers, except for potash, include other commodities such as natural gas and ammonia that tend to fluctuate in price. With higher costs, margins will be reduced resulting in lower profits for the company. Companies with access to low cost mines are sometimes favored as long-term investments, because they are less volatile and are more likely to survive and grow compared to ones with higher costs. COGS (cost of goods sold, or the cost of production) represented 62% of sales and 82% of all expenses. Other expenses include SG&A and taxes.

Continue to Part 4

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