Agrium profit dives, outlook weaker; shares drop 10 percent

Wed Nov 7, 2012 2:44pm EST

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(Reuters) - Canadian fertilizer producer and farm-products retailer Agrium Inc (AGU.TO) (AGU.N) reported a 56 percent drop in quarterly profit on Wednesday and offered a weaker-than-expected fourth-quarter outlook as key markets China and India balked at signing new contracts to buy the crop nutrient potash.

The company's performance in the third quarter was also hurt by downtime at Agrium's Saskatchewan potash mine and reduced sales of farm products due to the severe U.S. drought. Its shares dropped nearly 10 percent.

New contracts with India and China, the world's top two potash consumers, had been anticipated by late summer, but Agrium CEO Mike Wilson said a deal with China will now come by the first quarter of 2013, and one with India by the second quarter.

"If you look at the robust ag sector and what we have coming at us it doesn't warrant the (price) decreases that they're demanding," Wilson said in an interview with Reuters. "And given our cost to capital and costs of production, we need to resist these significant price decreases they're asking for."

Agrium's New York-listed shares were down 9.7 percent at around $96.75 on Wednesday afternoon, touching a three-month low. The stock was up 55 percent this year through Tuesday, helped by spiking grain prices resulting from the U.S. drought.

Competitor Potash Corp of Saskatchewan (POT.TO) (POT.N) last month reported third-quarter earnings down 22 percent due to a standoff on new contracts with China and India. Agrium, Potash and Mosaic Co (MOS.N) sell potash from Western Canada to offshore markets through marketing agency Canpotex.

China is seen as amply supplied with potash, while the nutrient is too expensive for some Indian farmers after a cut in government subsidies.

Agrium sells nearly half its potash in North America.

The company's Vanscoy, Saskatchewan, mine was shut down due to expansion-related work for at least eight weeks in the quarter, dropping potash sales by more than half to 160,000 tonnes, including some supplies the company had to buy from other producers to meet sales commitments.

Potash is a nutrient that helps plants develop strong roots and retain water, boosting yields and helping them resist disease, drought and insects.

Agrium says next year looks strong with a second-half rebound in potash sales, and with U.S. farmers likely to plant a large corn crop to cash in on high prices.

"China and India will settle," Wilson said. "And as soon as they settle, they're going to try to pull hard (on supplies). You combine that with Brazil, Southeast Asia, and we think it's going to be an excellent year for potash and phosphate and nitrogen in North America - you're going to see a real surge of demand."

Agrium's net earnings for the third quarter ended September 30, fell to $129 million, or 80 cents a share, from $293 million, or $1.85 a share, a year earlier.

Excluding one-time items, earnings were $1.34 a share, down from analysts' average estimate of $1.82, according to Thomson Reuters I/B/E/S.

The Calgary, Alberta-based company forecast fourth-quarter earnings of $1.50 to $1.90 per share, below analysts' expectations of $2.10.

RETAIL SALES DIP, JANA WANTS CHANGE

Sales at Agrium's retail business of selling seed, chemicals and fertilizer to farmers - the largest in the United States - dropped 10 percent as the United States faced its worst drought in over half a century.

"The negative impact of the U.S. drought on the company's retail segment was much stronger than we expected, and appears to have caught most sell-side analysts by surprise," said Robert Winslow, analyst at National Bank Financial.

Agrium is attempting to fend off a push by its largest shareholder, Jana Partners, to spin off the retail division.

"This quarter's performance, and today's share price reaction, highlight that Agrium's strong retail business remains subject to the cyclicality of its commodity-driven wholesale business, despite the absence of any quantifiable benefits to shareholders from this combination," Jana managing partner Barry Rosenstein said in an email to Reuters.

Jana, which owns about 4 percent of Agrium, has demanded the company return more cash to shareholders, and Wilson said he does not rule out further returns to investors in 2013. Wilson also moved to satisfy another of Jana's demands on Wednesday by offering additional disclosure of the retail side's operations.

"They're not getting the traction with our shareholders," he said.

The company has not received offers for the retail business, but some investors have "sniffed around," Wilson said.

Agrium posted weaker earnings despite a strong performance in its sales of nitrogen, which has returned big profit margins due to low costs of natural gas, a key ingredient.

Total sales for Agrium fell 6 percent to $2.96 billion, below analysts' average forecast of $3.13 billion.

(Reporting by Rod Nickel in Winnipeg, Manitoba; Editing by John Wallace and Bernadette Baum)

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