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PhosCan Chemical Corp PCCLF



GREY:PCCLF - Post by User

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Post by matisse2003on Sep 10, 2008 5:18pm
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Post# 15446292

Credit Suisse fertilizer report

Credit Suisse fertilizer report

13 August 2008

Americas/United States

Equity Research

Fertilizers (Agricultural Sciences / Fertilizer) / OVERWEIGHT

Fertilizer Markets

MONTHLY

Business Conditions - August 2008

Investors accustomed to a tight correlation between fertilizer and energy

pricing have history on their side, but don’t overlook the serious divergence in

demand trends. “Demand destruction” is what the bears keep talking about,

but where is it? In energy markets, not fertilizer markets. Our fertilizer team

across the world sees no meaningful demand destruction in any key market.

We view the weakness in the fertilizer stocks as a major buying opportunity.

Our farm profitability model registered a large decline in theoretical crop

profitability in July, especially in corn. Large farmers presumably sold forward

earlier, when profits were higher. Even with the drop, we estimate profitability

for corn at more than double 2007, and nearly double for soybeans, so higher

fertilizer prices clearly haven’t hurt profitability, and prices can rise

substantially from here, even at $5 corn.

Rising ammonia and declining natural gas prices bode well for nitrogen

producers, as does the prospect for a strong corn crop planting season in

Brazil this fall. Phosphate players are facing higher input costs (sulfur is up

$165/st according to once source), increasing the benefits from integration.

Potash prices will reach $1,000/mt before year end in the US (PCS sales

announced $250/st for North America for dates in Q3).

Exhibit 1: Key Prices and Margins

$ per short ton, unless otherwise stated

July June % Yr Ago %

Product Avg Price Avg Price Chg. Price Chg. July June Yr Ago

U.S. Gulf NH3 558 510 9% 278 101% 150 79 45

Mid Cornbelt NH3 993 762 30% 453 119% 537 283 172

U.S. Gulf Urea 755 674 12% 314 140% 443 346 126

U.S. Gulf UAN 470 423 11% 258 83% 289 232 147

Central Florida DAP 1064 1048 2% 376 183% 670 670 207

U.S. Gulf Export ($/mt) 1194 1183 1% 439 172%

Saskatchewan Potash 544 529 3% 205 165%

Midwest Potash 848 808 5% 220 286%

NYMEX Nat Gas ($/MMBtu) $11.68 $12.39 -6% $6.21 88%

AECO Nat Gas ($/MMBtu) $10.02 $11.10 -10% $5.15 95%

Tampa Sulfur ($/lt) 452 452 0% 61 641%

Est. Margin Per Ton

Source: Green Markets, Company data, Credit Suisse estimates.

Research Analysts

Mark W. Connelly

212 325 5844

mark.w.connelly@credit-suisse.com

Nils-Bertil Wallin

212 538 8127

nils-bertil.wallin@credit-suisse.com

Jin Kim

212 538 1969

jin.kim@credit-suisse.com

13 August 2008

Fertilizer Markets 2

Nitrogen (184.4mm MT global NH3 capacity; Asia/Oceania 50%, FSU 13%, Eur 12%, N Am 9%, ME 6%, Lat Am 6%, Afr 3%)

¦ Ammonia prices in mid-cornbelt are now above $1,000/st for the first time ever! The July average U.S. Gulf Coast

ammonia price increased to $558/st from the June average of $510/st. However, increases in prices were skewed

towards the end of July, moving up $190/st during the last week of July, which suggests that the weather-driven

delays we have been hearing about were substantial. Next up: demand from wheat.

¦ U.S. Gulf Urea prices averaged $755/st in July, up $82/st from the June average. Strong demand overseas

continues to put upward pressure on urea prices. Demand in Asia is still strong, and sources note that India still

needs another 1.5mm mt and Pakistan 0.3mm mt to meet their demands. Chinese supply remains tight. As U.S.

prices are slowly coming to parity with international prices, a window for cheaper imports to enter the U.S. market

could open, but with prices rising globally, we don’t think that is a very likely outcome. We expect Nitrogen prices to

moderate next year once Chinese supply comes back to market.

¦ The average July U.S. Gulf UAN price jumped by $47/st to $470/st from the June average of $423/st.

Exhibit 2: Ammonia Prices and Margins

$/short ton

Exhibit 3: Urea & UAN Prices and Margins

$/short ton

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Cornbelt UAN Price

Exhibit 4: Natural Gas Costs

$/MMBtu

Exhibit 5: Nitrogen Earnings Leverage

$10/short ton change in cash margin; volume estimate in short tons

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Henry Hub

Henry Hub - AECO Spread

Volume Net Income EPS

Company 2008E (000) ($mm) Impact

Yara International* 1 9,000 123.5 NKr2.30

Terra Industries 6 ,834 44.4 $0.42

CF Industries 6 ,694 43.5 $0.76

PotashCorp 6,551 42.6 $0.13

Agrium 4,824 31.4 $0.23

Terra Nitrogen 2,650 17.2 $0.91

*Norwegian Krone

*Includes share of Kemira GrowHow, Tringen, Qafco, Rossosh and Burrup

Exhibit 6: Historical and Projected Prices & Operating Rates

Product 2006A 2007A 2008E 2009E 2010E Product 2006A 2007A 2008E 2009E 2010E

U.S. Gulf NH3 $302 $307 $556 $566 $551 N.America NH3 82% 84% 85% 84% 83%

Mid Cornbelt NH3 382 466 7 38 7 48 733 Global NH3 84% 86% 86% 86% 84%

U.S. Gulf Urea 229 343 5 19 5 29 514

U.S Gulf UAN 159 257 3 66 3 76 361

Prices ($/st) Operating Rates

Source: Fertecon; Credit Suisse estimates, company data

13 August 2008

Fertilizer Markets 3

Phosphate (43.5mm MT global P2O5 capacity; Asia/Oceania 30%, N Am 23%, Africa 17%, FSU 14%, Eur 7%, ME 5%, Lat Am 4%)

¦ While DAP prices inched up slightly in July to $1,064/st (up 1.6% mom), MAP prices remained relatively flat at

$1,098/st (up 0.2% mom) versus the June averages. Rising costs are an increasing concern for non-integrated

phosphate producers. In addition to rising sulfur prices, phosphate rock prices moved up sharply – North African

phosphate rock prices rose to $450/mt, or 63.6% mom, from $275/mt in June. That is clearly bad news for nonintegrated

producers, but will tend to keep prices moving up.

¦ The average U.S. Gulf DAP export price was slightly higher at $1,194/mt in July from the June average of $1,183.

India came back to the market making tenders and DAP exports were made to Latin America with Brazil being an

important buyer. Exports to Argentina were still slow due to the farmers strike. According to the source, forward

sales were especially active in the domestic market.

¦ Sulfur prices for the third quarter are being settled up at approx. $165/lt. As such, we expect there could be another

significant jump in phosphate prices and potentially an increase of the price gap between MAP and DAP. The

increase in sulfur prices could push domestic phosphate prices to parity with international prices; however, with

rising phosphate rock prices, we expect the integrated producers like Mosaic to benefit from the situation.

Exhibit 7: Domestic DAP Price and Margin

$/short ton; integrated producers

Exhibit 8: Export DAP Price

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Exhibit 9: Sulfur Prices

Tampa, $/long ton; Vancouver, $/mt

Exhibit 10: Phosphate Earnings Leverage

$10/short ton change in cash margin; volume estimate in short tons

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Vancouver Sulfur

Tampa Sulfur

Volume Net Income EPS

Company 2008E (000) ($mm) Impact

Mosaic 9,796 63.7 $0.14

PotashCorp 4,715 30.6 $0.09

CF Industries 2 ,078 13.5 $0.24

IncitecPivot* 1 ,100 8.4 A$0.17

Agrium 1,094 7.1 $0.05

Fosfertil** 760 4.9 R$0.24

*Australian Dollar, **Brazilian Real

Exhibit 11: Historical and Projected Prices & Operating Rates

Product 2006A 2007A 2008E 2009E 2010E Product 2006A 2007A 2008E 2009E 2010E

Central Florida DAP $225 $364 $952 $957 $942 N.America P2O5 93% 99% 100% 98% 96%

U.S. Gulf Export ($/mt) 2 61 419 1 ,081 $1,086 $1,071 Global P2O5 80% 83% 84% 83% 83%

Central Florida MAP 224 362 9 70 $975 $960

Prices ($/st) Operating Rates

Source: Fertecon; Credit Suisse estimates, company data

13 August 2008

Fertilizer Markets 4

Potash (39.8mm MT global K2O capacity; N Am 40%, FSU 29%, Eur 14%, ME 8%, Asia 7%, Lat Am 3%)

¦ The July average price for U.S. Midwest potash jumped to $848/st, rising 4.9% from the June average of $808/st.

Saskatchewan prices increased more modestly, by 2.8%, to $544/st from the June average of $529/st. Demand

remains strong and prices continue to rise. In July, PCS sales announced that it will raise its North American potash

postings across the board by $250/st FOB, effective Sept. 1 through Nov. 30.

¦ The sinkhole in Russia continues to get sporadic headlines, but Credit Suisse’s fertilizer analysts in Russia believe

that any disruption would be measured in weeks, rather than months, given the strategic significance of the rail line

to the Russian government (potash isn’t the only important commodity riding on those rails).

¦ Freight rates declined again in July, with the Baltic Dry index falling 9.3% mom on top of the 9.5% decline in June.

Crude oil prices are now slightly above $120/barrel, a significant drop from the high of $145/barrel. If this trend were

to reverse, it could put strain on the netbacks of Canpotex exporters.

Exhibit 12: Domestic Potash Prices

$/short ton

Exhibit 13: International Potash Prices (Canpotex)

$/short ton (cfr); China cfr estimate based on current freight rates

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* to convert to metric tonnes, multiply by 1.1023

Exhibit 14: Ocean Freight Rates

Baltic Dry Index

Exhibit 15: Potash Earnings Leverage

$10/short ton change in cash margin; volume estimate in short tons

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Baltic Dry Index

Volume Net Income EPS

Company 2008E (000) ($mm) Impact

PotashCorp 11,026 71.7 $0.22

Mosaic 9,963 64.8 $0.15

K+S AG 7,165 46.6 €€ 0.76

Silvinit** 6,173 40.1 Rbl125.47

Uralkali** 5 ,842 38.0 Rbl0.44

Israel Chemicals* 3 ,968 25.8 NIS0.07

Agrium 2,246 14.6 $0.11

Arab Potash*** 2 ,161 14.0 JOD0.12

* Israeli Shekel, **Russian Ruble, ***Jordanian Dinar

Exhibit 16: Historical and Projected Prices & Operating Rates

Product 2006A 2007A 2008E 2009E 2010E Product 2006A 2007A 2008E 2009E 2010E

Saskatchewan $186 $212 $790 $955 $980 N.America Potash 68% 83% 87% 87% 88%

Midwest 205 257 8 31 1 ,000 1 ,025 Global Potash 84% 93% 94% 95% 95%

China yr. end (fob) 170 175 6 50

India yr. end (cfr) 2 20 270 6 25

Brazil yr. end (cfr) 1 85 410 7 50

SE Asia yr. end (cfr) 220 425 7 25

Prices ($/st, Domestic; $/mt, International) Operating Rates

Source: Fertecon; Credit Suisse estimates, company data

13 August 2008

Fertilizer Markets 5

Demand

¦ Corn crop future prices pulled back from its recent high of $7.15/bu. in June to prices slightly above $5.00/bu.

during July. The July average price was $6.08/bu. vs. the June average of $6.51/bu. Soybean prices increased by

3.4% mom (+93.0% yoy) to $14.63/bu., while wheat prices declined by 6.0% mom (but +9.2% yoy) to $5.83/bu.

Substantial drop in crop prices (except for soybean) and higher costs led to a decline in theoretical profitability for

all three crops. However, we think real farm profitability is still robust as most large farmers have already sold their

crops forward by now. If harvests come in weak, as we expect, corn prices will remain strong.

¦ The ethanol crush spread bounced back in July due to slightly higher distillers grains co-products and ethanol

prices. There was no change to the ethanol mandate (we hadn’t expected one), and ethanol prices continue to

increase. However, our energy team notes that there are three risks to current ethanol market balance and prices:

1) the fast return to market of cancelled or mothballed ethanol plants as ethanol economics improve; 2) the rollback

of the federal ethanol mandate (RFS) post the election; and 3) a further surge in the price of corn.

Exhibit 17: Representative Crop Spot Prices

$/bushel

Exhibit 18: Crop Implied Futures Curve

$/bushel

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Exhibit 19: Crop Profitability

$ per acre returns; 2008 based on futures prices

Exhibit 20: Ethanol Profitability

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2005 2006 2007E 2008E

Corn Soybeans Wheat

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Exhibit 21: Application Rates and Demand

Crop N P K N P K N P K

Corn 132 47 55 39% 38% 39% 4,690 1,696 1,901

Soybeans 4 14 25 1% 10% 17% 109 400 755

Wheat 62 23 6 14% 14% 4% 1,430 538 138

Cotton 75 31 42 4% 5% 6% 571 232 310

lbs/acre % of U.S. Consumption (000 nutrient tons)

Source: USDA; Credit Suisse estimates, company data; application rates and consumption % based on 5-yr trailing averages

13 August 2008

Fertilizer Markets 6

Company Profiles

Exhibit 22: Agrium: 2008E Revenues Exhibit 23: Agrium: 2008E Gross Profit

Advanced

Technologies

3%

Nitrogen

24%

Product purch.for

resale

4%

Potash

8%

Phosphate

Retail 9%

52%

Advanced

Technologies

2% Nitrogen

33%

Product purch. for

resale

1% Potash

18%

Phosphate

10%

Retail

36%

Exhibit 24: CF Industries: 2008E Revenues Exhibit 25: CF Industries: 2008E Gross Profit

Phosphate

31%

Nitrogen

69%

Nitrogen

63%

Phosphate

37%

Exhibit 26: Mosaic Co: FY09E Revenues

Exhibit 27: Mosaic Co: FY09E Gross Profit

Potash

30%

Offshore

16%

Phosphates

54%

Phosphates

47%

Offshore

3%

Potash

50%

Exhibit 28: PotashCorp: 2008E Revenue Exhibit 29: PotashCorp: 2008E Gross Profit

Nitrogen

28%

Phosphates

28%

Potash

44%

Potash

64%

Phosphates

16%

Nitrogen

20%

13 August 2008

Fertilizer Markets 7

Companies Mentioned (Price as of 12 Aug 08)

Agrium Inc. (AGU, $77.08, NEUTRAL [V], TP $128.00)

CF Industries (CF, $126.53, OUTPERFORM [V], TP $180.00)

Incitec Pivot Limited (IPL.AX, A$129.00, OUTPERFORM [V], TP A$215.00, OVERWEIGHT)

K + S (SDFG.DE, Eu69.00, OUTPERFORM [V], TP Eu102.00, OVERWEIGHT)

Mosaic Co (MOS, $97.04, OUTPERFORM [V], TP $195.00)

Potash Corporation of Saskatchewan (POT, $168.39, NEUTRAL, TP $280.00)

Silvinit (SILV.RTS, $1460.00, NEUTRAL [V], TP $2506.00)

Terra Nitrogen Co. L.P. (TNH, $97.40)

Uralkali (URKAq.L, $47.70, OUTPERFORM [V], TP $85.00)

Yara International ASA (YAR NO, NKr296.00)

Disclosure Appendix

Important Global Disclosures

I, Mark W. Connelly, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and

securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in

this report.

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total

revenues, a portion of which are generated by Credit Suisse's investment banking activities.

Analysts’ stock ratings are defined as follows***:

Outperform (O): The stock’s total return is expected to exceed the industry average* by at least 10-15% (or more, depending on perceived risk)

over the next 12 months.

Neutral (N): The stock’s total return is expected to be in line with the industry average* (range of ±10%) over the next 12 months.

Underperform (U)**: The stock’s total return is expected to underperform the industry average* by 10-15% or more over the next 12 months.

*The industry average refers to the average total return of the relevant country or regional index (except with respect to Europe, where stock

ratings are relative to the analyst’s industry coverage universe).

**In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested that analysts maintain at least 15% of their rated

coverage universe as Underperform. This guideline is subject to change depending on several factors, including general market conditions.

***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three rating definitions, with a required equity return

overlay applied.

Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,

including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other

circumstances.

Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24

months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected

performance of an analyst’s coverage universe* versus the relevant broad market benchmark**:

Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.

Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.

Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.

*An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector.

**The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months.

Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Outperform/Buy* 44% (58% banking clients)

Neutral/Hold* 42% (56% banking clients)

Underperform/Sell* 12% (52% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy,

Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's

decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the

market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit

Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research:

https://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

13 August 2008

Fertilizer Markets 8

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot

be used, by any taxpayer for the purposes of avoiding any penalties.

Important Regional Disclosures

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares;

SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not

contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit

https://www.csfb.com/legal_terms/canada_research_policy.shtml.

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