Scotai Global Fertilizer Jan 2011

Equity Research Industry Report
January 2011
The Distraction Is Over Back to Fundamentals

Launching Coverage on Global Fertilizer Producers
Ben Isaacson, MBA, CFA (416) 945-5310 (Scotia Capital Inc. Canada) Dean Groff (416) 863-7178 (Scotia Capital Inc. Canada)
Materials Global Fertilizers
For Reg AC Certication and important disclosures see Appendix A of this report. Analysts employed by non-U.S. afliates are not registered/qualied as research analysts with FINRA in the U.S.
The Distraction Is Over...Back to Fundamentals
January 2011

BHP Billiton rocked the fertilizer world in August 2010 when it ended its multi-year stalking of PotashCorp by formalizing a ~$39 billion hostile bid for the worlds largest fertilizer producer. Many will argue that the writing was on the wall, following excessive premiums paid for two junior potash developers over the preceding two years. In the weeks surrounding BHPs January 2010 acquisition of Athabasca Potash, PotashCorps market capitalization dropped by nearly 20%.
Fertilizer demand drivers over the long term are awesome.
While BHP was ultimately unsuccessful in its pursuit of PotashCorp, it is clear now that global mining giants such as BHP, Rio Tinto, and Vale are here to stay in the fertilizer game, and validate what fertilizer producer executives have argued for years fertilizer demand drivers over the long term are awesome. PotashCorps CEO recently stated that BHPs unsolicited offer distracted many people from where the real action is a significant improvement in fundamentals. We agree. Front-month corn, soybean, and wheat prices were up 44% in 2010, on average. With superb per acre economics heading into the 2011 planting season, farmers are now motivated to maximize yields through improved fertilizer application. Food demand will only continue to grow, with global grain consumption up 140 million tonnes (~7%) over the past three years, despite the 2008/09 global economic downturn. Potash-levered stocks should have the most torque in 1H/11, as price increases are finally now being accepted by buyers, especially given that potash was on allocation in Q4/10. Potash demand recovery should be complete by the end of 2011, with 56 million tonnes of potash consumption forecast by us (i.e., up 92% over 2009), which could rise to 60 million tonnes if dealers fully restock their low inventories. New nitrogen capacity could ultimately dampen robust ammonia/urea margins, but Chinas more restrictive urea export tax policy, higher crop prices, spectacular U.S. liquids-rich shale gas economics, rising marginal producer gas costs, and stronger 2011 U.S. ethanol demand are offsetting for now. Phosphate fertilizer prices almost doubled in 2010, on the back of sharp demand recovery, higher ammonia/sulphur feedstock costs, and commissioning delays at Maadens 3 million tonne phosphate complex. We think phosphate may be the first nutrient to peak, but expect healthy margins through 2011.
Exhibit 1.1: Fertilizer Demand Destruction Index
SC Fertilizer Price Index / SC Crop Price Index
0.9x 0.8x 0.7x 0.6x 0.5x 0.4x 0.3x 0.2x 0.1x 0.0x 2001 Room for up to 20% higher fertilizer prices with stable crop prices, before demand destruction. Demand Destruction!
SC Fertilizer Price Index: 50% Urea (FOB NOLA), 30% DAP (FOB NOLA), 20% MOP (FOB Vancouver). SC Crop Price Index: 21.5% Corn, 21.5% Soybeans, 21.5% Wheat, 21.5% Rough Rice, 7.0% Cotton, 7.0% Sugar.
Kick off 2011 overweight fertilizer equities but with a view to downshifting to market weight in the back half of the year.
2003
2005
2007
2009
2011
Source: Green Markets; Bloomberg; Scotia Capital.
Rising fertilizer prices may scare some investors into speculating that the end of the current bull run is near, and that we are close to reliving the mid-2008 collapse of the global fertilizer complex. We somewhat disagree, and see several differences between 2008 and 2011, which leads us to an initial overweight recommendation of fertilizer equities because: (1) farmer/dealer credit continues to improve; (2) emerging economy GDP and per capita income growth forecasts through 2014 look solid; (3) dealers cannot cover short-term demand growth from their low inventories; and (4) crop prices can sustain higher fertilizer prices without causing demand destruction (see Exhibit 1.1).
We have launched coverage of eight global fertilizer producers: Agrium, CF Industries, Intrepid Potash, K+S, Mosaic, PotashCorp, SQM, and Yara. In addition to providing stock-specific recommendations, commodity supply/demand outlooks, and fertilizer themes to watch for in 2011/12, we trust this report also provides the knowledge, logic, and rationale to support our investment views.
January 2011
Contents
The Distraction Is Over...Back to Fundamentals Investment Highlights How the Senior Producers Stack Up Our Top Picks 1 7 9 10
Agrium 1-SO, $106 One-Year Target K+S 1-SO, 61 One-Year Target Mosaic 1-SO, $82 One-Year Target PotashCorp 1-SO, $168 One-Year Target
2011+ Catalysts 2011+ Concerns NPK Pricing Forecast Summary Valuation Highlights
10 11 12 13
14 15 16 17
Overview Fertilizer Indices Peak & Trough Valuation Summary EV-to-EBITDA Price to Earnings Discounted Cash Flow Replacement Cost New
Key Investment Risks Growing More with Less U.S. Farmer Economics Look Powerful for 2011 Dealer Restocking Imminent Extreme Weather Frequency Rising Baltic Ocean Freight Rates Are Still Choppy Shale Gas-Improved North American Nitrogen Economics FSU Potash Consolidation Implications Biofuels-Based Fertilizer Demand Growth Is Waning Latest from the USDA Nitrogen Use Efficiency on Corn Yields Inconclusive?
17 18 18 19 22 25 26
28 29 32 35 37 39 40 42 44 49 57

Indias Nutrient-Based Fertilizer Subsidies Support Yara 2011 Fertilizer Export Tax Changes Are Mixed Rampant Food Inflation Returns to China Brazils Fertilizer Recovery Has Been Led by Potash India Must Apply More Potash to Combat Food Inflation Credit Ratings Support Further M&A/Share Buybacks Fertilizer M&A: Looking Back
January 2011
58 59 61 66 67 68 69
Summary Observations How We Crunched the Numbers Nitrogen M&A Phosphate M&A Potash M&A Retail M&A
Fertilizer M&A: Looking Ahead Do Grain Prices Influence Fertilizer Stocks? Nitrogen Outlook
69 69 70 72 73 74
75 80 89
Benchmark Price Forecast Supply & Demand Forecast The State of the Nitrogen Market
Phosphate Outlook
89 90 91
94
Benchmark Price Forecast Supply & Demand Forecast The State of the Phosphate Market
Potash Outlook
94 95 97
101
Benchmark Price Forecast Supply & Demand Forecast The State of the Potash Market
Agrium Inc. Still Acquisition Hungry
101 102 104

107
Investment Thesis & Recommendation Capital Markets Profile Corporate Profile Five Reasons We Like Agrium Valuation I. Retail II. Wholesale: Overview Wholesale: Nitrogen
108 109 110 114 116 123 134 140
January 2011
Wholesale: Phosphate Wholesale: Potash III. Advanced Technologies Key Investment Risks Financial Forecast Earnings Sensitivities Management & Directors
CF Industries Holdings, Inc. North Americas Nitrogen Bellwether
147 150 154 161 164 170 172

173
Investment Thesis & Recommendation Capital Markets Profile Corporate Profile What We Like About CF Industries Valuation Nitrogen Phosphate Does CF Have Uranium Upside? Why Corn Farmer Economics Matter to CF Key Investment Risks Financial Forecast Earnings Sensitivities Management & Directors
Intrepid Potash, Inc. A Unique Potash Pure Play
174 175 176 183 185 192 199 204 205 206 210 216 218
219
Investment Thesis & Recommendation Capital Markets Profile Corporate Profile What We Like About Intrepid Potash Valuation I. Potash Horizontal Potash Drilling 101 II. Langbeinite Langbeinite 101 Strong Brownfield Growth Pipeline Key Investment Risks Financial Forecast Earnings Sensitivities Management & Directors
K+S AG Welcome Back to Saskatchewan!
220 221 222 224 226 233 240 241 244 245 246 249 255 256
257
Investment Thesis & Recommendation Capital Markets Profile Corporate Profile What We Like About K+S Valuation I. K+S Potash & Magnesium
258 259 260 264 265 272
January 2011
II. K+S Salt III. K+S Nitrogen IV. K+S Complementary Key Investment Risks Financial Forecast Earning Sensitivities Management & Directors
The Mosaic Company Phosphate Leader with Potash-Focused Growth
276 285 290 293 295 300 302

303
Investment Thesis & Recommendation Capital Markets Profile Corporate Profile What We Like About Mosaic Valuation I. Phosphate II. Potash Global Footprint Across the Value Chain Specialty Products with International Exposure Strong MOS/POT Correlation Key Investment Risks Financial Forecast Earnings Sensitivities Management & Directors
Potash Corporation of Saskatchewan, Inc. Inflection Point Achieved
304 305 306 309 311 318 328 335 337 340 341 345 350 352
353
Investment Thesis & Recommendation Capital Markets Profile Corporate Profile What We (and BHP) Like About PotashCorp Valuation I. PCS Potash II. PCS Phosphate III. PCS Nitrogen Strategic Investments Worth $34/POT Share Special Dividend or Share Buyback? Key Investment Risks Financial Forecast Earnings Sensitivities Management & Directors
Sociedad Quimica y Minera de Chile A Rising Potash Star with Lithium Upside
354 355 356 359 361 368 375 381 386 389 390 394 399 401
403
Investment Thesis & Recommendation Capital Markets Profile Corporate Profile What We Like About SQM Valuation
404 405 406 412 414
January 2011
One-of-a-Kind Natural Resource Base I. Potash II. Specialty Plant Nutrition III. Iodine and Derivatives IV. Lithium & Derivatives The Lithium Hype V. Industrial Chemicals Key Investment Risks (ex Chile) Chile-Specific Investment Risks JV Partnerships Accelerating Globally Capex Program Signals Plentiful Organic Growth Opportunities Financial Forecast Earnings Sensitivities Management & Directors
Yara International ASA A Play on Natural Gas Price Spreads
421 426 430 435 438 441 446 448 450 452 454 455 462 464
465
Investment Thesis & Recommendation Capital Markets Profile Corporate Profile What We Like About Yara International Valuation I. Upstream II. Industrial III. Downstream Yaras Role in the Fertilizer Consolidation Theme The Strength of Yaras JVs Key Investment Risks Financial Forecast Earnings Sensitivities Management & Directors
Appendix 1: Conversion Factors Appendix 2: Product Analysis and Nutrient Factors Appendix Appendix 3: Raw Material Requirements Appendix 4: Planting Calendar Appendix 5: China Fertilizer Export Tariffs Appendix 6: Fertilizer Minerals and Application Rates Appendix 7: Global Fertilizer Trade Flow
Prices as at December 31, 2010, unless otherwise stated. All values in US$ unless otherwise stated.
466 467 468 473 476 483 489 494 500 501 502 505 511 513
515 516 517 518 519 520 521
Acknowledgement: With special thanks to Sam Kanes, for providing guidance, mentorship over five years, and a wealth of knowledge towards completing this report.
January 2011
Investment Highlights
We have initiated coverage on eight senior fertilizer producers: Agrium Inc. (AGU); CF Industries Holdings, Inc. (CF); Intrepid Potash, Inc. (IPI); K+S AG (SDF); The Mosaic Company (MOS); Potash Corporation of Saskatchewan, Inc. (POT); Sociedad Quimica y Minera de Chile (SQM); and Yara International ASA (YAR). Exhibit 1.2 summarizes our target prices, ratings, and relative valuation metrics for our senior fertilizer universe, as well as the five emerging fertilizer companies already under coverage.
Exhibit 1.2: Summary Table of Targets, Ratings, and Relative Valuation Metrics
Last Senior Producers Agrium CF Industries Intrepid Potash K+S Mosaic PotashCorp SQM Yara International Average Average (ex SQM) Last Price $4.93 $7.09 $0.32 $4.50 $1.06 SC Rating 1-SO 1-SO 2-SP 4-T 2-SP SC Risk High High Caution Caution Caution 1-Year Target $7.60 $8.50 $0.35 $4.50 $0.90 Ticker AGU-N, T CF-N IPI-N SDF-DE MOS-N POT-N, T SQM-N YAR-OL Price $91.75 $135.15 $37.29 56.36 $76.36 $154.83 $58.42 NOK 337.50 SC Rating 1-SO 2-SP 3-SU 1-SO 1-SO 1-SO 2-SP 3-SU SC Risk High High High High High High High High 1-Year Target $106.00 $140.00 $33.00 61.00 $82.00 $168.00 $58.00 NOK 300.00 1-Year ROR 15.7% 3.9% -11.5% 10.0% 7.6% 8.8% 0.5% -9.2% 3.2% 3.6% 1-Year ROR 54.2% 19.9% 11.1% 0.0% -15.1% 14.0% 2010E 11.0x 10.3x 28.7x 11.5x 19.8x 19.2x 23.3x 7.3x 16.4x 15.4x EV/EBITDA 2011E 7.8x 6.6x 14.0x 9.7x 11.4x 12.6x 18.2x 8.5x 11.1x 10.1x 2012E 8.0x 7.7x 11.8x 8.5x 9.7x 11.4x 15.6x 8.2x 10.1x 9.3x 2010E 19.7x 21.2x 67.3x 25.5x 41.2x 25.1x 40.7x 11.2x 31.5x 30.2x Price/Earnings 2011E 12.6x 10.6x 27.0x 15.9x 18.7x 16.7x 29.8x 12.4x 18.0x 16.3x 2012E 12.9x 13.2x 22.2x 13.5x 15.5x 15.0x 24.9x 11.9x 16.1x 14.9x
Emerging Producers Hanfeng Evergreen Migao MagIndustries Potash One Western Potash Average
Ticker HF-T MGO-T MAA-T KCL-T WPX-T
2010E 8.3x 7.0x 7.7x
EV/EBITDA 2011E 2012E 7.7x 6.5x 7.1x 6.0x 5.1x 5.5x
2010E 10.4x 9.0x 9.7x
Price/Earnings 2011E 2012E 10.5x 10.2x 10.4x 10.5x 10.2x 10.4x
Source: Reuters; Scotia Capital estimates.
COMPANY SUMMARIES
AGU is the largest retail ag supplier in North America.
Agrium Inc. (Agrium) is the largest retail supplier of agricultural products and services in North America, a major producer of nitrogen, phosphate, and potash, and a supplier of specialty fertilizers in North America. Following the loss of its hostile bid for wholesale nitrogen-oriented CF, a nice pickup of agricultural retail outlets in the United States and Argentina, and of course, the recent acquisition of Australias retail-oriented AWB Limited (AWB), we think Agrium is not finished its retail acquisitions. We expect to see more acquisitions over the next several years that will enable Agrium to reach its retail goal of $1 billion in annual EBITDA generation. We have transferred coverage on the common shares of Agrium Inc. with a 1-Sector Outperform rating, and a one-year target price of $106 per share. CF Industries, Inc. (CF) is North Americas largest nitrogen fertilizer producer (and second-largest in the world among public companies), boasting 13.5 million short tons of net capacity. There is no other stock in North America with as much leverage to the nitrogen market. After more than a year of fighting its peers, CF won the U.S. nitrogen war, with its $4.7 billion acquisition of Terra Industries Inc. (Terra). CF has already achieved a $100 million annual synergy run-rate, and should exceed its $135 million annual goal shortly. We have initiated coverage on the common shares of CF Industries, Inc. with a 2-Sector Perform rating, and a one-year target price of $140 per share.
CF is North Americas largest nitrogen producer.
January 2011
IPI is the largest MOP producer in the United States.
Intrepid Potash, Inc. (Intrepid) is the largest potash producer in the United States, the only North American publicly traded potash pure play, and one of only two companies in the world with commercialscale langbeinite production a specialty potash used on chloride-sensitive crops. Intrepid enjoys a net potash price advantage ($52/ton in Q3/10) over all other North American producers, due to mine proximityrelated transportation cost savings, as well as the companys ability to realize higher potash prices instantly due to its high U.S. spot market exposure. We have initiated coverage on the common shares of Intrepid Potash, Inc. with a 3-Sector Underperform rating, and a one-year target price of $33 per share. K+S AG (K+S) is the worlds top producer of salt, the fourth-largest potash player, and a leading supplier and distributor of nitrogen and specialty fertilizers. Following its 2009 acquisition of Morton Salt, K+Ss salt capacity now stands at 29.8 million tonnes, while its potash and magnesium capacity is about 7.5 million tonnes. Aging potash mines, declining reserves and ore grades, and high production cash costs led K+S to acquire Potash One Inc. in late 2010 developer of the 2.7 million tonne Legacy potash solution project. The move marks a return by K+S to Saskatchewan after having its Lanigan potash mine expropriated by Saskatchewan in the 1970s. We have initiated coverage on the common shares of K+S AG with a 1-Sector Outperform rating, and a one-year target price of 61 per share. The Mosaic Company (Mosaic) is the worlds largest phosphate producer, currently controlling about 11% of global phosphoric acid supply, and 8% of the worlds phosphate rock capacity. Mosaics integrated operation allows it to capture higher margins than its non-integrated U.S. competitors, as well as most Chinese and Indian phosphate producers. Mosaic also boasts 10.4 million tonnes of potash capacity (or 9.3 million tonnes excluding langbeinite), ranking it second globally behind PotashCorp. The company is well on its way toward increasing its potash capacity to 16.8 million tonnes by 2020. We have initiated coverage on the common shares of The Mosaic Company with a 1-Sector Outperform rating, and a one-year target price of $82 per share. Potash Corporation of Saskatchewan, Inc. (PotashCorp or PCS) is the worlds largest potash producer (~20% market share of nameplate capacity), the third-largest phosphate producer (5% market share of nameplate capacity), and the third-largest nitrogen producer (2% market share of nameplate capacity). In our view, PotashCorp is well positioned to benefit from rising potash demand and prices through our 2012 forecast period. PotashCorp is midway through a $7 billion program to increase its 2015 operational potash capability to 17.1 million tonnes, which should keep it as the worlds number one producer. We have transferred coverage on the common shares of Potash Corporation of Saskatchewan, Inc. with a 1-Sector Outperform rating, and a one-year target price of $168 per share. Sociedad Quimica y Minera de Chile (SQM) is the largest potassium nitrate (NOP) producer (50% market share), a specialty potash used for high-value, chloride-sensitive crops. SQM also boasts 1.5 million tonnes of potash capacity, growing to 2 million tonnes by 2012. Furthermore, SQM is the worlds leading producer of iodine (25% market share), as well as the largest producer of lithium (24% market share). SQMs success stems from its rights to exploit northern Chiles high-quality natural resources (i.e., caliche ore and salar brines). We have initiated coverage on the ADRs of Sociedad Quimica y Minera de Chile with a 2Sector Perform rating, and a one-year target price of $58 per ADR. Yara International ASA (Yara) is the worlds largest nitrogen fertilizer producer, with ~20 million finished tonnes of capacity. It is ranked number one in ammonia, nitrates, NPK compounds, and specialty fertilizers. Yara also boasts the largest global fertilizer marketing and distribution network. Yara benefits from favourable cost positions in Europe, with nitrate and NPK cash production costs ~10% below its competitors, and an improving cost structure through its movement away from oil-indexed gas contracts to hub-based spot gas markets. We have initiated coverage on the common shares of Yara International ASA with a 3-Sector Underperform rating, and a one-year target price of NOK300 per share.
K+S is the worlds largest salt and fourth-largest potash producer.
MOS is the worlds largest phosphate producer.
POT is the worlds largest potash producer.
SQM is the worlds largest NOP, iodine, and lithium producer.
Yara is the worlds largest nitrogen producer.
January 2011
How the Senior Producers Stack Up

Exhibit 1.3: 2011E Revenue by Company
14 Assumed FX: EUR/USD = 1.3; NOK/USD = 6.0 2011E Revenue ($ Billions)
Exhibit 1.4: 2011E EBITDA by Company

5.0 4.5 2011E EBITDA ($ Billions) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Assumed FX: EUR/USD = 1.3; NOK/USD = 6.0
12 10 8 6 4 2 0 YAR AGU MOS POT K+S CF SQM IPI
POT
MOS
YAR
AGU
K+S
CF
SQM
IPI
Source: Scotia Capital estimates.
Exhibit 1.5: Nitrogen EBITDA Weight by Company

CF YAR POT AGU K+S SQM MOS IPI 0% 0% 0% 0% 20% 40% 60% 2012E Nitrogen EBITDA Weight 80% 100% 5% 19% 18% 85% 82%
Exhibit 1.6: Phosphate EBITDA Weight by Company

MOS CF POT YAR AGU 4% 3% 0% 0% 0% 0% 20% 40% 60% 2012E Phosphate EBITDA Weight 80% 100% 15% 11% 49%
Nitrogen
SQM K+S IPI
Phosphate
Exhibit 1.7: Potash EBITDA Weight by Company

IPI POT SQM K+S MOS AGU YAR CF 0% 0% 0% 20% 40% 60% 2012E Potash EBITDA Weight 80% 100% 14% 57% 54% 51% 69% 100%
Exhibit 1.8: Non-NPK EBITDA Weight by Company

AGU SQM K+S YAR POT MOS 0% 0% 0% 0% 0% 20% 40% 60% 2012E Other EBITDA Weight 80% 100% Salt 14% Industrial Retail 43% 41% Iodine, Lithium & Industrial Chemicals 60%
Potash
IPI CF
Other
Exhibit 1.9: 2011E ROE by Company

POT SQM K+S YAR AGU MOS CF IPI 10% 13% 16% 19% 22% 25% 28%
Exhibit 1.10: 5-Year Avg. EPS Growth by Company

IPI K+S Five-Year EPS Growth POT SQM CF AGU MOS YAR 0% 1% 10% 20% 30% 40% 50% 8% 15% 12% 11% 20% 18%
12% excluding 2011 grow th.
40%
January 2011
Our Top Picks

AGRIUM 1-SO, $106 ONE-YEAR TARGET Still acquisition hungry. Following the loss of a hostile bid for CF Industries, a nice pickup of agricultural retail outlets in the U.S. and Argentina, and of course, the recent acquisition of AWB, we think Agrium Inc. (Agrium) is not finished. We expect to see more acquisitions over the mid-term, which will enable Agrium to reach its retail goal of $1 billion in annual EBITDA generation.
Nitrogen drivers look solid short term. Higher crop prices, low fertilizer inventories, several remaining global nitrogen plant outages, stronger 2011 U.S. ethanol demand, a more restrictive Chinese urea export tax, and low forward North American natural gas prices, all support superb nitrogen economics for Agrium, as well as for other U.S. nitrogen producers.
Margin expansion to continue. In our view, Agriums retail business is superb, offering margin protection during fertilizer cycle downturns, while providing diversification that many NPK peers do not offer. Retail margins should expand with increased private label offerings and a growing market share. Target valuation. In one year from now, we expect Agrium to trade at 9x 2012E EBITDA of $1.94 billion, 13.5x 2012E EPS of $7.09, and at about 90% of its replacement cost of $105 per share. We use these three metrics, as well as a DCF at an 11.2% WACC, to set our one-year target price of $106/share. Current valuation. Agrium is trading at 7.8x NTM EBITDA, 12.6x NTM EPS, and at 87% of its replacement cost. Our $106 target price implies a total ROR of 15.7%. AWB offers further upside to our forecast and target price, which we will integrate following the release of Agriums Q4/10 earnings. Getting to the next level. We are looking for Agrium to: (1) realize strong NPK Wholesale results in Q4/10, as realized/benchmark price lags fall away; (2) enhance/start synergy realization of UAP/AWB; (3) make a final investment decision on Vanscoy and progress on the MOPCO expansion; and (4) continue toward a long-term phosphate rock supply solution (Bayovar?).
Agrium is our top global fertilizer pick for 2011.

Exhibit 1.11: Agrium Inc. Stock Price Performance
$100 $90 $80 $70 $60 Price $50 $40 $30 $20 $10 $0 Mar-09 Jun-09 AGU (V olume)
Source: Bloomberg; Scotia Capital.
Ticker: Last P rice: M arket Cap: 52 Wk High: 52 Wk Lo w: FD Shares O/S: A GU $ 91.75 $ 14.5B $ 92.56 $ 47.96 158.0M
10,000 9,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Sep-09 A GU (Price) Dec-09 Mar-10 S&P 500 (rebased) Jun-10 Sep-10 0 Dec-10 Daily Volume (000s) 8,000
Bloomberg Fert Index (rebased)
10
January 2011
K+S 1-SO, 61 ONE-YEAR TARGET Potash reserve boost achieved. Aging potash mines, declining reserves and ore grades, and high production costs led K+S AG, the worlds fourth-largest potash producer, to acquire Canadas Potash One in late 2010 developer of the 2.7 million tonne Legacy potash project. The move marks a return by K+S to Saskatchewan after having its Lanigan potash mine expropriated by Saskatchewan in the 1970s.
Largest salt producer. Following its 2009 acquisition of Morton Salt, K+S is the worlds largest salt (i.e., food grade, industrial, and de-icing) producer, boasting a capacity of nearly 30 million tonnes. We expect the integration of the acquisition to enhance the stability of K+Ss earnings profile, as well as lower macroeconomic cyclicality from its potash and nitrogen segments.
Looking to exit COMPO? Since acquiring COMPO (consumer nitrogen) from BASF a decade ago, margins have generally been below expectations, and K+S wants to focus more on its potash and salt businesses. We think K+S will firm up a decision to exit the business by the spring. Target valuation. In one year from now, we expect K+S to trade at 8.5x 2012E EBITDA of 1.3 billion, 12.5x 2012E EPS of 4.17, and at 75% of its replacement cost of 86 per share. We use these three metrics, as well as a DCF at an 11% WACC, to set our one-year target price of 61. Current valuation. K+S is currently trading at 9.7x NTM EBITDA, 15.9x NTM EPS, and at 66% of its replacement cost. Our 61 target price implies a total rate of return of 10%.
Getting to the next level. We are focused on: (1) continued evidence of potash demand recovery; (2) further details with respect to its Canadian potash strategy more acquisitions?; (3) a board decision on whether to exit COMPO; (4) the development of the 2011 winter in both the United States and Europe, for de-icing salt demand; and (5) Q1/11 approval of the Integrated Package of Measures to halve the volume of discharged saline waste water over the next five years.
Exhibit 1.12: K+S AG Stock Price Performance
70 65 60 55 Price 50 45 40 35 30 Mar-09 Jun-09 SDF (Volume)
Ticker: Last P rice: M arket C ap: 52 Wk H igh: 52 Wk Lo w: FD Shares O/S: SD F 56.36 10.8B 57.40 35.55 191.4M
8,000 7,000 Daily Volume (000s) 6,000 5,000 4,000 3,000 2,000 1,000 Sep-09 SDF (Price) Dec-09 Mar-10 DAX (rebased) Jun-10 Sep-10 0 Dec-10
11
January 2011
MOSAIC 1-SO, $82 ONE-YEAR TARGET
Largest phosphate producer. The Mosaic Companys (Mosaics) integrated phosphate operations allow it to capture strong margins, and outperform non-integrated producers when rock prices rise.
Strong potash operations and growing. Currently number two in the world, Mosaic plans to spend ~$5 billion by 2020 to increase its potash capacity by 5.1 million tonnes to 16.8 million tonnes. This would position the company as a potash player first, with enhanced margins through economies of scale.
Cargill-controlled. We view Cargill Limiteds (Cargills) 64.1% interest in Mosaic as a mild stock overhang, despite several positives. Unless Cargill is a seller, or wants to take the company private, Mosaics stock should not reflect a material takeover premium.
Waiting for Maaden. A 3 million tonne DAP complex, being built by Maaden, is scheduled to begin production in Q3/11. If the project does not continue to be chronically delayed, we expect phosphate prices to come under pressure, at least until demand soaks up the incremental capacity. Target valuation. One year from now, we expect Mosaic to trade at 10.5x 2012E EBITDA of $3.4 billion, 15x 2012E EPS of $4.93, and at about 85% of its replacement cost of $91 per share. We use these three metrics, as well as a DCF at an 11.5% WACC, to set our one-year target price of $82.
Current valuation. Mosaic is currently trading at 11.4x NTM EBITDA, 18.7x NTM EPS, and at 84% of its replacement cost. Our $82 target price implies a total rate of return of 7.6%. Getting to the next level. We are focused on: (1) continued evidence of fertilizer demand recovery; (2) certainty surrounding the future of its South Fort Meade mine; (3) Mosaics long-term phosphate rock supply; (4) the on-time and on-budget advancement of Mosaics potash expansion projects; and (5) a conclusion to the Esterhazy (potash) tolling agreement dispute between Mosaic and PotashCorp. Exhibit 1.13: The Mosaic Company Stock Price Performance
$80 $75 $70 $65 $60 Price $55 $50 $45 $40 $35 $30 Mar-09 Jun-09 MOS (Volume)
Ticker: Last P rice: M arket Cap: 52 Wk H igh: 52 Wk Lo w: FD Shares O/S: M OS $ 76.36 $ 34.1B $ 76.80 $ 37.68 446.9M
30,000 25,000 20,000 15,000 10,000 5,000 0 Dec-10 Daily Volume (000s)
Sep-09 MOS (Price)
Dec-09
Mar-10 S&P 500 (rebased)
Jun-10
Sep-10
12
January 2011
POTASHCORP 1-SO, $168 ONE-YEAR TARGET Inflection point achieved. In our view, Potash Corporation of Saskatchewan, Inc. (PotashCorp or PCS) is well positioned to benefit from rising potash demand and prices through our 2012 forecast period. Potash-levered stocks should have the most torque heading into the 2011 spring planting season. Potash currently on allocation. We expect to see up to $125/short ton of North American potash price increases fully realized by the end of Q1/11 (the first $50/ton has now been realized). Potash demand recovery is in full swing, with spot shortages appearing across North America. China should settle near $400/tonne (CFR) based on Southeast Asian prices now at ~$430/tonne (CFR). Continued market dominance. PCS is midway through a $7 billion program to increase its 2015 operational potash capability to 17.l million tonnes, which will keep it as the worlds number one producer. BHP gone, but not forgotten. Shortly after BHP withdrew its hostile offer to acquire PotashCorp, the mining giant acquired yet another Saskatchewan potash permit. BHP has now filed an Environmental Impact Statement for Jansen, and recently awarded a $400 million contract to construct two shafts there.
Target valuation. In one year from now, we expect PotashCorp to trade at 11.5x 2012E EBITDA of $4.35 billion, 17x 2012E EPS of $10.34, and at about 95% of its $156/share replacement cost. We use these three metrics, as well as a DCF at a 9.9% WACC, to set our one-year target price of $168.
Current valuation. PotashCorp is currently trading at 12.6x NTM EBITDA, 16.7x NTM EPS, and at 99% of its replacement cost. Our $168 target price implies a total rate of return of 8.8%. Getting to the next level. To achieve our target valuation, we are looking for: (1) 9.4 million tonnes of 2011 potash sales, at an average netback price of $392/tonne; (2) continued fundamental fertilizer support from above-average global crop prices coupled with low grain inventories; and (3) strong earnings from PotashCorps four strategic potash-related publicly traded investments. Exhibit 1.14: Potash Corporation of Saskatchewan, Inc. Stock Price Performance
$160 $150 $140 $130 Price $120 $110 $100 $90 $80 $70 Mar-09 Jun-09 POT (V olume)
Ticker: Last P rice: M arket Cap: 52 Wk H igh: 52 Wk Lo w: FD Shares O/S: P OT $ 154.83 $ 47.3B $ 155.04 $ 83.85 305.3M
50,000 45,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Sep-09 POT (Price) Dec-09 Mar-10 S&P 500 (rebased) Jun-10 Sep-10 0 Dec-10 Daily Volume (000s) 40,000
13
January 2011
2011+ Catalysts
Exhibit 1.15: 2011+ Catalysts
Agrium
1-Sector Outperform Target: $106/sh
Realize strong NPK Wholesale results in Q4/10 and Q1/11. Enhance/start synergy realization of its UAP/AWB acquisitions. Vanscoy investment decision, progress on MOPCO expansion, and find a long-term rock supply solution.
CF Industries
2-Sector Perform Target: $140/sh
The realization of $135+ million in Terra acquisition synergies. Strong crop commodity futures prices, and 2011 U.S. nitrogen demand at ~13 million short tons. The possible advancement of a nitrogen complex in Peru.
Intrepid Potash
3-Sector Underperform Target $33/sh
The receipt of HB Mine permitting approvals. Stronger margins due to increased compaction at Moab, and compaction projects at Carlsbad. An eventual decision on whether to proceed with the North Mine.
K+S
1-Sector Outperform Target: 61/sh
Further details with respect to its Canadian potash strategy. A board decision on whether to exit COMPO. The development of the 2011 winter in both the U.S. and Europe.
Mosaic
Certainty surrounding the future of its South Fort Meade phosphate rock mine. Increased comfort with respect to the security of Mosaic's long-term phosphate rock supply. The successful advancement of several Saskatchewan potash expansion projects.
PotashCorp
9.4 million tonnes of 2011 potash sales, at an average netback price of $392/tonne. Continued fundamental fertilizer support from above-average global crop prices and low inventories. Strong earnings from PotashCorp's four strategic potash-related publicly-traded investments.
SQM
2-Sector Perform Target: $58/ADR
The successful completion of a 0.5 million tonne potash expansion project through 2012. The realization of higher MOP, SOP, SPN volumes, prices, and margins. Increased adoption of lithium-based energy and nitrate-based thermal energy storage applications.
Yara
3-Sector Underperform Target: NOK 300/sh
An increasing share of lower-cost gas nitrogen capacity. Continued capacity growth announcements to achieve an eventual capacity of ~40 million product tonnes. A widening spread between Zeebrugge gas and Ukrainian swing producer gas costs.
14
January 2011
2011+ Concerns
Exhibit 1.16: 2011+ Concerns
Agrium
Anticipated AWB (and UAP) synergies are not fully realized (i.e., integration risk). Further North American retail acquisitions are limited due to anti-trust concerns. Kapuskasing's phosphate rock mine life ends in 2013, with no economically viable rock supply solution.
CF Industries
2-Sector Perform Target: $140/sh
Crop futures prices and weather do not support North American nitrogen demand expectations. Global ammonia/urea capacity additions weigh on nitrogen prices/margins for an extended period. Demand for low-nitrogen utilization GM seeds soars at the expense of nitrogen fertilizer demand.
Intrepid Potash
3-Sector Underperform Target $33/sh
The HB Mine EIS approval is not received. Intrepid decides not to proceed with the development of the North Mine. Longer term, potash capacity additions weigh on prices and margins for an extended period.
K+S
1-Sector Outperform Target: 61/sh
Potash cash production costs continue to escalate due to aging mines and lower ore grades. Mild winters reduce the global demand for de-icing salt. Escalating costs to develop its greenfield Legacy potash project materially reduce the project's IRR.
Mosaic
Mosaic's South Fort Meade phosphate rock mine operation is predominantly abandoned. Esterhazy mine flood remediation costs continue to escalate. New phosphate capacity (i.e., Ma'aden and Morocco) weigh on DAP/MAP margins for an extended period.
PotashCorp
Potash demand recovery does not reach at least 55 million tonnes in 2011. PotashCorp is unable to return to a consistently net positive natural gas hedging strategy. Longer term, potash capacity additions weigh on prices and margins for an extended period.
SQM
2-Sector Perform Target: $58/ADR
Disruptions to SQM's gas supply that is ultimately dependent on Argentina's energy supply policies. The lithium market does not "take off" over the coming five years as anticipated. SQM's premium valuation narrows as Chilean pension funds increase their foreign equity exposure.
Yara
3-Sector Underperform Target: NOK 300/sh
The remote possibility of lower Ukrainian nitrogen producer delivered gas costs. Global ammonia/urea capacity additions weigh on nitrogen prices/margins for an extended period. No improvement from Russian NPK producers dumping inexpensive product into Western Europe.
15
January 2011
NPK Pricing Forecast Summary

We are more constructive on potash price development through 2012 than on nitrogen and phosphate.
We are constructive on fertilizer prices remaining above historical/average levels through our 2012 forecast period. However, that should not be interpreted as an expectation of continuously rising prices because, with near certainty, we do not anticipate such an event to occur. Throughout our forecast period, we do expect potash prices to continue rising (the only nutrient), because: (1) potash started the fertilizer cycle later (October 2010) than nitrogen (June 2010) and phosphate (November 2009); (2) potash demand recovery is still underway; and (3) new world-scale greenfield potash capacity wont start impacting supply/demand until 2013/14 (Vale/EuroChem). While nitrogen and phosphate prices should begin easing in 2012, we are generally bullish that all three nutrients will remain well-above reinvestment rates throughout our forecast period.
Exhibit 1.17: SC Forecast Fertilizer Benchmark Prices
2006 POTASH FOB Vancouver FOB Saskatchewan FOB Carlsbad FOB Midwest DEL Western U.S. AMMONIA CFR Tampa FOB Black Sea FOB Middle East FOB New Orleans FOB Mid Cornbelt DEL Pacific Northwest UREA FOB Black Sea FOB Middle East FOB New Orleans FOB Mid Cornbelt DEL Pacific Northwest DEL Western Canada DAP/MAP FOB Central Florida FOB U.S. Gulf Export FOB New Orleans FOB Mid Cornbelt DEL Pacific Northwest PHOSPHATE ROCK FOB Morocco Global Benchmark (mt) (mt) (st) (st) (st) 190 204 195 205 229
2007 207 237 221 261 273
2008 492 631 629 736 704
2009 600 699 644 595 712
2010 350 421 394 415 454
2011E 430 465 442 470 504
2012E 480 515 489 516 553
(mt) (mt) (mt) (st) (st) (st)
324 250 288 291 390 410
334 272 287 309 470 475
587 537 559 584 784 893
285 243 250 247 376 419
391 342 351 388 466 480
415 360 380 401 535 579
390 335 355 376 501 541
(mt) (mt) (st) (st) (st) (C$/mt)
222 235 218 273 311 412
306 318 346 384 412 511
499 542 505 571 632 778
250 275 272 331 360 503
280 306 302 360 393 492
345 371 345 393 451 550
315 340 315 362 422 524
(mt) (mt) (st) (st) (st)
247 265 230 267 310
408 433 394 422 435
974 980 849 892 1002
328 324 294 339 412
479 487 442 473 508
500 510 452 486 539
450 459 409 442 491
(mt)
44
59
363
117 Bold
105 SC Forecast
125
135
North America Benchmark
Note: All other fertilizer price estimates in future years are regression-implied.
Source: Green Markets; Fertilizer Week; Scotia Capital estimates.
16
January 2011
Valuation Highlights
OVERVIEW
Our fundamental valuation comprises four equally weighted methodologies: (1) an enterprise value to forward EBITDA multiple; (2) a price to forward earnings multiple; (3) a discounted cash flow (DCF) approach; and (4) a replacement cost new (RCN) calculation.
1. EV/EBITDA: We apply a one-year forward EV/EBITDA multiple, with company-specific adjustments
made to our current cycle benchmark nitrogen (8x), phosphate (9x), and potash (11x) multiples.
Potash valuation multiples typically exceed phosphate and nitrogen.
2. P/E: We apply a one-year forward P/E multiple, with company-specific adjustments made to our benchmark nitrogen (12.5x), phosphate (13.5x), and potash (16x) multiples. 3. DCF: For half of our eight senior fertilizer producers, our DCF-implied price values create the ceiling price of the four valuation methodologies. Our target WACCs range from 9.2% (CF) to 12.4% (YAR), with an average of 11.1% for the group. Our terminal growth rates fall between 1.75% and 2.5%, with the only exception being SQM at 3%. 4. RCN: We apply RCN percentages ranging between 65% RCN and 95% RCN, with a 75% to 90%
range for five of the seven companies (we do not value SQM using RCN). Exhibit 1.18 summarizes the implied one-year-out share price values for each of our eight companies, under each of the four different valuation methodologies we applied. Exhibit 1.19 shows the rank order of our forecast one-year total share price returns, as well as our initial stock ratings.
Exhibit 1.18: How Our Four Valuation Methodologies Set Our One-Year Target Prices
AGU EV/2012E EBITDA Implied Price Value ($/sh) 2012E P/E Multiple Implied Price Value ($/sh) Discounted Cash Flow (WACC) Implied Price Value ($/sh) Replacement Cost New ($/sh) Target Percentage of RCN Implied Price Value ($/sh) Target Price 9.0x $110 13.5x $96 11.2% $124 $105 90% $95 $106 CF 8.5x $159 13.5x $138 9.2% $135 $160 80% $128 $140 IPI 12.0x $37 17.5x $29 11.1% $33 $36 90% $32 $33 MOS 10.5x $83 15.0x $74 11.5% $94 $91 85% $78 $82 POT 11.5x $155 17.0x $176 9.9% $194 $156 95% $149 $168 K+S 8.5x 58 12.5x 52 11.0% 70 86 75% 64 61 SQM 17.5x $66 26.0x $61 12.1% $48 $58 YAR 7.0x NOK 280 11.0x NOK 313 12.4% NOK 367 NOK368 65% NOK 239 NOK 300
Exhibit 1.19: SC Forecast One-Year Total Returns

20% Group Average ROR = 3.2% 7.6% 3.9% 0.5% 8.8% 10.0% 15.7%
One-Year Total Return
15% 10% 5% 0% -5% -10% -15%
Valuation Methodology
Top Pick 1-SO 1-SO
3-SU
3-SU
-9.2% YAR
2-SP
2-SP
1-SO
1-SO
-11.5% IPI
SQM
CF
MOS
POT
K+S
AGU
17
January 2011
FERTILIZER INDICES
To assist in understanding valuation multiple spreads among equities levered to different nutrients, we have created four indices, as follows: (1) the SC Fertilizer Index; (2) the SC Nitrogen Index; (3) the SC Phosphate Index; and (3) the SC Potash Index. For each of the four indices, the constituents included are only companies within our universe of coverage. Constituent weights for the three nutrient indices were set using 2012E EBITDA weights in local currency. Constituent weights for the SC Fertilizer Index were set using U.S. dollar market cap weights as at December 31, 2010. Exhibit 1.20 highlights the constituent weights by index.
Exhibit 1.20: Composition of SC Fertilizer Indices
SC Fertilizer2,3 Stock Weight

(Post-IPI) (Pre-IPI)
SC Nitrogen1 Stock Weight
SC Phosphate 1 Stock Weight
SC Potash1,2 Stock Weight

(Post-IPI) (Pre-IPI)
POT MOS YAR AGU K+S CF IPI

1
33.9% 24.5% 11.9% 10.4% 10.3% 7.0% 2.0%
34.6% 25.0% 12.1% 10.6% 10.5% 7.1% -
CF YAR POT AGU K+S
40.9% 39.3% 9.2% 8.5% 2.2%
MOS CF POT YAR AGU
60.3% 17.9% 13.7% 4.9% 3.2%
IPI POT K+S MOS AGU
32.2% 23.4% 19.0% 17.9% 7.4%
34.5% 28.1% 26.5% 10.9%
Nutrient index constituent w eights are set by the relative proportion of nutrient leverage a given stock is expected to have in 2012E EBITDA. For example, w hile POT generates materially more potash EBITDA than IPI generates, IPI's 2012E EBITDA is 100%-levered to potash, w hile POT's is not.
2 3
IPI began trading on April 25, 2008, and has been excluded from the w eights for all prior dates.
SC Fertilizer Index constituent w eights are set by the U.S. dollar equivalent market capitalization as at December 31, 2010. We have excluded SQM as a SC Fertilizer Index constituent as w e believe its historical valuation multiples skew the results.
Source: Bloomberg; Scotia Capital estimates.
PEAK & TROUGH VALUATION SUMMARY
Below, we have highlighted the five-year average valuation multiple ranges for NTM P/E, EV/NTM EBITDA, and RCN. We discuss each of these in the following sections. However, as a point of clarification, the RCN peaks of 120% RCN to 160% RCN are not typical peak RCN metrics. Rather, they represent the extreme peak of the 2006 to mid-2008 fertilizer supercycle. In our view, 85% RCN to 95% RCN is more typical of peak valuations for fertilizer equities.
Exhibit 1.21: Peak and Trough Valuations Since 2005
NTM Earnings Multiples Point in Cycle: Nitrogen Phosphate Potash Fertilizers Trough 3.0x 2.5x 3.0x 3.0x 5-Yr Avg 12.5x 13.0x 13.5x 13.0x Peak 19.0x 21.5x 23.5x 21.5x NTM EBITDA Multiples Trough 1.5x 1.0x 1.5x 1.5x 5-Yr Avg 6.5x 7.0x 7.5x 7.0x Peak 11.5x 12.5x 14.0x 13.0x Percentage of RCN Trough 25% 25% 30% 25% Peak 120% 155% 160% 140%
Figures rounded to the nearest 0.5x.
18
January 2011
EV-TO-EBITDA
A Look at Past Fertilizer Cycles
Fertilizer stocks have shown volatility over the past cycle with EV/NTM EBITDA multiples peaking between 8x and 16x NTM EBITDA, and troughing at 1x to 3.5x. Multiples have vastly improved from cycle lows, with potash-levered stocks exceeding other nutrient-levered stocks (see Exhibit 1.22).
Exhibit 1.22: Senior Fertilizer Universe Historical EV/NTM EBITDA Trading Mutliples
18x 16x
EV/NTM EBITDA Multiples
14x 12x 10x 8x 6x 4x 2x 0x Dec-05
May-06
Oct-06
Mar-07 AGU
Aug-07 CF
Jan-08 IPI
Jun-08 K+S
Nov-08 MOS
Apr-09 POT
Sep-09 SQM
Feb-10 YAR
Jul-10
Dec-10
Source: Bloomberg; Reuters; Scotia Capital.
NPK Warrant Different Multiples
We have set our base nutrient EV/NTM EBITDA multiples at 8x, 9x, and 11x for nitrogen (N), phosphate (P), and potash (K), respectively. For the four of eight companies that have business segments beyond NPK, we have applied business-specific multiples to those segments. These companies include Agrium (Retail and Advanced Technologies), K+S (Salt and Complementary), SQM (Iodine, Lithium, and Industrial), and Yara (Industrial).
Exhibit 1.23: SC Fertilizer Indices Historical EV/NTM EBITDA Trading Mutliples
15.0x 12.5x 10.0x 7.5x 5.0x 2.5x 0.0x Dec-05
EV/NTM EBITDA
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
SC Fertilizer Index
SC Nitrogen Index
SC Phosphate Index
SC Potash Index
It appears that potash has commanded a greater multiple than phosphate and nitrogen (see Exhibit 1.23), likely due to the increased scarcity value of potash assets over phosphate and nitrogen assets. To a lesser extent, and especially within the past year, phosphate multiples have widened from nitrogen multiples.
19
January 2011
Exhibit 1.24 examines the EV/NTM EBITDA spreads of different nutrient-levered stocks.
Exhibit 1.24: NPK EV/NTM EBITDA Spreads
Phosphate/Nitrogen Spread Nitrogen/Phosphate Spread
0.8x
1x 2x 3x
EV/NTM EBITDA Nutrient Spreads
Jun-08
Dec-08 Potash/Phosphate Spread
Jun-09 Phosphate/Potash Spread
Dec-09
Jun-10
1.2x Dec-10
Jun-08
1x 2x 3x
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10 2x
Potash/Nitrogen Spread
Nitrogen/Potash Spread
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
How Sensitive Are Changes to Our Nutrient EV/NTM EBITDA Multiples?
We have highlighted the impact of a 1x EV/NTM EBITDA target multiple increase to the implied price value for each of our stocks under coverage (see Exhibit 1.25). We have applied the multiple increases to the overall firm, as well as to the following segments (if applicable): nitrogen, phosphate, potash, and any other material company segment.
Exhibit 1.25: Sensitivity of Nutrient EV/NTM EBITDA Multiple Changes to Implied Price Values
EV/NTM EBITDA Price Value Agrium CF Industries Intrepid K+S Mosaic PotashCorp SQM Yara $110 $159 $37 58 $83 $155 $66 NOK 280
+ 1x N $2.00 $18.00 0.50 $2.50 NOK 38.00
EV/NTM EBITDA Multiple Change + 1x P + 1x K + 1x Other $0.50 $3.00 $1.50 $3.00 3.50 $4.00 $10.00 $2.00 $7.50 (Retail)
+ 1x Overall $12.50 $21.00 $3.00 7.00 $8.00 $14.00 $3.50 NOK 46.50
3.00 (Salt)
$4.00 $1.50 NOK 2.00
$1.50 (Various) NOK 6.50 (Industrial)
20
January 2011
Company-Specific EV/NTM EBITDA Multiple Adjustments

Exhibit 1.26: EV/NTM EBITDA Multiple Buildup
EV/NTM EBITDA Base Multiple AGU CF IPI MOS POT K+S SQM YAR N 8.0x 9.0x 8.5x 0.0x 0.0x 8.0x 7.0x 0.0x 6.5x P 9.0x 9.0x 9.5x 0.0x 9.0x 9.0x 0.0x 0.0x 9.0x K 11.0x 11.0x 0.0x 12.0x 11.5x 13.0x 9.0x 18.0x 0.0x Retail 7.0x 8.0x 0.0x 0.0x 0.0x 0.0x 0.0x 0.0x 0.0x Other 8.0x 11.0x 0.0x 0.0x 0.0x 0.0x 8.0x 17.0x 10.0x Total Multiple 9.0x 8.5x 12.0x 10.5x 11.5x 8.5x 17.5x 7.0x
We have reflected relative strengths and weaknesses of company segments through adjustments to our base nutrient EV/NTM EBITDA multiples (see Exhibit 1.26). Below, we have summarized a list of our EV/NTM EBITDA multiple adjustments by segment and/or nutrient. For a more detailed look at the valuation build-up of each company, as well as for a discussion as to the merit of unchanged multiples, please refer to the valuation section of the individual reports.
Agrium: We apply a 1x EV/NTM EBITDA premium (to 9x) to Agriums nitrogen segment as its facilities have a material gas cost advantage over its North American peers. Why? Its natural gas purchases are referenced to lower-cost Alberta AECO-C spot rates, compared with NYMEX Henry Hub for most U.S. Gulf producers. Also, Agriums nitrogen margins are further enhanced through plant proximity advantages to higher reference rate nitrogen markets. A retail premium is warranted due to its strong North American market share, history of successful acquisition integration, and its regional diversification.
CF: (1) We boosted our nitrogen-based EV/NTM EBITDA multiple by 0.5x to 8.5x, as CFs location advantage allows it to realize higher pricing and lower gas costs relative to PotashCorp (our nitrogen benchmark), and (2) we increased our phosphate EV/NTM EBITDA multiple by 0.5x to 9.5x to reflect the companys 23 years of Florida-based phosphate rock reserves, as well as its position as a low-cost, rockintegrated phosphate producer. Intrepid: We did not make any adjustment to our generic EV/NTM EBITDA potash multiple.
Mosaic: We apply a potash premium of 0.5x (to 11.5x) to account for its position as a low-cost producer, its Canpotex membership, as well as its plans to bring on 6.4 million tonnes of low-cost brownfield potash capacity (with 1.3 million tonnes at no cost). We would have applied a phosphate multiple premium, but South Fort Meade uncertainty, as well as its ammonia position, offset.
PotashCorp: We added a potash premium of 2x (to 13x) to reflect: (1) PotashCorps crown jewel potash assets; (2) its 20% global potash capacity market share; (3) its 54% economic membership in Canpotex; and (4) its ability to bring on a significant amount of brownfield potash capacity at an average cost that is lower than most of its peers.
K+S: We apply (1) a nitrogen discount of 1x (to 7.0x) to reflect poor margins (usually between 3% and 5%) that are largely due to its production agreement with BASF that limits K+Ss upside and downside nitrogen earnings potential; (2) a potash discount of 2x (to 9x) to reflect the companys current position as a high-cost producer, as well its declining potash reserves; and (3) an Other multiple of 8x that considers K+Ss strong position as the worlds largest salt producer. SQM: We apply EV/NTM EBITDA multiple premiums of between 17x and 18x to mostly reflect captive Chilean pension fund money. Specifically, we use a potash EV/NTM EBITDA multiple of 18x to reflect SQMs strong position on the potash cash production cost curve; and (2) an Other EV/NTM EBITDA multiple of 17x to reflect: (i) superb growth expected in lithium for electric car batteries; (ii) SQMs strong global shares (i.e., between 24% and 30%) of the lithium, iodine, and potassium nitrate markets.
Yara: We apply a 1.5x EV/NTM EBITDA nitrogen multiple discount (to 6.5x) to reflect Yaras overall poor gas cost position relative to its North American peers (although it should improve over time).
21
January 2011
PRICE TO EARNINGS
A Look at Past Fertilizer Cycles
Similar to EV/NTM EBITDA, historical NTM P/E trading multiples suggest that the rank order of multiples (from high to low) is potash (#1), phosphate (#2), and nitrogen (#3). Exhibit 1.27 shows the SC Fertilizer Index peaking at 21.4x, troughing at 2.8x, and currently trading at 14.8 NTM earnings. Specifically, we calculate potash currently at 16x, phosphate at 14.7x, and nitrogen at 12.7x.
Exhibit 1.27: SC Fertilizer Indices Historical NTM P/E Trading Mutliples
25.0x 22.5x 20.0x NTM Price to Earnings 17.5x 15.0x 12.5x 10.0x 7.5x 5.0x 2.5x 0.0x Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 SC Nitrogen Index Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 SC Potash Index Dec-10
SC Fertilizer Index
SC Phosphate Index
Exhibit 1.28: NPK NTM P/E Multiple Spreads
Phosphate/Nitrogen Spread
Nitrogen/Phosphate Spread
1x 2x 3x Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
NTM P/E Nutrient Spreads
Potash/Phosphate Spread
Phosphate/Potash Spread
Jun-08
1x 2x 3x
Dec-08 Potash/Nitrogen Spread
Jun-09 Nitrogen/Potash Spread
Dec-09
Jun-10
Dec-10
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
We have set our base nutrient NTM P/E target multiples at 12.5x, 13.5x, and 16x for nitrogen, phosphate, and potash, respectively. Exhibits 1.29 and 1.30 provide support to our selection.
22
January 2011
Exhibit 1.29: NTM P/E Absolute Premium over EV/NTM EBITDA

14x 13x 12x 11x NTM P/E Over EV/NTM EBITDA 10x 9x 8x 7x 6x 5x 4x 3x 2x 1x 0x Dec-05 Absolute NTM P/E prem ium over EV/NTM EBITDA N = 4.6x P = 5.9x K = 6.0x Fertilizer = 5.6x Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
SC Fertilizer
SC Nitrogen
SC Phosphate
SC Potash
Jun-06
Dec-06
Exhibit 1.30: NTM P/E Relative Premium over EV/NTM EBITDA

180% 160% 140% NTM P/E Over EV/NTM EBITDA 120% 100% 80% 60% 40% 20% 0% Dec-06 Relative NTM P/E prem ium over EV/NTM EBITDA Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 97% drop to expected MOS Q3/09 and Q4/09 average EBITDA, com pared to Q1/09.
SC Fertilizer SC Phosphate
SC Nitrogen SC Potash
N = 57% P = 67% K = 59% Fertilizer = 62% Jun-10 Dec-10
How Sensitive Are Changes to Our Nutrient P/E Multiples?
We have highlighted the impact of a 1x NTM P/E target multiple increase to the implied price value of each our stocks under coverage (see Exhibit 1.31). We have applied the multiple increases to the overall firm, as well as to the following segments (if applicable): nitrogen, phosphate, potash, and other.
Exhibit 1.31: Sensitivity of Nutrient NTM P/E Multiple Changes to Implied Price Values
NTM P/E Price Value Agrium CF Industries Intrepid K+S Mosaic PotashCorp SQM Yara $96 $138 $29 52 $74 $176 $61 NOK 313 + 1x N $1.50 $8.50 0.00 $2.00 NOK 23.50 $2.50 $1.00 NOK 1.00 NTM P/E Multiple Change + 1x P $0.00 $1.50 + 1x K $1.00 $1.50 2.50 $2.50 $7.00 $1.50 + 1x Other $4.50 (Retail) + 1x Overall $7.00 $10.00 $1.50 4.00 $5.00 $10.50 $2.50 NOK 28.50
1.50 (Salt)
$1.00 (Various) NOK 4.00 (Industrial)
23
January 2011
Company-Specific NTM P/E Multiple Adjustments

Exhibit 1.32: NTM P/E Multiple Buildup
NTM P/E Base Multiple AGU CF IPI MOS POT K+S SQM YAR N 12.5x 14.0x 13.5x 0.0x 0.0x 12.5x 11.0x 0.0x 10.0x P 13.5x 13.5x 14.5x 0.0x 13.5x 13.5x 0.0x 0.0x 13.5x K 16.0x 16.0x 0.0x 17.5x 16.5x 19.0x 13.0x 26.0x 0.0x Retail 11.0x 12.5x 0.0x 0.0x 0.0x 0.0x 0.0x 0.0x 0.0x Other 12.5x 17.0x 0.0x 0.0x 0.0x 0.0x 12.5x 26.5x 15.5x Total Multiple 13.5x 13.5x 17.5x 15.0x 17.0x 12.5x 26.0x 11.0x
We have reflected company-specific business segment strengths and weaknesses through adjustments to our generic (nutrient-based) NTM earnings multiples (see Exhibit 1.32). Below, we have summarized a list of our NTM P/E multiple adjustments by segment and/or nutrient. For a more detailed look at the valuation build-up of each company, as well as for a discussion as to the merit of unchanged multiples, please refer to the valuation section of the individual reports.
Agrium: We apply a 1.5x NTM P/E premium (to 14x) to Agriums nitrogen segment as its facilities have a material gas cost advantage over its North American peers. Why? Its natural gas purchases are referenced to lower-cost Alberta AECO-C spot rates, compared with NYMEX Henry Hub for most U.S. Gulf producers. Also, Agriums nitrogen margins are further enhanced through plant proximity advantages to higher reference rate nitrogen markets. A retail premium is warranted due to its strong North American market share, history of successful acquisition integration, and its regional diversification.
CF: (1) We boosted our nitrogen-based NTM P/E multiple by 1.5x to 14x, as CFs location advantage allows it to realize higher pricing and lower gas costs relative to PotashCorp (our nitrogen benchmark), and (2) we boosted our phosphate NTM P/E multiple by 1x to 14.5x to reflect the companys 23 years of Florida-based phosphate rock reserves, as well as its position as a low-cost, rock-integrated producer.
Intrepid: We did not make any adjustment to our generic potash NTM P/E multiple.
Mosaic: We apply a potash premium of 0.5x (to 16.5x) to account for its current position as a low-cost producer, its Canpotex membership, as well its plans to bring on 6.4 million tonnes of low-cost brownfield potash capacity (with 1.3 million tonnes at no cost). We would have applied a phosphate multiple premium to Mosaic, but South Fort Meade uncertainty, as well as its ammonia position, offset.
PotashCorp: We apply a potash premium of 3x (to 19x) to reflect: (1) PotashCorps crown jewel potash assets; (2) its 20% global potash capacity market share; (3) its 54% economic membership in Canpotex; and (4) its ability to bring on a significant amount of brownfield potash capacity at an average cost that is lower than most of its peers.
K+S: We apply (1) a nitrogen discount of 1.5x (to 11x) to reflect poor margins (usually between 3% and 5%) that are largely due to its production agreement with BASF that limits K+Ss upside and downside nitrogen earnings potential; (2) a potash discount of 3x (to 13x) to reflect the companys current position as a high-cost producer, as well its declining potash reserves; and (3) an Other multiple of 12.5x that considers K+Ss strong position as the worlds largest salt producer. SQM: We apply NTM P/E multiple premiums of between 26x and 26.5x to mostly reflect captive Chilean pension fund money. Specifically, we use a potash NTM P/E multiple of 26x to reflect SQMs strong position on the potash cash production cost curve; and (2) an Other NTM P/E multiple of 26.5x to reflect: (i) superb growth expected in lithium for electric car batteries; and (ii) SQMs strong global shares (i.e., between 24% and 30%) of the lithium, iodine, and potassium nitrate markets.
Yara: We apply a 2.5x NTM P/E nitrogen multiple discount (to 10x) to reflect Yaras overall poor gas cost position relative to its North American peers (although it should improve over time).
24
January 2011
DISCOUNTED CASH FLOW
Our DCF valuations yielded the highest implied one-year out price values for five of the eight companies. Accordingly, and with the exception of SQM, IPI, and CF, companies within our coverage universe have DCF-implied one-year RORs that exceed our forecast one-year RORs.
Exhibit 1.33: DCF-Implied One-Year Total Returns
60%
DCF-Implied Total Returns
50% 40% 30% 20% 10% 0% -10% -20% -30% -17.8% SQM -11.5% IPI CF YAR MOS -0.1% 8.7% 23.1% 24.2% 25.6% 35.5%
1-Sector Outperform
K+S POT AGU
It is interesting to note that, under a DCF methodology, our 1-Sector Outperform stock rating preferences still hold true (i.e., outperformance for Agrium, PotashCorp, Mosaic, and K+S). Our targeted WACCs range between 9.2% and 12.4%, with an average of 11.1%. We assume a longterm targeted capital structure of 75% equity and 25% debt. Beta values for the group range between 1.00x (K+S) and 1.35x (MOS). Exhibit 1.34 highlights the WACCs we have applied across the group.
Exhibit 1.34: Fertilizer Group Weighted Average Cost of Capital
Targeted WACC (%)
Our average WACC is 11.1%.
14%
Group Average WACC = 11.1%

13% 12% 11%
12.1% 11.2% 11.1% 11.5% 11.0% 9.9%
12.4%
10% 9% 8% AGU
9.2%
CF
IPI
MOS
POT
K+S
SQM
YAR
Exhibit 1.35: Terminal Growth Rates
We apply terminal growth rates of between 1.75% and 2.5%. The one exception is for SQM, which we have set at 3%. In our view, a 3.0% terminal growth rate is warranted for SQM due to its dominant share of the high-growth lithium market, as well as the strong growth prospects for nitrate-based thermal energy storage applications. Additionally, SQM is, to a large extent, able to control the global potassium nitrate, iodine, and lithium markets.
AGU CF IPI K+S MOS POT SQM YAR
2.00% 2.50% 2.50% 2.00% 2.50% 2.50% 3.00% 1.75%
25
January 2011
REPLACEMENT COST NEW
Target percentages of RCN range between 65% and 95%, with five of the seven companies ranging between 75% and 90%. In our view, these target percentages of RCN are reflective of a fertilizer market that may begin peaking one year from now. Exhibit 1.36 highlights where we think companies are trading today as a percentage of RCN, as well as our targeted percentage of RCN metrics.
Exhibit 1.36: Trading and Valuation Ranges as a Percentage of Replacement Cost New
% of Replacement Cost New
Our target percent of RCNs range from 65% to 95%.
120% Group Target Average = 82.9% of RCN 100% 80% 60% 40% 20% 87% 0% AGU CF IPI K+S MOS POT SQM YAR 90% 85% 80% 105% 90% 66% 75% 84% 85% 99% 95% n.a. 92% 65% Current Stock Price as a % of RCN Targeted % of RCN
AGU CF IPI MOS POT K+S YAR
% of RCN Trough 22% 17% 40% 23% 49% 11% 25% Peak 107% 106% 206% 176% 153% 105% 125%
In addition to company-specific comparative advantages and disadvantages among assets, our RCN target weights generally ascribe greater value to potash and phosphate assets over nitrogen assets. In our view, this is warranted given: (1) the greater lead time and cost in constructing these assets; and (2) nitrogen is more commoditized than phosphate and potash; and (3) nitrogen is not a scarce resource.
What Are the Current Stock-Implied RCNs?
We suggest backing up the truck when fertilizer equities are below 40% RCN.
The fertilizer group is currently trading in a 66% to 105% RCN range. Excluding K+S, this range narrows to a much tighter 85% to 105% range. This is slightly above our target range of 65% to 95%. When fertilizer equities touched all-time highs in mid-2008, all of our senior fertilizer stocks traded above 100% RCN. While perhaps this is understandable during a bull supercycle, we do not believe that greater than 100% RCN is sustainable over the long term, or else investors would earn a higher return by building the assets themselves. Trough RCN levels have ranged between 11% and 49% RCN. To arrive at our estimated replacement costs of each company, we estimated the per tonne replacement cost of typical potash, phosphate, and nitrogen projects (see Exhibit 1.38).
Exhibit 1.37: Peak and Trough RCN Summary
AGU SC Target %RCN Market %RCN
Exhibit 1.38: Key RCN Assumptions

Potash (Conventional) Phosphoric Acid
Trough
Peak
CF
Trough
Peak
DAP/MAP
IPI
Trough Peak
Potash (Solution)
MOS
Trough Peak
Ammonia/Urea Ammonia Urea Phosphate Rock
K+S
Trough
Peak
POT
Trough
Peak
YAR
Trough
Peak
$0
0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 220%
$300
$600
$900
$1,200
$1,500
$1,800
Replacem ent Cost ($/m t)
26
January 2011
We do not use SQM in our RCN valuation, as we believe the calculation is unattainable (at least for us). Why? SQMs resources (i.e., caliche ore and salar brines), assets, and processes are so individualized that we do not think they can be directly replaced anywhere else on the planet. Additionally, most of SQMs business segments rely on multiple resource processes, such that the assets cannot be valued as stand-alone entities.
27
January 2011
Key Investment Risks

We list the key investment risks currently affecting the global fertilizer industry in Exhibit 1.39. While we recognize that these risks are faced by most fertilizer companies in our coverage universe to a certain extent, exposure does vary and is influenced by nutrient exposure, supply chain, production input, etc. While we have highlighted below those companies that are most exposed to each risk, investors should refer to each company report for a detailed descriptions of investment risks.
Exhibit 1.39: Key Investment Risks
Investment Risk Rationale Company Exposure AGU Farm Level Demand for Fertilizers All equities within our coverage universe are highly dependent on end-user fertilizer demand, which is generally affected by crop futures prices, crop nutrient prices, subsidies, the availability of farmer/customer credit, dealer inventories, and variable weather conditions. CF IPI K+S MOS POT SQM YAR
Cyclical Fertilizer Pricing
Unlike many commodities, fertilizers are typically not forward sold beyond one-year out, and prices cannot really be price hedged due to a lack of derivative products/markets.
Government Control
Government control in the nitrogen (~60%) and phosphate (~50%) industries are considered high. Capital investment and production decisions may be made for political reasons rather than economic reasons, resulting in excess supply and potentially lower prices and margins.
Merger Integration Risk
Given the recent consolidation in the fertilizer industry over the past cycle, several companies within our universe of coverage must prove to the market that they are able to achieve the synergies that formed their respective acquisition strategies and economics.
Natural Gas Price Volatility
Natural gas price changes have a significant impact on all macronutrient feedstock costs, but particularly for nitrogen. This risk can be somewhat mitigated by successfully employing hedging strategies that use natural gas derivatives to lock in prices once a forward sale is booked, and/or increasing capacity in lower-cost gas regions of the world.
Labour Market Disruptions
Global fertilizer producers own assets around the world, where local labour laws may cause unforeseen disruptions, contract delays, high employee turnover, and escalating employment compensation/benefit expenses.
Local and Foreign Environmental Laws
Producers with fertilizer assets residing in developed markets are typically environmental rules/laws pertaining to air emissions, use of hazardous materials, water contamination and land reclamation. Notably, is the U.S. Environmental Protection Agency's (EPA) recent adoption of the Greenhouse Gas Mandatory Reporting Rule on nitrogen and phosphate fertilizer production.
Chinese Export Tax Policies
In 2008, China significantly raised its export taxes on many fertilizers, such as urea, DAP, and compound fertilizers, in a move designed to secure inexpensive product for domestic end-users. Sustained high global benchmark fertilizer prices, coupled with any loosening of Chinese fertilizer export tax policies, can materially impact global supply/demand balances, and ultimately, global fertilizer margins.
Mining Risks
Flooding and brine inflow remain a key risk with conventional potash mining, and is generally uninsurable. Phosphate deposits (found closer to the surface) are extracted using strip mining techniques that can expose producers to environment risks, such as spills and/or clay contamination.
Customer Concentration / Contract Renewal Risk
Fertilizer companies often depend on several major dealers, distributors, and/or importers to purchase large quantities of their production. Negotiated contracts, particularly with large distributors come up for renewal periodically, and stalled contract negotiations can exacerbate seasonality and/or lead to production cutbacks.
Nitrogen Producer Delivered Gas Costs
Changes to prices of Russian-delivered gas to Ukraine, coupled with Ukrainian government subsidies to industrial users of natural gas, typically have material implications to the nitrogen cost curve.
Phosphate Oversupply
While we forecast a somewhat balanced phosphate fertilizer market in 2011, there are numerous new facilities expected to be commissioned over the coming five years, which could cause an overhang to stocks levered to phosphate exposure.
Weak Potash Demand Recovery
A deceleration in potash demand recovery through 2012 could lead to reduced production, lower prices, higher operating costs, and a slowdown of brownfield expansion projects.
Greenfield Potash Projects
Soaring potash prices between 2006 and 2008 led to a renewed interest in potash exploration and development. In Saskatchewan alone, there are approximately 200 permits, and significant potash supply has been discovered in areas of Brazil, which along with brownfield expansions could cap future potash prices and ultimately, producer profitability.
* The risk exists, but is not currently significant, relative to its peers.
Source: Scotia Capital.
28
January 2011
Growing More With Less

BY 2050, THE GLOBAL POPULATION COULD INCREASE BY 40%+ OVER TODAY
There could be 2.7 billion more mouths to feed on an annual basis by 2050, according to a recent forecast by the U.S. Census Bureau (see Exhibit 1.40). This represents a 42% increase in the global population from todays ~6.8 billion people. From a food, and subsequently, a fertilizer demand perspective, and considering this forecast alone, it is hard not to be bullish on the long-term demand prospects of the fertilizer space.
Exhibit 1.40: Estimated World Population Growth Forecast Through 2050
12
9.5 billion people expected by 2050 Annual w orld population grow th rate (RHS)
2.5% Annual World Population Growth Rate (%)
10 World Population (Billions)
2.0%
6.8 billion people today ~2.7 billion m ore m ouths to feed annually in 40 years
There could be 2.7 billion more mouths to feed on an annual basis by 2050.
1.5%
6
China's "Great Leap Forw ard" - w idespread fam ine - prem ature deaths (~30M) - natural disasters - fertility rate drops by about half
1.0%
Actual and forecast w orld population (LHS)
0.5%
0 1950 1975 2000 2025E

Source: U.S. Census Bureau; Scotia Capital.
0.0% 2050E
Exhibit 1.41: 2050E Population

US and Canada, +125M
Latin America, +250M
Oceania, +15M
Despite a sharp increase in the projected global population by 2050, the annual rate of growth is declining toward 0.5% per year. Why? Belowreplacement fertility is expected in 75% of the developed world by 2050. In 1990, the worlds women, on average, were giving birth to 3.3 children over their lifetimes. By 2002, the average was down to 2.6. We expect 90% of (absolute) population growth to come from Asia and Africa. Exhibit 1.41 shows the United Nations expected population change between 2005 and 2050. Most population growth forecasts, including the United Nations estimate, forecast a decline in the population of Europe by 50 million to 100 million people by 2050. In our view, one way to combat declining arable land per capita is to increase agricultural productivity, particularly through enhanced fertilizer use.
EU, -75M Africa, +1,000M
Asia, +1,500M
Source: United Nations; Scotia Capital.
29
January 2011
ARABLE LAND PER CAPITA IS SHRINKING FAST
Over the past 1,000+ years, increases in world food production have largely come from expanding agricultural land. Today, ~200,000 km2 of arable land is lost every year due to deforestation and urban sprawl. Land available per capita for food production has also declined, and should continue to do so over the next several decades, primarily as a result of population growth (see Exhibit 1.42).
Exhibit 1.42: Arable Land per Capita Is Shrinking Fast
0.6 0.5 0.4 0.3 0.2 0.1 0.0 1950 1960 1970 1980 1990 2000 2010E 2020E 2030E 2040E 2050E
Per capita land available for food production is declining rapidly.
Source: U.S. Census Bureau; Scotia Capital.
The world currently has about 0.5 acres of arable land per person, down from 1.33 acres in 1950. In Japan, South Korea, and Taiwan, farmers cultivate less than 0.05 acres of land per person. In China, arable land per capita has shrunk to 0.17 acres, from 0.42 acres in 1950.
GLOBAL MEAT CONSUMPTION PER CAPITA IS INCREASING
The average person consumes 60% more meat per year than they did almost 50 years ago. In the United States and Canada, meat consumption is about 125 kg per capita per year, up from 92 kg in 1963. Over the same time period, people in Asia are consuming over 350% more meat, at 28 kg per capita per year, while Africa remains flat at about 14 kg. Beef consumption per capita is on the decline in all regions of the world except for Asia and South America. Over the last 20 years, Americans and Europeans are eating 15% and 20% less beef per year, respectively. In Asia, beef consumption per person per year has doubled over the past two decades to 4 kg, but is still 10x less than what Americans and Canadians eat: 41 kg.
1 tonne of poultry, pork, and beef requires 2, 4, and 7 tonnes of grain, respectively.
Poultry consumption per capita is soaring, in every region of the world. In the United States, the average person eats about 50 kg of poultry per year, compared to 16 kg in the early 1960s. Over the same period, South Americans have increased their annual poultry consumption to 25 kg from 2 kg. People from Asia eat materially less poultry per person, at only 7 kg per person per year. Pork consumption is down in Europe, flat in the North America, and markedly higher everywhere else. Overall, the world consumes 15 kg of pork per capita per year, up from 8 kg nearly 50 years ago.
30
Arable Hectares per Capita
January 2011
Tracking meat consumption is very valuable for understanding fertilizer demand, as one tonne of poultry, pork, and beef requires feed corresponding to 2 tonnes, 4 tonnes, and 7 tonnes of grain, respectively. Exhibit 1.43 highlights the changes in meat consumption habits by region and by product since the early 1960s.
Exhibit 1.43: Meat Consumption per Capita Is Increasing
Meat Consumption
130 120 110 100 90 Kg/Capita/Yr Kg/Capita/Yr 80 70 60 50 40 30 20 10 0 Africa Asia Europe North America South America World 1963 1983 2003 55 50 45 40 35 30 25 20 15 10 5 0 Africa Asia Europe North America South America World 1963 1983 2003
Beef Consumption
Poultry Consumption
55 50 45 40 Kg/Capita/Yr Kg/Capita/Yr 35 30 25 20 15 10 5 0 Africa Asia Europe North America South America World 1963 1983 2003 35 30 25 20 15 10 5 0 Africa Asia 40 1963 1983 2003
Pork Consumption
Europe
North America
South America
World
Source: FAO; Scotia Capital.
31
January 2011
U.S. Farmer Economics Look Powerful for 2011

POST-2008 FARMER CREDIT IMPROVING
Low interest rate loans coupled with U.S. commercial banks that are hungry to start lending again has materially improved farmer credit profiles from the collapse in 2008. In early 2010, U.S. commercial banks had kept credit standards elevated for farmers wanting loans to grow crops and raise livestock after loan repayments plummeted in 2009 and delinquency rates soared. A lower debt/equity profile from two years ago is now boosting potential lenders confidence of opening their vaults to finance agricultural growth. Overall farm credit remains low, as fewer farmers have been using debt to finance operations since the 1980s farm crisis. According to the USDA, only 31% of farms reported using debt in 2007, compared to 60%+ in 1986 (see Exhibit 1.44).
Exhibit 1.44: Post-2008 Farmer Credit Improving
$2,250 $2,000 30%
Real $ Billions (2005 = 100)
$1,250 15% $1,000 $750 $500 $250 $0 1960 0% 1964 1968 1972
Farm Equity
U.S. farm er credit profile im proving since m id2008.
10%
5%
1976
1980
1984
1988
1992
1996
2000
Debt/Equity
2004
2008
Farm Debt (Real Estate)
Farm Debt (Non-Real Estate)
Source: Economic Research Service, USDA; Scotia Capital.
Exhibit 1.45: One of the Largest U.S. Net Farmer Income Expected in 2010
$130 $120 $110 Net Farm Income ($ Billions) $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 1930 1940 1950 1960
Nominal Net Farm Income Fourth highest nom inal net farm incom e ever.
1970
1980
Real Net Farm Income
1990
2000
2010
Source: Economic Research Service, USDA; Scotia Capital.
32
Debt/Equity
Farmer credit has vastly improved since mid-2008.
25% $1,750 $1,500 20%
January 2011
U.S. NET FARM INCOME FORECAST UP 31% YEAR OVER YEAR
Net farm income is estimated by the USDA to come in at $81.6 billion for 2010, up 31% from a year ago, and 26% above the average income over the past 10 years. This follows a 20% drop in 2009 and would be the largest U.S. net farmer (nominal) income ever, with the top five all occurring within the past decade (see Exhibit 1.45).
GOVERNMENT ASSISTANCE TO U.S. FARMERS COULD DROP IN 2011
2010 was likely the fourth-largest U.S. net farmer income ever.
The USDA estimates that government payments made directly to U.S. agricultural producers are expected to total $12.4 billion in 2010, or a 1.5% increase from $12.3 billion paid out in 2009. This would be almost 20% below the five-year average annual payout since 2005. While direct payments are fixed in legislation, and are therefore not affected by rising crop prices, counter-cyclical and ACRE payments should continue to drop for corn, soybean, and wheat growers, as spectacular farmer economics continue through 2011.
CASH MARGINS ARE WELL ABOVE HISTORICAL LEVELS Exhibit 1.46: Current Cash Margins Look Great for Farmers in the United States
$450 $400 $350 Cash Margin per Acre $300 $250 $200 $150 $100 $50 $0 2002 - 2006 Average Spot Cash Dec. 2011 Cash 2002 - 2006 Average Spot Cash Nov. 2011 Cash 2002 - 2006 Average Spot Cash Jul. 2011 Cash
$3.53/bu $8.32/bu $2.37/bu $6.14/bu $7.95/bu $13.94/bu $6.29/bu $5.62/bu $13.09/bu
CORN
Source: Agrium; Doanne; USDA; Scotia Capital estimates.
SOYBEANS
WHEAT
Exhibit 1.47: Across the Atlantic, European Wheat Farmers Should Expect Strong Margins in 2011
1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Wheat Price: 180/m t Yield: 8 m t/ha Wheat Price: 135/m t Yield: 8 m t/ha Wheat Price: 190/m t Yield: 7 m t/ha Fixed Fixed Fixed Seed/Other Pesticides Fertilizers Revenue Variable Seed/Other Pesticides Fertilizers Variable Revenue 71 Margin Seed/Other Pesticides Fertilizers Variable Revenue
2008
231 Margin
2009
2010
325 Margin
Source: K+S; Scotia Capital.
33
January 2011
Exhibit 1.48: Historical Grain Production Costs

Overhead 10%
FERTILIZER IMPLICATIONS
Labour 19%
Fertilizer costs, as a percentage of grain production costs, have historically been about 10% (see Exhibit 1.47).
Rent 17%
Fertilizer costs as a percent of grain production cost are about half of 2008 levels.
Fertilizer 10%
We estimate that fertilizer costs currently account for about 17% of grain production costs. While this is well above historical levels, we note that it is only half of the 30%+ that fertilizer costs represented of a farmers typical budget in mid-2008. In our view, a $100/tonne increase in nitrogen/potash/phosphate prices raises U.S. farm input costs to produce corn by only $0.06/$0.05/$0.04 per bushel, respectively.
Spray 13% Seed 5%
Pow er & Machinery 26%
Source: USDA; Scotia Capital.
34
January 2011
Dealer Restocking Imminent

After steady price increases between 2004 and 2006, global fertilizer prices surged in 2007 and 2008 due to strong demand for food crops and accelerated growth in biofuels (due to the demise of methanol-based MTBE), coupled with low fertilizer inventories. In the United States, low inventories were largely caused by an increase in fertilizer application from planting an additional 15.3 million corn acres and 3.3 million more acres of wheat in 2007 (relative to 2006). The financial crisis that started in mid-2008, as well as the associated crop price declines, led to fertilizer dealers and distributors refusing to stock high-cost inventory due to fears of either potential writedowns or a farmer strike against the high prices of potash and phosphate products. Based on the direction of fertilizer prices, coupled with potash on allocation in the United States (as at Q4/10), we think dealers will begin restocking inventory imminently (when available), especially potash. As fertilizer demand increased throughout 2007, U.S. urea inventory dropped by 15.4% to 0.88 million tons from 1.04 million tons in 2006. For most of 2009 and early 2010, urea ending inventory has trended below the five-year average. Since September 2010, we have seen some dealer restocking occur, which could reverse in Q1/11 due to strong U.S. demand. Urea inventory is about 3% below the five-year average for U.S. producers. U.S. phosphate inventory fell 27% to 0.6 million tons in 2007 from 0.8 million tons the previous year. Significant buying of DAP/MAP took wholesale prices above $1,000/ton in August 2008 from $400/ton one year earlier. U.S. producers have been slowly destocking DAP and MAP inventories since mid-2009, and while there was a brief inventory build in June 2010, current inventories remain 57% and 39% below their five-year averages for DAP and MAP, respectively.
Exhibit 1.49: U.S. Urea Inventory Exhibit 1.50: U.S. DAP Inventory
We think dealer restocking is imminent, especially in potash and phosphates.
Source: TFI; PotashCorp.
Exhibit 1.51: U.S. MAP Inventory
Exhibit 1.52: U.S. Potash Inventory
35
January 2011
U.S. potash inventory in North America fell 50% to 0.9 million tons at the end of 2007. The flooding of Uralkalis world-scale potash Mine-1, low inventories, and the inability of domestic and foreign fertilizer producers to quickly adjust production to meet strong fertilizer demand, contributed to a record $1,000/tonne potash price observed in mid-2008. Only now are we beginning to see signs of price and demand recovery for potash. U.S. potash ending inventory has hovered around its historical level for most of 2010, but currently sits 22% below its five-year average level (and at the lowest November level in five years).
36
January 2011
Extreme Weather Frequency Rising

Over the past several years, crop production and prices have been materially impacted by extreme weather/climate events, including: (1) droughts and heat stress; (2) flooding; (3) frost; and (4) volcanoes, among others. The Russian wheat crisis of 2010 was due to a drought (the worst in a century) and wildfires that led the government to place a ban on wheat exports through mid-2011 driving wheat spot cash prices to multiyear highs. A two-month heat wave, at temperatures exceeding 40oC, slashed wheat production there to ~60 million tonnes from ~90 million tonnes. This past year, floods in northern China and Pakistan were the worst the countries had experienced in more than a decade, leading to severe food supply disruptions in both China and Pakistan. During the same time period, southern China was suffering the worst drought in living memory, leaving at least 18 million people without access to drinking water. Additionally, parts of Asia and Africa have endured heavy monsoons and other rain-based floods, which are equally damaging to crop harvests. The end result of extreme weather is higher food prices. Throughout this process, fertilizer producers typically have an opportunity to earn above-average wholesale margins. Why? Extreme weather leads to poorer-than-expected crop yields/harvests, which causes prices to rise, and allows growers to potentially lock in higher crop prices. Higher crop prices leads to better fertilizer affordability the following year.
Exhibit 1.53: Food Price Index at Multi-Year Highs
220
Peak Oil
2010
FAO Food Price Index
Extreme weather drives higher crop and food prices, thus improving fertilizer affordability.
200 180 160 140 120 100
2008
Russia Wheat Crisis Argentina Soybean Drought
2007
2009 2006
Australia Drought
Australia Drought
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
BLAME LA NIA
The current La Nia could be the strongest in over 70 years, according to historical climatologist Evelyn Browning Garriss. What does this mean? Ms. Garriss suggests it will be a messy winter, as follows:
Early winter numerous storms across the Central Plains, Midwest, and Northeast; heavy snow and coastal rains throughout Western Canada and the Pacific Northwest; and the U.S./Canadian border and Great Lakes will be warmer than normal.
Mid-winter cold and stormy; rain in the central and Gulf States; and potential drought in the Southeast.
37
January 2011
Agricultural Implications
1. Global crop problems, especially for cotton, grains, and oilseeds, which could lead to rising food costs; 2. Prolonged drought in the Southeast to the lower Midwest that will likely continue until next spring; 3. Crop-damaging weather to Argentina; and 4. A warm spring that should allow for an early planting season.
Exhibit 1.54: Three Major Influences on This Winters Weather
Source: Browning Maps.
Exhibit 1.55: Potential Weather Effects on Fertilizer Demand
Buy fertilizer equities if severe frost or heat stress occurs after planting.
Weather Drought Prior to Planting Drought During Planting Drought After Planting Flooding Prior to Planting Flooding During Planting Flooding After Planting Frost After Planting Heat Stress After Planting
Negative
Neutral
Positive
N N N
+ + + ++ ++
38
January 2011
Baltic Ocean Freight Rates Are Still Choppy

Shipping costs have been fairly volatile over the last several years. The Baltic Dry Index, which is a key indicator of global dry freight rates, was down 41% in 2010. The index doubled during the four months prior to mid-2008 as global economic activity was soaring, only to collapse by over 90% during the following six months (i.e., credit crisis). In 2009, freight rates increased by 200%+, showing economic recovery, only to fall again in 2H/10 on the back of reduced Chinese commodity purchases. Shipping rate economics have a direct impact on the economics of fertilizer producers that deliver their goods with freight included in the price (i.e., C&F or CFR). With booming global economies and soaring commodity prices, little attention was paid to transportation costs during the last fertilizer cycle bull run between 2006 and mid-2008. With the exception of a couple of months in 1995, the Baltic Dry Index broke through 2,000 (1,000 = 1985) for the first time in mid-2004, which coincided with potash surpassing $120/tonne (FOB Vancouver).
Exhibit 1.56: Baltic Dry Index
12,000
Exhibit 1.57: Global Dry Bulk Trade by Product

Grain 13%
1,000 = January 4, 1985
Shipping rates directly impact the economics of CFR fertilizer sales.
10,000
Fertilizers 5%
Steel Products 13%
8,000
Bauxite/Alumina 3%
6,000
Other Bulks 11%

4,000
Iron Ore 25%
2,000
0 1986
1990
1994
1998
2002
2006
2010
Coal 30%
Source: PotashCorp; Scotia Capital.
Exhibit 1.58: Sailing Times
Exhibit 1.59: Indicative Fertilizer Shipping Rates
China
(days)
India
(days)
Brazil
(days)
Ammonia Yuzhnyy - Tampa Yuzhnyy - Europe (NW) Middle East - India (EC) Urea Yuzhnyy - Brazil Yuzhnyy - India (WC) Middle East - Mississippi DAP/MAP Tampa - India (WC) Tampa - Brazil Morocco - Brazil Potash Vancouver - China Vancouver - SE Asia Baltic - Brazil
Low
($/mt)
High
($/mt)
Vancouver Saint John Israel Jordan Germany Russia
17 35 24 24 37 38
30 26 10 10 22 23
28 16 23 23 19 21
54 52 32 30 35 19 54 34 21 27 42 32
60 58 38 32 37 31 56 36 23 29 44 34
Source: OMS; PotashCorp; Scotia Capital.
Source: Fertilizer Week; Scotia Capital.
39
January 2011
Shale Gas-Improved North American Nitrogen Economics

Nitrogen fertilizer production costs are significantly tied to the price of natural gas, as gas feedstock can account for up to 90% of the total production cost of ammonia. Worldwide natural gas prices have generally increased over the past decade, but as Exhibit 1.60 shows, the degree of natural gas price appreciation is localized in nature. In 2006, Western Europe overtook the U.S. Gulf with respect to natural gas prices, which led to change whereby nitrogen fertilizer producers are considered fourth-quartile cash cost producers.
Exhibit 1.60: Regional Natural Gas Price Outlook
$14
Exhibit 1.61: Regional Natural Gas Cost (2011E)
Natural Gas Price ($/mmBtu)
Nitrogen fertilizer production costs are significantly tied to the price of natural gas.
$12 $10 $8 $6 $4 $2 $0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E
Argentina $2.50 Venezuela $1.50 Canada $4.00 U.S. $4.50 Trinidad $3.50 N. Africa $1.00 W. Europe $9.50 (Spot $5.00) Ukraine ~$7.00
Russia $3.25
China $4.50
Indonesia $4.50
Russia
Western Europe
Ukraine
U.S Gulf
Source: Fertecon; PotashCorp; Scotia Capital estimates.
While the Middle East remains the lowest-cost gas producing region, Russias gas cost has moved up sharply due to WTO commitments, while the U.S. and Canada have suddenly emerged as lower-cost nitrogen production contenders (on a delivered basis to the U.S.). This is due to the emergence of shale gas production as an alternative source to conventional natural gas supply. While supply pressures due to declining conventional gas production reached new highs as recent as in 2008, new gas extraction technologies (horizontal drilling and hydro-fracturing) have allowed U.S. and Canadian natural gas producers to commercialize hard-to-access shale reservoirs (Exhibit 1.62). Exhibit 1.63 shows the advancement of shale gas production since 2000, which has now more than offset reduced conventional gas production, and by 2006, coincided with peak gas prices in North America. According to the U.S. EIA, DOE, and others, new proved and probable shale gas reserves have doubled and may triple gas reserves. Also, liquids-rich (NGLs) shale gas plays are being focused on, as a majority of shale gas economics at $90/bbl oil are for the liquids component, making dry shale gas a byproduct.
Exhibit 1.62: Shale Gas Plays in the U.S. Exhibit 1.63: N.A. Shale Gas Overtaking Conventional
12
Trillion Cubic Feet/Year
Shale gas should be sufficient to offset U.S. demand growth for at least the next decade.
10
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Conventional
Unconventional
Source: EIA.
Source: EIA; Scotia Capital.
40
January 2011
The dramatically increased supply of shale gas has helped North American nitrogen fertilizer producers gain a cost advantage over their European peers, given more attractively priced natural gas feedstock costs (Exhibit 1.64). It is estimated that the natural gas cost advantage of U.S. gulf nitrogen producers in 2010 reached between $2/mmBtu and $3/mmBtu compared with global swing producers delivered costs (Exhibit 1.65).
Exhibit 1.64: N.A. Natural Gas Advantage Exhibit 1.65: Ukraine Is a Swing Producer
$8 $7 2011 Gas Cost ($/mmBtu) $6 $5 $4 $3 $2 $1 $0 U.S. Gulf Producer Ukrainian Producer $4.50 $7.00
U.S. gulf nitrogen producers reached a $2/mmBtu to $3/mmBtu natural gas advantage over swing producers.
Source Data: Fertecon, CF Industries.
Source Data: Fertecon, CF Industries, Scotia Capital.
CF Industries, which boasts the most North American nitrogen fertilizer capacity, remains the best way to play the increasing spread between U.S. produced and European delivered nitrogen fertilizer economics. However, Agrium and PotashCorp should not be counted out. Agriums (mostly Alberta) nitrogen facilities have a strong cost advantage over those of its North American peers as its natural gas purchases are referenced to Alberta AECO-C spot rates, which historically has been $0.50/mmBtu to $1/mmBtu less expensive than Henry Hub gas, while regional nitrogen fertilizer prices are higher in Agriums target markets (Exhibit 1.66). PotashCorp will not benefit as much from the development of shale gas in the U.S., as the company has long-term lower-cost gas contracts based in Trinidad.
Exhibit 1.66: Agriums Nitrogen Advantage
CF and AGU are the best ways to play a widening spread between U.S. and European gas costs.
Source: Agrium.
41
January 2011
FSU Potash Consolidation Implications

RECENT DEVELOPMENTS
On December 20, 2010, Uralkali launched a friendly acquisition of Russian potash producer Silvinit. If completed (nearly certain), the acquisition will rank Uralkali as the worlds third-largest potash producer (i.e., 10.6 million tonnes of 2010 potash capacity), behind PotashCorp and Mosaic, and ahead of its BPC partner, Belaruskali. Prior to 1983, Uralkali and Silvinit operated as one company. The acquisition will be completed via two transactions, as follows:
1. First, Uralkali will spend $1.4 billion cash for 1.565 million (20%) of Silvinits common shares. To finance the cash acquisition, Uralkali will issue a ruble bond and use balance sheet cash, as well as existing credit facilities. Closing is expected in Q1/11. 2. Second, Uralkali will issue 133.4 Uralkali shares for each Silvinit common share, and 51.8 Uralkali shares for each Silvinit preferred share. Total consideration will be ~$5.5 billion for the remaining 80% of Silvinits common shares, and ~$0.9 billion for 100% of Silvinits preferred shares. Closing is expected in Q2/11.
Exhibit 1.67: Highlights of Uralkalis Acquisition of Silvinit
Source: Uralkali.
BACKGROUND
On June 11, 2010, Dmitry Rybolovlevs Madura Holdings disposed of 53.2% of its 65.6% stake in Uralkali to a Suleiman Kerimov-led consortium for $5.3 billion. Kerimov, through Kaliha Finance, accounted for one-quarter of the 53.2% Uralkali purchase, while the remainder was acquired by Kerimovs allies Alexander Nesis and Filaret Galchev. Additionally, Kerimov purchased a 20% stake in Silvinit for ~$500 million or at a stunning 64% discount to what Uralkali is paying Silvinit shareholders.
42
January 2011
Billionaire Suleiman Kerimov is ranked by Forbes as Russias 19th-richest person and is currently a senator in the upper house of Russias parliament. His direct involvement in the Kremlin will likely prove invaluable in gaining political support for the potash industry consolidation that is now occurring. In mid-July 2010, Russian newspaper Kommersant wrote that Kerimov had started talks to increase his Silvinit stake to 51%. Silvinit is Russias largest potash producer. Additionally, the newspaper claimed that Kerimovs affiliates had filed a request to Russias anti-monopoly body (FAS) to approve the acquisition of a controlling stake in Silvinit. However, these statements were denied by both the FAS and Kerimov. In mid-August 2010, Silvinit reported that two offshore firms acquired a 44% stake in the company, with speculation (August 17, 2010, Chemical Industry News & Intelligence) the firms are closely tied to Kerimov. Buyers of the 44% include:
Fenguard (20% stake) controlled by Anatoly Skurov, an owner of a 15% stake in Uralkali Filaret Galchev, and a colleague of Kerimov. Both individuals work as deputies in Russian parliament, albeit in different houses.
Forman Commercial (24% stake) owned by Russian lawmaker and State Duma deputy Zelimkhan Mutsoyev. POTENTIAL SYNERGIES
Uralkali estimates that $100 million (net of realization costs) in annual synergies will be achievable by 2013, as follows:
Operational $55 million. (1) Operational savings of $35 million from procurement improvements, technology efficiencies, and improvements to repairs and services functions; (2) maintenance and investment savings of $20 million per year; (3) a one-time cash release of $10 million due to a reduction of spare parts inventories; and (4) additional benefits from an integrated approach to greenfield development projects.
Transportation $20 million. (1) Redirection of Silvinits transportation routes to the Baltic Bulk Terminal owned by Uralkali; (2) lower ship chartering costs; and (3) more effective use of existing rolling stock through joint management.
SG&A $25 million. (1) Combination of corporate functions; and (2) elimination of duplicate functions and roles. IMPLICATIONS
While a Uralkali acquisition of Silvinit by itself would increase potash pricing discipline, the icing on the cake would come from the addition of Silvinit to the Russian and Belarusian potash export marketing arm BPC, which is currently controlled by Uralkali and Belaruskali.
A Uralkali acquisition of Silvinit likely means higher and more sustainable potash prices.
BPC, together with the Saskatchewan potash export marketing organization, Canpotex (POT/MOS/AGU), controls almost 60% of potash capacity. We estimate that the addition of Silvinit would increase this by ~10% to almost 70% today. On top of that, brownfield capacity expansion projects by all Canpotex and BPC members would, by 2015/2016, increase control to about 80%. The implication of up to 80% of the potash industry controlled by two export marketing associations is higher and more sustainable potash prices. However, BPC would likely need to adopt a strategy of price over volume (that Canpotex currently has). In fact, we speculate that FSU-based potash consolidation was likely the reason why BHP decided to make its hostile move on PotashCorp when it did.
43
January 2011
Biofuels-Based Fertilizer Demand Growth Is Waning

Food-based fuel demand growth took centre stage in the fertilizer super cycle that peaked in mid2008. Since 2005, the strong growth of new biofuels alternatives was prompted by concerns over scarcity in global food supplies. Food-based ethanol and biodiesel has evolved into second-, third-, and now fourth-generation non-food-based fuels. Prior to 2005, the development of alternative energy and biofuels was mainly due to increased environmental stewardship policies. When energy prices started climbing quickly, the evolution of food for fuel skyrocketed. Mosaics CEO, among others, believes that one-third of incremental global food demand between 2006 and 2008 was for biofuels production.
One-third of incremental global food demand between 2006 and 2008 was for biofuels.
As the push for biofuels (first-generation food for fuel) continued, so too did a surge in crop (feedstock) prices. U.S corn prices, which had traded in a ~$2/bu to ~$3/bu range over the prior decade, tripled to ~$7.50/bu. Food inflation rates began setting record highs, which led to global politicians worrying about potential hoarding and/or food riots breaking out across the world. In 2009, global biofuels production reached 22 billion gallons, 85% of which was food-based ethanol production. In recent years, a major driver of fertilizer price growth has been various mandated future biofuel blending requirements. Higher crop prices allow farmers to spend more on fertilizer. Exhibit 1.68 highlights the explosive growth of corn-based ethanol production in the U.S., which currently utilizes about one-third of U.S. corn.
Exhibit 1.68: Forecast U.S. Corn Production Utilized for Ethanol
16,000
Today Last fertilizer bull run.
40% U.S. Corn Used for Ethanol (%) 35% 30% 25% 20% 15% 10% 5% 0% 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
14,000 U.S. Corn Production (M bu) 12,000 10,000 8,000 6,000 4,000 2,000 0
U.S. Corn Production (M bu)
Ethanol Utilization (M bu)
Ethanol Utilization (%)
Source: USDA; FAPRI; Scotia Capital estimates.
Governments around the world have responded with caps to incremental food for fuel use, supporting second-, third-, and now fourth-generation biofuels, and not fertilizer-supportive firstgeneration biofuels. Specifically: (1) China has capped the incremental use of food for fuel; (2) the U.S. has capped 2012 food for fuel at 15 billion gallons per year, up from 13.95 billion for 2011; (3) India has capped incremental use of cooking oils to fuel; and (4) there have not been any recent (material) government first-generation biofuels expansion programs in recent years. The days of double-digit first-generation biofuel growth appear to be over, at least for now. Beyond 2012, we expect to see low single-digit annual growth rates for first-generation biofuels production, compared with ~15% previously.
44
January 2011
U.S. ETHANOL LIFELINE EXTENDED BY A YEAR
In the 1990s, several U.S. states mandated the use of MTBE (methyl tert-butyl ether) in gasoline, to curb auto exhaust pollution rates. After discovering that MTBE was contaminating drinking water and was potentially causing cancer, ethanol was sought as the MTBE substitute. Accordingly, in 2005 U.S. Congress mandated a doubling of ethanol-blended gasoline use by 2012, or an equivalent of 8 billion gallons of ethanol in gasoline. To achieve this, in 2005 U.S. Congress implemented an ethanol subsidy of 51 for each gallon blended with gasoline, alongside an import tax of 54 per gallon of ethanol. In December 2010, the U.S. Senate voted to extend both the ethanol credit (worth ~$6 billion) and the import tariff by one year to 2011. The amount of the credit and import tariff was left unchanged at 45 (reduced from 51 in 2009) and 54, respectively. Reuters reported that ~20% of the U.S. Senate opposed the one-year extension, although an attempt by Senator Feinstein to reduce the subsidy to 36 was voted down. Iowa Senator Grassley, who was key in passing the extension, said the credits will be phased out over the next five to 10 years. Effectively, the U.S. ethanol subsidy battle has simply been postponed by one year. If the ethanol tax credits had been allowed to expire at the end of 2010, the U.S. Renewable Fuels Association estimates ethanol production could have fallen by 38%, profits could have declined by 86%, and corn prices could have dropped by ~30/bu. Exhibit 1.69 highlights U.S. ethanol production and profitability, while Exhibit 1.70 shows a sensitivity of ethanol returns over variable costs.
Exhibit 1.69: U.S. Ethanol Production and Profitability
U.S. Ethanol Production
14,000 12,000 10,000 0.70 0.60 0.50
Ethanol Producer Profitability (LHS)
U.S. Ethanol Profitability

7 6 5 4 0.30 0.20 0.10 0.00 -0.10 Apr-10 Aug-09 Aug-10 Apr-09 Dec-09
Ethanol Price (RHS)
0.40
8,000
6,000 4,000 2,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E
3 2 1 0 Dec-10
Source: www.ethanolrfa.org; Bloomberg; Scotia Capital estimates.
Exhibit 1.70: Ethanol Return over Variable Cost ($ per Gallon of Ethanol)
Price of Ethanol (FOB Plant; $ per gallon) $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 -$1.05 -$0.92 -$0.78 -$0.65 -$0.52 -$0.38 -$0.25 -$0.11 $0.02 $0.15 $2.08 $1.25 -$0.82 -$0.69 -$0.55 -$0.42 -$0.28 -$0.15 -$0.02 $0.12 $0.25 $0.39 $2.95 $1.50 -$0.59 -$0.45 -$0.32 -$0.18 -$0.05 $0.08 $0.22 $0.35 $0.49 $0.62 $1.75 -$0.35 -$0.22 -$0.09 $0.05 $0.18 $0.32 $0.45 $0.59 $0.72 $0.85 $2.00 -$0.12 $0.01 $0.15 $0.28 $0.42 $0.55 $0.68 $0.82 $0.95 $1.09 $2.25 $0.11 $0.25 $0.38 $0.52 $0.65 $0.78 $0.92 $1.05 $1.19 $1.32 $2.50 $0.35 $0.48 $0.61 $0.75 $0.88 $1.02 $1.15 $1.28 $1.42 $1.55 $2.75 $0.58 $0.71 $0.85 $0.98 $1.12 $1.25 $1.38 $1.52 $1.65 $1.79 $3.00 $0.81 $0.95 $1.08 $1.21 $1.35 $1.48 $1.62 $1.75 $1.88 $2.02 $9.02 $3.25 $1.05 $1.18 $1.31 $1.45 $1.58 $1.72 $1.85 $1.98 $2.12 $2.25 $9.88 $3.50 $1.28 $1.41 $1.55 $1.68 $1.81 $1.95 $2.08 $2.22 $2.35 $2.48 $10.75
Cost of Corn (DEL Plant; $/bu)
$3.81 $4.68 $5.55 $6.42 $7.28 $8.15 Maximum or Shut-Down Cost of Corn (DEL Plant; $/bu)
Source: Mosaic; USDA; Scotia Capital estimates.
45
Feb-09
Feb-10
Jun-09
Jun-10
Oct-09
Oct-10
Corn ($/bu), Ethanol ($/gallon)
Millions of Gallons
Net Profits ($/gallon)
Corn Price (RHS)
January 2011
U.S. EPA SUPPORTS ETHANOL INDUSTRY, BUT ADOPTION COULD BE SLOW
In late 2010, the U.S. Environmental Protection Agency (EPA) increased the U.S. ethanol fuel blend wall to 15% (E15) from 10% (E10), but only for cars and light trucks that have been built since 2007. The decision applies to about 42 million vehicles, or to ~20% of the current fleet of passenger cars and light trucks in the U.S. A decision on cars or light trucks built between 2000 and 2006 is expected shortly, while model years 2000 and earlier are not eligible for the increase to E15 from E10. First-generation ethanol blends mandates are at 5% in British Columbia, Alberta, and Ontario; 7.5% in Saskatchewan; and 8.5% in Manitoba. The federal government has not yet clarified its 5% ethanol rate. These blend rates are above currently mandated biodiesel rates of 3% in British Columbia (rising to 5% in 2012), and an April 2011 goal of 2% in Alberta (currently zero). Manitoba is currently at 2% biodiesel. While E15 approval is supportive of 2011 U.S. corn-based ethanol demand, and therefore fertilizer fundamentals, the impact in 2011 will be negligible due to the inability of U.S. gas stations to monitor car vintages.
U.S. BIODIESEL TAX CREDIT IMPLEMENTED RETROACTIVELY THROUGH 2011
In addition to the ethanol tax credit and import tariff extensions, the U.S. Senate revived the $1 per gallon biodiesel tax credit retroactively for 2010, and through the end of 2011. The credit had expired at the end of 2009. Additionally, the U.S. has mandated a biodiesel blending market of 800 million gallons starting in 2011 and growing to 1 billion gallons in 2012. This could boost U.S. biodiesel operating rates from less than 10% currently to roughly 40% by 2012. In Europe home to the worlds largest biodiesel industry (mostly palm oil, soy oil, and canola oil) consumption is forecast by the USDA to reach 4 billion gallons by 2019, or a 41% increase over last years 2.87 billion gallons blended into diesel. This is mostly due to rising domestic consumption mandates. Unlike ethanol in the U.S., which is mostly produced from corn, production of biodiesel in Europe is spread across rapeseed (80%), soybean (15%), and sunflower (5%) oils. By 2019, this is forecast to change slightly to 83%, 13%, and 4%, respectively (Exhibit 1.71). The USDA forecasts that the world price for biodiesel will reach $5.58 per gallon by 2019, due to: (1) increasing crude oil prices; (2) higher biodiesel mandates in Argentina/Brazil/EU/U.S.; and (3) tariff barriers imposed by the EU on those (like the U.S.) that are viewed as dumping product into the EU.
Exhibit 1.71: EU Biodiesel Outlook
12,000 Feedstock (000 Tonnes) 10,000 8,000 6,000 4,000 2,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Consumption (RHS) Rapeseed (LHS) Soybean (LHS) Sunflower (LHS) Production (RHS) 4,000 Biodiesel Production (M Gallons) 3,500 3,000 2,500 2,000 1,500 1,000 500 0
Source: USDA; FAPRI; Scotia Capital.
46
January 2011
U.S. CELLULOSIC ETHANOL DELAYED
According to Reuters (December 29, 2010), Novozymes recently stated that it does not see secondgeneration ethanol making a U.S. breakthrough until 2014 or 2015, with first commercial-scale plants coming online in 2013. Earlier in 2010, Novozymes suggested that large volumes of cellulosic ethanol would not be produced until 2012. The reason for the delay is the postponed decision by the U.S. EPA on whether E15 is safe for vehicles built between 2001 and 2006. Delays to the development of second-generation U.S. ethanol capacity is positive for U.S. corn prices, U.S. nitrogen fertilizer prices, and nitrogen fertilizer producers such as CF Industries (~85% nitrogen 2012E EBITDA), PotashCorp (~19% nitrogen 2012E EBITDA), and Agrium (18% nitrogen 2012E EBITDA).
GERMANY BIOFUEL BLEND INCREASES SETBACK
In October 2010, Germany passed a law to raise the level of ethanol required in blended gasoline to 10% (E10) from 5% (E5) effective January 1, 2011. Recently, the German oil industry has requested more time to adjust its oil refineries, as well as its storage and transportation networks to accommodate the mandated increase to ethanol blending quotas. We believe that the setback is a slight negative for Yara, and supports our initial 3-Sector Underperform rating.
NEXT-GEN BIOFUELS A FERTILIZER DEMAND HEADWIND
To limit food price inflation, the world will likely trend away from first-generation biofuels (i.e., foodbased fuel production), in favour of second-, third-, and fourth-generation biofuels technologies.
First-Generation
Since the mid-2000s, initial production levels of first-generation biofuels such as ethanol and biodiesel resulted in a demand surge for grains, such as corn and soybeans in the U.S. (U.S. biodiesel capacity is mostly soybean based). The incremental demand effect was upward pricing pressure on corn and other biofuels-related cash crops. Twelve billion gallons of ethanol (8% of all U.S. gasoline demand) is required for 2011 by the 2007 energy bill, which was reconfirmed by President Obama. It takes approximately one bushel of corn to produce 2.8 gallons of ethanol.
Second-Generation Ethanol
The development of second-generation biofuels is a result of much-needed innovation in the industry, so that food will no longer be used for biofuels production. Second-generation biofuels focus on the use of biomass for cellulosic-based ethanol production. Funding has been extensive, with the U.S. dedicating $4.2 billion for loans, grants, and production incentives in addition to the most recent farm bill, which provides $3.7 billion for research/loans.
47
January 2011
Third-Generation Drop-in Renewable Fuels
Third-generation biofuels are defined as drop-in fuels, as they can be used with existing fuel infrastructure, unlike ethanol. Third-generation biofuels focus mostly on the development of algae-based biodiesel.
Fertilizer demand growth could decelerate if biofuels production moves away from foodbased crops.
Algae can produce 30 times more energy per acre than soybean-based biodiesel. If, or when, this generation of biofuels becomes commercially available (on a large scale), and at an economically competitive price to current diesel fuel, we estimate the U.S. would need only 40,000 km2 to replace all of its petroleum fuel requirements with algae farms. Over the long term, and with all else equal, fertilizer demand growth could decelerate if biofuels production moves away from food-based crops, such as corn, soybeans, and sugar cane, and towards second-, third-, and fourth-generation non-food-based (or food waste-based) feedstocks.
Exhibit 1.72: The Biofuels Family
BIOFUELS
Ethanol
Biodiesel
1st Generation (Food) - corn - cane - sugar beets - wheat, rye, barley
2nd Generation (cellulosic) - switchgrass - food waste (i.e. cobs) - wood waste - MSW - some macro algae
1st Generation (Food, cooking oil) - palm oil - soy oil - rapeseed oil
3rd Generation Drop-in - micro algae - jatropha - other photosynthesis - gasification, pyrolysis to drop-in fuels - Isobutanol, n-alkane
4th Generation
- CO2 direct to fuel - other
48
January 2011
Latest from the USDA

USDA monthly changes to corn/wheat/soybean ending inventories, production, and stocks-to-use ratios can have material impacts on the performance of global fertilizer equities.
Exhibit 1.73: CF Best Tracks USDA-Driven Corn Changes
-20% Consensus Surprise
8%
-10% 0%
4% 0%
10% 20% Jan-10 Feb-10 Jun-10 Jul-10 Oct-10 Nov-10 May-10 Aug-10 Dec-10 Mar-10 Sep-10 Apr-10
-4% -8%
CF Stock (RHS)
Corn Futures (RHS)
Surprise (LHS)
Grain & Fertilizer Stock % Chge .)..
Fertilizer stock volatility in a given month is typically greatest on WASDE report dates.
WASDE Ending Corn Inventory

-30% 12%
When the USDA revises its estimates lower/higher than the market had anticipated, crop commodities futures prices and fertilizer equities tend to rally/decline. The magnitude of the rally is dependent on how much the market has been surprised by the data. Exhibit 1.76, on the following page, reviews the performance of North American senior fertilizer equities throughout the day on which a material monthly WASDE (i.e., the USDAs World Agricultural Supply & Demand Estimates) report is released.
STOCK PRICE IMPLICATIONS
Source: USDA; Bloomberg; Scotia Capital.
Exhibit 1.74: AGU Closely Tracks USDA Wheat Changes
5%
0% 4%
0% -5%
8%
-10%
Grain & Fertilizer Stock % Chge
AGU and CF track wheat futures price changes well.
WASDE Ending Wheat Inventory

-8% 10%
Since 2005, we found that, on average, intraday fertilizer stock price and volume volatility is greatest on WASDE report dates than at any other time during a given month. Exceptions occur when the markets have revised their own expectations in line with what the WASDE report later publishes. CF Industries, and to a lesser degree Agrium, appears to track both corn and wheat futures price changes better than its peers (Exhibits 1.73 and 1.74). Why? Both corn and wheat are nitrogenintensive, while soybeans are not. This was observed in October, July, May, and January of 2010. Mosaic, PotashCorp, and Agrium show a strong sensitivity to soybeans futures (Exhibit 1.75), although leadership is not always clear.
12% Oct-10 Nov-10 May-10 Aug-10 Dec-10 Feb-10 Jan-10 Jun-10 Mar-10 Jul-10 Sep-10 Apr-10
-15%
Agrium Stock (RHS)
Wheat Futures (RHS)
Surprise (LHS)
Exhibit 1.75: MOS Best Tracks USDA Soybean Changes

WASDE Ending Soybean Inventory
-30% 9% Grain & Fertilizer Stock % Chge
MOS, POT, and AGU show greater sensitivity to soybeans futures.
6%
-10%
3%
0%
0%
10%
-3%
20% Feb-10 Jan-10 Mar-10 May-10 Jun-10 Nov-10 Aug-10 Dec-10 Jul-10 Sep-10 Apr-10 Oct-10
-6%
Mosaic Stock (RHS)
Soy Futures (RHS)
Surprise (LHS)
USDA estimate revisions that we view as material, as well as the associated impact on grains and fertilizer stocks, are highlighted in Exhibit 1.76 on the following page. We excluded the months that we believe were relatively neutral for crop prices (i.e., less than +/- 1.5% price performance relative to the S&P 500 Index).
49
January 2011
Exhibit 1.76: Select 2010 WASDE Grain Ending Stocks and the Associated Futures and Stock Price Impacts
Actual Consensus Beat/(Miss)
(M bu) (M bu) (%)
Nov 9th, 2010

Corn Soy Wheat Cotton
Futures Reaction
(%)
Stock Reaction
(Ticker) (%)
827 185 848 2.2
851 238 852 2.6
-2.8% -22.3% -0.5% -13.6%
-1.5% 4.3% -2.0% 0.8%
CF MOS AGU POT S&P 500
0.3% 1.8% -0.4% 0.4% -0.8%
Oct 8th, 2010


(M bu) (M bu) (%)
Futures Reaction
(%)
Stock Reaction
(Ticker) (%)
902 265 853 2.7
1,149 356 870 2.8
-21.5% -25.6% -2.0% -13.5%
6.0% 6.6% 9.1% 3.5%
11.4% 6.6% 7.5% 3.5% 0.6%
Aug. 12th, 2010


(M bu) (M bu) (%)
Futures Reaction
(%)
Stock Reaction
(Ticker) (%)
1,312 360 952 3.2
1,306 340 980 3.7
0.5% 5.9% -2.9% -12.3%
2.7% 1.2% 2.6% 2.4%
3.0% 3.8% 3.5% 3.5% -0.5%
Jun. 10th, 2010


(M bu) (M bu) (%)
Futures Reaction
(%)
Stock Reaction
(Ticker) (%)
1,573 360 991 2.8
1,800 360 991 3.0
-12.6% 0.0% 0.0% -6.7%
1.5% -0.9% 1.2% 2.0%
9.0% 6.6% 4.9% 4.8% 3.0%
May 11th, 2010


(M bu) (M bu) (%)
Futures Reaction
(%)
Stock Reaction
(Ticker) (%)
1,818 365 997 3.0
1,801 350 968 3.3
0.9% 4.3% 3.0% -9.1%
1.9% 0.6% 0.3% 0.0%
-5.6% -2.2% -2.4% -2.2% -0.3%
Feb. 9th, 2010


(M bu) (M bu) (%)
Futures Reaction
(%)
Stock Reaction
(Ticker) (%)
1,719 210 981 3.3
1,794 225 976 4.2
-4.2% -6.7% 0.5% -21.4%
0.7% -0.5% -0.4% 0.7%
3.8% 4.3% 5.0% 4.0% 1.3%
Jan. 12th, 2010


(M bu) (M bu) (%)
Futures Reaction
(%)
Stock Reaction
(Ticker) (%)
1,764 245 976 4.3
1,627 239 925 4.3
8.4% 2.5% 5.5% 0.0%
-7.1% -3.2% -6.4% -1.0%
-3.6% -5.8% -4.1% -4.4% -0.9%
Note: Uneventful 2010 WASDE release dates include: March 10, April 9, July 9, September 10, December 10. Source: USDA; Bloomberg; Scotia Capital.
50
January 2011
CORN
In our view, China will need to import a material amount of corn over the next year.
China will import a material amount of corn in 2011. Why: (1) China has stopped keeping about one years worth of grains in storage it had less than five months of usage at the end of last season; (2) consumption is increasing by about 4 million tonnes per year; (3) the U.S. Grains Council estimates Chinese production at 158 million tonnes for 2010/2011, or 8 million tonnes below the USDA forecast. Some believe China will import between 5 million and 6 million tonnes over the next year. Shanghai JC Intelligence has revised its forecast to 7.5 million tonnes! On December 30, Chinas Vice Agriculture Minister suggested that, going forward, China will no longer have surplus corn supplies, due to the rapid expansion of its corn processing and animal feed industries. Corn processors could need ~70 million tonnes in 2011, up from ~60 million tonnes over the past year. During the past season, China imported 1.3 million tonnes of corn the largest imports in 15 years. This follows the Chinese government selling 25 million tonnes of corn from its reserves into the domestic market. Global demand for corn likely reached 838 million tonnes in 2010 (a 4.3% year-over-year increase), due to increased demand for animal feed and ethanol production. A positive for corn futures was the recent U.S. Congress approval of a one-year extension to the 45 ethanol tax credit per gallon. China and Brazil continue to drive up livestock feed demand for corn, while 2010 U.S. ethanol production experienced strong growth, albeit at a reduced pace. Annual growth is forecast by the USDA to continue throughout 2011 and 2012 at 1.5% and 1.1%, respectively. While supply growth has largely met demand at 821 million tonnes, the 2010 harvest has been lowered due to poor results in the Ukraine and Argentina. Brazil and South Africa are also expected to return to average levels after several years of excess yields. The worldwide supply deficit in 2010 is expected to draw down world closing stocks at the end of the year by 13%, to 130 million tonnes (a stocks-to-use ratio of 15.5%).
Low U.S. stocks-touse ratio suggests higher corn prices may be coming.
The low U.S. stocks-to-use ratio suggests higher corn prices may be coming. The USDA lowered its stocks-to-use ratio for the 2010/2011 crop in December to 6.2%, down from 6.7% in October, and 13.1% in 2009/2010. Why? Strong export demand should reduce U.S. corn ending stocks to its lowest levels since the 1996/1997 season (Exhibit 1.77). The corn deficit in China could surge as high as 7 million tonnes due to early frost in northeastern China. Corn output in the U.S., the worlds largest corn grower and exporter, may no longer be able to fill the global deficit as carryover stock remains at a decade low despite several years of record harvests (Exhibit 1.77). China is not expected to reach a balanced supply and demand situation next year, we believe another shortfall in global corn supply could cause another surge in crop futures prices, and somewhat similar to the 33% jump in front-month corn prices in Q3/10 alone.
Exhibit 1.77: U.S. Corn Stocks-to-Use Ratio
16 14 U.S. Corn (Billion Bushels) 30% Stocks-to-use ratio of 6.2% is forecast by the USDA to be at its low est level in 15 years. 25% 20% 15% 10% 5% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Non-Ethanol Use Ethanol Use Ending Stocks Stocks-to-Use ratio Stocks-to-Use Ratio
USDA forecasts U.S. corn stocksto-use to be the lowest in 15 years.
12 10 8 6 4 2 0
51
January 2011
Exhibit 1.78: Historical U.S. Corn Prices

800 700 600
Exhibit 1.79: U.S. Corn Forward Strip

700 650 600 U.S. Cents/bu 550 500 450 400
U.S. Cents/bu
500 400 300 200
350
100
300 Jan-11 Jan-12 Jul-11 Nov-11 Jul-12 May-11 May-12

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Exhibit 1.80: U.S. Corn Ending Inventories

70 60 50 40 0% 30 20 10 0 Dec-05 -20% -40% -60% Dec-10 60% 40%
Exhibit 1.81: Global Corn Ending Inventories

180 160 30% 20% 10% 0% -10% -20% -30% -40% Dec-10
Ending Inventories (M mt)
140 120 100 80 60 40 20
Nov-12
Mar-11
Sep-11
Mar-12
Sep-12
20%
Dec-06
Dec-07
Dec-08
Dec-09
0 Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Exhibit 1.82: WASDE Corn Ending Stocks
Exhibit 1.83: U.S. Corn NPK Application

K, 54 lb/acre
N, 132 lb/acre P, 47 lb/acre
Source: Agrium; Scotia Capital.
Exhibit 1.84: Top 10 Corn Producers

Country United States of America China Brazil Mexico Indonesia India France Argentina South Africa Ukraine
Source: Hightower; USDA; Scotia Capital. Source: FAO; Scotia Capital.
Production Market Share

(M mt) (%)
333.0 163.1 51.2 20.2 17.6 17.3 15.3 13.1 12.1 10.5
42.3% 20.7% 6.5% 2.6% 2.2% 2.2% 1.9% 1.7% 1.5% 1.3%
52
MOM % Change
MOM % Change
January 2011
WHEAT
China could import 4 million tonnes of wheat, mostly due to its desire to improve its reserves to greater than 200 days of use according to Price Perceptions (CIS). Specifically, CIS forecasts that China will see 2010/2011 wheat ending stocks in the 64.2 million tonne area, up 14.2% year over year from 56.2 million tonnes last year. Additionally, poor weather could risk between 1 million and 2 million tonnes of USDA expected wheat production in China this year. In early November, China purchased 2 million tonnes of wheat from Australia its first major tender in six years. In mid-2010, following the worst drought in more than a century in the Black Sea region, Russian Prime Minister Putin told a cabinet meeting, I think it would be expedient to introduce a temporary ban on export grains and other agricultural goods. Accordingly, an export ban on wheat and other grains was implemented to cover August 15 through at least December 31. Some grains analysts speculate that Russia may stay out of the export market until the end of 2011. The impact of the drought reduced Russias wheat crop to 42 million tonnes from 62 million tonnes harvested last year. To put this in perspective, Russia is expected to consume about 48 million tonnes of wheat per year, or 14% more than it produces. Russia is normally one of the worlds largest wheat exporters accounting for 15% of the global wheat trade. Additionally, the Ukraine recently extended its own grain export quota to March 31, 2011, and this could be extended by a further three months. Global wheat production in 2010 is forecast to have reached 647 million tonnes sufficient to meet consumption, despite declining 5% from 2009 and 6% over 2008. Strong crop yields and soft consumption growth resulted in a fairly high global ending stock of ~200 million tonnes. However, the global ending stock of wheat is forecast to close 177 million tonnes, or at a healthy 26.5% stocks-to-use ratio. Looking out over the next couple of years, world demand for wheat is expected to surpass production, leading to reduced wheat stockpiles through 2012. We expect to see a more robust wheat crop in 2011, given strong end-market demand from both emerging and developed markets. This is particularly true for exporting countries such as the U.S., where winter wheat producers have added additional planting acreages in anticipation of higher demand. In our view, global wheat production could hit 660 million tonnes and 680 million tonnes in 2011 and 2012, respectively.
Exhibit 1.85: U.S. Wheat Stocks-to-Use Ratio
U.S. Wheat (Billion Bushels)
2.5 2.0 1.5 1.0 0.5 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 Total Use 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
40% 30% 20% 10% 0%
Ending Stocks
Stocks-to-Use ratio
53
Stocks-to-Use Ratio
Excess global wheat demand should reduce stockpiles through 2012.
4.0 3.5 3.0 USDA is forecasting a healthy stocksto-use ratio of 35.2%
60% 50%
January 2011
Exhibit 1.86: Historical U.S. Wheat Prices

1400 1200 1000 U.S. Cents/bu
Exhibit 1.87: U.S. Wheat Forward Strip

880 860 840 U.S. Cents/bu 820 800 780 760
800 600 400 200
740 May-11 May-12

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Exhibit 1.88: U.S. Wheat Ending Inventories

30 120% 100%
Exhibit 1.89: Global Wheat Ending Inventories

250 50% 40%
25
200
60% 15 40% 10 20% 0% -20% Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
150
10% 0% -10%
100
50
-20% -30%
0 Dec-05
0 Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
-40% Dec-10
Exhibit 1.90: WASDE Wheat Ending Stocks
Exhibit 1.91: U.S. Wheat NPK Application

K, 5 lb/acre
P, 27 lb/acre
N, 68 lb/acre
Exhibit 1.92: Top 10 Wheat Producers

Country China India Russian Federation United States of America France Canada Germany Pakistan Australia Ukraine
Source: Hightower; USDA; Scotia Capital. Source: FAO; Scotia Capital.
Production Market Share

(M mt) (%)
115.0 80.7 61.7 60.3 38.3 26.5 25.2 24.0 21.7 20.9
17.1% 12.0% 9.2% 9.0% 5.7% 3.9% 3.7% 3.6% 3.2% 3.1%
54
MOM % Change
20
MOM % Change
80%
30% 20%
May-13
Nov-11
Nov-12
Mar-11
Mar-12
Sep-11
Sep-12
Mar-13
Jul-11
Jan-11
Jan-12
Jul-12
Jan-13
January 2011
SOYBEANS
Soft commodities observers/traders were blindsided by the USDAs November 2010 downgrade to the projected U.S. 2010/2011 soybean yield. The consensus estimate was for a soybean yield increase to 44.7 bu/acre from 44.4 bu/acre. In reality, the yield estimate was reduced to 43.9 bu/acre. The combination of a lower soybean yield and a material increase in Chinese imports will likely result in U.S. soybean ending inventories in the 185 million bushel area, or materially lower than the 265 million bushel ending inventory that the USDA had forecast in October. With soybeans ending stock cushion gone, many expect front-month prices to hover in the $11/bu to $13/bu range, as soybeans acres will now compete with corn acres in 2011. Due to strong consumption growth in Asia (particularly China) and Latin America, worldwide demand for soybeans reached a record high of 248.5 million tonnes in 2010, or 5% higher year over year. China is expected to import half of the globally traded volume over the next few years. In order to meet anticipated demand growth, world production of soybeans has also increased particularly in 2009 where annual growth was over 20%, particularly from Latin American countries (Argentina, Brazil, and Paraguay combine for 50% of the worlds soybean production). The soybean belts in Brazil and Argentina experienced above-average rainfall throughout early 2010 caused by a Pacific Ocean El Nio warming effect, leading to increased soil moisture. Farmers in Argentina planted at a faster pace for the 2010 season, which took place in October to December, ahead of the summer months in late December through February that are forecast to be drier than average (due to La Nia). With demand continuing to be robust, larger plantings along with improved yields are expected to increase worldwide 2010/11 soybean production to 258 million tonnes.
Exhibit 1.93: U.S. Soybeans Stocks-to-Use Ratio
4,000 U.S. Soybeans (Million Bushels) 3,500 3,000 2,500 2,000 1,500 1,000 500 0
20 09 20 10 E 20 11 E 20 05 20 00 19 94 19 90 19 91 19 92 19 93 19 95 19 96 19 97 19 98 19 99 20 01 20 02 20 03 20 04 20 06 20 07 20 08
Global soybean production could increase to 258 million tonnes.
20% Stocks-to-use ratio of 4.9% is estim ated by the USDA to be at one the low est level in 15 years. 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Stocks-to-Use Ratio
The USDA forecasts a 15-year low for the U.S. soybeans stocks-touse ratio.
Soybean Production
Ending Stocks
Stocks/Use Ratio
55
January 2011
Exhibit 1.94: Historical U.S. Soybeans Prices

1800 1600 1400 U.S. Cents/bu
Exhibit 1.95: U.S. Soybeans Forward Strip

1,450 1,400 1,350 U.S. Cents/bu 1,300 1,250 1,200 1,150 1,100
1200 1000 800 600 400 200 0 2000 2001 2002
2003 2004 2005 2006 2007 2008
2009 2010 2011
Exhibit 1.96: U.S. Soybeans Ending Inventories

20 18 100% 80% 60%
Exhibit 1.97: Global Soybeans Ending Inventories

80 70 15% 10% 5% 0% -5% -10% -15% Dec-10
16 14 12 10 8 6 4 2 0 Dec-05
60 50 40 30 20 10 0 Dec-05
40% 20% 0% -20% -40% -60% Dec-10
Dec-06
Dec-07
Dec-08
Dec-09
Dec-06
Dec-07
Dec-08
Dec-09
Exhibit 1.98: WASDE Soybeans Ending Stocks
Exhibit 1.99: U.S. Soybeans NPK Application

N, 3 lb/acre
P, 11 lb/acre K, 20 lb/acre
Exhibit 1.100: Top 10 Soybeans Producers

Country United States of America Brazil Argentina China India Paraguay Canada Bolivia Ukraine Uruguay Production Market Share
(M mt) (%)
91.4 57.0 31.0 14.5 10.2 3.9 3.5 1.5 1.0 1.0
41.2% 25.6% 14.0% 6.5% 4.6% 1.7% 1.6% 0.7% 0.5% 0.5%
Source: Hightower; USDA; Scotia Capital.
56
MOM % Change
MOM % Change
Ja n1 M 1 ar -1 M 1 ay -1 1 Ju l-1 Se 1 p1 N 1 ov -1 Ja 1 n1 M 2 ar -1 M 2 ay -1 Ju 2 l-1 Se 2 p1 N 2 ov -1 Ja 2 n1 M 3 ar M 13 ay -1 3 Ju l-1 Se 3 p1 N 3 ov -1 3
January 2011
Nitrogen Use Efficiency on Corn Yields Inconclusive?

Exhibit 1.101 Nitrogen Use Accelerating
Nitrogen production has increased 11-fold since the 19th century, with accelerating negative environmental implications (Exhibit 1.101). There has recently been significant research focused on nitrogen-use efficiency (NUE), by both the public sector concerned with escalating environmental pollution, and also by the private sector. Research to date has primarily been based on the development of genetically modified (engineered) seeds that reduce farmer input costs per bushel.
Source: Union of Concerned Scientists.
Exhibit 1.102: Usage of Nitrogen Worldwide
We think NUE technology is largely unproven.
Seed companies such as Monsanto and Duponts Pioneer Hi-Bred have targeted specific plant traits using biotechnology that could enhance crop ability to either: (1) absorb more nitrogen from the soil; or (2) retain more nitrogen in the plant. Improved nitrogen utilization seeds would reduce application rates per bushel further, or improve yield in nitrogen-limiting conditions. There is limited field data to date confirming the efficacy of NUE on corn yields, which is critical to evaluate its potential commercial impact. Between 1987 and 2009, there were only 26 NUE field trials (under the general term nitrogen metabolism altered), compared with 4,623 field trials for herbicide tolerance and 3,630 trials for insect resistance. Monsanto recently expanded field testing in 2010 and is still in the Proof of Concept Stage (precedes Early Development Stage, Advanced Development, Pre-Launch, and Launch Stage). Similarly, Pioneer also started testing locations across the U.S. Corn Belt in 2010.
Source: Monsanto.
Exhibit 1.103: Usage of Nitrogen Worldwide

6,000
Number of Trials
5,000 4,000 3,000 2,000 1,000 0 Insect Resistance 3,360
4,623
125 Herbicide Tolerance NUE
Source: Union of Concerned Scientists; Scotia Capital.
Should reliable yield data demonstrating yield sustainability with reduced nitrogen fertilizer use become available, we expect higher efficiency could one day lead to sharply reduced nitrogen fertilizer application rates. In the past 40 years, while corn yields have quadrupled to 160 bu/acre, nitrogen application rates only doubled. In our view, NUE evidence to date remains inconclusive.
57
January 2011
Indias Nutrient-Based Fertilizer Subsidies Support Yara

India recently decided to move away from product-based fertilizer import subsidies, and toward a Nutrient-Based Subsidy (NBS) program. Concurrently, India marked up its maximum retail price (MRP) of urea by 10% and chose to relinquish control of setting non-urea fertilizer prices. The subsidies will apply for the year and are set by benchmarking DAP, MOP, urea, and sulphur prices. Why NBS. The NBS program came into effect in April 2010, in an effort to: (1) promote balanced Indian fertilization; (2) encourage production and application of fertilizers containing secondary and micronutrients; (3) spur the development of innovative fertilizer products; and (4) promote fertilizer pricing to be closer to international benchmark prices.
Exhibit 1.104: Indias Nutrient-Based Subsidy Program
Fertilizer DAP MAP TSP MOP AS 2008-09 Minimum
(INR/mt)
2008-09 Maximum
(INR/mt)
2010-11 NBS
(INR/mt)
2011-12 NBS
(INR/mt)
YoY NBS
(%)
11,022 10,508 9,848 7,595 -3,917
53,056 53,056 47,317 29,804 10,110
16,268 16,219 12,087 14,692 5,195 2010-11 NBS

(INR/kg)
12,960 12,770 9,340 2011-12 NBS

(INR/kg)
-20% -21% -23% YoY NBS

(%)
How NBS works. Under the NBS system, subsidies remain fixed during the year, according to the announced rates (Exhibit 1.104). Subsidies impact Indias fertilizers, including DAP, MAP, SSP, and NPK, which excludes urea, SOP, and NOP, among others. Retail fertilizer prices, however, are decided by local fertilizer companies. In November, Indias Department of Fertilizers (DOF) revealed its Nutrient Based Subsidy (NBS) policy for the 2011/2012 fertilizer year. Despite not coming into effect until April, the DOF released the revised subsidy policy five months in advance, hoping to allow sufficient time for supply contract discussions.
Nutrient Nitrogen (N) Phosphate (P) Potash (K) Sulphur (S)
Not applicable, as subsidies previously applied to finished products (above), not nutrients.
23.23 26.28 24.49 1.78
20.11 20.30 21.39 1.18
-13% -23% -13% -34%
Source: Fertilizer Week; Fertilizer Association of India; Scotia Capital.
Phosphates. Based on a phosphate nutrient subsidy cut of 23%, it appears that the price ceiling for DAP used in calculating the subsidy has been lowered to $450/tonne (CFR) from the current cap of $500/tonne (CFR).
Yara should benefit from Indias NBS program.
According to PotashCorp, about two-thirds of Indias P2O5 consumption prior to the NBS was in the form of DAP. Now, rather than subsidizing DAP, the nutrient P2O5 is subsidized, which has caused the consumption of NPK fertilizers to soar 45% in November 2010 alone. At the same time, DAP consumption has risen by 20%. We think Yara (one of the largest NPK compound sellers to India) will benefit the most from Indias NBS program, as NPK demand should continue to escalate. Potash. A 13% cut to Indias potash subsidy suggests that India hopes to pay no more than $350/tonne in 2011 (unlikely), down from $370/tonne last year. Importers receive NBS as a subsidy, with the domestic MOP price of ~$110/tonne serving to cover costs and provide a margin. The likely impact of lower subsidies is higher retail fertilizer prices to farmers, although the Indian government does not expect maximum retail prices to increase by more than 5%. Pressure from Indian buyers to accept higher international pricing will almost undoubtedly surface. Recall that when NBS was introduced in 2010, implied fertilizer prices were set close to international market prices.
58
January 2011
2011 Fertilizer Export Tax Changes Are Mixed

CHINA REDUCED OFF-SEASON FERTILIZER EXPORT OPPORTUNITIES
In November, China widened its nitrogen and phosphate peak-season window by one month and 1.5 months, respectively (see Exhibit 1.105). No changes were made to the 110% peak-season export tax rates, as well as the 7% off-season export tax rates. We view this as bullish for 2011 nitrogen and phosphate fertilizer pricing (ex China).
Exhibit 1.105: China Widens Its 110% Nitrogen and Phosphate Peak Season Export Tax Window
A widened peakseason export tax window is bullish.
Jan Nitrogen Phosphate
Feb
Mar
Apr
May
Jun
2011 Jul
Aug
Sept
Oct
Nov
Dec
Total Months 8 8 Total Months 7 6.5
Jan Nitrogen Phosphate N P
Feb
Mar
Apr
May
Jun
2010 Jul
Aug
Sept
Oct
Nov
Dec
= 110% peak-season export tax = 110% peak-season export tax = 7% off-season export tax
Nitrogen off-season reduced by one m onth to four m onths. Phosphate off-season reduced by 1.5 m onths to four m onths.
Source: Fertilizer Week; Green Markets; CFMW; Scotia Capital.
Under Chinas proposed 2011 policy, the domestic price for DAP/MAP has been set at RMB3,400/tonne and RMB2,900/tonne, a year-over-year decline of 15% and 22%, respectively. The urea price has been lowered by a more modest 9% to RMB2,100/tonne. Government-set price caps can be adjusted to reflect market pricing, and the off-season tariff only applies if prices for product sold do not exceed the caps.
Exhibit 1.106: Compare 2010 Chinese Phosphate Fertilizer Exports to the Off-Season Window (Above)
Phosphate Fertilizer Exports (000 mt)
1,000 900 800 700 600 500 400 300 200 100 0 Jan Feb Mar Apr May 2010 Jun 2009 Jul Aug 2008 Sept Oct Nov Dec
Source: CFMW; Scotia Capital.
RUSSIA REINTRODUCTION OF POTASH EXPORT TARIFF FAILS
Russia did not reinstate its potash export tax.
Russia, through its 2011-2013 budget, did not reinstate its potash export tax. This decision followed 2009/2010 discussions of a 5% to 15% export tax, which was an attempt to contain domestic prices. Russias last MOP export tariff of 5% was effective April 2008 to May 2009, but was abandoned due to the strain of the financial crisis on Uralkali and Silvinit. In our view, the introduction of an export tax would be positive for all non-Russian potash producers, but mostly for K+S, and would be quite negative for Yara. Why? Domestic Russian potash prices could fall, enabling NPK producers there to dump compound fertilizers into Western Europe at even lower prices, thereby squeezing Yaras margins further.
59
January 2011
BRAZIL 0% EXPORT TARIFF LIKELY MAINTAINED FOR 2011
Brazil will likely maintain a 0% fertilizer export tariff for 2011.
According to Fertilizer Week, Brazil will likely maintain its current 0% fertilizer export tariff for 2011. Import duties on fertilizers range from 0% to 6%, with the 0% rate applicable to key fertilizers such as urea, DAP, and MAP. These products had their tariffs reduced to nil in 2006, in an aim to lower farmer input costs. With a perception that an uneven playing field exists, Brazilian fertilizer producers are calling for a protective import tariff in order to boost local capacity (and margins). Currently, domestic Brazilian fertilizer production can only meet one-third of demand. Despite calls from the president of the Brazilian Fertilizer Industry Association for tax policy reform (aimed at boosting domestic fertilizer production), expectations are low. Why? (1) unsuccessful negotiations have been ongoing for 20+ years; (2) several pronouncements over the past year to adopt a Fertilizer Plan to boost long-term capacity have not materialized; and (3) the election of the new Brazilian president will likely delay discussions well into 2011.
SASKATCHEWAN POTASH TAXES
Effective January 1, 2010, the Government of Saskatchewan implemented a new potash tax structure, Potash Production Tax (PPT), which set a tax base for industry entrants and a tax floor for current producers. The intent of the reform was to benefit from the numerous proposed brownfield and greenfield potash projects. New entrants into Saskatchewans potash industry are assigned a tax base of 75% of sales, up to 1 million tonnes of K2O (1.64 million tonnes of KCl). Once this base level of sales is reached, entrants are able to expand sales without increasing taxable tonnes, thus providing entrants with similar treatment to that afforded to existing producers in 2003. Potash producers are subject to a tax floor equal to 35% of their total sales. This ensures that regardless of growth, a base level of sales for all producers is subject to profit tax.
60
January 2011
Rampant Food Inflation Returns to China

ECONOMIC SITUATION
Chinese policy makers continue to struggle with the impacts of record lending and an RMB4 trillion ($600 billion) stimulus package, which has pushed inflation above Chinas targeted 3% rate to 5%. On October 19, for the first time since the economic downturn, China raised interest rates in an attempt to fend off two-year high inflation and rampant food inflation at 10.1% (Exhibit 1.107). The World Bank immediately followed with a cut to its 2011 China GDP growth forecast to 8.5% from 8.7%. Chinas Q3/10 GDP growth was 9.6%, slightly ahead of consensus at 9.5% (Exhibit 1.108). To combat spiking food prices, China banned the incremental use of food for fuel in mid-2008.
Exhibit 1.107: Food Inflation at Two-Year High Exhibit 1.108: China Economic Highlights
16% 14%
5.4% gap betw een China's food inflation and total inflation. The largest since m id-2008
Chinas food inflation is at 10.1% currently.
25% 20% 15% 10% 5% 0% -5% Nov-05 China targets 3% inflation
8.3 8.1 7.9 7.7 7.5 7.3 7.1 6.9 6.7 Nov-06 GDP Grow th (YoY) Nov-07 Nov-08 Nov-09 6.5 Nov-10
12% 10% 8% 6% 4% 2% 0% Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Food Inflation (YoY)
National Inflation (YoY CPI)
China Lending Rate (12 month)
RMB/USD (RHS)
FIVE THOUGHTS FOR 2011
1. Domestic natural gas prices will increase. Chinas demand for natural gas is soaring while
incremental domestic supply is somewhat constrained. Local consultants predict China will have one of the highest natural gas prices in the world in five years.
2. The supply of coal will be tight. While anthracite gasification for fertilizer production could increase
in the short term due to the development of large-scale coal mines and coal gasification projects, Chinas energy and coal supply should continue to be tight over the mid- to long term.
3. Low-grade phosphate rock will raise domestic DAP/MAP costs. China lacks high-grade phosphate resources, but is rich in low- and medium-grade phosphate resources. We estimate there are between 10 and 15 years left of high-grade phosphate rock, and between 70 and 110 years of low- and mid-grade resources. 4. Sulphur self-sufficiency should rise dramatically. With the growth of sulphur supply from natural gas
processing, oil refinery, and smelter gas recovery, we think that Chinas self-sufficiency in sulphur supply will increase to 70% from 50% currently.
5. Domestic potash supply will remain challenging. While there are numerous proposed potash projects in China (and now Laos), totalling more than 3 million tonnes, we have not seen material progress on the development of these projects. However, over the next five years, the potash basins of Qinghai and Xinjiang will undoubtedly be enhanced. Companies to watch for include Qinghai Salt Lake Group, CITIC, and Luobupo, which together plan to add ~2.7 million tonnes (KCl) by 2016.
61
January 2011
OVERVIEW
China has managed to feed over 20% of the worlds population using only 9% of the worlds arable land. Chinas ~122 million hectares of available land has been declining in recent years, due to population growth, rapid socioeconomic development, and increased urbanization. Available land and is now only about 1 million hectares away from the governments minimum threshold. Accordingly, Chinese farmers often double- or even triple-crop in certain regions, giving China an equivalent of ~190 million hectares of total crop area (30%+ larger than the U.S.).
Exhibit 1.109: Share of World Crop Production
Latin America 8% Other 32%
India 9%
Additionally, China has a limited water supply, at about 25% of the average world water supply per capita. This drops further to only 5% in northern China, where much of its corn is grown. With resource constraints, China must improve its agronomic practices to get the most from its limited land and water resources. Agriculture is the most important economic activity in China, providing an economic livelihood to almost twothirds of its population of 1.33 billion. Although Chinas agricultural output is the highest in the world (number one producer of rice and wheat, and number two producer of corn), less than 15% of its total land area can be cultivated, of which only about 75% is used for food crops.
Agriculture is the most important economic activity in China.
North America 12%
Other Asia 14% China 25%
Fertilizer consumption is in central and southern China, while production occurs in the west (Exhibit 1.110). Source: PotashCorp; Scotia Capital. Chinas Qinghai province accounts for 78% of Chinas potash production, and nearly half of the countrys producers. Standard-grade (i.e., less expensive than granular-grade) potash is the preferred product; however, use of granular potash is slowly increasing as farming practices improve. Phosphate rock reserves also tend to reside in southwestern China, while nitrogen production is scattered around coal and/or natural gas reserves (~70% of Chinas nitrogen capacity uses coal as its production feedstock).
VIRTUALLY SELF-SUFFICIENT IN NITROGEN AND PHOSPHATES...
Chinas fertilizer industry is dominated (~70%) by the production of nitrogen-based fertilizers, a nutrient that China has been self-sufficient in since 1998. Like most developed countries, urea is Chinas preferred nitrogen fertilizer (60% share of N production). Why? Urea has one of the highest nitrogen contents (46% N) than any other nitrogen fertilizer (ex ammonia at 82% N), and it does not leave soildeteriorating acid residues. China is 97%+ self-sufficient in meeting its phosphate fertilizer requirements, and currently accounts for close to 30% of global tonnage. With phosphate rock reserves second only to Morocco, we believe China is positioned to become self-sufficient in phosphate production imminently. This is despite having ~321 million tonnes of lower-grade (and not economically viable) sulphur reserves that has China as a large net importer. The China Phosphate Fertilizer Industry Association estimates Chinas DAP capacity at ~15 million tonnes.
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January 2011
BUT NOT IN POTASH
China has accounted for 42% of the worlds fertilizer demand growth for over the past decade, most of which has come from increased potash use. Historically, China typically has imported ~75% of its potash requirements annually, with seaborne product representing the vast majority of its imports. Some believe that Chinas dependence on potash imports could drop to 50%, as new production capacity is ramped up.
Exhibit 1.110: Where Chinas Fertilizers Are Produced
Source: PotashCorp.
We think Chinas 2010 potash production was overstated.
Chinas 2010 domestic potash production statistics were questionable. We find it hard to believe that China produced 2.8 million tonnes (K2O) of potash for the first nine months of 2010 (National Bureau of Statistics). Why? 2.8 million nutrient (K2O) tonnes of potash equates to ~4.4 million product (KCl) tonnes. China only has about 5 million tonnes of potash production capacity, of which we estimate ~3.5 million tonnes is normal-grade KCl, while the remainder is either low-grade or specialty potash. Recognizing that Chinas potash production is typically shut down during its winter months, the nine months of stated production yields an implied utilization rate of 117%. Historically, Chinas potash production utilization rate has been closer to 70%.
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January 2011
SINOFERT IS CHINAS SOLE CANPOTEX AGENT FOR 2011 TO 2013
In late October, Canpotex and Sinofert, a subsidiary of SinoChem, entered into a three-year potash supply MOU through the end of 2013. A minimum of 3.15 million tonnes of potash will be supplied as follows: 2011 1 million tonnes; 2012 1.05 million tonnes; and 2013 1.1 million tonnes. Actual potash supplied will be the greater of the above amounts and one-third of annual seaborne trade. While prices are to be negotiated every six months (January/July), the following annual soft caps currently exist: 2011 $600 million; 2012 $730 million; and 2013 $870 million. The MOU also stipulates that SinoChem Macao will buy all of its Canadian potash from Canpotex, and Canpotex will not sell to any other buyers in China except under conditions we are not privy to.
CHINA RAISES FLOOR WHEAT PRICES FOR 2011
In mid-October 2010, several Chinese government divisions jointly issued a notice to increase the floor purchase price of wheat, as follows: (1) white wheat will be increased by 5.6% to RMB95 per 50 kg; and (2) red and mixed wheat will be increased by 8.1% to RMB93 per 50 kg. We view the policy changes as supportive for fertilizer stocks, as increased farmer revenue will allow them to pay higher sticker prices for fertilizers in 2011.
OFF-SEASON STOCKPILING
A program implemented by the Chinese government is requiring 10.25 million tonnes of fertilizer to be stockpiled during the off-season. We do not know the nutrient breakdown, but presume the majority will be nitrogen. Exhibit 1.111 shows a breakdown of the 27 provinces, regions, or municipalities affected.
Exhibit 1.111: China Should Stockpile 10M+ Tonnes of Fertilizer in 2011
Region Anhui Chongqing Fujian Gansu Guandong Guangxi Guizhou Hainan Hebei Stockpile
(000 mt)
Region Heilongjiang Henan Hubei Hunan Inner Mongolia Jiangsu Jiangxi Jilin Liaoning
Stockpile
(000 mt)
Region Ningxia Qinghai Shaanxi Shandong Shanxi Sichuan Xinjiang Yunnan Zhejiang
Stockpile
(000 mt)
450 200 200 160 300 500 200 50 500
850 600 450 550 400 600 400 800 700
120 70 250 700 100 500 360 100 150
Source: CFMW; Scotia Capital.
CHINA IS NOW A NET IMPORTER OF GRAINS
A near-record-low grain stocks-to-use ratio has China becoming a net importer of grains.
China is now a net importer of grains.
Population growth, rising incomes, and a shift to greater meat consumption have all caused Chinas grain inventories to become a concern recently. Its stocks-to-use ratio of grains has fallen dramatically over the past decade, from about 50% at the turn of the century, to a low of 14% one year ago (Exhibit 1.112).
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January 2011
Exhibit 1.112: Chinas Grain Stocks-to-Use Ratio Is Near Record Lows

90% 80% 70% Stocks to Use (%) 60% 50% 40% 30% 20% 10% 0% 1999/00 2000/01 2001/02 2002/03 2003/04
Wheat
China's stocks-to-use ratio for coarse grains is near a record low
2004/05
Coarse Grains
2005/06
Combined
2006/07
2007/08
2008/09
2009/10
Due to a declining stocks-to-use ratio, grain imports are rising to the point where China has become a net importer of grains for the first time since 1996. As GDP growth in China recovers following the global recession, we think China will increase its grain imports to reach a normalized stocks-to-use ratio.
CHINAS FERTILIZER DEMAND RECOVERY WELL UNDERWAY
Global demand for fertilizer has been strengthening since mid-November 2009 when China first bought 600,000 tonnes of imported DAP, followed by India ordering more than 3 million tonnes of DAP through Q1/11 (ceiling price of $500/tonne through Q1/11). Half a year later, in Q1/10, BPC, Arab Potash Company, and Israel Chemicals (ICL) concluded annual 2010 potash contracts with Indian buyers at $379/tonne CFR for April 2010-March 2011 shipments. In our view, Chinas reduced fertilizer consumption last year is: (1) inconsistent with the countrys foodrelated self-sufficiency goals; and (2) unsustainable for extended periods of time, without an eventual decline in both crop yields and crop quality. PotashCorp forecasts 2011 Chinese potash consumption could rise to near pre-downturn levels of ~11 million tonnes.
THE CORN SITUATION IN CHINA
China could consume up to 11 million tonnes of potash in 2011.
In early February 2010, northern China was hit by heavy snow and unusually low temperatures that continued through mid-May and prompted China to end its streak of no major U.S. corn imports since 1996. When temperatures rose towards historic levels, Chinese farmers frantically planted corn. We understand that the current harvest is looking normal this year in northern China. Despite the above, we see four reasons why the price of corn will increase this year in China, as follows: (1) the volume of stored corn in rural areas is low; (2) commercial corn inventory is low; (3) demand for corn continues to increase; and (4) the Chinese government needs to replenish its own inventory. As of the end of last summer, the Chinese government had provided 82.7 million tonnes of corn to the auction market. Compare this to the 166 million tonnes that all of China produced in 2008. On December 30, Chinas Vice Agriculture Minister stated that China will no longer have surplus corn supplies, due to the rapid expansion of its corn processing and animal feed industries. China could import between 5 million and 6 million tonnes of corn over the next year.
65
January 2011
Brazils Fertilizer Recovery Has Been Led by Potash

Brazil showed strong growth in 2010, posting a 15-year-record year-over-year GDP growth rate of 9.3% in Q1, followed by 9.2% in Q2 and 6.7% in Q3 (Exhibit 1.113). Expectations are for Brazil to round the year out with 7.5% GDP growth (up from 7.1% previously), followed by 4.5% through 2012.
Exhibit 1.113: Brazil Economic Highlights
20% 15% 10% 5% 0% -5% -10% Nov-05
Nov-06
Nov-07
Nov-08 Agricultural Read GDP Change
Nov-09 Monthly CPI Change
Nov-10
National Real GDP Change
Brazils fertilizer demand materially improved (more than expected) through the end of October 2010 (the most recent data), supported by a strong corn harvest and soaring sugar and soybean prices. Fertilizer deliveries over the 10-month period totalled 20 million tonnes, a 6% increase over 2009. Potash imports into Brazil for the first 10 months of 2010 were 5.11 million tonnes, or a 79% increase year over year. Urea, MAP, and DAP imports were up 20%, 27%, and 19% over the last year, respectively. Fertilizer Week forecasts a 39% increase in Brazils 2010 fertilizer imports over 2009.
We dont think Brazil will achieve fertilizer independence any time soon.
For the first three quarters of 2010, four of the top five international suppliers of fertilizer to Brazil were potash producers (BPC, Canpotex, K+S, and Israel Chemicals). The only other company that supplied more than a 5% share of Brazils imports was Bunge Maroc, which supplied finished phosphate fertilizers. Brazils new President Rousseff has stated a goal of fertilizer independence. This is not new to Brazil, but we have seen little action to date towards implementation, other than the $5 billion purchase by Vale of phosphate assets from Yara, Bunge, and Mosaic.
Exhibit 1.114: Brazil Fertilizer Import Growth (January-October)
6,000 Brazil Fertilizer Imports (000 mt) +79% 5,000 +15% 4,000 3,000 2,000 1,000 KCL Excludes imports for non-fertilizer usage DAP/MAP 2009 2010 Urea Other . +25% +20%
BPC Canpotex K+S Maroc ICL Ameropa Mosaic (ex Canpotex) Yara PCS (ex Canpotex) Uralkali (ex BPC) SQM ADM 28 Others Supplier
Exhibit 1.115: Q1/10-Q3/10 Suppliers

Brazil Imports
(000 mt product)
Market Share
(%)
1,403 997 984 690 683 510 432 337 233 190 164 115 3,990 10,728
13.1% 9.3% 9.2% 6.4% 6.4% 4.8% 4.0% 3.1% 2.2% 1.8% 1.5% 1.1% 37.1% 100.0%
Source: ANDA; Siacesp; Fertilizer Week; Scotia Capital.
Source: Siacesp; Fertilizer Week; Scotia Capital.
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January 2011
India Must Apply More Potash to Combat Food Inflation

Globally, India is: (1) the second-most populous country; (2) the second-largest producer of rice, sugar, wheat, fruit, and vegetables; and (3) the second-largest fertilizer consumer (~14% of global consumption), with annual fertilizer consumption growth of 4.5% over the past decade. Indias population of 1.1 billion is projected to add 150+ million people over the next decade, with the majority from a middle-class demographic. Despite having 17% of the worlds population, India accounts for only 11% of global arable land. Indias government has set an agricultural sector growth target of 4% per year until at least 2012, a level last reached in Q1/08 (Exhibit 1.116).
Exhibit 1.116: India Economic Highlights
20% 15%
Indias food inflation increased 15%+ over the past year.
10% 5% 0% -5% -10% Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09 Quarterly CPI Change
Nov-10
National Real GDP Change (LHS)

Agricultural Real GDP Change (LHS)
Food inflation is a serious concern in India, with food prices up 15% over the past year. India has reacted by: (1) promoting balanced fertilizer applications (adoption of its Nutrient-Based Subsidy program) and (2) blocking the incremental use of food-based cooking oils for biodiesel production. Indias fertilizer applications are 5:1 nitrogen to potash, or well above the United States, which is closest to the scientifically recommended 2:1 ratio (Exhibit 1.118). More efficient fertilization (i.e., increased potash use) will likely follow the Nutrient-Based Subsidy program. PotashCorp estimates that 5 million tonnes of additional potash application is required to reach the suggested levels for current Indian crop requirements. Unlike Brazil and China, India has no indigenous potash. Following a Chinese order of 0.6 million tonnes of DAP in mid-November 2009, which sparked the phosphate fertilizer demand recovery, India purchased more than 3 million tonnes of DAP at a ceiling price of $500/tonne (through Q1/11). In Q1/10, Arab Potash Company, BPC, and Israel Chemicals reached 2010 potash contracts with Indian buyers at ~$379/tonne (CFR) for April 2010 through March 2011 shipments.
Exhibit 1.117: Indias Food Inflation Exhibit 1.118: Grain Yield and Fertilizer Use
200 180 160 140 120 100 80 60 40 20 U.S. India N N 0.5 U.S. India P2O5 K2O P2O5 K2O 2.5 2.0 1.5 1.0
India underapplies potash fertilizer.
Fertilizer Application (lbs/acre)
3.5 3.0
Grain Yield (mt/acre)

3-year average yield (2007-09) for w heat, rice, and course grains
Source: Government of India, PotashCorp.
Source: IFA, USDA, PotashCorp.
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January 2011
Credit Ratings Support Further M&A/Share Buybacks

Global fertilizer companies have generated significant free cash flow over the past several years, as fertilizer prices, sales volumes, and margins reached record highs.
Exhibit 1.119: Fertilizer Producer Credit Metrics
T12M EBITDA / Tot. Debt / Interest Exp. Tot. Cap
(x) (%)
Company Intrepid Potash Mosaic PotashCorp Yara Agrium K+S SQM CF Industries
Current Ratio
(x)
102.9x 33.6x 21.8x 17.7x 15.3x 8.4x 8.4x 4.6x 26.6x
n.m. 35% 31% 30% 27% 23% 23% 34% 29%
5.4x 3.8x 1.3x 1.8x 2.3x 2.6x 2.6x 1.8x 2.7x
While the highly cyclical nature of the fertilizer industry remains unchanged, credit rating agencies generally have an improved credit outlook for many global fertilizer companies. The reasons cited for the more favourable view include positive supply and demand fundamentals, as well as improved liquidity and debt service capacity (Exhibit 1.119). Given the improved cash flow profiles and credit metrics, all of the companies within our coverage universe have achieved investment grade status, as shown in Exhibit 1.120. We note that Intrepid Potash is effectively debt free, with no long-term notes/bonds outstanding.
* As at September 30, 2010.
Exhibit 1.120: Credit Agency Ratings of Global Fertilizer Producers
All large cap companies within our fertilizer universe are investment grade.
Rating Agency S&P - Current (Previous) Moody's - Current (Previous) Fitch - Current (Previous)
PotashCorp A- (BBB+) Baa1 (Baa2) -
Mosaic BBB- (BB+) Baa2 (Baa3) BBB (BB+)
Agrium BBB (BBB) Baa2 (Baa2) -
CF Industries Ba3 BB+ (BB+)
Yara BBB (BBB+) Baa2 (Baa2) -
K+S BBB (BBB+) (Baa2) -
Intrepid Potash -
SQM BBB (BBB+) Baa1 (Baa1) -
Source: S&P; Moodys; Fitch; Bloomberg, Scotia Capital.
A favourable credit rating and access to debt capital markets are positives for fertilizer stocks, as: (1) the development of brownfield and greenfield fertilizer projects require significant amounts of capital and project financing; (2) banks are increasingly willing to extend bridge loans for M&A transactions; and (3) companies can fund share buybacks by issuing debt. In our view, the continuation of easy bank financing for takeovers will likely keep fertilizer M&A activities buoyant. During the most recent credit downturn, debt issuances used to finance corporate takeovers were dramatically scaled back. However, positive fundamentals and (near) investment grade status helped several fertilizer producers receive deal financing commitments such as CF Industries $4.7 billion takeover of Terra Industries. Morgan Stanleys $2.5 billion loan package represented the largest leveraged loan commitment in 2009. CF Industries was able to refinance the loan by issuing $1.6 billion of long-term corporate bonds in April 2010, which we believe also bodes well for future takeover financings in the sector. Debt financing also provides an added alternative for publicly traded fertilizer producers to enhance shareholder returns through the implementation of share buyback programs. In Q4/10, PotashCorp raised $1 billion in two $500 million bond offerings, consisting of a seven-year note with a coupon rate of 3.25%, and a 30-year note with a coupon rate of 5.63%. The proceeds were used to partially finance the companys share repurchase plan of up to $2 billion (4.9% of shares outstanding) following PotashCorps successful defence against the August 2010 hostile takeover attempt by BHP Billiton.
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January 2011
Fertilizer M&A: Looking Back

SUMMARY OBSERVATIONS Fertilizer M&A transaction valuation multiples have a tendency to follow grain cycles for all three nutrients (i.e., valuations peak close to the end of the cycle).
Deals involving potash assets command the highest valuation premiums, given the scarcity of available assets around the world. Over the past several years, potash, phosphate, and nitrogen asset transactions have averaged 10.8x, 10.1x, and 6.8x trailing EBITDA, respectively.
Retail fertilizer transaction valuations are materially more stable than those of wholesale fertilizer assets. We believe the relative stability of fertilizer retail transaction multiples reflects the steady nature of retail gross margins over wholesale gross margins. Fertilizer transactions near the bottom of the cycle are more lucrative for the acquirer than at any other point in the fertilizer cycle. However, few transactions during cycle troughs occur, which indicate to us that management teams are reluctant to commit to asset portfolio growth in a perceived unstable commodity price environment.
On average, the current grain cycle has seen the highest valuations and share price premiums paid for fertilizer assets. Why? As Investment Canada showed BHP and the world, fertilizer resources are increasingly viewed as strategic assets worth protecting.
Exhibit 1.121: Cyclical Valuations of Fertilizer M&A Transactions 2000-2010
Nitrogen M&A Transactions
9x
2001-2004 2006-1H 2008
Phosphate M&A Transactions

16x
2001-2004 2006-1H 2008
Potash M&A Transactions

16x
2001-2004 2006-1H 2008
8x 7x
14x 12x
14x 12x
EV/T12M EBITDA
6x 5x 4x 3x 2x 1x 0x Trough Mid Cycle Peak 2H 2008-2010
EV/T12M EBITDA
EV/T12M EBITDA
10x 8x 6x 4x 2x 0x Trough Mid Cycle Peak 2H 2008-2010
10x 8x 6x 4x 2x 0x Trough Mid Cycle Peak 2H 2008-2010
Source: Scotia Capital, Bloomberg, Capital IQ, Dealogic.
HOW WE CRUNCHED THE NUMBERS
We screened 27 announced global fertilizer transactions (both completed and failed) over the past decade. To maintain comparability, we applied a consistent valuation methodology across all transactions. For share price premiums, we used the average stock price for the trailing 20 trading days prior to the deal announcement, if applicable. We chose a 10-year period to study fertilizer M&A transactions, as that period covers two full grain cycles, as well as the current cycle underway. The most recent complete fertilizer cycle spanned 2006 to mid-2008, and was driven by 5% global GDP annual growth, soaring food prices, and oil soaring to $147/bbl. The previous cycle encompassed 2001 to 2004, when soybean prices doubled to $10.75/bu in April 2004, driven by a poor harvest in Brazil (due to Asian rust problems) and high Chinese grain imports.
69
January 2011
Exhibit 1.122: NPK M&A Summary 2000-2010

2001 - 2004 Mid-Cycle 3.8x 1 5.6x 15% 1 2006 - 1H 2008 Mid-Cycle 8.5x 41% 1 11.8x 28% 1 2H 2008 - 2010 Trough to Mid 8.5x 121% 3 15.1x 23% 6 12.6x 1 9.9x 52% 2
Nutrient Nitrogen EV/T12M EBITDA T-20 Day Avg. Premium # of Transactions Potash EV/T12M EBITDA T-20 Day Avg. Premium # of Transactions Phosphate EV/T12M EBITDA T-20 Day Avg. Premium # of Transactions Retail Fertilizer EV/T12M EBITDA T-20 Day Avg. Premium # of Transactions
Trough 5.4x 12.0% 1 -
Peak 4.7x 1 8.6x 1 12.3x 6% 2 -
Trough 5.5x 27% 1 4.9x 5% 1 9.7x 56% 1
Peak 7.9x 1 33% 1 14.2x 34.0% 1 -
In the current fertilizer cycle, potash deals have led the pack.
Source: Scotia Capital, Bloomberg, Capital IQ, Dealogic
NITROGEN M&A
Nitrogen M&A transactions have increased substantially in the current fertilizer cycle. A cyclical recovery in agricultural commodity prices, and access to lower-cost natural gas (due to sharply higher North American gas production and reserves), were the primary reasons behind the recent 14-month competitive bidding war that culminated in CF Industries successfully acquiring Terra Industries. CF revised its initial bid 137% higher, which allowed it to top Yaras competing (and friendly) offer and simultaneously fight off its own hostile takeover attempt by Agrium. CFs final offer consisted of $37.15 of cash and 0.0953 CF shares per TRA share, for a total consideration of ~$47.40/TRA share, which we estimate valued the company at about 10.8x EV/T12M EBITDA. After incorporating $135 million in annual synergies that we expect CF to realize, we estimate the transaction multiple improves to 6.3x EV/T12M EBITDA. This compares with Yaras $41.40/TRA share cash offer, or 10.6x EV/T12M EBITDA. Based on our calculations, Agriums final offer for CF of $45 in cash plus one AGU share valued the company at 4.1x EV/T12M EBITDA at the time of the announcement. Agrium demonstrated solid financial discipline during the bidding war, despite our belief that Agrium could have potentially tabled a higher CF bid initially, had CF not been successful in acquiring Terra. We note that Agriums bid was contingent on CF dropping its takeover of Terra. U.S. deal multiples for nitrogen fertilizer assets have increased as the price of ammonia/urea has risen, while the cost of North American natural gas has fallen. Deals announced during the cycle of 2006-1H/08 were completed at a ~30% premium over transactions during the 2001-2004 fertilizer cycle. Historically, management has made acquisitions ahead of run-ups in nitrogen fertilizer prices, with the exception of several transactions announced near the peak of the cycle in mid-2008. Further capital markets activity could be another bullish sign for nitrogen-based fertilizer stocks. CVR is a good example of this, which recently filed a $200 million IPO for its pet-coke gasification (the only one in North America) nitrogen fertilizer operation mostly UAN production for the U.S. Corn Belt.
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January 2011
Exhibit 1.123: Nitrogen-Focused M&A Transactions Compared with Ammonia Prices

1000 900 800 700 600 500 400 300 200 100 0 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Dec-10
EV/LTM EBITDA
(x)
CF acqires Terra Industries, 154% prem uim Failed Yara Bid for Terra Industries, 149% prem ium
12x
Ammonia (U.S. Gulf NOLA Barge, $/st)...
10x
Hindalco acquires Indo Gulf Corp, -6% prem ium
Terra Industries acquires Terra Mississippi
Aditya Birla Nuvo acquires Indo Gulf Fertilisers, 27% prem ium
8x
Failed Agrium Bid for CF, 58% prem ium
6x
4x
2x
0x Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10
Grain Cycles
Ammonia
Precedent Transactions
Source: Company reports; Fertilizer Week; Green Markets; Scotia Capital estimates.
Another notable nitrogen transaction was Yaras mid-2008 acquisition of Canadian nitrogen producer Saskferco, which was privately owned by Investment Saskatchewan (49%), Mosaic (50%), and CIBC (1%) for a total enterprise value of $1.6 billion. The transaction expanded Yaras North American manufacturing capability by adding approximately 0.75 million tonnes of ammonia and 1.1 million tonnes of urea capacity, as well as gaining access to Western Canadas lower-cost gas reserves. Risk metrics estimated the deal valued Saskferco at 7.9x EV/T12M EBITDA. Earlier acquisitions include Terra Industries (later acquired by CF Industries) purchase of Mississippi Chemical Corp., which predominantly produced nitrogen products for both fertilizer and industrial applications (but also had some potash, phosphate, and other assets). The deal gave Terra access to lowercost ammonia production facilities in Trinidad, which we believe materially strengthened Terras industrial nitrogen production business. Terra paid 4.7x EV/T12M EBITDA, or $107 million in stock and $161 million in loan assumptions, although valuations may be skewed to the downside, as the acquisition was consummated while Mississippi Chemical was operating under Chapter 11 bankruptcy.
Exhibit 1.124: Nitrogen-Focused M&A Transaction Deal Metrics
Announcement Date Deal Status Mar 2010 Jan 2010 Nov 2009 Jul 2008 Feb 2008 Jun 2005 Aug 2004 Jul 2002 Oct 1996 Sep 1996 Mean Median Max Min Complete Failed Failed Complete Complete Complete Complete Complete Complete Complete Target Name Terra Industries Inc Terra Industries Inc CF Industries Saskferco AZOT Berezniki Indo Gulf Fertilisers Ltd Mississippi Chemical Corp Indo Gulf Corp Ltd Viridian Arcadian Corporation Acquirer CF Industries Holdings Inc Yara International Agrium Yara International United Chemical Co UralChem Aditya Birla Nuvo Ltd Terra Industries Inc Hindalco Industries Ltd Agrium Potash Corp of Saskatchewan Inc Currency USD USD USD CAD RUB INR USD INR USD USD Payment Type Cash, Stock Cash Cash, Stock Cash Cash Stock Cash, Stock Stock Stock Cash, Stock Interest Acquired
(%)
Announced Announced TEV Equity

($M) ($M)
Premium
(%)
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
4,286 4,204 3,256 1,600 1,683 5,706 268 21,379 1,200 1,400
4,185 4,103 3,954 1,683 8,463 268 13,155 800 1,400
154.7% 149.6% 58.1% 3.6% 27.0% -5.5% 12.0% 22.4% 57.1% 27.0% 154.7% -5.5%
10.8x 10.6x 4.1x 7.9x 5.5x 4.7x 3.8x 4.7x 6.8x 5.5x 10.8x 3.8x
Source: Scotia Capital, Bloomberg, Capital IQ, Dealogic, Risk Metrics.
71
Valuation (EV/T12M EBITDA)
Yara acquires Saskferco
January 2011
PHOSPHATE M&A
Several similarities exist between the supply and demand dynamics of both the phosphate and potash fertilizer industries. Accordingly, this is why phosphate fertilizer transaction valuations are fairly in line with potash transaction multiples. Specifically, we found that transactions for phosphate assets have averaged 10.1x EV/T12M EBITDA, compared with 10.8x EV/T12M EBITDA for potash assets. Similar to potash, and unlike nitrogen, phosphate is a finite commodity with a growing scarcity value, due to the gradual depletion of quality mineable phosphate rock reserves worldwide. Another similarity extends to the significant interest that both nutrients have attracted from global mining giants.
Exhibit 1.125: Phosphate-Focused M&A Transactions Compared with DAP/MAP Prices
1,200 Cargill and IMC Global com bine crop nutrient com pany (Mosaic) Yara acquires 70% of Kem ira Grow how , 34% prem ium Bunge sells its Brazilian phosphate m ines to Vale 16x
14x
1,000
DAP/MAP (New Orleans, $/st)
12x 800 Yara Acquires Stake in Fertibras, 41% prem ium Perm odalan Nasional Bhd increases stake of Chem ical Com pany of Malaysia, 5% prem ium
Phosphate deals have been at a slight discount to potash but at a premium to nitrogen deals.
10x
600
8x
6x
400 4x 200 2x
0 Dec-03 Mar-04 Dec-04 Mar-05 Dec-05 Mar-06 Dec-06 Mar-07 Dec-07 Mar-08 Dec-08 Mar-09 Dec-09 Mar-10 Dec-10 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Jun-10 Sep-10
0x
Grain Cycles
DAP
MAP
In 2009, Bunge sold its phosphate mine facilities in Brazil, as well as its 42.3% interest in Fosfertil, to mining giant Vale for $3.8 billion. Fosfertil is Brazils largest supplier of fertilizer raw materials, specializing in high-concentration phosphate fertilizers. The all-cash bid valued the overall stake at 12.6x 2007-2009 average EBITDA, or 11.4x for the Fosfertil stake and 14.5x for Bunges nutrient assets. In October 2007, Yara acquired the remaining 70% of Kemira GrowHow that it did not already own, making Yara one of the largest phosphate fertilizer and feed producers in Europe. While there were few streamlining opportunities in combining Yaras nitrogen business with Kemira GrowHows phosphate mining platform, Yara appears to have paid a steep 14.2x EV/T12M EBITDA for the assets.
Exhibit 1.126: Phosphate-Focused M&A Transaction Deal Metrics
Announcement Date Deal Status Jan 2010 May 2007 Aug 2006 Jan 2005 Jan 2004 Jan 2004 Aug 1995 Mean Median Max Min Complete Complete Complete Complete Complete Complete Complete Target Name Bunge's Brazilian Phosphate Assets Kemira GrowHow Oyj Fertibras SA Chemical Co of Malaysia Bhd Mosaic Global Holdings Inc Phosphate Resource Partnership Nu-West Industries Inc Acquirer Vale Yara International ASA Yara International ASA Permodalan Nasional Bhd Cargill Inc Mosaic Global Holdings Inc Agrium Inc Currency USD EUR BRL MYR USD USD USD Payment Type Cash Cash Cash Cash Stock Stock Cash Interest Acquired
(%)

($M) ($M)
Premium
(%)
EV/LTM EBITDA
(x)
100.0% 70.0% 51.9% 10.7% 100.0% 48.4% 100.0%
3,800 705 214 3,275 103 162
485 69 240 1,235 103 240
34.0% 40.5% 4.6% 6.3% 2.4% 17.6% 6.3% 40.5% 2.4%
* Bunge sale of phosphate asset EV/EBITDA calculated using average 2007-2009 EBITDA Source: Scotia Capital, Bloomberg, Capital IQ, Dealogic.
72
Valuation (EV/T12M Multiple)

12.6x 14.2x 8.5x 4.9x 12.0x 8.4x 10.1x 10.2x 14.2x 4.9x
January 2011
POTASH M&A
There have been only a few M&A transactions in the potash fertilizer sector, as compared to the nitrogen and phosphate spaces. Why? Because 80% of the worlds total potash capacity is controlled by a few, large domestic champions located in Canada, Russia, and Belarus.
Exhibit 1.127: Potash-Focused M&A Transactions Compared with Potash Prices
800 BHP Announced hostile bid for PCS, 25% prem ium 25x
700
Potash (FOB Vancouver, $/mt)
Potash deals command the highest valuation metrics among nutrients.
600
500
15x
400
PCS acquires 26% in Arab Potash Israel Chem icals acquires rem aining stake in Dead Sea Works, 12% prem ium PCS acquires 18% in SQM, 15% prem ium Madura Holding sells 53.2% in Uralkali to consortium , 28% prem ium Uralkali acquires 20% in Silvinit, 6% prem ium
300
10x
200
5x
100
0 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Oct-10
0x
Grain Cycles
Potash
BHPs hostile attempt to buy PotashCorp for $130/share valued the company at ~21x EV/T12M EBITDA, or the highest valuation attached to an acquisition of a potash company on a trailing EBITDA basis. However, given the downturn in the fertilizer cycle between mid-2008 and 2009, PotashCorps production, sales, and EBITDA fell to a three-year low. Accordingly, we dont view BHPs offer price on trailing EBITDA as an appropriate comparative valuation multiple. Based on our estimates, BHPs $130/share offer implied 12.5x 2012E EV/EBITDA. The 20-day average premium prior to the announcement bid was 25%. In June 2010, Suleiman Kerimov, known as Russias Richest Civil Servant, acquired a 53.2% controlling stake in Russian potash producer Uralkali, which was completed at a 28% premium. Several weeks later, known associates of Mr. Kerimov acquired a 44% stake in Russian potash producer Silvinit, and at a 42% premium. Finally, we estimate that Uralkalis proposed acquisition of Silvinit will be completed for a 6% premium. For further details, please refer to FSU Potash Consolidation Implications on page 42.
Exhibit 1.128: Potash-Focused M&A Transaction Deal Metrics
Announcement Date Deal Status Dec 2010 Nov 2010 Aug 2010 Jun 2010 Jan 2010 Jan 2009 May 2008 Oct 2003 Oct 2001 Mar 2000 Nov 1995 Mean Median Max Min Pending Pending Failed Complete Complete Complete Complete Complete Complete Complete Complete Target Name Silvinit Potash One Potash Corp of Saskatchewan Inc Uralkali Athabasca Potash Potash North Anglo Potash Arab Potash Sociedad Quimica y Minera Dead Sea Works Ltd. (10.77%) Vigoro Corp Acquirer Uralkali K+S AG BHP Billiton Ltd Multiple Acquirers BHP Billiton Ltd Potash One BHP Billiton Ltd Potash Corp of Saskatchewan Inc Potash Corp of Saskatchewan Inc Israel Chemicals Ltd IMC Global Inc Currency USD CAD USD RUB CAD CAD CAD JOD CLP ILS USD Payment Type Cash/Stock Cash Cash Undisclosed Cash Stock Cash Cash Cash Cash Stock Interest Acquired
(%)

($M) ($M)
Valuation (EV/T12M Multiple)

EV/LTM EBITDA
(x) (%)
20x
Premium 6.0% 28.0% 24.9% 28.0% 30.0% 20.4% 33.0% 15.0% 12.0% 28.3% 23.9% 26.4% 33.0% 12.0%
100.0% 100.0% 100.0% 53.2% 100.0% 88.5% 100.0% 26.0% 18.0% 100.0% 100.0%
8,400 416 42,968 10,247 298 22 263 39,660 1,300
8,070 434 39,618 316 22 270 123 92 39,660 1,300
10.0x 20.9x 14.3x 8.6x 5.6x 5.4x 10.0x 10.8x 9.3x 20.9x 5.4x
Source: Scotia Capital, Bloomberg, Capital IQ, Dealogic.
73
January 2011
RETAIL M&A
Unlike wholesale commodity fertilizer producers, retail fertilizer (and seed/service) companies remain largely fragmented, with farmer-owned co-ops and private distributors controlling about one-third of the U.S. market. Agrium now owns the largest North American agriculture retail network that is about three times larger than its next-biggest competitor. However, it still commands only ~15% of the overall market. Agrium has led fertilizer retail consolidation over the past six years, including the acquisitions of Royster-Clark, UAP, and AWB, among others. In our minds, it is not surprising that Agriums three publicly traded retail fertilizer acquisition multiples (on an EV/T12M EBITDA basis) have remained fairly steady over time, despite volatile grain prices, which ultimately impact agri-business profit margins. The stability of the fertilizer retail transaction multiples reflect the steadier nature of retail gross margins over wholesale gross margins and other cyclical core fertilizer operations.
Exhibit 1.129: Retail-Focused M&A Transactions Compared with Retail and Wholesale Margins
60 18
50
15
Agrium Acquires UAP Holdings, 28% premium Agrium Tops GrainCorp's Bid for AWB, 52% premium
Gross Margin (%)
40
Agrium Acquires RoysterClark, 56% premium
12
30
Israel Chemicals acquires Scott's Global Professional Business
20
10
0 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0 2011F 2012F
Grain Cycles
Wholesale Margins
Retail Margins
Source: Company reports; Bloomberg; Scotia Capital estimates.
The standard deviation of retail gross margins is therefore lower, reflecting a more stable earnings profile and lower beta assets. Therefore, unlike wholesale nutrient M&A transactions, acquirers appear much more willing to pay a stable valuation multiple, given the less cyclical nature of the retail business. The mean and median (pre-synergy) EV/T12M EBITDA multiples paid by Agrium for its three retail acquisitions are 10.9x and 11.1x, respectively. Net of synergies, the multiples remain relatively stable, with Royster-Clark estimated to be ~5x trailing EBITDA net of synergies, ~7.8x for UAP, and ~7.7x for AWB (based on ~A$40 million in planned AWB/Landmark 2012E EBITDA synergies).
Exhibit 1.130: Retail Fertilizer-Focused M&A Transaction Deal Metrics
Announcement Date Deal Status Dec 2010 Aug 2010 Dec 2007 Jan 2006 Mean Median Max Min Pending Pending Complete Complete Target Name Scotts Miracle-Gro's (Global. Prof. AWB Ltd UAP Holding Corp Royster-Clark Ltd Acquirer Israel Chemicals Agrium Inc Agrium Inc Agrium Inc Currency USD AUD USD CAD Payment Type Cash Cash Cash Cash Interest Acquired
(%)

($M) ($M)
Premium
(%)
Valuation (EV/T12M EBITDA)

EV/LTM EBITDA
(x)
AGU has led retail consolidation over the past decade.
100.0% 100.0% 100.0% 100.0%
270 1,965 2,686 570
1,237 2,199 339
52.4% 27.8% 56.0% 45.4% 52.4% 56.0% 27.8%
8.6x 11.1x 11.8x 9.7x 10.3x 10.4x 11.8x 8.6x
Source: Scotia Capital, Bloomberg, Capital IQ, Dealogic
74
January 2011
Fertilizer M&A: Looking Ahead

In our view, the recovery in fertilizer prices and global fertilizer consumption, the failed ~$39 billion bid by BHP Billiton to acquire PotashCorp, and the near-certain merger between Uralkali and Silvinit highlight the importance that many companies place on securing high-quality, long-life fertilizer assets. Next, we highlight future potential large cap fertilizer take-out candidates and probabilities, which may benefit investors from any takeout premium offered by suitors.
Exhibit 1.131: Potash-Focused M&A Transaction Deal Metrics
Company Agrium Belaruskali Compass Minerals CF Industries Intrepid Potash Israel Chemicals K+S Mosaic PotashCorp Silvinit SQM Uralkali Yara International Market Capitalization
($B)
N X
Primary Focus K Spec. Retail X X Salt
Other
Target Probability
(%)
Possible Acquirer(s) Yara (N,P,K, distribution), Monsanto (retail). Chinese or Indian SOE (acquire <25% stake in Belaruskali). K+S (salt and SOP). Yara. Agrium. PotashCorp (Israeli government controls the company). EuroChem, BASF (both have been sellers recently, not buyers). Vale (requires Cargill's blessing + SK Gov't?). Now considered a strategic resource to Canada. Uralkali. Israel Chemicals, PotashCorp. Russian Government likely wouldn't allow it. Norwegian government owns 36.2%.
$14.5 ~$28.0 $2.9 $9.6 $2.8 $21.8 $10.9 $34.0 $46.1 $7.1 $14.8 $15.3 $16.8
X X X X X X X X X X X X X Industrial chemicals Salt
Lithium/Iodine Distribution
15% 65% 10% 10% <5% <1% <1% 10% <1% 100% <5% <5% <1%
Source: Company reports; Bloomberg; Scotia Capital estimates.
AGRIUM
Acquisition Target Probability: 15% Logical Acquirer(s): Yara International (more likely), Monsanto (possible) Agrium is unique in that it is vertically integrated through the fertilizer value chain, making it potentially attractive to several suitors as a packaged company that would need to be broken up.
We peg an AGU takeover at 15%.
Yara could be interested in Agriums nitrogen, phosphate, potash, and retail assets. Yara has proven its willingness to buy European retail assets (Kemira), and acquire North American nitrogen assets (i.e., Saskferco and failed Terra Industries acquisition). Yara could use the potash for its NPK compound production (which it currently purchases from K+S and FSU producers). However, we do not think Yara is too interested in retail at the moment. Agriums extensive distribution and storage network in North America would be highly complementary to Yaras downstream distribution and storage network in Europe and Latin America. This would enable the company to further penetrate the North American market. In our minds, a Monsanto acquisition of Agriums retail and distribution business makes some sense, although Monsanto would likely not be too interested in Agriums fertilizer wholesale assets; Yara would be. Agrium competes and cooperates with Monsanto in several product groups that are important to each company (i.e., seeds, glyphosate). Perhaps a logical transaction would be for Yara to acquire the wholesale assets and some storage and distribution facilities, while Monsanto takes Agriums advanced technologies business and possibly its retail empire.
75
January 2011
BELARUSKALI
Sell-Down Probability: 65% Logical Investor(s): Chinese or Indian SOE (not Russians) The Belarussian governments first deputy prime minister stated in mid-2010 that the government intends to raise up to $7 billion from the sale of a minority stake in potash producer Belaruskali. He stated the government would sell a non-blocking stake in the firm, or less than 25%, and that an acquisition of the stake by China or a Chinese company would make sense. The first deputy prime minister stated that, China is one of the largest buyers of our fertilizers, so if China becomes a holder of a certain stake, this would guarantee uninterrupted supplies. The National Assembly of Belarus recently voted to lift privatization restrictions of Belaruskali, which owns a 45% stake in BPC, with 50% owned by Russian potash producer Uralkali, and the remaining 5% held by Belarusian Railways Association.
COMPASS MINERALS
Acquisition Target Probability: 10% Logical Acquirer(s): K+S While both companies are involved in fertilizer production, the strongest rationale behind a potential Compass acquisition by K+S is actually based on Compass Minerals salt business. K+S is the worlds largest salt producer, with about 29.8 million tonnes of capacity, and is second to China National Salt at 18.7 million tonnes. Based in the United States, Compass Minerals is the thirdlargest salt producer with 14.4 million tonnes of capacity. K+S has had a successful track record of consolidating the global salt industry, as follows:
We peg a CMP takeover at 10%.
1. Started in the salt business with a high exposure to de-icing and industrial salt in Europe; 2. Added salt for chemical use through the acquisition of Frisia Zout; 3. Created the #1 salt producer in Europe through the acquisition of Solvays salt business; 4. Acquired the #1 salt producer in South America through an acquisition of SPL, which gave the company market entry into both the United States and Latin America; and 5. Acquired Morton Salt, the largest producer at the time in North America.
Compass Minerals also has potassium sulphate (SOP) production capacity of ~350,000 tonnes (expected to grow to 570,000 tonnes by 2015), giving K+S access to more of the SOP market in the United States, which typically earns a premium price and margin to commodity potash MOP. After K+S pays C$434 million for Potash One, we estimate K+S will have about 300 million of cash on hand, plus cash flow generation from what we think will be a very strong Q4/10, as well as the possible sale of its COMPO nitrogen business, which we estimate generates annual EBITDA in the 400 million area.
76
January 2011
CF INDUSTRIES
Acquisition Target Probability: 10% Logical Acquirer(s): Yara International

We peg a CF takeover at 10%.
Following a failed attempt by Yara to acquire Terra Industries, we believe the new and improved CF could actually be more attractive to Yara than Terra by itself, especially given that CF is on track to deliver more than $135 million of annual cost savings. Yara knows that North American nitrogen assets are far more attractive than similar European assets (having bought Saskferco in 2008), especially with the rise of shale gas production, which should keep long-term natural gas prices in the United States at a relatively inexpensive level. This will increase the challenges for Ukrainian, and to a lesser extent, European ammonia/urea producers, to economically ship urea to the U.S. Gulf.
INTREPID POTASH
Acquisition Target Probability: <5% Logical Acquirer(s): Agrium Two founding shareholders control 31.3% of the company, and after speaking with one of them in mid2010, we dont think they are currently sellers.
We peg an IPI takeover at <5%.
Following a site visit, we think the Carlsbad assets and various capacity expansion opportunities are impressive. Intrepid has a track record of earning higher net potash prices per tonne than its large cap North American peers, due to its close proximity to end-user markets. In our view, this would fit nicely with Agriums extensive distribution network throughout the United States not to mention that Agrium is short about 1 million tonnes of potash per year. We are confident that Intrepid will remain the only potash pure play in North America for quite some time. We know that the company is not interested in phosphate fertilizers, and with respect to nitrogen, it wants to see more evidence of shale gas development that would ensure continued competitiveness for North American nitrogen assets.
ISRAEL CHEMICALS
Acquisition Target Probability: <1% Logical Acquirer(s): PotashCorp While PotashCorp already owns a 13.9% interest in Israel Chemicals, Israel Corporation (i.e., the Government of Israel) owns a 52.4% controlling stake. We do not assign any probability to an acquisition due to the following:
1. Israel Corporations controlling stake; and 2. Too much of ICLs operations are outside the scope of fertilizers (57% of its $4.5 billion sales).
We peg an ICL takeover at <1%.
ICL is one the lowest cash cost (FOB Port) potash producers in the world, with ~5.7 million tonnes of potash (2 million tonnes is high-cost potash in Spain and England), 4.5 million tonnes of phosphate rock, and 1.9 million tonnes of phosphate fertilizers, and some NPK compound product.
77
January 2011
K+S AG
Acquisition Target Probability: <1% Logical Acquirer(s): EuroChem, BASF EuroChem currently owns 14.9% of K+S, but in our view, EuroChem is more of a K+S seller than a buyer. EuroChem is trying to finance its 2.3 million tonne underground greenfield potash project in Volgograd, Russia (not to mention the possibility of further phases).
We peg a K+S takeover at <1%.
BASF, which once controlled K+S, has been slowly selling down its stake over the past dozen years. In 1998, BASF reduced its controlling stake down to 25.1%. One year later, BASF sold about 10.1% of K+S, leaving itself with a 15% ownership position. In 2003, BASF reduced its K+S holdings down to 10%, which is where it currently stands unchanged for the past seven years.
MOSAIC
Acquisition Target Probability: 10% Logical Acquirer(s): Vale Are Mosaics substantial Saskatchewan-based potash resources any less of a strategic asset than those of PotashCorp? We think not. However, unlike PotashCorp, Mosaic is a U.S company. For any potential Mosaic acquisition, Cargills blessing is required, as it owns 64.1% of the company. Vale and Mosaic have a strong track record of dancing around the same Latin American circles. In February 2010, Vale bought Mosaics interests in Brazilian group Fosfertil for ~$1 billion, and an option on a fertilizer production and bagging business called Cubatao.
We peg a MOS takeover at 10%.
In April 2010, Mosaic acquired from Vale, for $385 million, a 35% stake in the open-pit Bayovar phosphate mine in Peru. Bayovar will eventually have an annual capacity of 3.9 million tonnes, and Mosaic has the right to purchase 35% of the rock, while Vale retains 51% control (~25% was sold to Mitsui). Benefits of a Mosaic acquisition by Vale include the following:
1. Vales Latin American presence in Brazil, Argentina, and Chile would be strengthened, as Mosaic owns warehouses, blending operations, phosphate production assets, and a port; 2. Vale would attain instant potash credibility by becoming the #3 producer in the world (with increasing capacity to 16.8 million tonnes over time), with unique access to Latin American markets, North American markets, and a ~37% stake in Canpotex. Recall that Vale bought Rio Tintos potash development assets for $850 million and wants to materially increase its fertilizer presence both inside and outside of Latin America; and 3. Vale would acquire one of worlds best integrated phosphate asset portfolios on the planet (behind Moroccos OCP).
Brazil is among the largest fertilizer consumers in the world, importing 53% of its phosphate needs and up to 92% of potash requirements.
78
January 2011
POTASHCORP
Acquisition Target Probability: <1% Logical Acquirer(s): n.a.

We peg a POT takeover at <1%.
Now that PotashCorps potash resources are considered a strategic resource to Canada, we believe it is highly unlikely that any company beyond Canadian borders would receive Investment Canada approval. Within Canada, there is no company we can think of that would be interested in acquiring PotashCorp. Canadian pension funds, Teck, and several First Nations groups were likely only interested in blocking a BHP hostile acquisition, which is no longer required.
SILVINIT
Acquisition Target Probability: 100% (Uralkali) On December 20, Uralkali launched a proposed acquisition of Silvinit via two transactions. First, Uralkali will spend $1.4 billion cash for 20% of Silvinits common shares. Second, Uralkali will swap its own shares for the remaining 80% of Silvinits shares, as well as 100% of its preferred shares. The acquisition would create the third-largest potash company (10.6 million tonnes), behind PotashCorp and Mosaic. Both Silvinits and Uralkalis mines are relatively close together, and material synergies would come from: (1) organized production; (2) strengthened pricing power; (3) increased freight-related and SG&A economies of scale; and (4) a more flexible distribution network. For further details, please refer to FSU Potash Consolidation Implications on page 42.
SOCIEDAD QUIMICA Y MINERA DE CHILE
Acquisition Target Probability: <5% Logical Acquirer(s): PotashCorp PotashCorp already owns a 32% stake in SQM, while company Chairman Julio Ponce also (directly and indirectly) owns a 32% stake. In order for an acquisition to occur, Mr. Ponce must want to sell. Why? There are eight members of SQMs board of directors, as follows: (1) four are appointed by Mr. Ponce; (2) three are appointed by PotashCorp; and (3) one is appointed by ADR holders. In any board vote that ends in a four-four tie, the ADR-appointed board member is removed from the voting process, and the votes are recast, implying that Mr. Ponces interests will ultimately prevail. PotashCorp likes SQMs profile because: (1) of its distribution network in Latin American markets; (2) it is the worlds largest producer of potassium nitrate and specialty fertilizers, with a 50% global market share; and (3) it has top global market share positions in its other business, such as lithium (24%), iodine (25% to 30%), and industrial nitrates (~50%).
YARA INTERNATIONAL
We peg a SQM takeover at <5%.
Acquisition Target Probability: <1%

We peg a YAR takeover at <1%.
Logical Acquirer(s): n.a. The Norwegian government owns 36.2% of Yara. We are not aware of any company that is interested in European nitrogen assets at the moment. Additionally, we think that the Norwegian government would not relinquish its blocking position in the company.
79
January 2011
Do Grain Prices Influence Fertilizer Stocks?

Simply put, yes. One only need watch the USDAs monthly release of its World Agriculture Supply & Demand Estimate report, where ending stock, production, or yield deviances from consensus estimates can lead to wild swings in both crop prices and fertilizer equities. We performed numerous regressions to determine relationship strengths between changes of fertilizer equity prices and of major crop (i.e., corn, soy, and wheat) and energy (oil and gas) prices. We also looked at how fertilizer stocks change with NPK price movements. We consider an R2 greater than 0.70 (shaded in tables) to be meaningful. Our key findings are below:
KEY FINDINGS
1. Nitrogen-levered stocks, such as Agrium, CF Industries, and Yara, have the strongest relationship to
changes in U.S. corn prices. Why? Corn requires significantly more nitrogen-based fertilizer per acre than phosphate and potash.
2. Urea is a much better predictor of changes to nitrogen-levered stocks than ammonia. 3. The relationship between natural gas price changes and nitrogen-levered stocks is surprisingly weak,
given that between 75% and 90% of the cash cost of ammonia is natural gas feedstock.
4. Oil price changes are a much better predictor of Agriums share price than natural gas price changes. 5. Since inception, Agriums stock price has a strong relationship to both urea and DAP prices, with an average R2 of 0.78. 6. Naturally, Mosaics share price is more closely tied to DAP prices than to any other nutrient. 7. Potash-levered stocks have a higher correlation coefficient to changes in soybean prices than to other crop commodity price changes. 8. The R between PotashCorp and potash prices, over a 10-year period, is only 0.49. However, applying a
2
six-month lag to the stock price increases the correlation coefficient to 0.89.
9. Surprisingly, K+S has a stronger relationship to nitrogen and phosphate price changes than to potash. K+S is the worlds fourth-largest potash producer. 10. Potash price changes are a poor indicator of almost all fertilizer equities. 11. Since it began trading as an ADR on the NYSE, SQM has no meaningful relationship with crop and
energy prices over any given period studied.

12. We found three-year correlations to be stronger than over any other period, and we believe the strength
of these relationships will not hold over the long term. Why? The 2006 to 2008 fertilizer cycle peak, and the associated 2008 to 2009 collapse, was unusually dramatic.
13. Long-term relationships break down when a stock is no longer trading on fertilizer fundamentals, such as when it has become a takeover target.
80
January 2011
AGRIUM
Crops & Energy
Over the past 10 years, between 73% and 83% of the movement of Agriums share price can be explained by movements in corn, soybeans, and wheat. The strength of the relationship has weakened substantially over the past three years, although the rank order of corn (#1), soy (#2), and wheat (#3) still holds true.
Exhibit 1.132: Regression Agrium Against Crops & Energy Prices
AGU has a meaningful 10-year R2 across all crops.
Corn 1 Yr 3 Yr 5 Yr 10 Yr Incep.
0.696 0.635 0.740 0.827 0.662
Soy
0.537 0.537 0.766 0.768 0.723
Wheat
0.488 0.317 0.508 0.729 0.678
Oil
0.291 0.762 0.650 0.816 0.815
NatGas
0.286 0.349 0.015 0.080 0.228
The long-term relationship between Agrium and corn prices is not surprising, since nitrogen is the major nutrient used by farmers to improve corn yields, particularly for Canadian and U.S. Midwest growers. Specifically, over half of Agriums 2009 revenue was in some way related to nitrogen, 28% to potash, and 12% to phosphate. Fertilizer costs typically account for between 10% and 20% of variable corn production costs in the United States, with nitrogen accounting for almost 60% of corns fertilizer requirements (on a pound-for-pound basis).
Fertilizers
We are not surprised to see that the variability in urea prices can explain almost 80% of the variability of Agriums share price. Agrium has indicated there is a direct correlation between what farmers receive for corn and the price that it charges for urea. Agrium is the fourth-largest phosphate producer in North America, and our regression work indicates a strong relationship between Agriums stock price and DAP prices. The company owns only one potash mine with 2.05 million tonnes of capacity; accordingly, the relationship to potash price variability is relatively weak, with an R2 value of 0.412 since inception.
Exhibit 1.133: Regression Agrium Against Fertilizer Prices
Ammonia 1 Yr 3 Yr 5 Yr 10 Yr Incep.
0.463 0.318 0.264 0.475 0.509
Urea
0.601 0.623 0.638 0.779 0.791
DAP
0.779 0.570 0.680 0.770 0.774
Potash
0.691 0.043 0.136 0.395 0.412
81
January 2011
CF INDUSTRIES
Crops & Energy
We would have bet that soybean price variability would be the poorest indicator of CFs share price, as soybeans dont really require nitrogen, and farmers apply 44 times less nitrogen fertilizer per acre than they do for corn (soybeans are able to fixate nitrogen from the air). We would have been completely wrong. In fact, since inception, soybean price movements can explain 90% of the movements in CFs share price. Corn is a close second, with an R2 value of 0.759 since CFs inception. One thing to keep in mind is that corn and soybean acres typically compete with one another, so their own R2 is very strong, and likely explains why the relationship between CF and soybeans is high. The strength of crop price regressions diverged during Agriums unsolicited bid for CF Industries, as the stock was being traded by event-driven arbitrage accounts, and no longer on fundamentals.
Exhibit 1.134: Regression CF Industries Against Crops & Energy Prices
Surprisingly, CF tracks soybeans better than corn.
0.516 0.691 0.736 0.759
Soy
0.399 0.681 0.889 0.898
Wheat
0.283 0.425 0.564 0.597
Oil
0.255 0.813 0.579 0.575
NatGas
0.050 0.474 0.006 0.005
Fertilizers
With 80%+ of CFs earnings levered to nitrogen fertilizer production, we would have expected a strong relationship between urea and CFs share price. However, over various periods studied, the R2 has only ranged between 0.538 and 0.579. We do not believe the relationship between potash and CF is strong, despite a one-year R2 of 0.731. Why? CF does not produce potash. The company did purchase and resell potash periodically over the past couple of years, but the amounts were immaterial, and CF has since stopped this practice.
Exhibit 1.135: Regression CF Industries Against Fertilizer Prices
0.282 0.348 0.240 0.240
Urea
0.538 0.579 0.561 0.561
DAP
0.700 0.575 0.642 0.642
Potash
0.731 0.004 0.229 0.229
82

INTREPID POTASH
January 2011
As Intrepid Potash started trading on public markets in April 2008, we do not believe there is enough data to provide a statistically relevant analysis, as we emphasize longer-term trends between fertilizer stocks and crop/energy/fertilizer prices.
Exhibit 1.136: Regression Intrepid Potash Against Crops & Energy Prices
IPI regression data is limited due to a mid-2008 IPO.
0.163 0.725
Soy
0.182 0.797
Wheat
0.018 0.597
Oil
0.238 0.802
NatGas
0.004 0.649
Exhibit 1.137: Regression Intrepid Potash Against Fertilizer Prices
0.093 0.240
Urea
0.026 0.680
DAP
0.069 0.587
Potash
0.005 0.104
83
January 2011
K+S
Crops & Energy
Regressions of K+Ss share price against various crop prices show consistent price variability with corn and soy prices over five-year, 10-year, and since-inception periods. The R2 between corn and K+S has ranged between 0.7 and 0.83 over the past decade, with a breakdown during this past year. While K+Ss stock price also exhibited a significant relationship with wheat prices historically, it appears that the relationship no longer holds the same strength. Historically, wheat price variability explained between 60% and 66% of K+S share price variability. In our minds, the Russian wheat crisis in 2010 was the primary reason for the relationship to collapse to 18.7%. We expect the R2 to strengthen over the coming years.
Exhibit 1.138: Regression K+S Against Crops & Energy Prices
Since inception, K+S has best tracked oil price changes.
0.368 0.699 0.746 0.829 0.623
Soy
0.336 0.595 0.834 0.786 0.700
Wheat
0.187 0.206 0.392 0.663 0.597
Oil
0.444 0.635 0.514 0.756 0.817
NatGas
0.095 0.483 0.010 0.067 0.320
Fertilizers
As the fourth-largest potash producer in the world, coupled with no phosphate production and little nitrogen, we are surprised to see that since its inception, K+S has the weakest relationship with potash price movements over other fertilizer prices. However, all 10-year and since-inception R2 values are reasonable, ranging from a low of 0.476 for ammonia to a high of 0.76 for DAP. The high R2 to DAP prices is somewhat puzzling, given the company has no phosphate production.
Exhibit 1.139: Regression K+S Against Fertilizer Prices
0.216 0.303 0.247 0.443 0.476
Urea
0.004 0.582 0.588 0.739 0.752
DAP
0.126 0.533 0.648 0.753 0.759
Potash
0.003 0.071 0.399 0.599 0.611
84
January 2011
MOSAIC
Crops & Energy
In our minds, over the long term, a significant amount of the variability in Mosaics stock price can be explained by the variability in soybeans (#1), corn (#2), and wheat prices (#3). Since Mosaics inception in 2004, soybean price variability can explain 86% of the movements in Mosaics share price. This makes sense. Why? U.S. soybean farmers use significantly more potash and phosphate fertilizer than nitrogen. Mosaic is one of the largest phosphate and potash fertilizer producers on the planet, and has immaterial nitrogen capacity. Specifically, about two-thirds of its EBITDA generation is from phosphates, with the remaining one-third from potash. We believe that Mosaics stock price divergence from crop prices since early 2010 is not stock specific but rather due to the broader equity market selloff from fears of a European debt contagion that began in April 2010. Longer term, we believe the strong trend between Mosaics stock price and grain prices (corn and soybeans, in particular) will remain intact.
MOS tracks all crops quite well, but especially soybeans.
Exhibit 1.140: Regression Mosaic Against Crops & Energy Prices
0.448 0.775 0.779 0.804
Soy
0.341 0.782 0.849 0.864
Wheat
0.216 0.590 0.653 0.710
Oil
0.222 0.834 0.731 0.753
NatGas
0.019 0.727 0.097 0.020
Fertilizers
Mosaics significant amount of phosphate assets within its production portfolio corroborates the strong relationship between its stock price and DAP prices. Since inception, the R2 between DAP prices and Mosaics share price is a robust 0.78. Like many other stocks, the R2 of potash price changes to movements in Mosaics stock price is weak, with a low R2 of only 0.203 since inception. We suggest ignoring the strong urea R2 of between 0.59 and 0.65 with Mosaics stock price. The company produces no nitrogen (for resale).
Exhibit 1.141: Regression Mosaic Against Fertilizer Prices
0.167 0.367 0.314 0.325
Urea
0.585 0.611 0.639 0.651
DAP
0.591 0.694 0.768 0.780
Potash
0.483 0.007 0.171 0.203
85
January 2011
POTASHCORP
Crops & Energy
PotashCorp, like Agrium, is one of only a few stocks that have strong relationships to all three crops over a 10-year period. For corn, soybeans, and wheat, the 10-year R2 values of 0.86, 0.81, and 0.78 are slightly higher than Agriums 0.82, 0.76, and 0.72, respectively. The strong relationships weakened over the past year, as expected. Why? In mid-August, BHP Billiton launched a hostile takeover attempt for PotashCorp, which temporarily decoupled the stock from fundamentals, such as soaring grain prices.
Exhibit 1.142: Regression PotashCorp Against Crops & Energy Prices
POT has a strong relationship to soybeans and oil price changes.
0.610 0.812 0.808 0.858 0.670
Soy
0.404 0.730 0.883 0.812 0.747
Wheat
0.569 0.490 0.617 0.779 0.696
Oil
0.075 0.836 0.650 0.802 0.820
NatGas
0.258 0.589 0.029 0.085 0.315
Fertilizers
We find it interesting that changes in the price of potash tend to have had a surprisingly low impact on changes in PotashCorps share price. Over the past three years, the potash R2 is nil, but down from 0.49 since the companys inception. However, changes in DAP and urea prices can explain 82% and 78% of PotashCorps share price changes since inception, respectively. We believe the reason for the relatively weak potash R2 can be partially explained by the fact that potash buying patterns are sporadic. While there is a very limited spot market for potash, spot prices typically follow negotiated, contracted prices between the two large selling syndicates (i.e., Canpotex, BPC).
Exhibit 1.143: Regression PotashCorp Against Fertilizer Prices
0.291 0.392 0.290 0.475 0.501
Urea
0.256 0.675 0.642 0.771 0.779
DAP
0.385 0.701 0.743 0.816 0.821
Potash
0.184 0.002 0.236 0.473 0.488
Just how good is the stock market at anticipating potash price improvements? When we lag PotashCorps share price by six months and run a regression against the current weekly potash (FOB Vancouver) price, we found the R2 over the 10-year and five-year term to be greater than 0.80 compared with <0.50 for no lag.
86
January 2011
SQM
Crops & Energy
Of the stocks we examined, the share price movement of SQM had the weakest relationship to movement in crop prices, with a slight exception for soybeans, which varies moderately well (R2 of 0.62) since SQMs inception. While SQM is the worlds largest potassium nitrate (NOP) producer, and a material portion of its total revenue is generated from the sale of potash-based fertilizers, its stock price does not trade with nearly the same variability to grain prices as other fertilizer equities do. We believe the reason has less to do with grain exposure than with SQMs capital markets profile: (1) roughly one-third of SQMs revenue comes from lithium and iodine, which have broad industrial usages; (2) insiders and related parties control at least 64% of SQMs shares; and (3) Chilean pension funds own a high percentage of SQM (~13.2%), which can make the stock price susceptible to large pension fund flows.
Exhibit 1.144: Regression SQM Against Crops & Energy Prices
SQMs relationship to fertilizer and grain prices is weak.
0.868 0.020 0.320 0.602 0.513
Soy
0.696 0.006 0.468 0.627 0.619
Wheat
0.698 0.096 0.069 0.429 0.447
Oil
0.132 0.017 0.117 0.562 0.627
NatGas
0.188 0.064 0.137 0.007 0.130
Fertilizers
The regression of SQM against fertilizer prices shows a mild relationship to potash prices over a 10-year period, but that relationship has deteriorated over time. We expect this trend to reverse as SQM increases its potash capacity to 2 million tonnes by 2012, and possibly to 2.2 million tonnes by 2014.
Exhibit 1.145: Regression SQM Against Fertilizer Prices
0.044 0.000 0.024 0.261 0.297
Urea
0.201 0.035 0.189 0.508 0.531
DAP
0.122 0.002 0.178 0.435 0.452
Potash
0.281 0.100 0.427 0.617 0.628
87
January 2011
YARA INTERNATIONAL
Crops & Energy
Yara is the worlds largest supplier of nitrogen fertilizer, with 80%+ of its annual revenue generated from nitrogen production. Similar to Agrium and CF Industries, our regression work revealed a consistent relationship between changes in Yaras stock price and changes in the prices of corn and soybeans over the mid- to long term. Since Yaras inception, corn and soybean price changes explain 80% and 71% of Yaras price changes, respectively. Yara also has a strong correlation to oil, as much of its nitrogen production feedstock was historically priced off oil-indexed gas contracts. However, as Yara continues to switch away from oillinked contracts in favour of European hub-based gas contracts, we expect this relationship to weaken over time.
Exhibit 1.146: Regression Yara International Against Crops & Energy Prices
Naturally, YAR tracks corn and oil very well.
0.489 0.737 0.791 0.801
Soy
0.442 0.682 0.755 0.711
Wheat
0.314 0.431 0.524 0.632
Oil
0.218 0.836 0.733 0.793
NatGas
0.006 0.597 0.105 0.035
Fertilizers
Since inception, the relationships between Yaras share price and urea and DAP prices have been decent, with a slightly higher R2 for DAP (0.75) over urea (0.68). Additionally, the relationships of both fertilizers have been consistent over the periods we reviewed, while the R2 values of potash price changes are not too meaningful (and all over the map) ranging between 0.03 and 0.55 over just the past three years.
Exhibit 1.147: Regression Yara International Against Fertilizer Prices
0.244 0.318 0.303 0.336
Urea
0.619 0.568 0.645 0.681
DAP
0.625 0.617 0.723 0.746
Potash
0.548 0.029 0.095 0.176
88
January 2011
Nitrogen Outlook
BENCHMARK PRICE FORECAST
For 2011 and 2012, we forecast average international ammonia prices of $360/tonne and $335/tonne (FOB Black Sea), respectively. Assuming shipping rates of between $55/tonne and $65/tonne, this implies $415/tonne and $390/tonne (CFR Tampa) for 2011 and 2012. At the end of December, Tampa prices continued to show strength at $475/tonne. If India halts ammonia business with Iran like Transammonia did in late December, further price declines could be delayed temporarily. For 2011 and 2012, we forecast average international urea prices of $345/tonne and $315/tonne (FOB Black Sea), respectively. Our regression-implied benchmark North American urea prices are $345/short ton and $315/short ton (FOB New Orleans). We would have forecast slightly lower global urea benchmark prices, but a recently widened 110% export tax window for domestic Chinese urea producers is a mildly bullish pricing signal amid several factors that will likely put mid-term pricing pressure on urea, including: (1) increased ammonia/urea capacity; (2) lower-cost gas regions are producing more nitrogen; and (3) the possible rise of low-nitrogen-utilization GM corn seeds.
Exhibit 1.148: SC Forecast Nitrogen Benchmark Prices
2006 AMMONIA CFR Tampa FOB Black Sea FOB Middle East (mt) (mt) (mt) (st) (st) (st) 324 250 288 291 390 410
2007 334 272 287 309 470 475
2008 587 537 559 584 784 893
2009 285 243 250 247 376 419
2010 391 342 351 388 466 480
2011E 415 360 380 401 535 579
2012E 390 335 355 376 501 541
We forecast higher urea and ammonia prices in 2011, but weakening in 2012.
FOB New Orleans FOB Mid Cornbelt DEL Pacific Northwest UREA FOB Black Sea FOB Middle East FOB New Orleans FOB Mid Cornbelt DEL Pacific Northwest DEL Western Canada
(mt) (mt) (st) (st) (st) (C$/mt)
222 235 218 273 311 412
306 318 346 384 412 511
499 542 505 571 632 778
250 275 272 331 360 503 Bold
280 306 302 360 393 492
345 371 345 393 451 550
315 340 315 362 422 524
Global Benchmark
SC Forecast
Exhibit 1.149: SC Forecast North America Benchmark Urea Prices

$900 $800 $700 $600 $500 $400 $300 $200 $100 $0 2004 Forecast
Urea ($/st)
2005
2006
2007 FOB New Orleans
2008
2009
2010
2011
2012
FOB Mid Corn Belt
DEL Pacific Northw est
89
January 2011
SUPPLY & DEMAND FORECAST
In our minds, supply and demand of the currently tight nitrogen market should begin to ease as new global ammonia capacity is brought online through 2014. Ammonia capacity is projected by the IFA to grow in the order of 4% per annum through 2014. While the construction of several global-scale nitrogen complexes was cancelled or postponed in 2009 and 2010, the IFA forecasts 37.4 million tonnes (NH3) of new ammonia capacity will be commissioned by 2014 (over 2008), bringing global capacity to 224.1 million tonnes (NH3) or 184.2 million nutrient tonnes. Of the 65 new ammonia plants that are expected to be built through 2014, 23 are currently scheduled to come from China. Additionally, we estimate that approximately one-third of the increase in global ammonia capacity is expected to come from improvements to existing plants, while the remainder should come from new projects. However, the overall net capacity increase of merchant ammonia will likely be small, as the majority of the projects are associated with increases in downstream capacity for urea.
Exhibit 1.150: IFA Global Ammonia Forecast
2010
(M mt N)
New ammonia capacity through 2014 should ease a tight nitrogen market.
Exhibit 1.151: IFA Global Urea Forecast

2014
(M mt N)
2011
(M mt N)
2012
(M mt N)
2013
(M mt N)
2010
(M mt)
2011
(M mt)
2012
(M mt)
2013
(M mt)
2014
(M mt)
Supply Capacity Production Utilization Demand Fertilizer Non-Fertilizer Distribution Losses Total Balance % of Supply
158.7 134.7
84.9%
163.8 139.6
85.2%
170.2 144.3
84.8%
176.1 150.3
85.3%
184.2 158.5
86.0%
Supply Capacity Production Utilization Demand Fertilizer Non-Fertilizer Total Balance % of Supply
179.1 155.6
86.9%
188.3 162.9
86.5%
198.5 169.9
85.6%
206.9 179.1
86.6%
222.1 193.4
87.1%
103.9 23.0 3.2 130.1 4.6

3.4%
106.1 24.2 3.3 133.6 6.0

4.3%
108.0 25.1 3.3 136.4 7.9

5.5%
109.9 25.8 3.4 139.1 11.2

7.5%
111.7 26.6 3.5 141.8 16.7

10.5%
133.7 17.5 151.2 4.4

2.8%
139.5 18.9 158.4 4.5

2.8%
143.6 19.9 163.5 6.4

3.8%
148.8 20.9 169.7 9.4

5.2%
152.6 21.9 174.5 18.9

9.8%
Source: IFA; Scotia Capital.
Global urea capacity is forecast to grow by 51.3 million tonnes between 2009 and 2014 to reach 222 million tonnes. However, excluding China, global urea capacity should increase by only 38 million tonnes to reach 144.6 million tonnes.
Exhibit 1.152: U.S. Urea Producer Inventories (M st)
In summary, we expect a large urea surplus to evolve by 2014, and would look for downward pricing pressure to accelerate in 2013 and 2014. Through 2012, we anticipate the supply/demand balance for both ammonia and urea to range between 3% and 6%. For the first half of 2010, U.S. urea inventories showed normal seasonal declines, with July 2010 pegged as the five-year low point. Urea inventories have still not returned to five-year average levels for this time of year. Specifically, urea inventories are 3% below the five-year average level, and tight supplies have been reflected in rising prices year-to-date.
We expect a urea surplus to evolve by 2014.
90
January 2011
Exhibit 1.153: Global Nitrogen Demand by Crop

Other 21% Wheat 17%
THE STATE OF THE NITROGEN MARKET
The Importance of Nitrogen
Rice 16% Fruits & Veg 16%
Half of all food today is dependent on nitrogen originating from ammonia-based fertilizers. The availability of nitrogen in the soil determines the plants growth, vigour, colour, and yield. About 60% of fertilizer consumption is nitrogenbased. Nitrogen is found in the earths atmosphere and, once processed, becomes one of three primary nutrients for crop growth. Nitrogen has to be applied on an annual basis to maintain yield and biomass compared to phosphate and potash fertilizers, which can theoretically go for longer periods of time between applications. Wheat, rice, and corn consume approximately half of all nitrogen fertilizer used. China dominates the global production of ammonia. However, lower-cost production areas such as Trinidad, Russia, and the Middle East are also significantly growing production. Nitrogen also has non-fertilizer uses in both industrial and agricultural use; in particular, 31% of U.S. ammonia consumption is for non-fertilizer purposes.
Sugar 3% Cotton 4% Oilseed 6%
Corn 17%
Exhibit 1.154: Top Ammonia Producing Countries

50 Ammonia Production (M mt NH ) 3
40
30
India
Indonesia
Trinidad
Russia
Ukraine
Canada
Source: IFA; Agrium; Scotia Capital.
Urea is the most commonly used nitrogen fertilizer due to its high concentration, stability in solid form, and its relatively low price per unit of ammonia.
Exhibit 1.155: Nitrogen Fertilizer Production Process
Natural Gas Air from the Atmosphere 32.5 MMBtu/ton Anhydrous Ammonia NH3 Carbon Dioxide CO2
Nitrogen has to be applied on an annual basis.
0.29 t/t Nitric Acid NA
0.22 t/t Liquid Ammonium Nitrate AN 0.80 t/t 0.45 t/t 1.01 t/t UAN Solutions 28-32% N UAN
Germany
China
Egypt
U.S.
China dominates the global production of ammonia.
20
10
0.58 t/t Liquid Urea UR
0.78 t/t
0.35 t/t
1.01 t/t Prill Tower or Granulator Prill Tower or Granulator
Ammonia Fertilizers & Industrial Sales
Nitric Acid Industrial Sales
Ammonium Nitrate Explosives
UAN Solution Fertilizers
Solid Urea Fertilizers, Feeds & Industrial Sales
91
January 2011
The U.S. Imports Half of Its Nitrogen

Exhibit 1.156: Top Ammonia Importers
Ammonia Imports (M mt NH ) 3
About half of U.S. ammonia needs are imported.
We estimate that about half of U.S. ammonia requirements are imported. This is unusual, as ~90% of global ammonia production is consumed domestically, as transporting ammonia is generally considered difficult, dangerous, and expensive. North American ammonia imports typically account for between 35% and 40% of world ammonia trade.
8 7 6 5 4 3 2 1 0
India
Taiwan
Turkey
Korea
France
Belgium
Germany
Spain
USA
Norway
Low-Cost Gas Regions Are Exporting Nitrogen
Ammonia Exports (M mt NH) 3
Ammonia exports tend to originate from gas-rich countries.
Exhibit 1.157: Top Ammonia Exporters

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
Ammonia exports tend to originate from gas-rich countries that have limited domestic needs. Trinidad is the worlds largest exporter of ammonia due to its large natural gas reserves and its proximity to the United States. While China is by far the worlds largest ammonia producer, the country consumes almost all of its production, making it an insignificant player in the global ammonia trade. In compliance with U.S./EU/UN requests, many companies (most recently Transammonia, Inc.) are winding down all contracts to export ammonia from Iran a positive, in our view.
China/Ukraine Provide a Floor Price
Trinidad
Indonesia
Iran
Ukraine
Russia
Saudi Arabia
Canada
Algeria
Exhibit 1.158: Ammonia/Urea Cash Cost Curves

$400 $350 $300 Floor
Netherlands
Qatar
$250 $200 $150 $100
Historically, 75%-90% of the cash cost to produce ammonia is the price of natural gas (ammonia is also the feedstock for production of urea, ammonium nitrate, and other nitrogen fertilizers). Since ammonia is the primary feedstock for urea, ureas cash cost is also highly dependent on the price of ammonia. High-cost producers in the Ukraine, China, and Western Europe currently set the floor price for nitrogen fertilizers. U.S. producers rank among lower-cost producers of nitrogen, as they benefit from offshore ammonia capacity in Trinidad. Sailing from Trinidad to the United States takes about one-quarter of the time it would take from the Middle East. U.S. natural gas production has increased significantly in recent years as declining conventional gas reserves have been more than offset by shale gas production, which has lowered the natural gas forward price curve there.
Europe (Contract) China (Coal)
Ammonia ($/mt)
High-cost producers in the Ukraine, China, and Western Europe usually set the floor for nitrogen fertilizers.
Urea ($/mt)
$50 $0 Middle East Trinidad Europe (Spot) Ukraine China (Gas) Russia U.S. Floor Ukraine is the floor during China's urea export tax peak-season Ukraine U.S.
$250
$200
$150
$100
$50
$0 Middle East Russia
Source: PotashCorp; Yara; Scotia Capital estimates.
92
January 2011
Exhibit 1.159: Low Barriers to Nitrogen Entry
High Government Involvement
2M mt (KCl)
1M mt (P2O5)
We estimate that ~60% of global ammonia production is under government control. This can lead to new capacity and production decisions being made for political reasons over economic ones. According to PotashCorp, the cost of building a 1 million tonne (NH3) ammonia/urea complex is in the $1.4 billion area, or up to $1.7 billion with associated infrastructure. This is significantly less expensive than world-scale potash and phosphate projects.
New Projects Keep Getting Delayed
(M mt) ($/mmBtu)
1M mt (NH3)
Mine Site Infrastructure
$0
$1
$2
$3 Billions
$4
$5
$6
Source: PotashCorp; Scotia Capital estimates.
Exhibit 1.160: Select Global Urea Projects

Country Pakistan Pakistan China Plant Engro Fertilizers Agritech Various Pequiven Sorfert Algerie Various Vietnam National Chemical Corp. Pequiven Yara Agro-Cherepovets JSC KazAzot Egyptian Fertilizer Company Misr Oil Processing Company (MOPCO) Lordegan Petrochemical Ejroud Saudi Arabian Fertilizer Co. (SAFCO) Various Ca Mau Sharkia El Djazairia El Omani lil Asmida Various Start Capacity Gas Cost 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2014 2014 1.3 0.1 ~8.6 1.5 1.3 ~15.4 0.6 0.7 1.2 0.5 1.8 0.3 1.3 1.1 1.1 1.5 ~1.4 0.8 2.4 ~0.6 $0.75 $0.75 $0.85 $0.60 $0.85 $2.00 $2.00 $0.75 $0.75 $1.00 $0.60 -
Global urea capacity growth could average 3.5% to 4.5% through 2014 (ex China).
Venezuela Algeria China Vietnam Venezuela Italy Russia Kazakhstan Egypt Egypt Iran Iran Saudi Arabia China Vietnam Algeria China
Over the past decade, 90% of the growth in nitrogen capacity came from new urea capacity. Through 2014, the IFA forecasts a 30% increase in urea capacity, with the addition of 55 new plants expected online by then. Between 35% and 40% of the new capacity should come from China. Over the past several years, urea capacity growth has averaged 4.1%, according to Yara. We expect global urea capacity growth to average 3.5% to 4.5% through 2014, excluding China. With fluctuating energy prices, changing export tax policies in China, and abnormal demand growth over the last couple of years, many new urea projects have either been cancelled or postponed.
Source: IFA; PotashCorp; Scotia Capital estimates.
Nitrogen Demand Is Generally Stable
Nitrogen consumption growth has historically been more stable than phosphate and potash consumption growth. Unlike phosphate and potash, nitrogen must be applied every season in order to maintain yield and biomass. Exhibit 1.161 shows a regional breakdown of nitrogen supply and demand. Over the past 15 years, global nitrogen fertilizer demand has increased at 1.6% per year. However, we note that the growth rate steadily accelerated through 2008 due to a surge in Asian (China and India) demand.
N demand growth is more stable than P and K.
Exhibit 1.161: Nitrogen Consumption by Region (2009)
Region Capacity
(M mt N)
Supply
(M mt N)
Fertilizer Industrial
(M mt N) (M mt N)
Other
(M mt N)
Demand
(M mt N)
Long/Short
East Asia South Asia North America West Europe Latin America Eas Europe & Central Asia West Asia Central Europe Africa Oceania
60,123 16,135 13,107 10,293 8,879 21,244 11,615 5,898 5,911 1,656
49,311 14,501 11,403 9,590 8,245 19,168 9,875 4,634 5,125 1,647
40,805 19,613 13,098 8,261 5,893 3,644 3,054 2,694 2,892 1,079
8,389 469 4,545 4,534 1,148 1,512 466 727 376 652
1,229 502 441 320 176 128 88 85 82 44
50,423 20,584 18,084 13,115 7,217 5,284 3,608 3,506 3,350 1,775
Short Short Short Short Long Long Long Long Long Short
Source: IFA.
93
January 2011
Phosphate Outlook
For 2011 and 2012, we forecast average international DAP/MAP prices of $500/tonne and $450/tonne (FOB Central Florida), respectively. While 2011 is starting off in the $600/tonne area, we expect prices to decline steadily over the next couple of years. Why? The 3 million tonne Maaden DAP project should start up by Q3/11, followed by Moroccos OCP that will increase its DAP/MAP capacity by 4 million tonnes, starting in mid-2013. For 2011 and 2012, we forecast phosphate rock prices of $125/tonne and $135/tonne (FOB Morocco), respectively. Demand for rock should increase with more new DAP/MAP capacity coming online than new rock projects being commissioned.
Exhibit 1.162: SC Forecast Phosphate Benchmark Prices
2006 2007 408 433 394 422 435 2008 974 980 849 892 1002 2009 328 324 294 339 412 2010 479 487 442 473 508 2011E 500 510 452 486 539 2012E 450 459 409 442 491
We expect phosphate prices to peak in 2011.
DAP/MAP FOB Central Florida FOB U.S. Gulf Export FOB New Orleans FOB Mid Cornbelt DEL Pacific Northwest PHOSPHATE ROCK FOB Morocco Global Benchmark
247 265 230 267 310
(mt)
44
59
363
117 Bold
105 SC Forecast
125
135
Exhibit 1.163: SC Forecast International Benchmark DAP/MAP Prices

$1,400 Forecast
DAP/MAP ($/mt)
$1,200 $1,000 $800 $600 $400 $200 $0 2004 2005 2006 2007 2008 2009 2010
2011
2012
FOB Central Florida
FOB U.S. Gulf Export
Exhibit 1.164: SC Forecast International Benchmark Phosphate Rock Price

Phosphate Rock ($/mt)
$500 Forecast $400 $300 $200 $100 $0 2004
2005
2006
2007
2008
2009
2010
2011
2012
FOB Morocco
94
January 2011
SUPPLY & DEMAND FORECAST
Phosphate Rock
Between 2008 and 2014, the IFA forecasts that global phosphate rock capacity will increase 20% to 228 million tonnes from 190 million tonnes in 2009. The bulk of the increase in future rock supply will likely come from Asia, with slight increases in all regions worldwide (ex United States).
Exhibit 1.165: Regional Phosphate Rock Supply & Demand
12
14
6 0
6 0
5 0
4 0
31
32
0 5 0
3 0
2 0
1 0
7
6 0 5 0 6 0 4 0
61
68
5 0
3 0
4 0
2 0
3 0
2 0
12
1 0
1 0
41 22
9
6 0 5 0 4 0
Production (M Mt) Dem and (M Mt)
Source: PotashCorp; Fertecon; Scotia Capital estimates.
In the United States, however, productive capacity is expected to decline. Since 2005, two phosphate rock mines and four fertilizer plants have been closed down permanently with U.S. phosphate rock production reaching levels not seen in 50 years. Why? Phosphate rock is a non-renewable resource, and the quality of remaining phosphate ore has been declining steadily.
Phosphoric Acid & Finished Product
Near term, we expect phosphoric acid capacity to remain constrained, particularly given the strength of the global recovery in fertilizer demand. The net addition to merchant grade acid capacity is only projected to be 1.3 million tonnes (P2O5), most of which will come from Jordan, Morocco, and Tunisia. Over the mid-term, global phosphoric acid capacity could increase to 55.5 million tonnes by 2014, or by a net 9.2 million tonnes. China, Morocco, and Saudi Arabia would provide the main additions to domestic capacity. The IFA believes that 90% of this net capacity expansion would be earmarked for domestic markets, with the remaining 10% sold under contracted off-take agreements. On the demand side, the IFA forecasts 3% to 5% annual growth in global phosphoric acid demand through 2014. Developed regions such as North America and Europe are expected to rebound, but growth there will only account for ~15% of global phosphate consumption. Why? Generally, soils remain well fertilized and only require application following harvests. In contrast, fertilizer application rates in many emerging markets remain low and up to 75% of soils there are nutrient-deficient, which ultimately leads to sub-par yields.
95

Exhibit 1.166: 2009 Phosphoric Acid Supply/Demand Balance
Region
Capacity
(M mt P2O5)
January 2011
Supply
(M mt P2O5)
Fertilizer
(M mt P2O5)
Industrial
(M mt P2O5)
Other
(M mt P2O5)
Demand
(M mt P2O5)
Long/Short
East Asia North America Africa East Europe Latin America West Asia South Asia West Europe Central Europe Oceania
14,476 9,191 7,893 4,451 2,309 2,235 2,146 1,025 1,087 600
12,733 9,850 6,930 3,140 2,010 1,655 1,481 844 602 540
10,676 3,952 800 596 3,704 1,092 6,620 1,552 515 618
1,236 991 523 222 907 374 110 699 44 23
239 99 26 16 93 29 134 45 11 13
12,151 5,042 1,349 834 4,704 1,495 6,864 2,296 570 654
Short Short Short Short Long Short Long Long Short Long
Source: Agrium; IFA; Scotia Capital.
Exhibit 1.167: Select Phosphoric Acid Projects

Country China Brazil Russia Iran Jordan Saudi Arabia China Jordan Algeria Phosphoric Acid Plant Various Vale JSC Kingisepp Phosphorit Arya Phosphoric Jonub Co. JAFCCO Ma'aden Various JPMC & IFFCO (JV) Ferfos/Engro Start 2011 2012 2012 2012 2012 2012 2012 2013 2014 Capacity
(M mt P2O5)
Exhibit 1.168: Select DAP/MAP Projects

Country Brazil Venezuela Morocco China Brazil Algeria China Saudi Arabia Vietnam Morocco DAP/MAP Plant Start Capacity
(M mt P2O5)
1.2 0.2 0.4 0.1 0.0 1.5 0.5 0.3 0.5 4.8
Copebras Ltda. 2011 Pequiven (DAP) 2011 OCP/Bunge J.V. (MAP) 2011 Various 2011 Vale 2012 Ferfos/Engro 2012 Various 2012 Ma'aden 2013 Tang Loong (DAP) 2013 OCP 2013-2015
0.1 0.1 0.2 0.9 0.4 0.5 0.7 1.3 0.2 2.0 6.3
About 12.5 m illion product tonnes of DAP/MAP capacity
Source: IFA; Company reports; Scotia Capital.
Source: IFA; Company reports; Scotia Capital.
Exhibit 1.169: IFA Global Phosphoric Acid Forecast

2010
(M mt P2O5)
2011
2012
2013
2014
(M mt P2O5) (M mt P2O5) (M mt P2O5) (M mt P2O5)
Supply Capacity Production Utilization Demand Fertilizer Non-Fertilizer Distribution Losses Total Balance % of Supply
47.8 39.6
82.8%
51.0 41.5
81.4%
52.5 43.3
82.5%
53.8 45.3
84.2%
55.5 47.1
84.9%
The expected supply and demand picture for finished product (i.e., MAP/DAP) is poised to be less strained. About 40 new MAP, DAP, and TSP facilities are in various stages of construction, with almost half of those coming from China. In addition to Maadens 3 million tonne DAP complex that should be online by Q3/11, Moroccos OCP recently announced the launch of a major investment program to expand its production of DAP and MAP. Specifically, OCP intends to construct four identical DAP/MAP plants, each with a capacity of about 1 million tonnes per year. The plants are to be built and commissioned in six-month intervals over the period July 2013 to July 2015. When combined with other projects, Moroccos DAP/MAP capacity will increase to 9 million tonnes from 3 million tonnes currently. In the United States, DAP producer inventory levels are 57% below the five-year average.
31.3 5.5 0.7 37.5 2.1

5.3%
32.8 5.6 0.8 39.2 2.3

5.5%
34.2 5.6 0.8 40.6 2.7

6.2%
35.5 6.0 0.8 42.3 3.0

6.6%
36.6 6.2 0.9 43.7 3.4

7.2%
Exhibit 1.170: U.S. Producer DAP Inventory (M st)
96
January 2011
THE STATE OF THE PHOSPHATE MARKET
All Crops Require Phosphates
Phosphorus (P) is a macronutrient required by all crops, and is found in inorganic phosphate rock. Phosphorous is vital for root development and helps plants resist drought. It is also important for plant growth and development, such as the ripening of seeds and fruit. Typically, phosphate fertilizers are produced by blending phosphate rock with sulphur and ammonia (Exhibit 1.171).
Exhibit 1.171: Phosphate Fertilizer Production Process
Primary Product Phosphate Ore from the Mine Phosphate Rock Primary Use To phosphate fertilizer producers; for direct application on acidic soil To fertilizer producers; to dealers that custom mix fertilizers
Screen, Wash, Float & Dewater
Phosphate Rock Super-phosphoric Acid Plant Phosphoric Acid Plants Phosphoric Acid P2O5
Add ammonia
MGA (54% P2O5)
Liquid Fertilizers Superphosphoric Acid (70% P2O5) Poly-N (11-37-0,10-34-0) To dealers that add ammonia and custom mix fertilizers To dealers that custom mix fertilizers
Calcination
Sulfuric Acid
Purchased Sulfur
Sulfuric Acid Plants Animal Feed Plants
Feed and Industrial Fertilizers Dical, Monocal and DFP Poultry, cattle and swine feed supplements
Cogenerated Electricity & Steam
Purified Phosphoric Acid Plants Raffinate
Technical-Grade and FoodGrade Purified Phosphoric Acid Solid Fertilizers DAP and MAP
Food and beverage products, metal treatment, detergents and electronics
Solid Fertilizer Plants

Add ammonia
To dealers that custom mix fertilizers; most DAP is exported
Exhibit 1.172: Phosphate Use by Crop

Corn 12% Other 29%
Phosphate Consumption by Crop
Demand for phosphate fertilizer by corn, soybeans, wheat, and rice makes up almost half of global phosphate fertilizer consumption (Exhibit 1.172).
Rice 12%
Wheat 16% Fruits & Vegetables 18% Oil Palm 1% Sugar 4%
According to Agrium, 47 lb/acre of phosphate fertilizer is typically applied to U.S. corn acres. For soybeans and wheat, this drops to 11 lb/acre, and 19 lb/acre (winter wheat) to 27 lb/acre (spring wheat), respectively. Harvested corn will remove approximately 75% of the P2O5 nutrient that was initially taken up by the crop. Harvested soybeans will remove closer to 85%.
Soybeans 8%
Source: IFA; Fertecon; PotashCorp; Scotia Capital.
97
January 2011
Exhibit 1.173: Phosphate Use by Region

Other 20%
China and India Are Important Phosphate Players
China and India account for almost half of global phosphate fertilizer consumption.
China 31%
China and India account for almost half of global phosphate fertilizer consumption. The difference between the two countries is that China has vast phosphate resources, while India has barely any. We estimate that China consumes about 12 million tonnes (P2O5) of phosphate annually, almost all of which is produced domestically. While Indias finished phosphate capacity is fairly significant (i.e., DAP/MAP), India must import the majority of the raw materials required for production, such as rock and phosphoric acid.
Who Has Access to Low-Cost Rock?
West Europe 6%
Brazil 8%
U.S. 11%
India 16% Other Asia 8%
Exhibit 1.174: Who Has the Rock?

60 6 Phosphate Rock Reserves (B mt) 5 4 3 2.1 2 1 0 Morocco China Jordan South Africa U.S. Other 1.5 1.5 1.1 10 0 3.7 40 30 20 5.7 Phosphate Rock Procduction (M mt) 50
Morocco and China control about 50% of the worlds phosphate rock. However, China is only able to satisfy its domestic phosphate requirements; therefore, China does not export a material amount of phosphate. Accordingly, Morocco exports ~40% of the worlds traded rock. India has a limited phosphate rock supply and relies heavily on imports of phosphate rock, phosphoric acid, and finished products. Exhibits 1.175 and 1.176 show the top importers and exporters of phosphate rock.
Exhibit 1.176: Rock Imports by Region
FSU 7% Latin America 8% Oceania 3% India 29%
Morocco exports ~40% of the worlds traded phosphate rock.
Reserves (LHS)
2008 Production (RHS)
2009 Production (RHS)
Source: USGS; Scotia Capital.
Exhibit 1.175: Rock Exports by Region

FSU 4% Other 3%
China 7%
Other Africa 17%
Morocco 42%
North America 13%
Middle East 27%
EU-27 17%
Source: Fertecon; PotashCorp; Scotia Capital.
Other Asia 23%
98
January 2011
Exhibit 1.177: Phosphoric Acid Capacity

CF 2% Other Public 6%
Phosphoric Acid Control with Governments
PCS 5% MOS 9%
Unlike producers of nitrogen and potash fertilizers, the worlds largest producers of phosphoric acid are mostly government-owned. We estimate that publicly traded companies control no more than one-fifth of the phosphoric acid market.
Private/ Government 78%
Office Chrifien des Phosphates (OCP), owned by the Moroccan government, has a 49% share of the phosphoric acid market.
60%+ of Phosphoric Acid Goes to DAP/MAP
Exhibit 1.178: Where Phosphoric Acid Goes

40% 35% 35% 30% 25% 20% 15% 10% 5% 0% DAP MAP Food & Industrial Feed TSP Other 9% 6% 5% 19% 26%
The majority of the worlds phosphoric acid is upgraded to concentrated solid fertilizers, such as DAP and MAP. According to PotashCorp, about 15% of phosphoric acid is used to produce feed, food, and industrial products. Production of phosphate rock suitable for phosphoric acid production in the U.S. has been declining over the past decade at an annual rate of about 4%. In 2009 U.S. phosphate rock production and reported demand fell to levels not seen since the mid-1960s.
Integrated Producers Hold the Cost Advantage
Exhibit 1.179: DAP/MAP Economics

$450
Phosphate Fertilizer Cost ($/mt)
Integrated phosphate producers hold an advantage of at least $100/tonne.
$400 $350 $300 $250 $200 $150 $100 $50 $0 U.S. Integrated U.S. NonIntegrated China Integrated India NonIntegrated
Companies such as Mosaic, CF Industries, PotashCorp, and Agrium, which are able to mine their own rock supply, hold a cost advantage over peers that buy rock feedstock on the open market. We estimate that integrated producers hold an advantage of at least $100/tonne. Current export prices for Moroccan rock are $125/tonne to $135/tonne. With a global reserve life of less than 100 years based on current consumption, we believe that rock will increasingly be viewed as a strategic resource over the next couple of decades.
Rock
Ammonia
Sulfur
Other
Saudi Arabias Maaden and Moroccos OCP projects are expected to account for the biggest share of new supply over the next several years, although the commercial start date for Maaden continues to be postponed (currently Q3/11). Phosphoric acid expansions primarily in granulated phosphate capacity will also likely come from China and OCP in Morocco. DAP/MAP projects are expected to add a total of 4.3 million tonnes over the next three years, representing a 5% increase over current global DAP/MAP/TSP capacity.
99
January 2011
Access to low-cost, high-grade rock is a significant cost differentiator when it comes to phosphate fertilizer production. Producers required to purchase rock are usually at a significant cost disadvantage, particularly if they rely on phosphate rock export markets.
Exhibit 1.180: New Phosphoric Acid Supply on the Way
3.5 3.0
Million Tonnes P 2O5
2.5
Saudi Arabia
2.0 1.5 1.0 0.5 0.0 2010E

Tunisia China Tunisia China Morocco Jordan Brazil China Morocco China
Tunisia China
2011E
2012E
2013E
2014E
Exhibit 1.181: Indian DAP Market

10 9 8
Focus on India
In India, DAP prices remained unchanged for several years due to government subsidies, which insulated farmers there from price fluctuations. The Indian government recently ended a maximum retail price policy for DAP, among other fertilizers. Under the new policy, subsidies will be given based on nutrient grade (i.e., subsidy on DAP will be calculated based on its 18% nitrogen and 46% phosphorous weights). India has now become a 5 million to 7 million tonne per year importer of DAP.
Focus on China
India is a 5 million tonne to 7 million tonne per year DAP importer.
7 DAP (M mt) 6 5 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Domestic Imports
Source: FAI; Fertecon; PotashCorp; Scotia Capital.
Exhibit 1.182: Chinese MAP/DAP Exports

5
DAP/MAP (M mt)
In China, 25% of DAP/MAP producers are nonintegrated, although rock is procured domestically. In 2007, the Chinese government stepped up efforts in curtailing the export of DAP and MAP fertilizers after it reached a record high of 3.8 million tonnes in 2007. The Chinese government has implemented a 110% seasonal export tax, in an effort to guarantee a sufficient supply of phosphate fertilizers during Chinas fertilizer application periods.
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
100
January 2011
Potash Outlook
For 2011 and 2012, we forecast average international potash prices of $430/tonne and $480/tonne (FOB Vancouver), respectively. China/India will likely reprice their potash contracts every six months, following several Canpotex deals announced in September/October. Southeast Asia is already paying in the $430/tonne (CFR) area for standard product and $450/tonne for granular. Chinese contracts are typically $30/tonne to $50/tonne less than Southeast Asia spot prices, but closer to $30/tonne in a rising price environment. For 2011 and 2012, we forecast average North American potash prices of $465/tonne and $515/tonne (FOB Saskatchewan), respectively. We may be too conservative as sales are already in the $460/tonne to $470/tonne range, but we will wait to see how prices react if/when dealers remove potash from allocation.
Exhibit 1.183: SC Forecast Potash Benchmark Prices
2006 2007 207 237 221 261 273 2008 492 631 629 736 704 2009 600 699 644 595 712 2010 350 421 394 415 454 2011E 430 465 442 470 504 2012E 480 515 489 516 553 POTASH FOB Vancouver FOB Saskatchewan FOB Carlsbad FOB Midwest DEL Western U.S. Global Benchmark
We are bullish on potash price development through 2012.
190 204 195 205 229
Bold
SC Forecast
Exhibit 1.184: SC Forecast International Benchmark Potash Price

$800 $700 Forecast
Potash ($/mt)
$600 $500 $400 $300 $200 $100 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012
FOB Vancouver
Exhibit 1.185: SC Forecast North America Benchmark Potash Prices

$1,000 $800 $600 $400 $200 $0 2004 Forecast
Potash ($/st)
2005
2006
2007 FOB Saskatchew an (mt)
2008
2009 FOB Carlsbad
2010 FOB Midw est
2011
2012
101
January 2011
SUPPLY & DEMAND FORECAST Exhibit 1.186: 2011 Global Potash Demand Expectations
Organization 2010E
(M mt)
We estimate 2011 potash demand of 56 million tonnes.
2011E
(M mt)
2012 - 2014 Growth

(%)
Revised
(2010)
For 2011, we expect potash (MOP only) demand will continue its recovery from a 2009 low of 29.2 million tonnes, and should reach the 56 million tonne area. This is a 12% year-over-year increase over our 50 million tonne demand estimate for 2010. There is likely 1 million to 2 million tonnes of upside available to our estimate, depending on the extent of dealer restocking, if any. We forecast an average annual growth rate of 4% through 2014. Exhibit 1.187 shows a regional breakdown of where K+S believes 2011 potash demand will be generated. PotashCorps CEO recently stated on PotashCorps Q3/10 conference call that India could import 6.3 million to 6.9 million tonnes of potash, Brazil could reach the 7.5 million to 8 million tonne range, and China could consume a massive 11 million to 11.8 million tonnes of potash. Finally, other Asia (i.e., Malaysia, Indonesia, etc.) could fall in the 6.3 million to 6.7 million tonne area.
Potash Corp K+S1 Mosaic Uralkali IFA2 Scotia Capital
50 - 51 50 - 51 48 - 49 51.7 52 51
55 - 60 53 - 58 52 - 55 56 56
3% - 5% 2.9% (to 2020) 3% - 5% 4%
November December October December December December
1. K+S's demand forecasts have been cut by 2M mt/y to account for low -grade and SOP demand. 2. Implied 2011 KCl demand, based on 7.9% grow th in K2O consumption.
Source: Company reports; Scotia Capital estimates.
Exhibit 1.187: 2011 Global Potash Demand by Region

2007
(M mt)
2008
(M mt)
2009
(M mt)
Low High 2010

(M mt) (M mt)
Low High 2011

(M mt) (M mt)
Beyond 2011, we think potash demand will grow at 4% through 2014.
Western Europe Central Europe / FSU Africa North America Latin America Asia Oceania
7.4 4.7 0.7 10.8 10.4 24.2 0.5 58.7
6.3 5.0 0.6 10.2 8.6 23.2 0.6 54.5
2.7 3.1 0.3 4.1 6.0 14.6 0.2 31.0
5.8 4.2 0.7 9.6 8.6 22.6 0.5 52.0
6.0 4.3 0.7 9.8 8.7 23.0 0.5 53.0
6.3 4.4 0.7 9.6 9.0 24.5 0.5 55.0
7.4 5.0 0.8 10.2 10.0 26.0 0.6 60.0
Note: K+S's forecast includes ~2M mt of low -grade and SOP potash.
We dont see too many significant greenfield potash projects coming online, other than several possible projects in China (i.e., Luobupo). Almost all of the new potash capacity coming online through 2014 will be brownfield potash expansion projects commissioned by Canpotex and/or BPC members (now including Silvinit). Two exceptions:
1. EuroChem hopes to begin commissioning its 2.3 million tonne Gremyachinskoye potash project in 2013, with full capacity likely achieved no earlier than 2015. Eventually, EuroChem hopes to double capacity to 4.6 million tonnes, with the construction of an additional skip shaft, as well as expansion of its processing facility. EuroChem estimates that the total investment for both phases will be $3.4 billion, or less than $750/tonne of overall capex. 2. Vale is looking to complete the first 2.4 million tonne phase (of a potential 4.3 million tonnes by 2017)
of its Argentina-based Rio Colorado project by Q4/13. Vale expects to spend $1.225 billion of capex in 2011 to further its Rio Colorado project. Additionally, Vale has secured concessions for the construction of a maritime terminal at the port of Bahia Blanca, and for the operation of a 756 kilometre branch of the Ferrosur railroad. Construction of a 350 kilometre rail spur is also required. Engineering and feasibility studies are already complete, as well as natural gas supply agreements.
102
January 2011
Exhibit 1.188: New Potash Capacity Coming Online Through 2014

2.0 Potash Supply (M mt K 2O) 1.5 1.0 0.5 0.0 -0.5 -1.0 2007 2008 2009 2010E Canada FSU 2011E Other 2012E 2013E 2014E
Source: Agrium; Scotia Capital estimates.
Exhibit 1.189: U.S. Producer Potash Inventory (M mt)
In our view, dealers and distributors may have finally resumed the replenishment of their ultra-low potash inventories. For the past 1.5 years, dealers have applied a just-in-time potash inventory strategy. North American ending potash inventory levels finally returned to the five-year average level in mid2010, but supplies have since tightened. November ending inventory was up by 0.2 million tonnes over October and now stands 22% below the five-year average November inventory level.
We expect dealer potash restocking to ramp up in 2011.
We expect dealer restocking to continue in advance of the spring planting season.
The real opportunity (and upside) to potash demand growth will come from optimal potash use by China, India, Brazil, and others. What will trigger these countries to move toward optimal potash application? It has already started, and is accelerating due to government fears of potential food shortages, as well as further food price inflation.
103
January 2011
THE STATE OF THE POTASH MARKET Exhibit 1.190: Potash Use by Crop
Corn 14% Wheat 6%
Potash Is Vital
Other 23%
If the worlds farmers stopped growing food today, there would only be enough grain inventories to feed the worlds population for slightly less than two months. As a result, 95% of globally produced potash is applied as a fertilizer to help feed the worlds growing population. Benefits of potash: (1) slows growth of crop diseases; (2) maintains cell resilience; (3) reduces wilting; (4) reduces water loss; (5) increases proteins available to plants; (6) assists in photosynthesis; (7) improves drought resistance; (8) builds cellulose; and (9) reduces the development of weak stocks. Potash has no known substitutes. Beyond North America, we believe investors should focus on the potash markets of China, Brazil, and India, which together account for 50% of the worlds potash use. In 1990, China consumed less than 2 million tonnes of potash annually. In 2011, China could consume more than five times that amount. In India, potash is consumed mostly in the southern rice-producing states, as northern transportation and distribution infrastructure is poor. Brazil accounts for 75% of all potash consumed in Central and South America. Unlike China and India, Brazil uses modern agronomic practices, and therefore prefers granular potash rather than the standard potash used in China and India.
Rice 13% Fruits & Vegetables 22% Palm Oil 5%
Soybeans 8% Sugar Crops 9%
Exhibit 1.191: Potash Use by Region

Other 17%
China 21%
China, Brazil, and India together consume 50% of the worlds potash.
W. Europe 7%
India 14%
Brazil 14%
Other Asia 12%
U.S. 15%
Exhibit 1.192: The Potash Opportunity (M tonnes)

30 25 20 15 10 5 0 30 25 20 15 10 5 0 1988 1998 2008 Potential 1988 1998 2008 Potential
30 25 20 15 10 5 0 1988 1998 China 2008 Potential
India
Brazil
104
January 2011
Exhibit 1.193: Potash Reserves by Country

Russia 22%
12 Countries with High-Quality Reserves
Canada boasts over half of the worlds economically viable potash reserves.
The current world resource estimate for potash is 250 billion tonnes K2O, of which ~20 billion tonnes (8%) is measured and indicated, and ~10 billion tonnes (4%) is economically viable at current prices.
Canada 53%
Belarus 9%
Canada boasts over half of the worlds economically viable potash reserves. When combined with Russia and Belarus, over 80% of the worlds potash resources are accounted for. While there are significant potash resources worldwide, many deposits have yet to be proven as commercially viable, given the quality of the ore.
13 Major Potash Producers
Germany 9% Brazil 4% Other USA 2% 1%
Exhibit 1.194: Potash Producers by Country

Other 12% Germany 8%
Only 13 companies have significant potash (MOP) production capacity.

Canada 35%
Only 13 companies have significant MOP production capacity.
By 2015, PotashCorps and Mosaics combined operational capability will account for almost half of annual potash consumption worldwide. FSU producers Belaruskali, Silvinit, and Uralkali will have capacity to provide up to one-third of the worlds potash requirements by 2015.
Israel 10%
Belarus 16%
Russia 19%
The Vice Governor of Qinghai recently stated that, within five years, China will increase its potash capacity to 10 million tonnes. Based on regional infrastructure challenges, this is likely optimistic.
Potash Is Heavily Traded Across Borders
According to PotashCorp, about 80% of world potash production is typically traded across borders. Why? There are only 12 producing countries and 160+ potash consuming countries. Global potash sales are dominated by two main offshore marketing organizations Canpotex, based in Saskatchewan, and BPC, based in the FSU. Canpotex is equally owned by PotashCorp, Mosaic, and Agrium, but the economics are split by supply contribution, or 54%, 37%, and 9%, respectively. Canpotex handles all of its members offshore potash sales to over 30 countries. Canpotex typically exports between 8 million and 9 million tonnes annually. BPC, or Belarusian Potash Company, is jointly owned by Uralkali and Belaruskali. While Silvinit is not a member of BPC (yet), a merger between Uralkali and Silvinit would create a powerhouse potash export marketing association.
105
January 2011
Exhibit 1.195: Potash Production Is Labour Intensive

Energy 20% Labor 30%
Potash Production Is Labour Intensive
Unlike nitrogen production, where 75% to 90% of cash costs are based on energy feedstock costs, potash mining is much more labour intensive. Production costs depend on deposit grades, ore depth, consistency, thickness, continuity, the amount of insoluble material contained in the ore body, and the distance between the mining area and the shaft. Mining costs increase as the potash beds become twisted, folded, or pinched.
Barriers to Entry Are Rising
Supplies 18% Royalties & Other Taxes 8% D&A 14% Other 10%
Exhibit 1.196: Greenfield Timeline

Mineral Lease
Exploration
Environm ental
We estimate that a 2 million tonne conventional potash mine in Saskatchewan costs between $2.8 billion and $3 billion. Our estimate excludes infrastructure costs (~$1 billion), as well as costs associated with purchasing a commercially viable potash deposit. A greenfield project in Saskatchewan can take nine years before first tonnes are produced. Nitrogen and phosphate projects can take three to four years to construct, and can cost 50% to 75% less.
Infrastructure
Head Fram /Shaft Sinking
Mine Developm ent/Ram p Up
We think a 2 million tonne conventional potash mine costs $2.8 billion to $3 billion (ex infrastructure).
Engineering & Design
Construct Mill
YearYear Year Year2 Year 3 1 YearYearYear Year 6 1 Year 1 Year YearYea 1 1 1 Year 1 Year Year 4 1 5 1 Year Year 7 Year 8 1 9
We Prefer Solution Over Conventional Potash Mining
In our opinion, a solution mine offers investors a better economic return than a conventional potash mine. Why: (1) lower capex requirements; (2) quicker timeline to production; (3) materially smaller environmental footprint; (4) absence of any flooding risk; and (5) on a discounted basis, the higher operating costs do not offset the lower upfront capital cost requirements.
Exhibit 1.197: We Prefer Solution Mining Over Conventional Mining
Equity investm ent m ade 40-year m ine life
We believe a solution mine has better economics than a conventional potash mine.
Solution Conventional
A B
where: NPV [A] - NPV [B] > 0
40-year m ine life
A = Solution mine production prior to conventional mine commissioning. B = Conventional mine production after closure of solution mine.
TimeA = TimeB
Recently, less expensive natural gas costs have improved solution mining economics in Saskatchewan. This may be behind K+Ss decision to purchase the Legacy project through an acquisition of Potash One.
106
Agrium Inc.
January 2011
Agrium Inc.
(AGU-N, AGU-T)
Dec 31, 2010: Rating: Risk: IBES EPS 2010E IBES EPS 2011E 1-Yr Target: 1-Yr ROR: 2-Yr Target: 2-Yr ROR: Div. (Curr.): Yield Valuation: 9x 2012E EBITDA, 13.5x 2012E EPS, DCF @ 11.2%, 90% RCN Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather Qtly EPS (FD) (Next Release: 09-Feb-11) Y/E DECEMBER-31 Mar Jun 2009A $-0.38A $2.35A 2010E $-0.04A $3.20A 2011E $0.95 $3.23 2012E $0.92 $3.20 Qtly CFPS (FD) 2009A 2010E 2011E 2012E Mar $0.69A $0.78A $1.34 $1.32 Jun $1.51A $3.51A $3.66 $3.65 Sep $0.16A $0.37A $1.81 $1.76 Sep $0.33A $1.34A $2.23 $2.18 Dec $0.19A $1.12 $1.29 $1.21 Dec $0.35A $1.50 $1.68 $1.61 Year $2.33 $4.65 $7.28 $7.09 Year $7.14 $8.91 $8.76 $8.61 $91.75 1-Sector Outperform High $4.74 $6.89 $106.00 15.7% $120.00 31.0% $0.11 0.1% Capitalization Shares O/S (M) Total Value ($M) Float O/S (M) Float Value ($M) S&P Weight 158.0 14,496.5 157.7 14,469.0 0.94%
P/E 26.4x 19.7x 12.6x 12.9x P/CF 8.6x 10.3x 10.5x 10.7x
All values in US$. Regular Voting Note: Historical price multiple calculations use FYE price. Source: Reuters; company reports; Scotia Capital estimates.
Still Acquisition Hungry

INVESTMENT HIGHLIGHTS
Still acquisition hungry. Following the loss of a hostile bid for CF Industries, a nice pickup of agricultural retail outlets in the U.S. and Argentina, and of course, the recent acquisition of AWB, we think Agrium Inc. (Agrium) is not finished. We expect to see more acquisitions over the next several years that will enable Agrium to reach its retail goal of $1 billion in annual EBITDA generation.
Nitrogen drivers look solid short term. Higher crop prices, low fertilizer inventories worldwide, several remaining global nitrogen plant outages, stronger 2011 U.S. ethanol demand, a more restrictive Chinese urea export tax, and low forward natural gas prices are all supporting superb nitrogen economics for Agrium, as well as for other U.S. nitrogen producers.
Margin expansion to continue. In our view, Agriums retail business is superb, offering margin protection during fertilizer cycle downturns, while providing diversification that many NPK peers do not offer. Retail margins should expand with increased private label offerings and a growing market share. Target valuation. In one year from now, we expect Agrium to trade at 9x 2012E EBITDA of $1.94 billion, 13.5x 2012E EPS of $7.09, and at about 90% of its replacement cost of $105 per share. We use these three metrics, as well as a DCF at an 11.2% WACC, to set our one-year target price of $106/share. Current valuation. Agrium is trading at 7.8x NTM EBITDA, 12.6x NTM EPS, and at 87% of its replacement cost. Our $106 target price implies a total ROR of 15.7%. AWB offers further upside to our forecast and target price, which we will integrate following the release of Agriums Q4/10 earnings. Getting to the next level. We are looking for Agrium to: (1) realize strong NPK Wholesale results in Q4/10, as realized/benchmark price lags fall away; (2) enhance/start synergy realization of UAP/AWB; (3) make a final investment decision on Vanscoy and progress on the MOPCO expansion; and (4) continue toward a long-term phosphate rock supply solution (Bayovar?). We have transferred coverage on the common shares of Agrium Inc. with a 1-Sector Outperform rating.
107
January 2011
Investment Thesis & Recommendation

Agrium Inc. is the largest retail supplier of agricultural products and services in North America, a major producer of nitrogen, phosphate, and potash, and a supplier of specialty fertilizers.
Agrium is the largest agricultural retailer in the U.S.
Fertilizer volumes, prices, and margins are soaring, although, nowhere near the extent we witnessed in mid-2008, which ultimately led to demand destruction and a sharp collapse of both the fertilizer complex as well as fertilizer company valuations. Based on our outlook and current valuations, we believe that Agriums share price will benefit more than any of its peers over the next 12 months. Grain prices heavily support a spring planting rally by Agrium, and to a slightly lesser extent, other fertilizer stocks. Agriums CEO suggested recently that crop nutrient prices can still increase from current levels before an impact on demand is felt. Specifically, he stated the cost of nutrients as a percent of revenue are almost 20% below normal, on a per acre basis, for a typical U.S. corn grower. In addition to a solid operational outlook throughout our forecast period, albeit with lower realized nitrogen and phosphate prices in 2012 (but higher potash prices), we are looking for Agrium to further capitalize on its strong acquisition prowess. We also expect continued synergy/margin realization to lower acquisition valuation multiples on AWB, Miles Farm Supply, UAP, and others.
Retail margins outperform wholesale margins in a down market.
Near-term stock catalysts for Agrium include: (1) realize strong NPK Wholesale results in Q4/10, as realized/benchmark price lags fall away; (2) enhance/start synergy realization of UAP/AWB; (3) make a final investment decision on Vanscoy and progress on the MOPCO expansion; and (4) continue toward a long-term phosphate rock supply solution (Bayovar?).
FINANCIAL OUTLOOK
For fiscal 2011, we estimate net sales, EBITDA, and fully diluted EPS of $10.6 billion, $2 billion, and $7.28, respectively, generally in line with consensus estimates. In 2012, we are looking for net sales of $10.9 billion, EBITDA of $1.9 billion, and EPS of $7.09. We note that we have not yet incorporated Agriums acquisition of AWB into our financial model, and will do so following the release of Agriums Q4/10 earnings (expected February 9, 2011).
TRANSFERRING COVERAGE
We rate Agrium 1-SO. Our oneyear AGU target price is $106 per share.
We have transferred coverage on the common shares of Agrium Inc. with a 1-Sector Outperform rating. Our target price is $106 per share, and is based on an equally weighted 9x 2012E EBITDA, 13.5x 2012E EPS, a DCF @ 11.2% WACC, and 90% of its replacement cost. Agrium is currently trading at about 7.8x NTM EBITDA and at 12.6x NTM EPS. We expect slightly lower realized nitrogen and phosphate prices in 2012 will result in a 3% drop in earnings. However, we think that upward revisions to 2011 global fertilizer consumption forecasts (already underway) will continue, which when coupled with strong crop futures prices, will provide the support to achieve our $106 price objective. Agrium is our top pick heading into 2011. Our risk ranking for Agrium is High. We believe this risk ranking is justified due to: (1) the cyclical nature of the fertilizer industry, which is partially offset by low nitrogen demand elasticity; (2) volatile crop price changes (and farmer incomes), to which changes in Agriums share price are strongly correlated; (3) new nitrogen supply risk that could erode Agriums long-term margins; (4) commodity price exposure, which for most commodity fertilizers is difficult to hedge beyond one year out; (5) the neverending possibility of China reducing its urea export tax rates; and (6) the continued rollout of nextgeneration crop seeds that may require materially less nitrogen fertilizer application.
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Agrium Inc.
January 2011
Capital Markets Profile

Headquartered in Calgary, Alberta, Agrium Inc. is the largest retail supplier of agricultural products and services in North America; a major producer of nitrogen, phosphate, and potash; and a supplier of specialty fertilizers in North America. Specifically, Agriums retail operations, Crop Production Services (CPS), boasts almost 1,000 locations (i.e., farm centres, terminals, and distribution centres) spread across 45 U.S. states, Canada, and South America. Its wholesale business is heavily nitrogen-weighted, with 5.8 million product tonnes of saleable capacity, including ammonia, urea, and other nitrogen-based fertilizers. Agrium also produces potash from its 2.05 million tonne mine at Vanscoy, Saskatchewan, and is an integrated producer of phosphate fertilizers, with about 2.2 million tonnes of concentrated rock production. Its current MAP capacity is about 1 million tonnes, and also produces other phosphate products such as merchant-grade acid and super phosphoric acid. Finally, Agrium is a producer of specialty products, such as slow- and controlled-release (SCR) fertilizers, through its Advanced Technologies business unit, and indirectly through a 19.6% stake in Hanfeng Evergreen Inc. Chinas leading producer of SCR fertilizers. Agrium was formed to facilitate the reorganization of the fertilizer division of Cominco Ltd. and the acquisition of the fertilizer assets of Alberta Energy Company in 1993. That same year, Agrium began trading on the Toronto Stock Exchange; three years later, Agriums shares first publicly traded on the New York Stock Exchange. Led by President and CEO Michael Wilson, Agriums management team consists of seasoned industry experts and business professionals with extensive knowledge of retail agricultural markets, as well as domestic and offshore chemical and fertilizer markets. Mr. Wilson has led Agrium for seven years, and is a past executive at Methanex and Dow Chemical. Together, insiders and related parties control (directly and/or indirectly) about 3.5% of Agrium. Agriums 158 million (fully diluted) common shares trade under the ticker symbol AGU on both the Toronto Stock Exchange and the New York Stock Exchange. Exhibit 2.1 shows the stocks historical trading range and volume. As at December 31, Agriums market cap was about $14.5 billion. The company currently pays a semi-annual dividend of $0.055/share, which equates to a current dividend yield of about 0.12%. Agrium reports in U.S. dollars, using a December 31 year-end, and its financial statements are prepared in accordance with Canadian GAAP.
Exhibit 2.1: Agrium Inc. Stock Price Performance
$100 $90 $80 $70 $60 Price $50 $40 $30 $20 $10 $0 Mar-09 Jun-09 A GU (V olume)
Ticker: Last P rice: M arket C ap: 52 Wk H igh: 52 Wk Lo w: FD Shares O/S: A GU $ 91.75 $ 14.5B $ 92.56 $ 47.96 158.0M
Agrium is the largest agricultural retail supplier in North America.
10,000 9,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Sep-09 A GU (Price) Dec-09 Mar-10 S&P 500 (rebased) Jun-10 Sep-10 0 Dec-10 Daily Volume (000s) 8,000
Insiders and related parties control 3.5% of Agrium.
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Corporate Profile
OVERVIEW
Agrium is one of the only North American public companies that offers investors exposure to agricultural retail, all three NPK nutrients, and slow- and controlled-release fertilizers. Agriums agricultural retail presence consists of nearly 1,000 outlets, scattered mostly throughout the United States, with some in Canada and South America. Its wholesale operations consist of 8.7 million (net) tonnes of capacity, split 62% nitrogen, 24% potash, and 14% phosphate. The companys small but growing Advanced Technologies business develops controlled-release fertilizers for the North American market, and has a 19.6% stake in Hanfeng Evergreen Inc. Chinas premier controlled-release nitrogen fertilizer manufacturer. Exhibit 2.2 summarizes Agriums capacities by division.
Exhibit 2.2: Agrium at a Glance (ex AWB)
Retail Wholesale Units Region Nitrogen Phosphate*
(000 mt) (000 mt)
Advanced Tech. Potash

(000 mt)
Agrium has 8.7M (net) tonnes of wholesale NPK capacity.
Type
Product Capacity
(000 mt)
Centres Terminals Distribution
907 38 18 963
Canada United States South America Egypt
3,730 1,273 635 196 5,834
660 421
2,050
ESN XCU Polyon Other
1,081
2,050
200 105 94 137 536
* Excludes phosphate rock mining assets.
In 2009, Agrium realized net sales of $9.1 billion and gross profits of $1.9 billion. While net sales were down only 9% during the year, gross profit fell by 40%. Why? The farmer strike in 2009 resulted in a collapse of global NPK volumes and prices, which materially impacted Agriums Wholesale unit, as well as the Crop Nutrients segment of its Retail business. Specifically, Wholesale gross profits were down 64% year over year, most notably phosphate and potash, which fell by 72% and 91%, respectively. Exhibit 2.3 highlights Agriums gross profit by business and product over the past three years.
Exhibit 2.3: Agrium Gross Profit by Business Line
$M $800 $700 $600
576 648 627 508 412 335 181 212 223 160 322 167 174 421
712 632
Advanced Technologies is a small but growing business for Agrium.
$500 $400 $300 $200 $100 $0 07 08 09 07 08 09 07 08 09 07 08
118 38 55
79
54
09
07
08
09
07
08
09
07
08
AAT
09
Crop Protection
Crop Nutrients
Seed, Services & Other
Nitrogen
Potash
Phosphate
RETAIL
WHOLESALE
ADVANCED TECHNOLOGIES
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Agrium Inc.
January 2011
A BRIEF HISTORY OF AGRIUM
In 1939, Cominco Ltd. entered into the fertilizer business. Things were fairly quiet for the next 25 years until the mid- to late 1960s, when Cominco commissioned two nitrogen complexes as well as its Vanscoy potash mine. The 1970s and 1980s saw two more nitrogen facilities opened. Agrium was formed in 1993 to facilitate the reorganization of the fertilizer division of Cominco and the acquisition of Alberta Energy Company. Agrium established its Retail division through further acquisitions of Crop Production Services (CPS) in 1994 and Western Farm Service in 1995. The companys phosphate business was initiated through the 1995 purchase of Nu-West Industries. The same year, Agrium established its first international presence under the name Agroservicios Pampeanos (ASP). In 1996, Agrium bought Viridian Inc., which included Viridians Alberta-based nitrogen and phosphate assets in Redwater and Fort Saskatchewan. Over the following decade, Agrium focused on bulking up its phosphate and nitrogen businesses through both acquisitions and greenfield development. Agrium made retail acquisitions in 2006 (Royster-Clark), in 2008 (UAP), and again in 2010 (AWB). Several other acquisitions have occurred over the past several years, which include retail outlets in South America, Nu-Gros fertilizer technology and professional products business, Pursell Technologies, numerous retail acquisitions in the United States and Canada (most recently Miles Farm Supply), and the purchase of Common Market Fertilizers a European fertilizer distributor. Additionally, Agrium holds a 19.6% stake in Hanfeng Evergreen, a 26% stake in MOPCO a nitrogen complex in Egypt, and a 50/50 JV in an ammonia/urea complex in Argentina. Exhibit 2.4 summarizes the evolution of Agrium over the past 80 years.
Exhibit 2.4: A Brief History of Agrium
1931 1965 1968 1969 1977 1987 1993
Cominco Fertilizers enters the fertilizer business. Homestead (nitrogen) begins production. Borger (nitrogen) begins production. Vanscoy (potash) begins production. Carseland (nitrogen) begins production. Joffre (nitrogen) begins production. Cominco Fertilizers publicly trades on the TSX. Nu-West Industries and Western Farm Service acquired. Cominco Fertilizers Ltd. changes its name to Agrium Inc. Agrium establishes its international presence under the name Agroservicios Pampeanos. Agrium is publicly traded on the NYSE. Viridian Inc. acquired - Redw ater (nitrogen, phosphate) and Fort Saskatchew an (nitrogen). Ramussen Ridge (phosphate) acquired. Kapuskasing (phosphate) begins production. Unocal's agricultural products division acquired. Profertil S.A. begins production in Argentina. Astaris (Nu-West's Condo phosphate operation) acquired. Western Canadian fertilizer distribution assets from Imperial Oil acquired. 18 retail outlets in Argentina and Chile acquired from UAP. Royster-Clark acquired. Nu-Gro fertilizer technology and professional productions businesses acquired. Pursell Technologies acquired. 19.6% equity stake in Hanfeng Evergreen acquired. ADM's 18 retail centres and 14 satellites in Kansas and Oklahoma acquired. United Agri Products (UAP) acquired. 70% equity stake in Common Market Fertilizers S.A. (CMF) acquired. Agrium opened an office in Beijing. Agronomics division of Turf Care Products acquired. Agrium's Retail unit consolidates in the U.S., and changes its name to Crop Production Services (CPS). 26% equity stake in MOPCO (Egypt) acquired. Agrium loses hostile bid for nitrogen rival CF Industries. Remaining 30% of CMF acquired. 24 Argentine retail centres acquired, as w ell as Miles Farm Supply in the U.S. Agrium enters Australasian agricultural retail market through its acquisition of AWB. Agrium sells a majority of AWB's Commodity Management business to Cargill.
The acquisitions of Royster-Clark and UAP have made Agrium the largest agricultural retailer in the U.S.
1995 1996 1998 1999 2000 2004 2005 2006 2007 2008 2009 2010
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January 2011
THE PATH FORWARD
Retail. (1) Integrate the earnings-accretive AWB acquisition into Agriums platform, potentially selling off the remaining non-core commodity management businesses that Cargill did not acquire. Realize up to A$40 million in AWB annual synergies by 2012 (A$17 million in 2011 for a one-time cost of A$5 million), as well as improve market share position (at the expense of Elders?); (2) realize the full $115 million in synergies from the UAP acquisition; (3) continue to grow the business through acquisitions in both North and South America, ultimately moving toward a 30% U.S. market share goal from 15% to 17% currently; (4) focus on organic growth opportunities, with a particular emphasis on its seeds and private label businesses; and (5) optimize returns from economies of scale across all product lines.
Investors should focus on Agriums plan to replace Kapuskasing.
Wholesale (1) Make a final investment decision on its $1 billion brownfield potash project at Vanscoy, which would increase Agriums potash capacity by 37% to 2.8 million tonnes; (2) continue to evaluate greenfield potash opportunities in Saskatchewan, or off-take agreements with potash development companies; and (3) progress the expansion of two urea trains at its 26%-owned nitrogen complex in Egypt (MOPCO), which would triple the size of the complex. In our view, Agrium will not expand its phosphate business, other than to secure rock supply for its Redwater phosphate facility in Alberta. Currently, the facility is supplied from Agriums phosphate rock mine in Kapuskasing, Ontario. However, the mines economic life is expected to end in 2013. We believe that Agrium is not worried about its long-term phosphate rock supply, as it believes the phosphate rock market will be long for the period of at least the next five years, versus a short market since 2002. Advanced Technologies. (1) Continue to reduce the coating cost for its flagship product, ESN; (2) double earnings from its AAT business primarily through increasing ESN demand to ~1 million tonnes per year; (3) expand various AAT product lines globally; and (4) enhance presence in China either through Hanfeng or another channel (ChinaBlue Chemical?). Exhibit 2.5 shows a map of Agriums global presence.
112
113
4 22 16a 11 17-19 21 14 20
1 Corporate HQ Wholesale - Potash 2 Vanscoy Retail 16a ~950 outlets in the U.S. 16b 33 outlets in Canada 16c 57 outlets in Argentina, Chile, Uruguay Advanced Technologies 17 Alabama 18 Georgia 19 South Carolina 3 4 5 6 Wholesale - Phosphate Redwater Kapuskasing Soda Springs Dry Valley 7 8 9 10 11 12 13 14 15 Wholesale - Nitrogen Redwater Carseland Joffre Fort Saskatchewan Borger Kennewick (upgrade) West Sacramento (upgrade) North Bend (upgrade) Bahia Blanca
Agrium Inc.
Exhibit 2.5: Map of Agriums Operating and Investing Activities
1, 3, 7, 8, 9, 10, 16b 2 5,6 12
13
16c 15
20 21 22 23
Investments Hanfeng (19.6%) MOPCO (26%) CMF (100%) AWB (100%)
23
January 2011
January 2011
Five Reasons We Like Agrium

1. SUPERB DIVERSIFICATION ACROSS THE AG VALUE CHAIN
We believe that Agrium is the most well diversified fertilizer producer among its peers.
Exhibit 2.6: Agriums Ag Value Chain
Agrium is well diversified across the value chain.
First, Agrium has dedicated retail exposure, with a 15% to 17% U.S. market share as well as growing retail markets in other countries. While we note that its wholesale business is not evenly spread across all three macro nutrients (i.e., heavy weighting towards nitrogen), its portfolio allocation is admirable, given its strong nitrogen cost advantages. Agriums small Advanced Technologies segment adds upside to the growing market for controlled-release nitrogen fertilizers. Geographically, the majority of Agriums presence is in the United States, but offers material and expanding exposure to Australasian and South American agriculture markets, including Argentina, Chile, and Uruguay.
and AWB
Source: Agrium.
2. RETAIL MARGINS OFFER GREATER STABILITY OVER WHOLESALE MARGINS
In our view, investors should appreciate the relative stability that Agriums retail gross margins offer over wholesale gross margins. While it is certainly true that wholesale fertilizer margins generally outperform retail margins as the fertilizer cycle approaches its peak, we note that fertilizer cycles have historically been marked by five to seven years of underperformance, followed by one to two years of outperformance. Accordingly, at the peak of the fertilizer cycle, such as in mid-2008, investors would have been rewarded, at least on a relative basis, by switching out of wholesale stocks such as PotashCorp and Mosaic, and into Agrium. Exhibit 2.7 shows Agriums retail and wholesale margins since 2000. We note that the standard deviation of Agriums retail gross margins is almost half of its wholesale margins. In fact, Agrium states that the standard deviation of its Crop Protection business line is about 1%.
Exhibit 2.7: Agriums Retail Margins Offer Greater Stability Over Wholesale Margins
45 40 35 30 25 20 15 10 5 0
Gross Margin (%)
Fertilizer retail margins offer greater stability over wholesale margins.
Retail Wholesale
Forecast
Wholesale Gross Margin Standard Deviation: 6.4% Retail Gross Margin Standard Deviation: 3.2%
Low er retail prices coupled w ith highcost inventory
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
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Agrium Inc.
January 2011
3. UAP MERGER SYNERGIES ON TRACK
Exhibit 2.8: Targeted UAP Synergies
UAP Synergy Source
2009
($M)
2010+
($M)
As an acquirer, Agrium should be able to meet its synergy targets in order to justify acquisition premiums and earn investor approval of future acquisitions. Agrium has, for the most part, delivered on its synergy promises to date. On its Royster-Clark acquisition, Agrium provided synergy guidance of $30 million, but delivered 58% better than expected. For its UAP acquisition, Agrium looked to realize $80 million in 2009 synergies, followed by $115 million in 2010+ (Exhibit 2.8). In 2009, however, only $55 million of UAP of synergies were realized due to the continuing recovery process of a weak crop nutrient market.
Marketing & Logistics Fertilizer Margins Corporate Overhead Purchasing Proprietary Products Other
$17 $25 $18 $18 $5 -$3 $80
$35 $25 $25 $22 $9 -$1 $115
4. AGRIUMS NITROGEN ASSETS HAVE MATERIAL ADVANTAGES OVER PEERS
The majority of nitrogen produced at Agriums Alberta plants is sold into Western Canada, as well as into the northwestern and Northern Plains regions of the United States. In these markets, the reference selling prices for ammonia and urea are materially higher than the benchmark New Orleans price (i.e., NOLA). Why? Most U.S. nitrogen imports arrive in the NOLA region and are then redirected. The further that nitrogen fertilizers are sold from the NOLA region, the greater the transportation, distribution, and storage costs, which are passed on to customers. Agriums strategically located production and upgrading facilities allow it to realize higher prices and enjoy lower gas costs due to lower AECO-C costs versus Henry Hub costs (due to pipeline distance differences), which enables Agrium to enjoy a strong margin advantage over its U.S. peers.
5. WELL-EQUIPPED BALANCE SHEET TO FUND FUTURE ACQUISITIONS
With ~$0.9 billion of cash on hand and another $1 billion of undrawn lines of credit, we think Agrium has a solid balance sheet to finance future acquisitions. We note that Agriums $1.1 billion all-cash acquisition of AWB should not deplete its current cash and undrawn credit lines. Why? Proceeds from Agriums sale to Cargill of most of AWBs commodity management businesses, as well as the recent issuance of a $500 million, 30-year debenture, mostly offset. Moodys and S&P rate Agriums debt Baa2 and BBB, respectively, which is mostly in line with its fertilizer producer peers, although we note that PotashCorp is rated one notch higher by both rating agencies.
Agriums net debt to EBITDA has dropped materially since 2000.
Exhibit 2.9: Agriums ROCE vs. WACC
45% 40% Return on Capital Employed (%) 35% 30% 25% 20% 15% 10% 5% 0% 2000
ROCE Avg.
Exhibit 2.10: Net Debt to EBITDA Is Declining

4.0x 3.5x 3.0x Net Debt to EBITDA (x) 2.5x 2.0x
Average
1.5x 1.0x
WACC Avg.
0.5x 0.0x 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
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January 2011
Valuation
OVERVIEW
We have transferred coverage on the common shares of Agrium with a 1-Sector Outperform rating and a one-year target price of $106 per share. When coupled with our forecast NTM dividend of 11 per share, we expect investors to earn a one-year pre-tax total return of 15.7%. Our one-year Agrium target price of $106 is derived from four different valuation methodologies, as follows: (1) a discounted cash flow approach; (2) an enterprise value to forward EBITDA multiple; (3) a price to forward earnings multiple; and (4) a replacement cost new calculation. We weight each of the four approaches equally. Our valuation work is extremely sensitive to various price, volume, and other assumptions used within our financial forecast (Exhibits 2.11 and 2.12). For full details on our earnings sensitivities, please refer to pages 170 and 171. We summarize our valuation work below.
Exhibit 2.11: Agrium Key Assumptions
2011E Nitrogen Volume (M mt) Realized Price ($/mt) Phosphate Volume (M mt) Realized Price ($/mt) Potash Volume (M mt) Realized Price ($/mt) 2012E
Exhibit 2.12: Agrium Summary Sensitivities

2011E Sensitivity Potash ($/mt) Phosphate Margin ($/mt) Nitrogen Margin ($/mt) Resale Margin ($/mt) Crop Protection Margin (%) Crop Nutrient Margin (%) Seed Margin (%) Natural Gas ($/mmBtu) C$ (US$)
$20 $20 $20 $20 1% 1% 1% $1 3
4.5 379
4.5 352
1.0 539
1.0 491
1.8 401
1.8 445
EPS +11 +9 +38 +28 +12 +13 +4 +39 +15
1. DISCOUNTED CASH FLOW
Our DCF approach yields a one-year price value of $124 per Agrium share. We apply a WACC of 11.2% and a long-term growth rate of 2.0%. Exhibit 2.13 highlights the buildup of our WACC calculation. Our terminal growth rate of 2.0% is in line with Agriums peer group and is justified, given Agriums high nitrogen and retail exposure. With Agriums wholesale potash business representing only 14% of our 2012E Agrium EBITDA, we have refrained from applying the 50 basis point long-term growth rate premium we have ascribed to more heavily weighted potash-levered companies.
Exhibit 2.13: Agrium WACC
Risk Free Rate Beta Country Risk Premium Cost of Equity Pre-Tax Cost of Debt Effective Tax Rate After-Tax Cost of Debt L/T Equity Weight L/T Debt Weight WACC Terminal Growth Rate 2.8% 1.30x 8.5% 13.9% 4.3% 25.0% 3.2% 75% 25% 11.2% 2.0%
Exhibit 2.14: Agrium Summary DCF

($M) EBITDA Less: Taxes Less: Change in NWC Less: CAPEX Free Cash Flow PV of Free Cash Flow 1 Net Present Value Less: Net Debt Equity Value Equity Value ($/sh) Equity Value, Rounded ($/sh) Last Price, Rounded Implied ROR 20,646 1,006 19,640 $124.31 $124 $92 35% 2011E 1,984 501 -42 375 1,150 1,034 2 2012E 1,938 485 -89 350 1,191 963 3 2013E 1,901 472 -75 300 1,204 875 4 2014E 1,935 480 -94 300 1,249 816 5
WACC 11.2% $119 $122 $124 $127 $130
2015E 2,006 498 -105 300 1,313 771 6
Terminal 2,067 513 -105 300 1,358 14,997
$124.31 1.50% 1.75% 2.00% 2.25% 2.50%
13.2% $102 $104 $106 $108 $110
12.2% $110 $112 $114 $117 $119
10.2% $130 $133 $137 $140 $144
9.2% $144 $148 $152 $157 $162
116
Terminal
Agrium Inc.
January 2011
2. ENTERPRISE VALUE TO EBITDA
On an EV/NTM EBITDA basis, Agrium is currently trading at 7.8x our NTM EBITDA estimate of $2 billion. Agrium should trade up toward 9x NTM EBITDA in 12 months from now (partially due to a 3% drop in 2012E EBITDA), which implies a $110 price value by then. Exhibit 2.15 summarizes our justification for a 9x EV/NTM EBITDA multiple. Specifically, we made the following adjustments:
We added a 1x EV/EBITDA multiple to Agriums nitrogen segment as its facilities have material gas cost and transportation-related pricing advantages over its North American peers.
In our minds, any premium multiple that Agriums phosphate business deserves due to its sulphur, ammonia, and transportation cost advantages is fully offset by Kapuskasings low reserve life.
Our Agrium potash EV/EBITDA multiple of 11x is unchanged from our base, as we believe the companys Canpotex membership is offset by a possible net deficit position in the market, as well as few economies of scale relative to its North American peers.
We believe that Agriums agricultural retail business deserves a 1x premium multiple over its peers, due to its strong market share, its history of successful acquisition integration, and its regional diversification.
Exhibit 2.15: Agrium EV/NTM EBITDA Buildup

Segment General EV/EBITDA
[A]
Premium/ Discount Notes

[B]
Agrium EV/EBITDA
[C=A+B]
2012E EBITDA
[D, $M]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
Agrium Price Value Calculation

($M)
Nitrogen Phosphate Potash Retail Adv. Tech.

Notes
8.0x 9.0x 11.0x 7.0x -
1.0x 0.0x 0.0x 1.0x -
[1] [2] [3] [4]
9.0x 9.0x 11.0x 8.0x 11.0x
343 51 275 1,164 105 1,938
18% 3% 14% 60% 5% 100%
1.6x 0.2x 1.6x 4.8x 0.6x 8.8x
2012E EBITDA* AGU EV/EBITDA Multiple** Implied EV Cash* Debt* Equity Value FD Shares O/S (M) Implied Price Value
*Excludes AWB acquisition. **Rounded to nearest 0.5x.
1,938 9.0x 17,441 1,813 -1,934 17,319 158.0 $109.62
1. Agriums nitrogen facilities have a material cost advantage over its North American peers. 2. Premium for sulphur/ammonia cost advantages, fully offset by low Kapuskasing reserve life. 3. Agrium's Canpotex membership is offset by its current short position of ~1 million mt/y of potash. 4. North American retail leader w ith 15% to 17% market share.
Exhibit 2.16 shows Agriums historical one-year forward EV/EBITDA trading range, which has averaged 6.2x over the past several years. Agrium has historically traded at a slight discount to its peers, due to a discount placed on nitrogen assets in general, compared to both phosphate and potash. We believe that the current 7.8x NTM EBITDA is a reasonable multiple for this point in the fertilizer cycle. However, as Agrium realizes stronger wholesale margins, we expect its stock to move toward 9x 2012E EBITDA.
Exhibit 2.16: Agrium EV/NTM EBITDA Chart
14x NTM EV/EBITDA Multiples 12x 10x 8x 6x 4x 2x 0x Dec-06 Jun-07 Dec-07 Jun-08 AGU Dec-08 AGU Average Jun-09 Group Average Dec-09 Jun-10 Dec-10 Average NTM EV/EBITDA = 6.2x
117
January 2011
3. PRICE TO EARNINGS
On a NTM P/E basis, Agrium is currently trading at 12.6x our NTM EPS estimate of $7.28. In our minds, and relative to its peers, Agriums appropriate NTM P/E multiple should be closer to the 13.5x area, which implies a price value of $96 per share one year out. Exhibit 2.17 highlights our segmented P/E breakdown. For Agrium, we made the following adjustments to our general P/E multiples:
We apply a 1.5x P/E premium to Agriums nitrogen segment, as its facilities have material gas cost and transportation-related pricing advantages over its North American peers. As we previously stated, any premium multiple that Agriums phosphate business deserves due to its sulphur, ammonia, and transportation cost advantages is fully offset by Kapuskasings low reserve life.
Our Agrium potash P/E multiple of 16x is unchanged from our benchmark multiple, as we believe the companys Canpotex membership is offset by a net deficit potash position in the market, as well as a lack of economies of scale relative to its Canpotex peers.
We think that Agriums agricultural retail business deserves a 1.5x P/E multiple premium over others, due to its strong market share, its history of successful acquisition integration, and its regional diversification.
Exhibit 2.17: Agrium NTM P/E Buildup

Segment General P/E Ratio
[A]

[B]
Agrium P/E Ratio

[C=A+B]
2012E EPS
[D, $/sh]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
Agrium Price Value Calculation

($/sh)
Nitrogen Phosphate Potash Retail Adv. Tech.

Notes
12.5x 13.5x 16.0x 11.0x -
1.5x 0.0x 0.0x 1.5x -
[1] [2] [3] [4]
14.0x 13.5x 16.0x 12.5x 17.0x
$1.25 $0.19 $1.00 $4.26 $0.38 $7.09
18% 3% 14% 60% 5% 100%
2.5x 0.4x
2012E EPS* AGU P/E Mulitple** Implied Price Value
7.09 13.5x $95.66
2.3x 7.5x 0.9x 13.5x
*Excludes AWB acquisition. **Rounded to nearest 0.5x.
1. Agriums nitrogen facilities have a material cost advantage over its North American peers. 2. Premium for sulphur/ammonia cost advantages, fully offset by low Kapuskasing reserve life. 3. Agrium's Canpotex membership is offset by its current short position of ~1 million mt/y of potash. 4. North American retail leader w ith 15% to 17% market share.
Exhibit 2.18 shows Agriums NTM P/E trading range, which has averaged 11.6x over the past few years. On a P/E basis, Agrium has historically traded at a slight discount to its peers, due to a discount placed on nitrogen assets in general, compared with both phosphate and potash. We think the current multiple of 12.6x NTM EPS should expand to 13.5 NTM EPS on the back of improved volumes/prices.
Exhibit 2.18: Agrium NTM P/E Chart
25x Average NTM P/E = 11.6x NTM P/E Multiples 20x 15x 10x 5x 0x Dec-06
Jun-07
Dec-07
Jun-08 AGU
Dec-08 AGU Average
Jun-09 Group Average
Dec-09
Jun-10
Dec-10
118
Agrium Inc.
January 2011
4. REPLACEMENT COST NEW
We believe that the replacement cost for Agrium, net of minority and JV interests, is about $105 per share, which is detailed in Exhibit 2.19. Our replacement cost estimates are derived from: (1) current projects under construction; (2) feasibility, pre-feasibility, and scoping studies; (3) inflation-adjusted costs for historical projects; and (4) professional judgment.
Exhibit 2.19: Agrium Replacement Cost New (RCN)
Production Plant Potash Vanscoy - Conventional Vanscoy Expansion (to date) - Conventional Product Capacity
(000 mt)
Replacement Cost New

($M) ($/sh)
Potash Potash
2,050 750 2,800
3,519 100 $3,619
22.27 0.63 $22.90
Phosphate Redwater Soda Springs Kapuskasing Dry Valley Nitrogen Redwater
MAP MAP Phosphate Rock Phosphate Rock
660 300 950 1,300 3,210 250 720 215 350 180 375 600 430 99 170 430 135 680 480 120 430 204 110 77 110 78 6,243
732 333 292 399 $1,755 198 371 86 140 72 297 309 341 51 135 222 107 351 381 48 172 82 44 38 55 39 $3,539 $5,813 $390
4.63 2.11 1.85 2.53 $11.11 1.25 2.35 0.54 0.89 0.46 1.88 1.96 2.16 0.32 0.85 1.40 0.68 2.22 2.41 0.30 1.09 0.52 0.28 0.24 0.35 0.25 $22.40 $36.79 $2.47 Value
($/sh)
Bahia Blanca Borger Fort Saskatchewan Carseland Joffre Upgrade Kennewick West Sacramento North Bend Florence Americus Hartsville Retail 8x 2012E Retail EBITDA of $727M Agrium Advanced Technology (AAT) 11x 2012E AAT EBITDA of $35M Investments CMF (Agrium Europe) Egypt Hanfeng Evergreen1
Ammonia Urea Ammonium Nitrate Ammonium Sulphate Nitrogen Solutions Ammonia Urea Ammonia Urea Ammonia Urea Ammonia Urea Ammonia Nitrogen Solutions Nitrogen Solutions Nitrogen Solutions Nitrogen Solutions Rainbow Rainbow Rainbow
Ownership
(%)
Market Cap
($M)
Value
($M)
100.0% 26.0% 19.6%
Private Private 365
~50 ~106 72 $228
0.32 0.67 0.45 $1.44
Gross Replacement Cost New Plus: Working Capital @ September 30, 2010 Less: LT Debt O/S @ September 30, 2010 Net Replacement Cost New2,3
1. As at December 31, 2010. 2. Assumes 158 million shares outstanding. 3. Exlcudes Agrium's acquisition of AWB.
$15,345 2,941 1,621 $16,665
$97.12 18.61 10.26 $105.47
119
January 2011
We think that Agrium should be trading closer to 90% replacement cost new (RCN), which yields a price value of $95. During the peak of a normal (not 2008) fertilizer cycle, we expect Agrium to trade between 80% and 90% RCN. Conversely, in normal market downturns, it could trade as low as 25% to 30% RCN. While a slight RCN discount should be placed on nitrogen assets in general, much of Agriums assets are relatively newer than its peers. We estimate that Agrium is currently trading at 87% RCN compared with the group (ex SQM) at 82.9% RCN (Exhibit 2.20).
Exhibit 2.20: Senior Fertilizer Universe Last Price as a Percentage of RCN
120% % of Replacement Cost New Group Target Average = 82.9% of RCN 100% 80% 60% 40% 20% 87% 0% AGU CF IPI K+S MOS POT SQM YAR 90% 85% 80% 105% 90% 66% 75% 84% 85% 99% 95% n.a. 92% 65% Current Stock Price as a % of RCN Targeted % of RCN
SETTING OUR TARGET PRICE & RATING
Exhibit 2.21: Agrium Valuation Summary

Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Metric 13.5x 9.0x 90% 11.2% Value $95.66 $109.62 $94.93 $124.31 Weight 25% 25% 25% 25% Contribution $23.92 $27.40 $23.73 $31.08 $106.13 $106.00
We have set our one-year Agrium target price at $106 per share, which we derived by equally weighting our four valuation methodologies shown in Exhibit 2.21. Given our forecast Agrium total return of 15.7%, coupled with our average total return of 3.2% for the group (Exhibit 2.22), we rate the company 1-Sector Outperform.
AGU Target Price

Exhibit 2.22: Senior Fertilizer Universe Forecast One-Year Total Returns

20% 15.7% 7.6% 3.9% 0.5% 8.8% 10.0%
15% 10% 5% 0% -5% -10% -15%
Group Average ROR = 3.2%
Top Pick
3-SU
3-SU
-9.2% YAR
2-SP
2-SP
1-SO
1-SO
1-SO
1-SO
-11.5% IPI
SQM
CF
MOS
POT
K+S
AGU
120
Exhibit 2.23: Global Fertilizer Equities Peer Group Comparison

Scotia Capital Rating Last Price (local $) $91.75 $135.15 $89.27 $37.29 $76.36 $154.83 $106 $140 $33 $82 $168 -11.5% 7.6% 8.8% 3-SU 1-SO 1-SO 15.7% 3.9% 1-SO 2-SP 158.0 71.9 32.8 75.1 446.9 305.3 14,497 9,719 2,928 2,801 34,125 47,269 15,517 11,658 3,347 11,658 33,028 49,538 0.1% 0.3% 2.0% 0.3% 0.3% 0.6% 2.4% 6.3% 28.8% 10.8% 6.5% 10.9% 3.7% 15.0% 17.9% 7.5% 6.5% 8.5% 9.9% 8.4% 23.8% 114.0% 8.1% 9.6% 17.8% 30.3% 0.4x 0.0x 2.2x 0.2x 0.6x 0.7x 0.3x 0.0x 0.7x 0.1x 0.4x 0.3x 0.8x -1.1x 1.5x -0.7x 3.3x 0.7x Target (1-Yr) ROR (1-Yr) Rating Shares (FD M) Mkt Cap (M, local $) EV (M, local $) Div Yield (%) Div Payout (%) ROA (%) ROE (%) D/E (x) Debt/Cap (x) ND/EBITDA (x) Int. Cov. (x) Overview Dividends & Returns Debt
Nam e
Ticker
121
C$7.60 27.5% 1-SO 61 C$8.50 10.0% 9.3% 1-SO 1-SO JOD 45.50 HKD 5.57 C$5.96 A$3.96 ILs 1,732 JOD 17.25 56.36 C$7.78 RMB 66.24 $900.00 HKD 4.02 $58.42 RUB 219 NOK 338 $58 NOK 300 1.3% 24.3% -9.2% 3-SU 0.5% 2-SP 9.6% 21.3% 0.5x 83.3 1,771 61.4 1,629 1,269 75.0 191.4 52.2 767.6 7.8 7,021 263.2 2,124 288.8 3,791 25,678 366 6,450 77,459 1,294 10,787 406 50,843 7,043 28,224 15,376 465,815 97,481 3,699 21,383 339 7,519 22,921 1,232 11,658 384 51,720 31,462 16,117 473,760 109,065 1.5% 1.8% 2.2% 6.5% 0.0% 0.7% 0.6% 0.9% 1.2% 0.8% 1.9% 1.7% 44.3% 32.8% 30.9% 68.8% 0.0% 45.0% 25.2% 16.2% 50.0% 0.0% 21.0% 30.4% 15.0% 7.6% 10.2% 6.4% 13.2% 16.5% 2.2% 11.1% 14.0% 9.7% -5.2% 11.3% 14.5% 5.3% 9.4% 19.4% 9.9% 23.0% 11.8% 29.5% 20.9% 5.1% 14.3% 40.8% 22.4% -11.1% 22.3% 23.2% 13.0% 17.5% 0.1x 0.0x 0.0x 0.3x 0.5x 0.0x 0.6x 0.2x 0.2x 1.0x 0.7x 0.9x 0.3x 0.6x 0.4x 0.1x 0.0x 0.0x 0.2x 0.3x 0.0x 0.4x 0.2x 0.2x 0.5x 0.4x 0.5x 0.2x 0.4x 0.2x 0.3x -0.5x -1.0x -1.3x 1.5x 0.7x -1.5x 1.6x -0.1x -0.1x 2.1x 1.3x 0.5x 4.4x 0.6x 0.6x Margins Y/E Gross (%) 20.6% 32.2% 36.8% 40.5% 25.1% 25.8% 30.1% 57.3% 29.7% 14.8% 40.3% 35.9% 34.4% 23.3% 61.4% 74.4% -2.1% 36.2% 73.7% 40.0% 36.7% 28.6% 23.1% 27.2x 48.0% 34.3% 14.4% 24.1% 27.1% 24.9% 12.9% 18.5% 53.7% 62.5% -8.1% 41.4% 48.4% 6.1% 29.2% 40.2% 21.7% 12.0% 19.3% 22.6% 22.1% 8.0% 16.9% 49.6% 54.2% -9.2% 30.6% 39.0% 2.1% 23.5% 13.8x 27.4x 16.2x 20.4x 10.6x 17.4x 24.4x 12.3x 32.1x 19.4x 5.8% 2.8% 0.5% 3.6% 5.1% 4.9% 5.5% -13.3% 1.0% 4.1% 2.2% -3.2% 10.1% 2.3% 2.7% 5.2x 2.2x 1.3x 1.8x 8.7x 2.7x 4.4x 1.4x 13.4x 4.4x 1.9x 9.6x 2.9x 4.6x 4.7x 11.0% 29.9% 32.6% 36.6% 25.4% 28.3% 27.3% 8.3% 26.1% 28.1% 30.8% 18.8% 20.5% 22.1% 24.6x 10.5x 24.8x 86.7x 33.9x 53.1x 38.9x 11.2% 10.1% 1.1% -0.9% 2.2% -2.6% 3.5% 2.8x 2.5x 10.3x 3.8x 3.8x 5.9x 4.8x 11.8x 13.6x 11.6x 33.2x 16.5x 22.1x 18.1x 18.3x 10.6x 10.7x 10.7x 15.5x 10.8x 13.1x 7.6x 12.2x 21.9x 13.1x 13.1x 14.9x EBITDA (%) Operating (%) P/CF (x) FCF Yield (%) P/BV (x) 2009A (x) Metrics Enterprise Value to EBITDA 2010E (x) 11.0x 10.3x 11.6x 28.9x 19.8x 19.2x 16.8x 16.2x 8.3x 11.5x 8.5x 14.3x 9.4x 11.5x 7.3x 17.8x 10.0x 23.3x 18.7x 7.3x 12.6x 13.9x 2011E (x) 7.8x 6.6x 9.5x 14.0x 11.4x 12.6x 10.3x 12.2x 6.4x 8.3x 7.9x 11.4x 7.4x 9.7x 5.9x 14.2x 8.2x 13.7x 18.2x 14.3x 8.5x 10.4x 10.4x 2012E (x) 8.0x 7.7x 8.6x 11.8x 9.7x 11.4x 9.5x 8.8x 5.1x 7.4x 7.3x 10.1x 15.5x 8.5x 5.0x 12.0x 7.4x 11.3x 15.6x 11.7x 8.2x 9.6x 9.6x 2009A (x) 24.7x 17.6x 19.5x 81.1x 32.1x 29.7x 34.1x 28.3x 25.4x 14.0x 15.6x 22.3x 13.9x 31.8x 11.0x 38.1x 0.7x 35.3x 11.3x 20.6x 25.1x Price to Earnings 2010E (x) 19.7x 21.2x 18.8x 67.3x 41.2x 25.1x 32.2x 21.8x 20.3x 15.4x 12.7x 20.6x 10.5x 25.5x 11.5x 33.6x 0.5x 28.7x 40.7x 26.2x 11.2x 20.0x 23.6x 2011E (x) 12.6x 10.6x 15.4x 27.0x 18.7x 16.7x 16.8x 17.7x 14.5x 11.1x 12.1x 15.4x 8.9x 15.9x 9.2x 24.4x 0.4x 18.3x 29.8x 19.9x 12.4x 15.0x 15.6x 12/31 12/31 12/31 12/31 5/31 12/31 12/31 12/31 6/30 9/30 12/31 12/31 12/31 3/31 12/31 12/31 12/31 12/31 12/31 12/31
Agrium Inc.
Agrium CF Industries Compass Minerals Intrepid Potash Mosaic PotashCorp North Am erican Average
AGU CF CMP IPI MOS POT
5.3x 378.4x 10.2x 12.4x 6.7x 82.6x 51.1x 80.8x 13.1x 20.4x 39.7x 2.0x 26.4x 29.0x 14.0x 28.3x 30.5x 47.9x
Arab Potash China BlueChemical Hanfeng Evergreen Incitec Pivot Israel Chemicals Jordan Phosphate K+S Migao Qinghai Salt Lake Silvinit Sinofert Holdings SQM Uralkali Yara International Overseas Average
APOT 3983 HF IPL ICL JOPH SDF MGO 000792 SILV 297 SQM URKA YAR
Peer Group Average
Nam e
Ticker
2012E (x) 12.9x 13.2x 13.8x 22.2x 15.5x 15.0x 15.4x 11.4x 10.2x 9.8x 11.5x 13.8x 12.1x 13.5x 7.5x 21.9x 0.4x 14.8x 24.9x 20.8x 11.9x 13.2x 13.9x
Peer Group Average
SC estimates (A GU, CF, HF, IP I, M GO, M OS, P OT, SDF, SQM , YA R). B lo o mberg co nsensus estimates (all remaining tickers no t included in SC estimates). A ll relative valuatio n multiples are based o n fiscal year ends, which is December 31fo r all co mpanies except fo r: (1 M OS - M ay 31 (2) IP L - Sep. 30; (3) HF - Jun. 30; and (4) M GO - M ar. 31 ) ; .
January 2011
January 2011
Exhibit 2.24: Agrium Tear Sheet
Agrium
AGU.T; AGU.N 1-Year Target: 2-Year Target: 1-Year Return: 2-Year Return: NTM Dividend Rating: Risk: $106 $120 15.7% 31.0% $0.11 1-SO High Last Price: FY End: Market Cap: EV: Avg. Volume: FD Shares O/S: Float: $91.75 Dec. 31 $14.5B $15.5B 1.8M 158.0M 99.8%
Valuation: 9x 2012E EBITDA, 13.5x 2012E EPS, DCF @ 11.2%, 90% RCN
Ownership Insider Ownership: Institutional Ownership: Target Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Operational Nitrogen Volume (M mt) Phosphate Volume (M mt) Phosphate Realized Price ($/mt) Potash Volume (M mt) Potash Realized Price ($/mt) EPS Estimates Q1 Q2 Q3 Q4 Total Consensus* 2009 -$0.38a $2.35a $0.16a $0.19a $2.33a
3.5% 68.2% Multiple Value Weight 13.5x $95.66 25% 9.0x $109.62 25% 90% $94.93 25% 11.2% $124.31 25% 2010E 4.0 1.3 $511 1.6 $346 2010E -$0.04a $3.20a $0.37a $1.12 $4.65 $4.74 2011E 4.5 1.0 $539 1.8 $401 2011E $0.95 $3.23 $1.81 $1.29 $7.28 $6.80 2012E 4.5 1.0 $491 1.8 $445 2012E $0.92 $3.20 $1.76 $1.21 $7.09 $6.93 EPS +11 +9 +38 +28 +12 +13 +4 +39 +15 2012E -1.2x 24.2x 0.15x Baa2 2014E 1,935 480 -94 300 1,249
Financial EV/EBITDA P/E P/FCF P/BV Dividend Yield ROE ROA Gross Margin EBITDA Margin EBITDA Growth Income Statement Net Sales COGS Gross Profit Wholesale Retail AAT Other EBITDA Net Income EPS (FD) Balance Sheet Cash & Equivalents PP&E Total Assets Short-Term Debt Long-Term Debt Total Liabilities Shareholders' Equity Cash Flow Statement Operating (post-WC) Investing Financing Cash Replacement Cost New Calculated: $105/sh
2009 18.9x 39.4x n.m. 3.2x 0.1% 8% 4% 21% 9% -65% 2009 9,129 7,123 1,943 640 1,182 54 67 823 366 $2.33 2009 933 1,782 9,785 106 1,699 5,193 4,592 2009 1,404 -513 -315 576
2010E 11.0x 19.7x 18.5x 2.7x 0.1% 14% 8% 25% 14% 71% 2010E 10,085 7,526 2,559 946 1,537 81 -5 1,409 733 $4.65 2010E 1,813 1,978 9,414 773 1,161 4,113 5,301 2010E 1,015 -260 118 874
2011E 7.8x 12.6x 12.6x 2.3x 0.1% 18% 12% 30% 19% 41% 2011E 10,610 7,465 3,145 1,285 1,783 67 10 1,984 1,151 $7.28 2011E 2,202 2,225 9,955 214 1,135 3,520 6,434 2011E 1,366 -375 -602 389
2012E 8.0x 12.9x 12.2x 1.9x 0.1% 15% 10% 29% 18% -2% 2012E 10,927 7,769 3,158 1,205 1,872 70 11 1,938 1,120 $7.09 2012E 3,104 2,442 11,079 188 1,135 3,542 7,537 2012E 1,296 -350 -43 903
2011E Sensitivity Potash ($/mt) Phosphate Margin ($/mt) Nitrogen Margin ($/mt) Resale Margin ($/mt) Crop Protection Margin (%) Crop Nutrient Margin (%) Seed Margin (%) Natural Gas ($/mmBtu) C$ (US$) Credit Metrics Net Debt/EBITDA Interest Coverage Debt/Total Capital Standard & Poor's: Free Cash Flow EBITDA Less: Taxes Less: NWC Less: CAPEX Free Cash Flow
* Bloomberg.
$20 $20 $20 $20 1% 1% 1% $1 3 2010E 0.2x 13.2x 0.27x 2011E 0.2x 21.2x 0.17x Moody's: 2013E 1,901 472 -75 300 1,204
2009 1.2x 6.2x 0.28x BBB 2011E 1,984 501 -42 375 1,150
Peak: Trough:
107% 22%
Target: Current:
90% 87%
2012E 1,938 485 -89 350 1,191
Source: Bloomberg; Reuters; company reports; Scotia Capital estimates.
122
Agrium Inc.
January 2011
I. Retail
OVERVIEW
Agrium is the largest agricultural retailer in North America, with ~950 locations spread across 45 states and with more than three times the number of outlets than its nearest competitor. Agriums retail business, known as Crop Production Services (CPS), strives to provide growers with a one-stop shop for the products and services they need to optimize both crop yields and financial returns.
Exhibit 2.25: Agriums U.S. Retail Presence
Specifically, Agrium operates 662 farmer centres, 211 satellites, 71 terminals, and 9 distribution centres. In addition to its U.S. presence, Agrium is growing its retail business in South America, with over 60 locations spread across Argentina, Chile, and Uruguay, and in Canada, with 33 locations in Alberta and Saskatchewan. Exhibit 2.25 maps Agriums retail presence in the United States. Agriums retail business is split among three divisions: Crop Nutrients; Crop Protection Products; and Seeds, Services, and Other Products, each of which we describe next. Agriums retail sales and gross profits are well distributed across each of its business lines (Exhibits 2.26 and 2.27).
Exhibit 2.27: 2011E Retail Gross Profit Breakdown
Seed, Services & Other 24%
Source: Agrium.
Exhibit 2.26: 2011E Retail Sales Breakdown

Seed, Services & Other 16% Crop Nutrients 41%
Agriums retail business contributes 65% to 70% of sales.
Crop Nutrients 36%
Crop Protection Products 43%

Crop Protection Products 40%
Agriums retail business contributes 65% to 70% to the companys total annual sales. In 2009, Agrium generated $6.2 billion in net retail sales, compared with $5.5 billion in 2008. However, gross profit declined by 14% to $1.2 billion in 2009, primarily due to a material drop in crop nutrient margins, which itself was a result of both high-cost 2008 inventory on Agriums books, coupled with significantly lower realized selling prices. Crop Nutrient margins are mildly correlated to Agriums Wholesale margins and are generally lower than its Crop Protection and Seed, Services & Other gross margins. Within Retails Seed, Services & Other sub-segment, we note that services & other margins have ranged between 60% and 65% over the past several years, compared with between 16% and 21% for the seeds side of the business. While seed sales are a growing business, we anticipate that higher volumes will be offset by tighter margins due to the highly competitive nature of this business.
123
January 2011
Crop Nutrients
We think Agrium's seeds volumes will grow, but possibly at the expense of tightening margins.
Agriums Crop Nutrients business is focused on providing a full line of (liquid and dry) fertilizers, including nitrogen, phosphate, potash, sulphur, and various micronutrients. Crop nutrients are typically mixed in customer blends based on a growers field requirements and objectives. Agrium offers custom crop nutrient application services and employs a large fleet of application and equipment to custom-apply nutrients at prescribed rates. Agrium buys its fertilizer at approximately market prices from a variety of producers and wholesalers, including its own Wholesale unit. In 2009, the Crop Nutrients segment purchased 14% of its product from Agriums Wholesale segment. Retail crop nutrient margins are tied closely to both crop prices and per-acre margins. Specifically, crop nutrient margins were hit hard in 2009 (8.4%) due to a large volume of high-cost fertilizer inventory that was carried over from the previous year and subsequently sold into a lower priced environment. Prior to 2009, Agrium achieved an average margin of about 23%, with little variability. We expect a full recovery of crop nutrient margins (up to the 23% area) through 2012, as the high-cost inventory position built up in late 2008 was depleted by early 2010. Further supporting materially improved crop nutrient margins is our expectation of above-average crop prices and expanding farmer net incomes (Exhibits 2.28 and 2.29). We anticipate that the Crop Nutrients business will contribute 41% to Agriums 2010 Retail sales dollars, but only 30% to its 2010 Retail gross margins.
Exhibit 2.28: U.S. Farmer Gross Income Rising
$400
Exhibit 2.29: U.S. Crop Prices Still Above Average

1,800 1,600
$350
1,400 Cents per Bushel

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 $300
1,200 1,000 800 600 400
U.S. crop prices are still all well above 10-year average prices.
Billions
$250
$200
$150
200
$100 1990
0 1996
1998
2000 Corn
2002
2004 Soybeans
2006 Wheat
2008
2010
U.S. Gross Farm Income
U.S. Production Expenses
Crop Protection
Agriums Crop Protection group provides herbicides, fungicides, adjuvants, and insecticides that help growers maximize yields by optimizing crop health and reducing losses to weeds, diseases, and insects. The company is the largest distributor of crop protection products in the United States, selling both brand name and generic products. Additionally, the company markets over 200 proprietary-branded products in both North and South America under the Loveland Products Inc. (LPI) label. Agrium owns and operates three blending and formulation facilities in Colorado, Montana, and Mississippi, which produce about 250 million pounds of LPI products annually.
124
Agrium Inc.
January 2011
Glyphosate represents ~20% of Crop Protection sales.
Glyphosate is the largest crop protection product that Agrium sells, accounting for ~20% of Crop Protections sales last year. Initially patented and sold by Monsanto, glyphosate is the most used herbicide in the United States, with an annual application rate of between 90 million and 100 million lb. Some crops have been genetically modified to be resistant to glyphosate, allowing farmers to use it as a post-emergence herbicide. Specifically, Monsantos Roundup Ready line includes soy, corn, sorghum, canola, and cotton seeds. As of 2006, about 90% of U.S. soybean fields were planted with glyphosate-resistant seeds. In 2009, sales and gross profit from Agriums Crop Protection group increased by 24% and 13% to $2.6 billion and $648 million, respectively. The increases were mostly due to the integration of a full year of Agriums UAP acquisition. The strong 2009 performance came despite: (1) lower crop prices; (2) reduced seeded crop acreage in the United States; (3) a drought in Argentina; and (4) severe pressure on glyphosate prices due to a late, wet spring, as well as the introduction of cheaper, generic glyphosate products. Chinese glyphosate producers are now selling product for ~$7/gallon, which has caused the Roundup Ready line to lower its average retail price to ~$8/gallon from ~$14/gallon.
Seed, Services & Other
Agriums Seed, Services & Other retail business line sells seed from major global suppliers (i.e., Monsanto, Syngenta), as well as its own Dyna-Gro private label brand. Agrium believes that this segment of its retail business has the potential for the highest levels of organic growth. Services include production application, soil and leaf tissue testing, and crop scouting. Additional activities in the division include the use of a wireless network of weather stations across the western region that collects field-specific weather data and monitors soil conditions. Seed net sales in 2009 were $731 million, or 70% above 2008 levels, primarily due to the full-year inclusion of the UAP acquisition. Dyna-Gro branded seeds accounted for 20% of total seed sales in 2009. Net sales for services and other products was a disappointing $237 million in 2009 an 8% year-over-year increase over 2008, which is actually a net decline after subtracting the UAP acquisition. We believe that application revenues in the spring and summer were below expected levels due to unfavourable weather, lower crop prices, and reduced fungicide applications.
RETAIL MARGIN SEASONALITY
While one of Agriums investment strengths is its relatively lower gross margin volatility compared with its peers, due to its significant retail exposure, we note that its retail margins are not without their seasonal effects.
Retail margins are seasonally stronger in the back half of the year due to rebate receipts.
Unlike Agriums Wholesale division, where seasonality impacts volumes, and to a much lesser extent, pricing, we found that seasonality in the agricultural retail space impacts gross margins. What is actually occurring is the receipt of a large portion of Agriums annual rebates in the third and fourth quarters, as the company achieves its volume/sales targets. Specifically, Agrium realizes materially higher Crop Protection gross margins in Q4 compared with the rest of the year, and strong Seed, Services & Other gross margins in the third quarter. We found little gross margin seasonality for its Crop Nutrient business, which supports our view that seasonality has a low impact on conventional fertilizer margins in North America. Exhibits 2.30 and 2.31 highlight Agriums retail seasonality.
125
January 2011
Exhibit 2.30: Crop Protection Seasonality

70%
Exhibit 2.31: Seed, Services & Other Seasonality

70%
Crop Protection Margin Seasonality
Seed/Services Margin Seasonality
60% 50% 40% 30% 20% 10% 0% Q1 Q2 Q3 Q4 Q4 gross m argins are stronger than other quarters due to rebate receipts
60% 50% 40% 30% 20% 10% 0% Q1 Q2 Q3 Q4 Q3 gross m argins are stronger than other quarters
2006
2007
2008
2009
2006
2007
2008
2009
NORTH AMERICAN RETAIL STRATEGY BUILT ON ACQUISITION SUCCESS
Agrium targets a 30% market share in the U.S. agricultural retail market, and is a little more than halfway there at between 15% and 17%. The company has increased its market share through several key acquisitions over the past decade. Following the establishment of Agriums retail business, which was built on three acquisitions in the mid-1990s (i.e., Crop Production Services, Nu-West Industries Inc., and Western Farm Service), Agrium was fairly silent on its North American retail business until 2005.
Royster-Clark
On November 8, 2005, Agrium launched a hostile C$10/share bid for Royster-Clark a distributor of agricultural fertilizer, seed, and crop protection products with annual sales in excess of C$1 billion. At the time of the bid, Royster-Clark operated 366 facilities, including 254 retail farm centres and a network of 74 storage/distribution terminals and warehouses in the midwestern and southern United States. Additionally, the company operated 29 fertilizer granulation, blending, and seed-processing facilities, as well as two nitrogen manufacturing plants. The total value of the initial unsolicited bid was C$535 million, split C$325 million cash for equity and C$210 million of assumed debt and minority interests. The C$10/share equity component of the bid represented a 27% premium over Royster-Clarks previous closing price of C$7.85/share. The initial bid came only five months after Royster-Clarks IPO at C$10/share. Following a Royster-Clark shareholder rejection of the C$10/share bid, Agrium counter-offered at C$11/share, which was also rejected. Agriums final offer of C$11.90/share was accepted by RoysterClarks shareholders about 10 weeks following the initial offer. At 52%, the premium paid by Agrium appears steep, but the valuation of 9.1x EBITDA pre-synergies was reasonable, in our view. Exhibit 2.32 highlights the timeline of events for Agriums acquisition of Royster-Clark. In our minds, the rationale behind the Royster-Clark acquisition was due to: (1) increased economies of scale through a retail distribution network overlap in the U.S. Midwest; (2) a deeper expansion into the southeastern United States; (3) the ability for Agrium to move Royster-Clarks low EBITDA margins higher and towards the 9% level that Agrium was realizing at the time; and (4) additional synergies involving both cost reductions and working capital improvements. Following Agriums acquisition of Royster-Clark, the company announced that it had surpassed its initial synergy targets by more than 50%.
126
Agrium Inc.
January 2011
Exhibit 2.32: Agriums Royster-Clark Acquisition Timeline of Key Events

AGU bids C$10/sh for ROY, 27% prem ium (Nov 8/05) ROY in talks w ith a num ber of parties (Dec 8/05) AGU and ROY agree to drop regulatory fight (Dec 16/05) ROY rejects sw eetened C$11/sh bid (Jan 13/06)
Royster-Clark IPO @ C$10/sh (July 25/05)
ROY accepts C$11.90/sh offer (Feb 1/06)
ROY recom m ends ROY adopts 60against C$10/sh day poison pill (Dec 8/05) hostile bid (Nov 23/05)
AGU raises bid to C$11/sh, 40% prem ium (Jan 9/06)
AGU raises bid to C$11.90/sh, 52% prem ium (Jan 25/06)
AGU controls 98.5% of ROY (Feb 9/06)
Source: Agrium; Reuters; Scotia Capital.
United Agri Products (UAP)
On December 3, 2007, Agrium announced a $2.65 billion friendly takeover of UAP Holdings the largest independent distributor of agricultural and non-crop products in the United States and Canada. Agriums acquisition price of $39/share equated to a 30% premium over the previous closing price for UAP, which, in our opinion, was in line with historical norms for chemical/fertilizer friendly acquisitions. Agrium initially paid 11.8x trailing EBITDA for the purchase of UAP, but forecast that with fully realized synergies, the purchase price multiple would drop to the 7.8x trailing EBITDA area. This compares with ~5x trailing EBITDA (net of synergies) that Agrium paid for Royster-Clark in early 2006.
Agrium should continue to grow its retail presence through several small acquisitions.
The logic behind the UAP transaction was to give Agrium: (1) the ability to offer a two-tier retail business model that includes a high-service and high-margin Agrium model and a low-service, price-sensitive UAP model; (2) geographic diversification; (3) the ability to double its agricultural retail presence in the United States; (4) increased retail margin stability relative to many of its peers that generate more volatile wholesale fertilizer margins; and (5) the realization of strong synergies. Synergies were generated from a wide variety of sources, including crop protection and crop nutrient procurement, SG&A expenses, expanded private label crop protection product lines, as well as crossbusiness distribution efficiencies. We believe Agrium will continue to grow its retail segment through acquisitions, although we suspect that anti-competitive fears may lead the company to focus on small acquisitions of agricultural retailers in niche geographic pockets throughout the United States and Canada.
NO RETAIL COMPETITIVE THREATS IN THE NEAR TERM
At the local level, Agrium competes with numerous dealers and cooperatives for agricultural retail market share. Following its two key acquisitions over the past five years, Agrium has now become the largest retailer in the United States, with 15% to 17% share of a ~$42 billion market. Exhibit 2.33 highlights Agriums rank among U.S. chemical and fertilizer retailers (pre-Miles Farm Supply acquisition). We estimate that the company can achieve cost savings and economies of scale that its competitors cannot as a result of the successful integration of its Royster-Clark, UAP, and Miles Farm Supply acquisitions, which will enable Agrium to enhance its North American gross margins over its peers.
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January 2011
Exhibit 2.33: Agrium Is the Top Agricultural Retailer in the United States
2008 Sales Breakdown Crop Custom Seeds Protection Application
38% 41% 42% 34% 43% 39% 17% 18% 38% 34% 19% 20% 30% 18% 31% 31% 8% 15% 4% 11% 7% 12% 14% 14% 25% 15% 22% 16% 7% 13% 12% 13% 5% 3% 5% 6% 7% 18% 4% 4% 1% 1% 3% 5% 2% 6% 3% 5%
Rank Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Type
Outlets U.S. States 929 301 132 109 300 100 224 135 40 60 153 34 41 12 21 173 45 48 18 18 17 19 10 4 4 2 5 2 3 1 3 13
Fertilizer
49% 41% 49% 49% 43% 31% 65% 64% 36% 50% 56% 59% 61% 63% 64% 52%
Agrium Dealer Helena Chemical Dealer Wilbur-Ellis Dealer J.R. Simplot Dealer Growmark Co-op Agriliance Co-op Southern States Co-op MFA Co-op Jimmy Sanders Dealer Harvest Land Co-op Tennessee Farmers Co-op South Dakota Wheat Growers Co-op McGregor Dealer Effingham Equity Co-op Miles Farm Supply Co-op
Source: Agrium; Crop Life Magazine; Scotia Capital.
THE SOUTH AMERICAN RETAIL OPPORTUNITY
Agriums investment in South America provides the company with an opportunity to regionally diversify its business as well as participate in what is still a growth industry. Agroservicios Pampeanos (ASP) is Agriums wholly owned subsidiary that supplies farmers with inputs and services in Argentina, Chile, and Uruguay (Exhibit 2.34). Input products include fertilizers, chemicals, and seeds.
In our view, South America offers significant expansion opportunities.
Exhibit 2.34: South American Retail
The majority of Agriums South American exposure is in Argentina, where the company operates 56 retail farm centres, four satellite centres, several fertilizer plants (under Wholesale), and a chemical storage warehouse. Additionally, there are two retail farm centres in Uruguay and two chemical storage warehouses in Chile. Argentina produces about two times more soybeans than both corn and wheat combined. Accordingly, nitrogen-based fertilizer uses make up about 57% of fertilizer consumption, with phosphate a close second at 39%. There is very little potash used in Argentina we estimate less than 100,000 tonnes per year. In our view, expansion opportunities for ASP exist in Chile, Uruguay, and most importantly, Brazil. Brazil is the third-largest fertilizer import market in the world, and consumes the fourthlargest amount of crop nutrients on an annual basis. Agrium estimates there is still about 60 million hectares of land that can be brought into agricultural production over the coming years. In 2009, about 43% (nutrient tonnes) of Brazils fertilizer use was potash, followed by phosphates (38%) and nitrogen (19%).
Source: Agrium.
128
Agrium Inc.
January 2011
AWB ACQUISITION HIGHLIGHTS
On August 15, 2010, Agrium announced a $1.1 billion offer for Australias AWB at A$1.50/share, representing a 57% premium to AWBs stock price prior to GrainCorps July 29 merger proposal with AWB. We estimate Agriums offer is valued at between 10x and 11x AWBs 2011E EBITDA (Bloomberg) estimates on a pre-synergy basis, and 8x to 9x 2011E EBITDA post synergies. While the acquisition is in line with Agriums strategy to increase annual Retail EBITDA to $1 billion, we note that about 60% of AWBs business should be considered non-core to Agrium (Exhibit 2.35). We expect the deal to be mildly EPS accretive in 2011, although we will not integrate the AWB acquisition until following the release of Agriums Q4/10 earnings.
Exhibit 2.35: AWB Business Overview
Source: AWB.
AWB offers Agrium ~400 agricultural retail outlets, which will boost Agriums global reach to Australasian markets. The company has two core business streams: Landmark Rural Services and Commodity Management. Landmark is the largest distributor of fertilizer and retail merchandise in Australia, and also owns a 50% stake in Hi-Fert, a wholesale fertilizer distributor. AWBs Commodity Management division focuses on grain merchandising, insurance, trade finance, and various management and consulting services. Exhibit 2.36 shows a breakdown of AWBs 2010 EBITDA generation by business sub-segment, while Exhibit 2.37 highlights AWBs Landmark locations.
Exhibit 2.36: AWB 2010 EBITDA Breakdown
Logistics & Other Investments 13%
Exhibit 2.37: AWBs Landmark Locations
Rural Services 25%
International Commodity Management 29%
Pool Management & Harvest Finance 6%
Grain Marketing 27%
Source: AWB; Scotia Capital.
Source: AWB.
129
January 2011
Agrium announced in mid-December that it had sold a majority of AWBs commodity management businesses to Cargill. This sale is not surprising, as Agrium is mostly interested in AWBs Landmark business. Had the transaction occurred on September 30, 2010 (i.e., AWBs year-end), the net proceeds of the sale would have been ~A$870 million. Agrium also noted that other commodity management businesses it seeks to divest could have fetched ~A$55 million on September 30. Agrium reiterated that the AWB/Landmark acquisition will be significantly accretive to 2011 earnings. In our minds, Agriums suggestion of over A$40 million in annual synergies (by 2012) may be a touch optimistic. Why? The proposed merger between GrainCorp and AWB pegged a ramp-up to A$40 million in annual synergies over two years. We believe there is less overlap between an AWB/Agrium transaction compared with an AWB/GrainCorp transaction. With that said, if there is any company within our coverage universe that has a strong track record of achieving (and sometimes exceeding) synergy targets, it is Agrium. We note that if Agrium is indeed able to achieve 2012 annual synergies of A$40 million, its acquisition multiple improves materially to about 7.7x 2012E EBITDA (Exhibit 2.38).
Exhibit 2.38: Implied AWB Acquisition Multiples
Special dividend Scheme consideration Total Agrium offer AWB shares O/S Equity value Plus: Debt Less: Cash Enterprise Value
(A$/sh) (A$/sh) (A$/sh) (M) (A$M) (A$M) (A$M) (A$M)
0.15 1.35 1.50 817.3 1,226.0 652.2 -111.9 1,766.3 ~$870.0 ~$55.0 841.3
Landmark 2010 EBITDA Implied EV/2010 EBITDA Landmark 2010 EBITDA Plus: 2011E synergies Less: One-time costs Landmark 2011E EBITDA Implied EV/2011E EBITDA Landmark 2010 EBITDA Plus: 2012E synergies Less: One-time costs Landmark 2012E EBITDA Implied EV/2012E EBITDA
(A$M)
69 12.2x 69 17 -5 81 10.4x 69 40 0 109 7.7x
(A$M) (A$M) (A$M) (A$M)
(A$M) (A$M) (A$M) (A$M)
Less: Cargill sale (A$M) Less: Other potential sales (A$M) Adjusted EV (A$M)
AWB has faced several legal problems/lawsuits over the past several years, although we note that all but one has either been dismissed or settled. The final outstanding lawsuit is from the Iraqi government, with respect to the Oil-for-Food Programme. The Iraqi government is seeking damages of $10.4 billion from AWB and 92 other companies, suggesting that the defendants conspired with the former Saddam Hussein Regime to divert funds out of the Oil-for-Food Programme escrow account. In August 2009, the Australian Federal Police dropped its investigation into the matter. However, the Australian Securities and Investments Commission then brought several civil lawsuits against AWB. As a result of lawsuit settlements, AWB sold portions of its business to avoid financial troubles. Accordingly, Agrium is picking up AWB for nearly 75% below its peak share price of A$6.30/share on January 15, 2006. On August 24, 2010, the AWB board recommended Agriums proposed all-cash transaction to AWB shareholders, and the transaction closed on December 3. We expect to integrate AWBs financials into our forecast following the release of Agriums Q4/10 results, by which time we should have more clarity surrounding the future of AWBs grain handling and trading businesses.
130
Agrium Inc.
January 2011
OUTLOOK (EX AWB)
With the integration of Agriums 2008 acquisition of UAP effectively complete, and synergies on track to be fully realized, if not surpassed, were looking for 2011 Retail net sales to come in at $6.8 billion, or about 5% higher than our 2010 estimate. In 2012, we forecast $7.1 billion of Retail net sales. Exhibit 2.39 shows our Retail net sales forecast, broken down by sub-segment.
Exhibit 2.39: SC Forecast Retail Net Sales by Business Line (ex AWB)
4,000
Retail Net Sales ($M)
3,500 3,000 2,500 2,000 1,500 1,000 500 0 2006 2007 2008 Crop Nutrients 2009 Crop Protection 2010 Pre-UAP acquisition
Forecast
2011
2012
Seeds, Services & Other
We expect Agrium to realize 2011 Retail gross profit of about $1.8 billion, for an overall 2011 gross margin of 26%. Our average 2010-2012 gross margin forecast of 25.4% is materially higher than the 19% realized in 2009, but in line with the previous four years. Crop Nutrient margins averaged 8% in 2009, but should come back to a historical 20% to 23% going forward due to above-average crop prices and the completed pass-through of higher-cost conventional fertilizer inventories.
Exhibit 2.40: SC Forecast Retail Gross Profits by Business Line (ex AWB)
800 700 600 500 400 300 200 100 0 2006 2007 2008 Crop Nutrients 2009 Crop Protection 2010 2011 2012 Pre-UAP acquisition Forecast
Retail Gross Profit ($M)
Seeds, Services & Other
Exhibit 2.41: SC Forecast Retail Gross Margins by Business Line (ex AWB)
70% 60% 50% 40% 30% 20% 10% 0% 2006 2007 2008 Crop Nutrients 2009 Crop Protection 2010 2011 2012 Seeds, Services & Other
Retail Gross Margins (%)
Forecast
Retail gross margins are reasonably diversified.
131
January 2011
We anticipate Agriums retail unit will contribute $686 million of EBITDA in 2011, or a 30.1% increase year over year. Most of this jump is due to our expectation for a strong 2011, following a somewhat normal 2010 and a poor 2009. In 2012, were looking for 7% growth in Retail EBITDA to $727 million. We think Agriums retail EBITDA margin will come in at about 10% for 2010 through 2012, materially above the 4% realized in 2009, but in line with previous years.
Exhibit 2.42: SC Forecast Retail EBITDA and EBITDA Margins (ex AWB)
500 20% 15% 10% 5% 0% -5% -10% 2006 2007 2008 2009 2010 2011 2012
Retail EBITDA ($M)
400 300 200 100 0 -100
Retail EBITDA (LHS)
Retail EBITDA Margin (RHS)
132
Retail EBITDA Margin (%)
Forecast
133
1,065 591 319 1,975 848 437 195 1,480 217 154 124 495
20% 26% 39% 25% 27% 26% 14% 19% 21% 26% 19% 15% 22% 26% 41% 33% 25% 28% 47% 62% 32% 13% 27% 45% 29% 27% 18% 25% 22% 42% 25% 15% 22% 23% 23% 23% 4% 9% 9% 11% 8% 17% 18% 21% 21% 46% 40% 31% 20% 24% 33% 24%
Exhibit 2.43: SC Forecast Agriums Retail Segment (ex AWB)

2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 3/31/10 6/30/10 9/30/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 1,453 619 394 2,466 1,118 438 234 1,790 335 181 160 676 627 576 223 1,426 18 77 47 142 117 304 176 597 31 169 54 254 46 98 45 189 212 648 322 1,182 63 69 30 162 252 274 193 719 86 172 61 319 125 153 59 337 526 668 343 1,537 79 87 101 267
21% 26% 24% 24%
Agrium Inc.
($M)
Net Sales Crop Nutrients Crop Protection Products Seed, Services & Other 2,718 2,115 683 5,516 2,091 1,539 460 4,090 419 349 141 909 1,192 906 453 2,551 314 599 60 973 385 136 28 549 2,310 1,990 682 4,982 308 393 197 898 1,140 964 517 2,621 325 540 60 925 471 179 89 739 2,244 2,076 863 5,183 297 248 321 865 1,001 1,047 353 2,401 334 262 118 713
25% 20% 25% 23%
437 426 188 1,051 351 705 177 1,233 93 211 144 449
21% 23% 45% 27%
1,309 1,210 629 3,148
345 768 114 1,227
431 234 73 738
2,522 2,638 1,004 6,164
371 462 227 1,060
1,392 1,238 710 3,340
411 712 121 1,244
596 332 148 1,076
2,648 2,770 1,054 6,472
375 334 422 1,132
1,335 1,309 470 3,114
445 916 321 1,682
626 349 155 1,130 494 188 93 776 131 161 62 354
21% 46% 40% 31%
2,781 2,908 1,107 6,796 2,143 2,188 943 5,275 637 720 425 1,783
23% 25% 38% 26%
2,920 3,054 1,162 7,136 2,250 2,298 990 5,538 669 756 447 1,872
23% 25% 38% 26%
COGS Crop Nutrients Crop Protection Products Seed, Services & Other
Gross Profit Crop Nutrients Crop Protection Products Seed, Services & Other
Gross Margin (%) Crop Nutrients Crop Protection Products Seed, Services & Other
Selling Expenses Other EBITDA 30 95 33 177 80 480 26 -94 24 283 26 31 27 -57 103 163 27 -72 27 360
361 9 125
442 4 210
788 78 560
198 12 -68
273 17 307
200 -3 57
211 8 -30
882 34 266
200 7 -45
304 28 387
220 -4 103 28 75
250 31 56 28 29
926 62 549 110 440
204 31 32 28 4
282 31 400 28 373
224 31 194 28 166
263 31 60 28 33
972 124 686 110 576
1,021 124 727 110 617
Depreciation EBIT
January 2011
January 2011
II. Wholesale: Overview

Agrium is among the worlds largest conventional fertilizer producers, with approximately 8.7 million tonnes of annual net production capacity. In addition to the companys 13 major production facilities and several regional upgrade plants, the company also boasts a strong presence in wholesale fertilizer transportation and distribution infrastructure. Agriums wholesale business is heavily tilted towards nitrogen-based fertilizer production, with about two-thirds of its overall capacity dedicated to N-based nutrients. The remaining one-third of Agriums wholesale production capacity is split between phosphate (11%) and potash (22%). Outside of North America, Agrium has made selective and strategic wholesale investments in South America, northern Africa, and Europe. Exhibit 2.44 maps Agriums wholesale assets.
Exhibit 2.44: Map of Agriums Wholesale Operations
Unlike nitrogen, Agrium is not a dominant player in potash and phosphate.
In 2009, the Wholesale division contributed $3 billion and $640 million of net sales and EBITDA, respectively, representing one-third of overall net sales but 74% of total EBITDA generation. Over the past five years, Agriums Wholesale unit has typically contributed closer to 50% of total sales and about 80% of EBITDA. Exhibits 2.45 and 2.46 show a nutrient-based split of Wholesale sales and gross profit contribution to our forecast 2011 results.
Exhibit 2.45: 2011E Wholesale Net Sales Breakdown
Product Purchased for Resale 21% Nitrogen 46% Potash 19%
Exhibit 2.46: 2011E Wholesale Profit Breakdown
Agriums stock price is highly levered to nitrogen markets.
Potash 36%
Nitrogen 59% Phosphate 5%
Phosphate 14%
Source: Scotia Capital estimates. Source: Scotia Capital estimates.
134
Agrium Inc.
January 2011
NITROGEN
Agrium owns and operates five major North American nitrogen facilities, with total net capacity of 5 million tonnes and an additional 0.8 million net tonnes of international capacity (Argentina and Egypt ex MOPCO expansion). The company is the second-largest producer of both ammonia and urea in North America. Its nitrogen portfolio is split urea (46%), net ammonia (26%), and nitrogen solutions and other products (28%).
Agriums nitrogen assets have a strong margin advantage over its peers.
Agriums nitrogen facilities have a material cost advantage over its North American peers, as its natural gas purchases are referenced to AECO-C spot rates, compared with NYMEX for most U.S. Gulf producers. The spread between the two has historically been $0.50/mmBtu and $1/mmBtu. Additionally, the companys strategically located production and upgrading facilities allow it to realize higher selling prices, therefore enabling Agrium to enjoy a strong margin advantage over its peers. For full details on Agriums wholesale nitrogen business, please refer to our Wholesale: Nitrogen section on page 140.
PHOSPHATE
Agrium has a decent sized phosphate business, with two production facilities (one in Alberta and one in Idaho) that offer a total capacity of nearly 1 million tonnes of MAP and ~0.26 million tonnes of other products, such as merchant-grade phosphoric acid and super-phosphoric acid (SPA). As an integrated phosphate producer, Agrium depends on its phosphate rock mines to remain competitive in the North American market. In 2013, production from the companys Kapuskasing (Ontario) rock mine will likely come to an end, due to rock quality issues. Agrium continues to evaluate several rocksourcing options, such as importing rock from West Africa or possibly even from the new Bayovar rock mine in Peru. For full details on Agriums wholesale phosphate business, please refer to our Wholesale: Phosphate section on page 147.
POTASH
An investment decision on Vanscoy is expected soon.
Unlike its potash-producing peers, Agrium owns only one potash mine worldwide. Its Vanscoy facility is a 2.05 million tonne operation located about 30 kilometres southwest of Saskatoon, Saskatchewan. Agriums Vanscoy capacity represents about 8% of the North American market and approximately 3% of global potash capacity. About 45% of Agriums potash production is shipped to international markets via Canpotex the international potash marketing association of Saskatchewan potash producers. On the back of an extended reserve life at Vanscoy, Agrium is currently studying a potential brownfield expansion of the mine by 750,000 tonnes to 2.8 million tonnes. Final approval of the ~$1 billion project is expected soon, with production anticipated to ramp up between 2013 and 2015, if approved. For full details on Agriums wholesale potash business, please refer to our Wholesale: Potash section on page 150.
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January 2011
PURCHASED PRODUCTS FOR RESALE
Exhibit 2.47: Agrium Europe (CMF) Sales by Region

Other 4%
In 2010, Agrium acquired the remaining 30% of CMF.
South Am erica 4%
North Am erica 30%
In addition to selling its manufactured products, Agriums Wholesale unit purchases crop nutrient products from other suppliers for resale to customers in North and South America as well as across Europe (Exhibit 2.47). In our view, this business allows Agrium to optimize the value of its extensive distribution and marketing capabilities.
In mid-2008, Agrium acquired a 70% stake in Common Market Fertilizers S.A. (CMF) one of the Europe largest fertilizer storage and distribution 62% companies in Western Europe. The company Source: Agrium; CMF; Scotia Capital. boasts 300,000 tonnes of dry and liquid storage at both port and inland sites. CMF sells conventional NPK fertilizers, processed fertilizers, and NPK compounds, with total turnover of about 2.5 million tonnes, or about 400 million. In early 2010, Agrium purchased the remaining 30% of CMF, and subsequently changed CMFs name to Agrium Europe. In 2009, Agriums Products Purchased for Resale business realized $816 million of net sales, down 16% from 2008, mostly due to a reduction of potash purchased for resale. Gross profit per tonne averaged slightly less than $20/tonne prior to sharp declines at the end of 2008. Exhibit 2.48 shows historical net sales and gross margins as well as our forecast through 2012.
Exhibit 2.48: SC Forecast Wholesale Purchased Product Sales and Gross Margins
500 100 50 0 -50 -100 -150 -200 -250 -300 2006 2007 2008 2009 2010 2011 2012
400 300 200 100 0 High-cost inventory am id falling fertilizer prices
We anticipate that Purchased Product margins will range between 5% and 7% through 2012.
Purchased Product Sales (LHS)
Purchased Product GM (RHS)
OTHER
Agriums Other wholesale product group includes its Rainbow Plant Food business, which manufactures product in the southern United States, as well as ammonium sulphate in Western Canada. These products are used on high-value crops such as tobacco, fruits and vegetables, cotton, as well as some commodity crops. Rainbow-branded fertilizer products are manufactured at three Agrium facilities in Alabama, Georgia, and South Carolina, with an annual production capacity totalling 265,000 tonnes. In 2009, Agriums Other wholesale unit realized gross profit of $55 million, down 19% from 2008 but about flat with 2007. Similar to other business units, the lower year-over-year gross profit in 2009 was primarily a result of carrying over high-cost inventory from 2008, and to a lesser extent, lower sales volumes.
136
Purchased Product GM ($/mt)
Purchased Product Sales (000 mt)
Forecast
Agrium Inc.
January 2011
OUTLOOK
For 2011 and 2012, we are looking for almost flat net sales of $3.74 billion and $3.71 billion, respectively. Why? With the exception of potash, our forecast for slightly declining 2012 realized nitrogen and phosphate prices (Exhibit 2.49) is mostly offset by small sales-volume increases. Exhibit 2.50 shows our quarterly net sales forecast for Agriums Wholesale division, split by sub-segment.
Exhibit 2.49: SC Forecast Wholesale Realized NPK Prices
Wholesale Realized Prices ($/mt)
1,400 1,200 1,000 800 600 400 200 0 2005 2006 2007 2008 Nitrogen 2009 Phosphate 2010 Potash 2011 2012
Forecast
Exhibit 2.50: SC Forecast Wholesale Net Sales by Nutrient

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2005 2006 2007 2008 Nitrogen 2009 Phosphate Potash 2010 Other
Wholesale Net Sales ($M)
Forecast
2011
2012
In 2011 and 2012, we forecast Agrium to earn annual gross profits of $1.29 billion and $1.21 billion, respectively, with a heavier weight in Q2. As can be seen in Exhibit 2.51, we forecast that slightly more than 50% of Wholesale gross profit will be generated by nitrogen, 35% to 40% from potash, with the remainder from phosphate, product purchased for resale, and/or other.
Exhibit 2.51: SC Forecast Wholesale Gross Profits by Nutrient
Wholesale Gross Profit ($M)
700 600 500 400 300 200 100 0 -100 2005 2006 2007 2008 Nitrogen 2009 Phosphate Potash 2010 Other 2011 2012 Forecast
137
January 2011
Exhibit 2.52 shows our estimated realized Wholesale gross margins by nutrient. We do not think 2011 and 2012 will deviate from the norm, with nitrogen margins trumping phosphate, and potash trumping all. Specifically, we are looking for margins of ~40% (N), 12% (P), and 61% (K) next year.
Exhibit 2.52: SC Forecast Wholesale Gross Margins by Nutrient
Wholesale Gross Margins (%)
90% 75% 60% 45% 30% 15% 0% -15% 2005 2006 2007 2008 Nitrogen 2009 Phosphate 2010 Potash 2011 2012
Extended turnaround at Vanscoy
Forecast
138
139
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 Q1-10 3/31/10 1,280 298 213 382 96 2,269 1,536 466 305 339 199 2,845 1,815 847 816 971 237 4,686 229 113 42 266 45 695 464 118 47 240 81 950 260 114 109 149 26 658 294 91 135 161 35 716 1,247 436 333 816 187 3,019 239 115 181 205 49 789 444 124 188 216 70 1,042 290 156 127 194 32 799 404 117 142 177 0 840 1,377 512 638 792 151 3,470 317 99 159 165 0 739 565 171 227 247 0 1,211 398 136 170 195 0 899 421 112 168 187 0 888 1,016 271 115 363 69 1,834 265 27 98 19 26 435
21% 9% 46% 5% 27% 19% 31% 38% 17% 22% 20% 25% 27% 29% 29% 28% 42% 23% 8% -4% 1% -12% -9% 0% -5% 29% 21% 55% 77% 50% 49% 51% 55% 52% 25% 50% 23% 10% -1% 1% 9% 33% 39% 24% 39% 31% 32% 33% 30% 16% 59% 6% 18% 28% 32% 8% 59% 2% 14% 26%
Exhibit 2.53: SC Forecast Agriums Wholesale Segment
Agrium Inc.
($M)
Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 6/30/10 9/30/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12
Net Sales Nitrogen Phosphate Potash Product Purchased for Resale Other
1,701 517 724 795 0 3,737
1,577 472 822 840 0 3,711
COGS Nitrogen Phosphate Potash Product Purchased for Resale Other 1,026 348 138 311 148 1,971 508 118 167 28 53 874 712 421 632 -42 68 1,791 55 26 21 2 13 117 412 38 174 -39 55 640 182 12 23 -28 23 212 80 -1 56 -13 11 133 95 1 74 0 8 180 72 18 106 12 9 217 140 10 110 4 10 274 80 24 59 9 7 179
28% 15% 46% 5% 22% 22%
1,103 426 184 892 169 2,774 161 15 88 12 0 276

40% 13% 62% 7% 0% 33%
174 87 21 246 32 560
279 106 24 239 58 706
180 115 53 162 15 525
199 90 61 159 2 536
832 398 159 806 107 2,327
167 97 75 193 40 572
304 114 78 212 60 768
210 132 68 185 25 620
243 102 55 165 0 564
924 445 276 755 125 2,524 453 67 363 37 26 946

33% 13% 57% 5% 17% 27%
178 87 61 154 0 480 139 12 98 11 0 259

44% 12% 61% 7% 0% 35%
326 150 89 231 0 795 239 21 139 16 0 415

42% 12% 61% 7% 0% 34%
227 119 66 182 0 595 171 17 104 13 0 304

43% 12% 61% 7% 0% 34%
243 98 65 175 0 582 178 14 102 12 0 306

42% 12% 61% 7% 0% 34%
974 454 281 742 0 2,452 726 63 442 53 0 1,285

43% 12% 61% 7% 0% 34%
974 419 328 784 0 2,505 603 52 494 56 0 1,205

38% 11% 60% 7% 0% 32%
Gross Profit Nitrogen Phosphate Potash Product Purchased for Resale Other
Gross Margin Nitrogen Phosphate Potash Product Purchased for Resale Other
Selling Expenses Other EBITDA 125 136 91 119 0 667 105 87 1,478 22 0 57 29 0 215 32 0 83
30 55 352
27 61 786
29 92 1,670
8 30 79
9 -41 244
9 9 115
8 3 169 29 0 140
34 1 605 110 0 495
9 33 175 35 0 140
9 -83 348 63 0 285
8 -19 190 55 0 135
8 25 244 25 0 218
34 70 842 178 0 664
7 8 244 26 0 217
8 -20 427 32 0 395
10 64 230 30 0 200
8 28 270 26 0 243
34 80 1,171 115 0 1,056
36 90 1,079 120 0 959
Depreciation Asset Impairment EBIT
January 2011
January 2011
Wholesale: Nitrogen
AGRIUMS STOCK PRICE IS MOST LEVERED TO NITROGEN
Over the past five years, nitrogen-based wholesale gross profits have contributed more to Agriums bottom line than any of the companys other business activities (Exhibit 2.54). About 86% of Agriums $1.2 billion of 2009 nitrogen sales were based in Canada (38%) and the United States (48%), with the remaining sales generated mostly from its Profertil facility in Argentina.
Exhibit 2.54: Agriums Stock Price Is Most Levered to Nitrogen
600
Five-Year Avg. Gross Profit ($M)
500 400 300 200 100 0

Nitrogen (W) Crop Protection (R) Crop Nutrients (R) Potash (W) Seed, Services & Other (R) Phosphate (W) Advanced Technologies (AAT) Other
Agrium owns and operates five major North American nitrogen facilities, four of which are located in Alberta and one in Texas. Additionally, the company has nitrogen investments in both South America and Egypt. Net capacity at Agriums North American nitrogen facilities is 5 million tonnes, with an additional 0.8 million tonnes of international capacity. Agriums nitrogen portfolio is split among urea (46%), ammonia (26% net), and nitrogen solutions (18%). Ammonium sulphate and ammonium nitrate round out the remainder of its nitrogen assets (Exhibit 2.55).
Exhibit 2.55: Summary of Agriums Nitrogen Assets and Investments
Facility Ammonia
(000 mt net)
Urea
(000 mt)
Am. Nitrate Am. Sulphate N Solutions

(000 mt) (000 mt) (000 mt)
Total
(000 mt)
Look for nitrogen expansion in Egypt over the coming years.
Canada Redwater, AB Carseland, AB Joffre, AB Fort Saskatchewan, AB Standard and Granum, AB (upgrade) United States Borger, TX Kennewick, WA (upgrade) West Sacramento, CA (upgrade) North Bend, OH (upgrade) International Profertil S.A. (50%) MOPCO (26%)
250 135 480 170 1,035 430
720 680 430 1,830 99
215
350
180
215
350
120 300
1,715 815 480 600 120 3,730 529 430 204 110 1,273 635 196 831
430 35 21 56 1,521
99 600 175 775 2,704 215 350
430 204 110 744
Total
1,044
5,834
140
Agrium Inc.
January 2011
ON THE BIG STAGE
Agrium is the second-largest producer of both ammonia and urea in North America, with market shares of 15% and 18%, respectively (Exhibits 2.56 and 2.57). On the world stage, Agriums ammonia and urea market shares are 1.8% and 1.6%, respectively. Unlike the potash industry, global nitrogen capacity is highly fragmented among numerous players, coupled with high government involvement.
Exhibit 2.56: North American Ammonia Producers Exhibit 2.57: North American Urea Producers
AMMONIA
2010 Capacity
(M mt)
N.A. Share
(%)
UREA CF Industries Agrium Yara Koch PotashCorp Coffeyville LSB Industries Dyno Nobel Rentech Others
2010 Capacity
(M mt)
N.A. Share
(%)
Agrium has high market shares in North American ammonia and urea production.
CF Industries 1 Agrium Koch PotashCorp Yara Honeywell International Mosaic Others
6.3 2.4 2.3 1.3 0.8 0.5 0.5 2.0 16.1
39% 15% 14% 8% 5% 3% 3% 12% 100%
1. 7.74M st global ammonia capacity, less 0.85M st Trinidad/U.K. capacity, converted to mt.
2.5 1.9 1.2 1.1 0.9 0.3 0.2 0.2 0.1 1.9 10.4
24% 18% 12% 11% 9% 3% 2% 2% 1% 18% 100%
Source: IFDC; Agrium; company reports; Scotia Capital.
Source: Blue & Johnson; Agrium; Scotia Capital.
AGRIUMS NITROGEN COSTS 91% CORRELATED TO NATURAL GAS PRICES
While it should come as no surprise that Agriums (or any companys) nitrogen-based COGS are highly correlated to its natural gas feedstock costs, we think it is important to stress the relationship. Why? As we have previously mentioned, Agriums stock price is highly levered to its nitrogen business, and therefore, indirectly to natural gas prices (Exhibits 2.58 and 2.59).
Exhibit 2.58: Agriums Alberta Advantage
$12 $10 Natural Gas ($/mmBtu) $8 $6 $4 $2 $0 Q1/06 Q3/06 Q1/07 Q3/07 Q1/08 Q3/08 Q1/09 Q3/09 Q1/10 Q3/10 $400 $350 Nitogen COGS ($/mt) $300 $250 $200 $150 $100 $50 $0
Exhibit 2.59: Nitrogen Cash Cost Calculation

Gas price Gas consumption Gas cost Conversion cost Ammonia cash cost
($/mmBtu) (x) ($/mt) ($/mt) ($/mt)
$4.50 35x $158 $30 $188
[A] [B] [C = A X B] [D] [E = C + D]
AGU Realized (LHS)
NYMEX Benchmark (LHS)
Nitrogen COGS (RHS)
$400 $350 Nitrogen COGS ($/mt) $300 $250 $200 $150 $100 $50 $0 $3 $4 $5 $6 $7 $8 $9 $10 Natural Gas ($/mmBtu) R = 0.91
2
Ammonia price Ammonia use Ammonia cost Gas consumption Gas cost Conversion cost Urea cash cost
($/mt) (x) ($/mt) (x) ($/mt) ($/mt) ($/mt)
$188 0.58x $109 5.5x $25 $23 $157
[E] [F] [G = E X F] [H] [I = A X H] [J] [K = G + I + J]
Source: Agrium; Bloomberg; Scotia Capital.
Source: Yara International; Agrium; Scotia Capital.
141
January 2011
ALBERTA FACILITIES SHOULD RECEIVE A COST ADVANTAGE
About 3.7 million tonnes of Agriums nitrogen-based fertilizer capacity is located in Alberta, where Agrium typically pays for its natural gas based on the benchmark AECO-C spot price. On an equivalent basis, the historical five-year spread between NYMEX (i.e., Henry Hub) and AECO gas prices is between $0.50/mmBtu and $1.00/mmBtu. Accordingly, and as three-quarters of Agriums North American nitrogen production is based in Alberta, Agrium typically realizes lower ammonia and urea production costs compared with similar facilities in the southern United States. Exhibits 2.60 and 2.61 show historical NYMEX and AECO natural gas prices, as well as the spread between the two.
Exhibit 2.60: NYMEX vs. AECO Gas Prices
$16 $14
Exhibit 2.61: The Alberta Advantage

$5
The Alberta Advantage has averaged between $0.50/mmBtu and $1/mmBtu over the past few years.
$12 $/mmBtu $10

$/mmBtu
$4
$8 $6 $4 $2
NYMEX AECO
$3
+1 SD
$2
Average
$1
$0 Dec-04
-1 SD
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
$0 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
BUT NATURAL GAS HEDGING STRATEGY HAS REDUCED THIS RECENTLY
Until late 2008, the combination of Agriums natural gas hedging strategy, its AECO cost advantage, and market rates culminated in Agriums realized quarterly gas cost averaging 80% of NYMEX prices. We note that Agrium uses derivative financial instruments and other contractual arrangements to manage its risk of gas price volatility, including: (1) swaps; (2) forward sales; and (3) prepayments. Since energy markets turned south in Q3/08, Agriums realized natural gas cost per quarter has averaged 11% over NYMEX prices (Exhibit 2.62). For Agriums natural gas derivative contracts outstanding as at December 31, 2009, a realized natural gas cost increase of $0.10/mmBtu would have increased net earnings by $2 million.
Exhibit 2.62: Agriums Natural Gas Hedging Success Mostly Ended in Q3/08
$12 $11 $10 $9
Prior to Q3/08, AGU's natural gas cost averaged about 80% of NYMEX m arket rates Since Q3/08, AGU's average natural gas cost has been 11% above NYMEX m arket rates.
Agriums natural gas hedging success mostly ended in Q3/08.
($/mmBtu)
$8 $7 $6 $5 $4 $3 $2 Q1-06 Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10
AGU Natgas Cost NYMEX Natgas Price
142
Agrium Inc.
January 2011
AGRIUM REALIZES HIGHER NITROGEN PRICES OVER BENCHMARK RATES
The majority of nitrogen produced at Agriums Alberta plants is sold into Western Canada, as well as the northwestern and Northern Plains regions of the United States. In these markets, the regional reference selling prices for both urea and ammonia are materially higher than the benchmark New Orleans price (i.e., NOLA). Why? The further that nitrogen products are sold from the NOLA region, and into the U.S. Midwest and toward Canada, the higher the transportation, distribution, and storage costs. Agriums strategically located production and upgrading facilities allow it to realize higher prices coupled with lower AECO-C spot gas costs, enabling the company to enjoy a strong margin advantage over its U.S. peers. Partially offsetting is Agriums sales to industrial customers, which generally result in lower realized prices. Between 20% and 25% of Agriums nitrogen sales are to industrial buyers. Exhibit 2.63 maps the 10-year historical spreads between regional reference prices and the NOLA reference price. To better understand the premium pricing Agrium enjoys, Exhibit 2.64 graphs urea prices at Black Sea, NOLA, and the Pacific Northwest.
Exhibit 2.63: Proximity to Western Canadian and Pacific Northwest Customers Provides Greater Margins
Pacific NW urea prices are higher than U.S. Gulf prices due to transportation and storage costs.
Source: Agrium.
Exhibit 2.64: Pacific Northwest Urea Prices are Higher than U.S. Gulf and Black Sea Urea Prices
$1,000 $900 $800 Urea Price ($/st) $700 $600 $500 $400 $300 $200 $100 $0 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
U.S. Gulf (FOB)

Source: Green Markets; Fertilizer Week; Scotia Capital.
Pacific NW (DEL)
Black Sea (FOB)
143
January 2011
THE UPS & DOWNS OF AGRIUMS OFFSHORE NITROGEN BUSINESS
Argentina
Agrium has a 50/50 JV with Repsol YPF that owns an Argentine-based nitrogen complex called Profertil, which boasts a nameplate urea capacity of 1.2 million tonnes. The facility also produces 0.75 million tonnes of ammonia, but only 70,000 tonnes per year is available for sale as the majority of the production is used as urea feedstock. The only other nitrogen complex in Argentina is about 20% of Profertils size. We like Agriums nitrogen investment in Argentina, which, in our view, provides the company with the upside associated with margin expansion in rising nitrogen markets due to its low-cost natural gas contracts with the Argentine government. We note that these gas contracts are not tied to North American natural gas prices and cover between 80% and 90% of the plants annual gas requirements.
Gas deliverability has been an issue in the past at Profertil.
The downside associated with Profertil is the risk of gas deliverability cutbacks during the winter period due to strains on gas distribution in Argentina. According to Agrium, the Argentine government has at times reduced the gas available to industrial users in favour of residential users during the peak winter demand season. To partially mitigate this risk, Agrium uses LNG imports as an alternative supply of natural gas, which we expect could increase during Argentinas winter season.
Egypt
Agrium owns a 26% stake in a nitrogen complex in Egypt called MOPCO, which currently has a nameplate capacity of 0.7 million tonnes of urea. The facility also produces 0.4 million tonnes of ammonia, but only 0.1 million tonnes per year is available for sale as the majority of its ammonia production is used as urea feedstock. The upside of Agriums nitrogen investment in Egypt is simple a potential threefold urea capacity expansion by early 2012, which is already under construction. Following commissioning of the expansion, Agriums 26% stake of the JV would result in approximately 575,000 tonnes of annual urea capacity. Additional upside to the complex stems from long-term, low-cost natural gas contracts, which we estimate at slightly above $1/mmBtu. Agriums participation in this project originally faced pushback from the Egyptian government, which forced Agrium to reduce its position as a 60% owner of the project to a 26% investor in the MOPCO complex. Exhibit 2.65 highlights the history behind the development of the Egyptian nitrogen complex. Since then, the relationship has run smoothly.
Exhibit 2.65: Agrium Initially Faced Egyptian Government Pushback When Securing Its Egyptian Nitrogen Complex
Agrium announces plans to boost its nitrogen capacity by 20% by 2010, through the development of a $1.2 billion nitrogen complex in Damietta, Egypt. The plant site is chosen by Agrium as a w ay to enhance the company's proximity to both European and Asian customers. Additionally, longterm, low -cost gas contracts w ill enable Agrium to realize strong nitrogen-based fertilizer margins. Agrium agrees to have a 60% stake in the project, w hich w ould comprise 1.3 million mt/y of urea capacity and 0.1 million mt/y of net ammonia capacity.
May 1, 2007 April 21, 2008
The Egyptian government halts construction of the project. Agrium announced that citizens in Damietta, Egypt, have voiced concerns over the possible environmental impact that Agrium's nitrogen complex April 24, 2008 w ould have. The Egyptian government requests that Agrium "increase its efforts to achieve a public consensus on the project and to undertake an evaluation of all options to address the concerns raised". Agrium announces that it has been cleared by the Egyptian Parliamentary Committee of all substantive issues w ith respect to the project. June 17, 2008 Additionally, Agrium states "previous claims of substantial deficiencies in the project development process have been proven false". The Egyptian People's Assembly votes to recommend the relocation of the facility to undisclosed site, and the Egyptian Prime Minister indicates he June 20, 2008 w ill support this recommendation. Agrium states that movement of the facility from the existing industrial-zoned site w ould require new financing, permitting, and the negotiation of a new EPC contract. Agrium reaches an agreement on its nitrogen project w hereby it w ill enter into an agreement w ith MISR Oil Processing Company (MOPCO) that w ill August 11, 2008 see Agrium ow n a 26% interest in the combined company.
144
Agrium Inc.
January 2011
OUTLOOK
Barring any North American acquisitions of nitrogen assets, we expect Agrium to realize quarterly nitrogen sales volumes consistent with average years (i.e., 2006-2008). Specifically, we are looking for North American sales volumes of 4.5 million tonnes in both 2011 and 2012. For 2011, our product split is as follows: 2.2 million tonnes of urea (78% domestic and 22% overseas); 1.5 million tonnes of ammonia (80% domestic and 20% overseas), and the remainder spread mostly across nitrogen solutions, with some ammonium nitrate and ammonium sulphate. Exhibit 2.66 highlights our North American quarterly nitrogen sales volume forecast through 2012, which shows the second quarter and, to a much lesser extent, the fourth quarter, as the strong seasonal quarters for nitrogen sales volumes. While we anticipate that there will be no material winter-based gas curtailments in Argentina that Agrium cannot fulfill with LNG imports, it is certainly possible for this to occur (i.e., 1H/07). Additionally, we expect that Agriums 26% interest in MOPCO, which is constructing two additional urea trains, will not be thrown off schedule by government intervention.
Exhibit 2.66: SC Forecast Wholesale Nitrogen Domestic Sales Volumes by Product
NA Nitrogen Volume (000 mt)
1,600 1,400 1,200 1,000 800 600 400 200 0 2005 2006 2007 2008 Ammonia 2009 Urea 2010 Other Nitrogen
Nitrogen sales should remain stable through 2012.
Forecast
2011
2012
Source: Agrium; Scotia Capital estimates
We expect Agriums realized domestic ammonia and urea prices in 2011 to average $445/tonne and $393/tonne, respectively (Exhibit 2.67). The following year, were looking for a 6% and 8% decline in realized domestic ammonia and urea prices. While we anticipate that high crop prices, and moderately low nitrogen inventories will continue to support nitrogen prices, there are several factors that may hamper a continuous rise in ammonia, urea, and other nitrogen-based commodities prices over the mid-term:
1. New supply. Excluding China, we estimate 11.5 million tonnes of nitrogen capacity is scheduled for
commissioning between 2010 and 2014. While the timing of 2013/2014 projects is less certain, it is possible that this incremental capacity may not be fully soaked up by demand growth.
Urea exports by China could weigh on nitrogen prices usually in the back half of the year.
2. Chinas urea export tax. China is currently in a state of nitrogen overcapacity, with 29 million tonnes of construction or proposed ammonia/urea projects over the next few years. Despite a recent widening of its peak-season 110% export tax window, the off-season export tax rates of 7% will continue to incentivize Chinese urea producers to export product. 3. Industrial demand. There is no question that the United States is still undergoing an economic recovery, which should boost industrial demand for ammonia and urea over the mid-term. However, if industrial demand for nitrogen products is weaker than expected, we could see lower pricing in 2011 and 2012. We are not convinced that U.S. industrial demand will soar back to the 2007/2008 levels that some expect.
145
January 2011
Exhibit 2.67: SC Forecast Wholesale Domestic Realized Nitrogen Prices by Product

Domestic Nitrogen Realized Prices ($/mt) 700 600 500 400 300 200 100 0 2005 2006 2007 2008
Ammonia
Forecast
2009
Urea
2010
Other Nitrogen
2011
2012
4. We are looking for declining Wholesale Nitrogen net sales of $1.7 billion and $1.6 billion in 2011 and 2012, respectively. Exhibit 2.68 highlights our quarterly net sales forecast, broken down by nitrogen product. We forecast Agrium to realize 38% to 44% quarterly gross margins throughout 2012, with Q1s usually the highest. On a gross profit basis, we estimate Agriums Wholesale Nitrogen division will realize $726 million and $603 million in 2011 and 2012, respectively or between 2007 and peak 2008 levels. Exhibit 2.69 shows our gross profit and gross margin forecasts for Wholesale Nitrogen.
Exhibit 2.68: SC Forecast Wholesale Nitrogen Net Sales by Product
700 600 500 400 300 200 100 0 2005 2006 2007 2008 Ammonia Urea 2009 Other Nitrogen 2010 International 2011 2012
Nitrogen Net Sales ($M)
Forecast
Exhibit 2.69: SC Forecast Wholesale Nitrogen Gross Profit and Gross Margins
300 60% 50% 40% 30% 20% 10% 0% -10% -20% 2005 2006 2007 2008 2009 2010 2011 2012
250 200 150 100 50 0
Nitrogen Gross Profit (LHS)
Nitrogen Gross Margin (RHS)
146
Nitrogen Margin (%)
Nitrogen Profit ($M)
Forecast
Agrium Inc.
January 2011
Wholesale: Phosphate
INTEGRATED, AND FOURTH-LARGEST NORTH AMERICAN PHOSPHATE PRODUCER
Agrium has a fair-sized phosphate business, with two production facilities that offer a total capacity of nearly 1 million tonnes of MAP and ~0.26 million tonnes of other products, such as merchant-grade phosphoric acid and super-phosphoric acid (SPA). As an integrated producer, each of the companys two facilities has a dedicated phosphate rock mine. Specifically, Agriums Redwater facility obtains phosphate rock from its mine in Kapuskasing, Ontario, while its Conda plant in Idaho receives rock from Agriums nearby Dry Valley mine. Exhibit 2.70 highlights Agriums phosphate facilities and capacities.
Exhibit 2.70: Agriums Phosphate Assets
Facility
MAP
(000 mt)
Other
(000 mt)
Total
(000 mt)
Concentrated Rock Rock Quality

(000 mt) (% P2O5)
Agrium produces ~1M mt/y of MAP.
Canada Redwater, AB Kapuskasing, ON United States Conda, ID Dry Valley, ID Total

660 300 960
255 255
660 555 1,215
950 1,300 2,250
37% 31% 34%
In 2009, Agriums phosphate net sales and gross profit were materially lower than in 2008, at $436 million and $38 million, respectively. The year-over-year decline was due to average 2009 phosphate sales prices dropping by $501/tonne from 2008 levels. Specifically, Agriums selling price per tonne dropped by 54% to $434/tonne in 2009, while its COGS declined by only 16% to $396/tonne. Accordingly, the 2009 margin per tonne was a disappointing $38/tonne, down 92% from 2008 and 67% from 2007 levels.
NORTH AMERICAN RANKING Exhibit 2.71: North American MAP/DAP Producers
MAP/DAP
2010 Capacity (M mt P2O5) 4.2 1.0 0.9 0.5 0.4 0.4 7.4
N.A. Share
(%)
Agrium is the fourth-largest phosphate producer in North America, with a 7% market share based on nutrient tonnes, or a 9% market share based on product tonnes (Exhibit 2.71). On the world stage, Agriums phosphate capacity represents about 2.2% of finished phosphate fertilizer (MAP/DAP/TSP) global market. With several small to medium phosphate capacity expansions expected in China, Tunisia, Jordan, Brazil, and Morocco, as well as Saudi Arabias world class Maaden phosphate complex, we anticipate that Agriums global market share could drop to 1.9% by 2013 while its North American market share should remain stable.
Mosaic CF Industries PotashCorp Agrium J.R. Simplot Mississippi Phosphates
57% 14% 12% 7% 5% 5% 100%
Source: IFDC; Agrium.
147
January 2011
ROCK RESERVE LIFE CONTINUES TO BE A THORN IN AGRIUMS SIDE
As an integrated phosphate producer, Agrium depends on its phosphate rock mines to remain competitive in the North American market.
Agriums Kapuskasing mine will likely be economically depleted by 2013.
In late 2006, Agrium took a $100 million writedown on the carrying cost of its Kapuskasing phosphate rock mine. Why? Quality issues with the rock from its mine resulted in a comprehensive drilling program as part of a re-evaluation of the nature of the reserves. The outcome of the drilling program resulted in a reduction in the economic ore reserve life of Kapuskasing to 2013 from 2019. Additionally, the writedown also reflected: (1) a lower price forecast of phosphate-based fertilizers due to significant global capacity additions and (2) a stronger Canadian dollar. To prepare for the end of Kapuskasings economic ore reserve life in 2013, and in order to keep its Redwater phosphate facility operating beyond 2013, Agrium continues to evaluate several rock-sourcing options, such as importing rock from West Africa, as it used to do prior to developing Kapuskasing. At Agriums Dry Valley phosphate mine in Idaho, which supplies rock to its Conda facility, the economic ore reserve life is sufficient over the long term.
COST ADVANTAGES ON SULPHUR AND AMMONIA
Phosphate production advantages are based on low ammonia costs and good access to sulphur.
While phosphate rock costs as well as a strong Canadian dollar continue to be areas of concern for Agriums phosphate business, we note that Agrium boasts a material and more than offsetting competitive advantage with respect to its sulphur and ammonia costs. As a reminder, 1 tonne of MAP requires 0.48 tonnes of sulphur and 0.13 tonnes of ammonia or up to 456,000 tonnes and 122,900 tonnes on an annual basis, respectively. Redwater. Given the significant availability of sulphur in the region, due to the oil and gas industry in Alberta, lower regional sulphur prices are highly favourable at Agriums Redwater facility compared with global prices. Additionally, the companys Redwater nitrogen complex produces slightly less than 1 million tonnes of ammonia per year, 74% of which is not sold to the market, but rather used as feedstock for Agriums nitrogen and phosphate businesses. Conda. Agriums Conda facility sources both sulphur and sulphuric acid locally and ammonia from Agriums Alberta-based nitrogen plants.
MARGIN ADVANTAGES ON PRICING AND TRANSPORTATION
Similar to urea, MAP prices are higher in the U.S. Northwest than in the U.S. Gulf.
Agrium directs its phosphate fertilizers into the western Canadian, Pacific Northwest, and western U.S. markets, where it realizes both higher selling prices and lower freight costs due to the locations of its phosphate facilities. As a comparison, all 10 of Mosaics facilities are located on the opposite side of the continent, with eight plants in Central Florida and two in Louisiana. With respect to western U.S. and Canadian phosphate markets, we think that PotashCorp is somewhat better positioned than Mosaic, but not as strong as Agrium is. Exhibit 2.72 shows the historical spread between western U.S. delivered MAP prices and MAP prices in both Central Florida and New Orleans. Since 2005, Pacific Northwest MAP prices have averaged an $86/short ton premium over central Florida prices.
148
Agrium Inc.
January 2011
Exhibit 2.72: Western U.S. MAP Prices Over Central Florida Prices
$1,400 $1,200
MAP Price ($/st)
$1,000 $800 $600 $400 $200 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
U.S. Gulf (FOB)
Western U.S. (DEL)
Central Florida (FOB)
Source: Green Markets; Fertilizer Week; Scotia Capital.
OUTLOOK
We understand that Agrium has no plans to increase its North American phosphate production capacity, as we believe it has a full plate trying to replace Kapuskasing rock by 2013. Accordingly, we forecast flat sales volumes through our 2012 forecast period. We expect Agrium to realize slightly less than 1 million tonnes of finished phosphate fertilizer sales volumes per year through 2012. We note that sales are strongest in Q2, followed by Q3. Exhibit 2.73 shows our forecast quarterly phosphate sales volumes and realized pricing, while Exhibit 2.74 highlights our expectations for quarterly realized gross profit per tonne, as well as the associated margins.
Exhibit 2.73: SC Forecast Wholesale Phosphate Volumes and Realized Prices
400 Forecast 1,400 1,200 1,000 800 600 400 200 0 2005 2006 2007 2008 2009 2010 2011 2012 Phosphate Volume (LHS) Phosphate Realized Price (RHS)
Phosphate Volume (000 mt)
350 300 250 200 150 100 50 0
Exhibit 2.74: SC Forecast Wholesale Phosphate Gross Profits and Gross Margins
900 70% 60% 50% 40% 30% 20% 10% 0% 2005 2006 2007 2008 2009 2010 2011 2012
Phosphate Profit ($/mt)
750 600 450 300 150 0
Phosphate Gross Profit (LHS)
Phosphate Margin (RHS)
149
Phosphate GM (%)
Forecast
Phosphate Realized Price ($/mt)
January 2011
Wholesale: Potash
SMALL BUT MEANINGFUL POTASH PRESENCE
Unlike most of its potash-producing peers that boast multiple potash mines/facilities, Agrium owns only one potash mine worldwide. Its Vanscoy facility is a 2.05 million tonne operation located about 30 kilometres southwest of Saskatoon, Saskatchewan. At its current operating rate, we estimate that the Vanscoy potash mine has a useful mine life of about 40 years. Agriums Vanscoy capacity represents about 8% of the North American market and approximately 3% of global potash capacity (Exhibit 2.75).
Exhibit 2.75: Major Global and North American Potash Producers
POTASH PotashCorp Mosaic 1,2 Belaruskali K+S Silvinit3 Israel Chemicals Uralkali3 Arab Potash Qinghai Salt Lake Potash Agrium SQM Intrepid2 Vale
1
2010 Global Capacity Share

(M mt KCl) (%)
POTASH PotashCorp Mosaic 1,2 Agrium Intrepid2

1
2010 Capacity
(M mt KCl)
N.A. Share
(%)
About half of Agriums potash sales are shipped offshore.
13.3 9.3 9.0 ~7.5 5.1 5.7 5.5 2.5 ~2.2 2.1 1.5 0.8 0.7
18% 13% 13% 10% 7% 8% 8% 3% 3% 3% 2% 1% 1%
13.3 9.3 2.1 0.8 25.5
52% 37% 8% 3% 100%
1. Associates 1.3M mt of Esterhazy capacity w ith PCS. 2. Excludes langbeinite capacity. 3. Uralkali w ill have 10.6M mt post-Silvinit acquisition.
In 2009, Agriums potash business realized a gross profit of $174 million, down materially from the $632 million earned the previous year. The decline was mostly due to a significant drop in sales volumes as a result of a farmer strike in potash consumption globally. However, pricing remained historically high for much of 2009; accordingly, Agriums realized profit per tonne was the second highest on record in 2009 at $228/tonne. Exhibit 2.76 shows Agriums realized (and our forecast) quarterly potash prices, both in North America and internationally since 2005.
Exhibit 2.76: SC Forecast Realized Wholesale Potash Prices by Region
Potash Realized Prices ($/mt) 900 Forecast 750 600 450 300 150 0 2005 2006 2007 2008 North America 2009 2010 International 2011 2012
150
Agrium Inc.
January 2011
VANSCOY BROWNFIELD EXPANSION
With a proven and probable mineral reserve of 124 million tonnes (27.9% K2O), coupled with a measured and indicated resource of 113 million tonnes (24.9% K2O), Agrium estimates that Vanscoy has an estimated mine life of about 40 years based on its current annual capacity of 2.05 million tonnes. With an inferred mineral resource of 200 million tonnes (24.7% K2O), the potential exists for an additional 34 years of mine life reserves to be added to Vanscoy.
A Vanscoy expansion would start ramping up in 2013.
On the back of this extended reserve life potential at Vanscoy, Agrium is currently studying a potential brownfield expansion of the mine by 750,000 tonnes to 2.8 million tonnes. Final approval for the $1 billion project is expected soon; if approved, we anticipate that most of the work will be completed between 2011 and 2013. First tonnes could be shipped in 2013, with the majority of the ramp-up occurring in 2014, and full production in 2015. At a capex cost of ~$1,333/tonne, we find the Vanscoy brownfield project to be a little expensive relative to other brownfield potash projects, which average between $500/tonne and $800/tonne of capex. For further details on global greenfield and brownfield potash projects, please refer to our January 2010 report, Finding Value in Growth.
TRITON GREENFIELD DEFERRED
In early 2010, Agrium deferred the development of a potential 2 million tonne greenfield potash mine located in the Yorkton-Melville area of Saskatchewan. The reasons cited for the decision were: (1) high capital costs at about $3.5 billion (ex infrastructure); (2) an easing of global potash/supply demand and lower potash pricing; and (3) significant capital nearly committed to its Vanscoy potash expansion.
WHY CANPOTEX IS BEST FOR AGRIUM
About 45% of Agriums potash production is shipped offshore to international markets via Canpotex the potash export-marketing association of Saskatchewan producers. Agrium is a 9% contributor to Canpotex, with PotashCorp (54%) and Mosaic (37%) making up the rest of Canpotex. While its true that Agriums realized potash prices from offshore markets are historically about $25/tonne to $50/tonne lower than its realized North American prices, the benefits of its membership in Canpotex outweigh the costs. Why? Leveraging off of its larger potash peers PotashCorp and Mosaic, Agrium has been able to realize strong economies of scale through the use of reduced freight rates to Vancouver, port infrastructure, marketing offices worldwide, and favourable shipping rates. Going forward, however, it is possible that Agrium may lose some of its gross profit per tonne as a direct result of PotashCorp bringing on new capacity faster than Agrium. Why? As PotashCorp brings on new capacity, we think it will direct most of those incremental tonnes to offshore markets, as North America is relatively balanced with respect to potash supply. If true, both Mosaic and Agrium have options to proportionately allocate more potash to Canpotex. If Agrium does not exercise this option, it could lose its ability to supply those incremental tonnes for the following three years something we believe Agrium will not risk. Accordingly, we think Agrium may switch tonnes away from North American markets and toward Canpotex, as PotashCorp brings on its brownfield capacity. This in turn could give PotashCorp an opportunity to increase its North American potash market share at the expense of both Agrium and Mosaic.
Agrium could lose North American potash market share shortly.
151
January 2011
OUTLOOK
Our forecast period through 2012 does not account for Agriums brownfield potash mine at Vanscoy, as we dont anticipate production to begin until at least 2013. Accordingly, we expect potash sales volumes to be in line with historical trends (ex 2009) at between 1.7 million and 1.8 million tonnes annually. Unsurprisingly, sales volumes usually peak in Q2 for the spring planting rush (Exhibit 2.77).
Exhibit 2.77: SC Forecast Wholesale Potash Sales Volumes by Region
Potash Volumes (000 mt)
700 600 500 400 300 200 100 0 2005 2006 2007 2008 2009 2010 International 2011 2012
Forecast
North America
Exhibit 2.78: SC Forecast Wholesale Potash Net Sales by Region

300
Potash Net Sales ($M)
Forecast
250 200 150 100 50 0 2005 High volum es, rising prices 2006 2007 2008 2009 North America 2010 International 2011 2012 High prices and low volum es
Margin Improvement on Stronger Pricing
In our minds, if Agrium is able to maintain production at 85%+ operating rates going forward, which we expect it should, we anticipate a decline in its cash production costs per tonne over the coming years. We estimate that actual cash production likely ranges between $75/tonne and $85/tonne, with an additional $25/tonne for depreciation, and a further $25/tonne to $35/tonne for freight and logistics. We estimate that cash costs of potash production between 2005 and 2008 averaged $82/tonne. In 2009, Agriums Vanscoy operating rate was between 35% and 40%, and accordingly, produced materially less tonnes of potash over which to spread its fixed costs. If realized potash prices continue to strengthen, we anticipate that Agrium will enjoy similar margins to those enjoyed in 2H/07. Exhibit 2.79 shows historical and forecast COGS and gross margins per tonne through 2012.
152
Agrium Inc.
January 2011
Exhibit 2.79: SC Forecast Wholesale Potash COGS and Gross Margins

600
Potash ($/mt)
500 400 300 200 100 0 2005 2006 2007 2008 2009 2010 Potash COGS
Forecast
2011
2012
Potash Gross Margin
Exhibit 2.80: SC Forecast Wholesale Potash Gross Profits and Gross Margins
250 100% 80% 70% 60% 50% 40% 30% 2005 2006 2007 2008 2009 2010 2011 2012
200 150 100 50 0
Potash Gross Profit (LHS)
Potash Gross Margin (RHS)
153
Potash Margin (%)
Potash Profit ($M)
Forecast
90%
January 2011
III. Advanced Technologies

OVERVIEW
AAT develops and markets controlled-release fertilizers.
Agriums Advanced Technologies (AAT) business develops and markets controlled-release (macronutrient and micronutrient) fertilizers, which are used in broad-based agriculture, specialty agriculture, professional turf, horticulture, and consumer lawn and garden markets worldwide. The business is split into two broad product lines: (1) Agriculture, which includes its highly successful ESN (environmentally sensitive nitrogen) product Exhibit 2.81: Agriums Advanced Technologies Business line, and targets broad agricultural crops such as corn, wheat, and potatoes, and (2) Turf and Ornamental, which directs its products to professional turf, horticulture, and structural pest control customers in North America. AAT was formed in Q3/06 following the amalgamation of Agriums legacy controlled-release product lines, and its acquisitions of both Nu-Gro and Pursell. Slow- and controlled-release fertilizers are produced at three U.S. facilities and at two plants in Canada (Exhibit 2.81).
Source: Agrium.
Agrium uses three production methods within its AAT unit: (1) coating methods where various fertilizer substrates are encapsulated to provide a desired release profile; (2) reacted slow-release production where urea is combined with other nitrogen elements to produce a slow-release profile; and (3) packaging and blending of fertilizers. In 2009, Advanced Technologies realized net sales of $304 million, or a 14% decline over 2008. In 2009, EBIT was $3 million, compared with $33 million the previous year. The significant year-overyear decline in 2009 sales and earnings was mostly due to lower sales volumes in its Turf and Ornamental segment. Why? The economic recession negatively impacted spending by golf courses and other professional product customers. We note that, of the 17,000+ golf courses in the United States and Canada, the average annual expenditure on fertilizer, seeds, and pest control products is ~$40,000 or slightly under $700 million per year in total. In AATs Agriculture segment, 2009 ESN prices (and margins) were negatively impacted by the overall decline of urea prices.
Exhibit 2.82: SC Forecast Advanced Technologies Net Sales by Business Line
160 140 AAT Net Sales ($M) 120 100 80 60 40 20 0 2006 2007 2008 2009 Turf & Ornamental 2010 Agriculture 2011 2012 Forecast
154
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January 2011
ESN
Environmentally sensitive nitrogen (ESN) is Agriums patented controlled-release product for major crops. Due to the success of the product, in Q1/10, Agrium commissioned a new 120,000 ton plant in Missouri, bringing total capacity to 360,000 tons. ESN encapsulates urea inside a specially designed polymer coating that releases nitrogen depending on soil temperature and moisture. ESN has the ability to increase crop yields, improve nutrient efficiency, widen the window for nutrient application, reduce fuel costs and save time for growers by lowering required number of passes over a field.
HANFENG INVESTMENT STRATEGIC, NOT FINANCIAL
In mid-2007, Agrium invested C$74.4 million in Hanfeng Evergreen Inc. for a 19.6% stake in the company. Hanfeng is primarily a producer of slow- and controlled-release fertilizer for the agricultural market in China, with plans to extend its manufacturing capabilities into Southeast Asia. Highlights of Agriums relationship with Hanfeng include:
1. In April 2007, Hanfeng issued 11.959 million common shares to Agrium at a price of C$6.22 per share
for gross proceeds of C$74.4 million. Agriums 19.6% stake (i.e., cost method) in HF shares is similar to the ownership level of the companys CEO, Xinduo Yu.
2. Agrium has provided Hanfeng with a perpetual and exclusive technology licence to produce and sell sulphur-coated urea in China. 3. Hanfeng granted Agrium an exclusive right to acquire 50% of the companys new SCU projects in China for a period ending in April 2009. Agrium exercised its option prior to the deadline and subsequently paid Hanfeng C$2.2 million for a 50% interest in Hanfengs 50,000 tonne 50/50 JV with Shanxi Fengxi Fertilizer Group. Following the transaction, net production capacity to Hanfeng from the facility dropped to 12,500 tonnes. Hanfeng has since bought the Agrium stake back. 4. Two Agrium senior executives (Joni Paulus and Andrew Mittag) serve on Hanfengs board of directors.
Hanfeng owns and operates 10 facilities (wholly owned and through joint ventures) with a combined net capacity of 726,000 tonnes. These facilities are strategically located in northeastern China (Heilongjiang province), the eastern region (Jiangsu, Shandong, and Shanxi provinces), and in Indonesia. Together, these regions account for over two-thirds of Chinas ~51 million tonnes of annual fertilizer consumption. Hanfeng aims to have 2 million tonnes of annual production capacity (net to Hanfeng) over the next several years. In our view, these plans are optimistic, and we expect actual 2013/14 capacity could come in below 2 million tonnes. In our view, Agriums C$74.4 million investment in Hanfeng is a fairly inexpensive way to buy firsthand knowledge into Chinas fertilizer industry the largest market for fertilizers on the planet. Additionally, Agriums ESN patents will expire by 2021, which will allow its competitors to copy the product. Until that time, Agrium has been reluctant to sell its ESN into foreign markets due to the risk of reduced legal recourse of patent infringement. Accordingly, Agriums investment in Hanfeng allows the company to participate in SCR fertilizer growth in foreign markets while keeping its flagship ESN product line in North America. In January 2010, we initiated coverage on the common shares of Hanfeng (HF-T). We currently rate the stock 1-Sector Outperform with a one-year target of $7.60 per share. We value Hanfeng using a 12.5x P/E multiple on a 2012 earnings estimate of $0.61 per share.
155
January 2011
Our risk ranking for Hanfeng is High. We believe this risk ranking is justified due to: (1) trading volume illiquidity; (2) near-100% geographic concentration in one market China; (3) high key management risk; and (4) Hanfengs exposure to market risk from fluctuating commodity feedstock input costs and volatile product selling prices.
Exhibit 2.83: Hanfengs Operational and Planned Expansion Facilities
Product Location Capacity Ownership
(000 mt) (%)
Net Capacity
(000 mt) (N)
Nutrients
(P) (K) (S)
Technology
Markets
SCU1 SCU1 Compound2 Compound3
Jiangsu Shanxi Heilongjiang Heilongjiang Heilongjiang Heilongjiang Jiangsu Heilongjiang Shandong
100,000 50,000 100,000 200,000 50,000 50,000 50,000 50,000 100,000 150,000
100% 50% 100% 100% 100% 100% 100% 100% 50% 34% Operational
100,000 25,000 100,000 200,000 50,000 50,000 50,000 50,000 50,000 51,000 726,000 75,000 34,000 109,000 835,000
X X X X X X X X X X X X X X X X X X X X X X X X
X X
Licensed Licensed Proprietary, patented Proprietary, patented
Jiangsu, Zhejiang, Anhui Shanxi, Shaanxi Heilongjiang, Jilin Heilongjiang, Jilin Heilongjiang, Jilin Heilongjiang, Jilin Jiangsu, Zhejiang, Anhui Heilongjiang, Jilin Shandong, Hubei Southeast Asia
Hanfeng aims to double its capacity over the next several years.
Coated NPK4 Coated NPK5 Blended SCR Blended SCR PCU6
X X X X
Proprietary, patented Proprietary, patented Proprietary, patented Proprietary, patented Proprietary, patented
Compound2/Coated NPK4 Indonesia
Proprietary
CarbonPower Multiple
Jiangsu Heilongjiang
150,000 100,000
95% 50% 34% Expansion Total
X X
X X
X X
X X
Proprietary Proprietary Proprietary
Jiangsu, Zhejiang, Anhui for Beidahuang JV Southeast Asia
Compound2/Coated NPK4 Indonesia
Notes: (1) Sulphur coated urea; (2) Compound w ith urease inhibitor; (3) NPK compound - chemical form; (4) Coated; (5) Polymer coated; and (6) Polymer coated urea.
Source: Hanfeng Evergreen; Scotia Capital estimates.
Exhibit 2.84: Hanfeng Evergreen Inc. Stock Price Performance

C$15 Ticker: HF C$14 Last P rice: C$ 5.96 C$13 M arket Cap: C $ 366M 52 Wk High: C$ 8.30 C$12 C$ 4.84 52 Wk Lo w: C$11 61.41M Shares O/S: C$10 C$9 C$8 C$7 C$6 C$5 C$4 Mar-09 Jun-09 Sep-09 HF (V olume)
3,500 3,000 2,500 2,000 1,500 1,000 500 0 Dec-10 Daily Volume (000s)
Price
Dec-09
Mar-10 TSX (rebased)
Jun-10
Sep-10
HF (Price)
156
Agrium Inc.
January 2011
SLOW- & CONTROLLED-RELEASE NITROGEN FERTILIZERS 101
Slow- and controlled-release (SCR) fertilizers release their nutrients at more gradual rates than conventional fertilizers, which permit maximum uptake and utilization of the nutrient while minimizing leaching losses.
Except for a few slow-release potash sources, almost all SCR fertilizers are nitrogen-based.
SCR fertilizers can be broadly divided into coated and uncoated products. Uncoated products rely on physical characteristics, such as low solubility for their slow release. Coated products mostly consist of quickrelease nitrogen sources surrounded by a barrier that prevents the nitrogen from releasing rapidly into the environment. Except for a few slow-release potash sources, almost all SCR fertilizers are nitrogen-based.
Sulphur-Coated Fertilizers
Sulphur-coated urea (SCU) technology was developed in the 1960s by the National Fertilizer Development Center. Sulphur was chosen as the principle coating material due to its low cost and its value as a secondary nutrient.
Exhibit 2.85: Sulphur-Coated Urea
SCUs are simply particles of urea coated with a layer of sulphur, and usually a sealant as well (see Exhibit 2.85). The total nitrogen content of SCUs varies with the amount of coating applied, but is typically between 30% and 40%. The release rate of a single SCU particle is directly affected by the coating thickness and the coating quality. Particles with higher sulphur loads typically show fewer imperfections, and therefore can extend the release rate. We note that a risk exists, however, that particles with sulphur coatings that are too thick can exhibit lock-off, whereby the nitrogen may never be released effectively. Depending on the coating weight and environmental conditions, SCUs can effectively provide nitrogen for six to 16 weeks.
SCUs can effectively provide nitrogen for between six and 16 weeks.
Source: Zafaran.
Polymer-Coated Fertilizers
Polymer-coated fertilizers represent the most technically advanced SCR product on the market with respect to controlling both product longevity and nutrient efficiency. Most polymer-coated urea fertilizers (PCUs) release nutrients by diffusion through a semi-permeable polymer membrane, and the release rate can be controlled by varying the composition and thickness of the coating (see Exhibit 2.86).
Exhibit 2.86: Polymer-Coated Urea
Source: Agrium Inc.
157
January 2011
Uncoated SCR Fertilizers
UF products are one of the oldest SCR nitrogen fertilizer technologies available.
Non-coated materials of limited solubility can be manufactured in a smaller particle size than coated products, and they are homogenous (i.e., the composition is the same throughout the particle, unlike coated products). Therefore, homogenous fertilizers release their nutrients at a rate that is not dependent on any coating. As a result, equipment cannot destroy the fertilizer particles slow-release characteristics. Urea formaldehyde (UF) products are one of the oldest SCR nitrogen fertilizer technologies available. Products include: (1) ureaform, (2) methylene urea, and (3) UF solutions. The rate of nitrogen release from UF reaction products is directly affected by polymer chain length. The longer the methylene urea polymer, the longer it takes for the nitrogen to become available. Exhibit 2.87: Agriums SCR Results (ESN)
Growth Responses to SCR Fertilizers
Source: Agrium Inc.
Because most controlled-release nitrogen sources cost several times more per pound of nitrogen than soluble (conventional) sources, most field trials have been conducted on high-value cash crops such as vegetables, citrus, and ornamentals. Little research has been conducted on agronomic crops because their use in the sector has generally been considered economically unviable. In addition to Hanfengs SCR field trials, Agrium has also conducted SCR field trials with positive results (Exhibits 2.87).
OUTLOOK
We expect Agrium to realize 2011 and 2012 Advanced Technologies gross profits of $67 million and $70 million, respectively. While this is modestly higher than 2009 gross profit of $54 million, we note that our forecast is below the average realized gross profits realized in both 2007 and 2008. Exhibit 2.88 highlights our quarterly forecast of AATs gross profit through 2011, split by its two business lines. We estimate that between 60% and 80% of Advanced Technologies gross profit is driven by the Turf & Ornamental segment.
Exhibit 2.88: SC Forecast Advanced Technologies Gross Profits by Business Line
160 140 AAT Net Sales ($M) 120 100 80 60 40 20 0 2006 2007 2008 2009 Turf & Ornamental 2010 Agriculture 2011 2012
Forecast
158
Agrium Inc.
January 2011
The Advanced Technologies Agriculture segment has consistently delivered higher gross margins that the Turf & Ornamental unit. Over the past five years, we estimate that the gross margin spread between Agriculture and Turf & Ornamental is about 700 bp, with an average Agriculture gross margin of 25%. Going forward, we look for both segments to deliver similar gross margins to the average over the past five years (Exhibit 2.89).
Exhibit 2.89: SC Forecast Advanced Technologies Gross Margins by Business Line
AAT Gross Margins (%)
We look for AAT to grow its Agriculture business faster than its Turf & Ornamental business.
50% 40% 30% 20% 10% 0% 2006 2007 2008 2009 Turf & Ornamental 2010 Agriculture
Forecast
2011
2012
We anticipate Advanced Technologies will contribute $33 million to $35 million of annual EBITDA through 2012. Similar to Agriums Retail unit, we think AAT will deliver ~10% EBITDA margins in both 2011 and 2012, in line with the average EBITDA margin over the previous four years although we note the range was somewhat wide at between 7% and 13%. Exhibit 2.90 highlights our forecast quarterly EBITDA and EBITDA margins through 2011.
Exhibit 2.90: SC Forecast Advanced Technologies EBITDA and EBITDA Margins
AAT EBITDA Margin (%) aa
25 20% Forecast 20 15 10 5 0 2006 2007 2008 2009 2010 2011 2012 15% 10% 5% 0% -5%
AAT EBITDA ($M) aaa
AAT EBITDA (LHS)
AAT EBITDA Margin (RHS)
159
160
208 41 249 162 32 194 46 9 55
22% 22% 22% 22% 15% 21% 18% 17% 18% 24% 22% 16% 32% 17% 32% 23% 25% 24% 26% 24% 26% 27% 20% 18% 14% 16% 17% 15% 15% 23% 22% 19% 18% 23% 31% 25%
Exhibit 2.91: SC Forecast Agriums Advanced Technologies Segment
($M)
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 3/31/10 6/30/10 9/30/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12
Net Sales Turf & Ornamental Agriculture 239 113 352 196 77 273 43 36 79 6 4 10 9 8 17 8 3 11 11 5 16 34 20 54 10 5 15 21 10 31 10 5 15 13 7 20 54 27 81 10 3 13
19% 19% 19%
68 33 101 56 26 82 12 7 19 37 20 57 48 17 65 39 10 49 64 15 79 188 62 250 34 14 48 76 31 107 52 25 77 57 19 76 219 89 308 42 14 56 55 21 76 12 8 19

17% 26% 20%
43 24 67
57 25 82
47 13 60
75 20 95
222 82 304
44 19 63
97 41 138
62 30 92
70 26 96
233 86 319
51 18 69
66 29 95
54 17 71 44 12 56 10 4 14
19% 26% 20%
73 27 101 60 20 80 13 7 21
18% 27% 20%
245 90 335 200 68 268 44 23 67

18% 25% 20%
257 95 352 210 71 281 47 24 70

18% 25% 20%
COGS Turf & Ornamental Agriculture
Gross Profit Turf & Ornamental Agriculture
18%
Gross Margin (%) Turf & Ornamental Agriculture
21%
19%
Selling Expenses Other EBITDA 8 -1 16 13 17 33 5 1 4 8 4 0 6 -6 19 3 4 -1 5 15
5 7 7
10 16 29
6 23 50
1 3 6
2 3 12
1 6 4
9 7 0
13 19 22
6 11 3
8 3 20
8 7 1 5 -4
5 5 9 5 4
13 20 33 20 14
2 5 6 6 0
3 5 11 6 5
3 5 7 6 1
6 5 10 6 4
14 20 33 23 10
14 21 35 25 10
Depreciation EBIT
January 2011
Agrium Inc.
January 2011

We believe that Agrium carries a High risk profile. Key risk factors are outlined below.
FOREIGN EXCHANGE
A strengthening Canadian dollar is mildly negative for Agriums EPS. Agrium earns the majority of its revenue in U.S. dollars, while most of its operating expenses are denominated in Canadian dollars. The major impact would be to Agriums potash and phosphate operations, as well as to its corporate overhead costs. Exposure to currency fluctuations is partially offset through Agriums currency hedging programs. We estimate that a 1 appreciation in the Canadian dollar will reduce our 2011 Agrium earnings forecast by 5 per share. Exhibit 2.92 highlights the historical FX rate over the past five years.
Exhibit 2.92: CAD-USD FX History
Canadian Dollar (U.S. Dollar)
1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
-1 SD +1 SD Avg
NEW GREENFIELD SUPPLY RISK
Soaring potash prices between 2006 and 2008 led to a surge of interest among new entrants looking to join the potash party. These new entrants ranged from pre-IPO junior resource companies to global mining giants such as BHP Billiton. In Saskatchewan alone, there are approximately 200 potash exploration permits that cover about 11 million acres, 90% of which were applied for and granted post 2006. If new supply, including existing producer-announced brownfield expansions, were to come online faster than warranted, potash prices could be depressed for a prolonged period. This would negatively impact Agriums wholesale margins, profitability, and ultimately, its share price. Additionally, we suspect this could also impact the companys decision to invest in: (1) its Vanscoy brownfield potash expansion and (2) its Triton greenfield potash project in Saskatchewan. For further details on the future of greenfield potash supply, please refer to our January 2010 report, Finding Value in Growth.
NATURAL GAS EXPOSURE
Commodity price exposure is one of the largest investment risks to shareholders.
In our minds, commodity price exposure is one of the largest investment risks to Agrium shareholders. Unlike many global commodities, fertilizers are typically not forward sold beyond one year out, and cannot be price-hedged in a futures market as no such market exists (yet). Natural gas is the principal raw material used to manufacture nitrogen, and is Agriums singlelargest purchased raw material for its Wholesale operations. A rise in natural gas costs will increase Agriums nitrogen cost of production and negatively impact its nitrogen-based margins for its North American assets.
161
January 2011
While higher production costs may be partially or fully reflected in higher product prices, this may not always be the case. However, we note that the majority of Agriums nitrogen sold in North America is produced in Western Canada, which has lower-cost gas than most of its competitors that produce nitrogen-based fertilizers elsewhere in North America. Agrium uses derivative financial instruments to manage its risk of gas price variability. We estimate that a $1/mmBtu increase in Agriums natural gas cost, excluding hedges and with no change in nitrogen pricing, would reduce Agriums 2011 EPS by about 39.
Profertil If natural gas deliverability to Profertil is an issue, Agrium can use LNG imports.
In Argentina, Agriums 50%-owned Profertil facility faces a material risk of reduced gas deliverability during the winter period due to strains on gas distribution in Argentina. The Argentine government periodically reduces the gas available to industrial customers in favour of residential users during much of the winter season. An additional risk exists that Profertil may not be able to renew its (relatively low-cost) gas supply contracts at favourable rates (or at all) going forward.
VARIABLE WEATHER CONDITIONS
Changes in regional weather patterns can have a significant and unpredictable impact on the demand and pricing strategy for Agriums products and services. Farmers have limited windows of opportunity to complete crop cultivation. If adverse weather conditions occur during these seasonal windows, Agriums sales and earnings could be negatively impacted without the opportunity to recover until the following season. Agrium attempts to limit its weather risk by utilizing its extensive distribution and storage system, which enables it to move product to locations where demand is strongest. However, margins on product that is moved more than normal will be lower due to higher transport costs and potentially lower sales prices. Additional weather risk mitigants include: (1) geographic diversification; (2) sales to industrial customers that are not dependent on regional weather factors; and (3) agronomic advances in agricultural products and/or equipment that can shorten application time or widen the product application window.
NITROGEN AND PHOSPHATE GOVERNMENT INVOLVEMENT
Because government involvement in the nitrogen industry is fairly steep at between 50% and 60%, a risk exists that new supply will be added without regard to demand, resulting in high price volatility. Agrium attempts to mitigate this risk by being a low-cost nitrogen producer, due to its Canadian natural gas feedstock advantage, as well as its ability to pick up additional margins through its close proximity to customers in both Western Canada and the Pacific Northwest. Similar to the nitrogen industry, the phosphate industry is also highly government-controlled, sometimes leading to production maximization at the expense of profitability. Increased supply, such as Maadens 3 million tonne DAP facility, which is now ramping up slowly, could outpace growth of world consumption over the next few years.
FERTILIZER DEMAND RECOVERY
Agriums profitability is highly dependent on crop input demand, which can be affected by the outlook for crop prices, crop nutrient prices, farmer economics, government policies and subsidies, farmer/customer credit, a build-up of inventories, and competitor actions such as decisions to build or close production facilities and/or changes in production operating rates.
162
Agrium Inc.
January 2011
INTEGRATION RISK
Over the past six years, Agrium has invested about $3.5 billion (ex AWB) on numerous acquisitions and other major growth initiatives (see Exhibit 2.93). Part of its acquisition economics include the realization of anticipated synergies from a variety of sources, including: (1) economies of scale, such as improved rebate programs from greater purchased volumes; (2) more efficient transportation, distribution, and storage systems; (3) reduced overhead expenses; and (4) opportunities for cross-selling. If Agriums anticipated acquisition synergies are not fully realized, the implied economics of an acquisition can decline, resulting in a less efficient use of the companys capital, which we believe would ultimately be reflected in a lower stock price. We estimate that AWBs Landmark business could add between $80 million and $100 million to Agriums annual EBITDA generation, assuming that ~$40 million of AWB synergies is attainable by 2012.
For the most part, Agriums forecast synergies have been met or surpassed to date.
Exhibit 2.93: Agriums Key Acquisitions Since 2005
AWB - not included in forecast yet
11,000 10,000 9,000

UAP
CMF
Net Sales ($M)
8,000 7,000 6,000 5,000 4,000 3,000 2,000 2004 2005

Im perial Oil South Am erica ADM Royster-Clark Pursell
MOPCO
Texas & Canadian Retail
Argentina Retail
Hanfeng Evergreen
Nu-Gro
2006
2007
2008
2009
2010E
163
January 2011
Financial Forecast
On the top line, and excluding the AWB acquisition, we are looking for 2011 and 2012 gross sales of $10.9 billion and $11.2 billion, respectively, or a 5.2% increase over our 2010 forecast. On a net basis (ex freight and transportation), we forecast $10.6 billion and $10.9 billion for 2011 and 2012 (Exhibit 2.94).
Exhibit 2.94: SC Forecast Net Sales by Division
6,000 5,000
Forecast
Net Sales ($M)
4,000 3,000 2,000 1,000 0 -1,000 2006 2007 2008 Wholesale 2009 Retail 2010 2011 Eliminations 2012 Advanced Technologies
We forecast 3% to 5% sales growth in 2011 and 2012 (ex AWB).
Gross profits should rebound similarly to sales but will be dominated by the retail business, as usual. Exhibit 2.95 shows the powerful seasonality that Agrium will realize in gross profits. We estimate that Retail will contribute between 57% and 59% of gross profits in both 2011 and 2012. Exhibit 2.96 highlights our forecast gross margins by business segment.
Exhibit 2.95: SC Forecast Gross Profits by Division
1,400
Gross Profit ($M)
1,200 1,000 800 600 400 200 0 2006 2007 2008 Retail 2009 Wholesale 2010
Forecast
2011
2012
Advanced Technologies
Exhibit 2.96: SC Forecast Gross Margins by Division

50% Gross Margin (%) 40% 30% 20% 10% 0% 2006 2007 2008
Retail
Forecast
2009
Wholesale
2010
2011
2012
Advanced Technologies
164
Agrium Inc.
January 2011
We forecast 2011 and 2012 EBITDA and EBITDA margins to be in the $1.94 billion to $1.98 billion range and in the 17.7% to 18.7% area, respectively. Our EPS estimates for Agrium are $7.28 (2011) and $7.09 (2012), versus a record $8.34 in 2008.
Exhibit 2.97: SC Forecast EBITDA and EBITDA Margins
1,200 1,000 Forecast 35%
EBITDA ($M)
800 600 400 200 0 -200 2006 2007 2008 2009 EBITDA (LHS) 2010 EBITDA Margin (RHS) 2011 2012
25% 20% 15% 10% 5% 0%
We estimate that Agrium will generate $1.4 billion in cash flow from operations in 2011 and $1.3 billion in cash flow from operations in 2012 (post-working capital adjustments).
Exhibit 2.98: SC Forecast Net Income and Net Income Margins
700 28% 20% 16% 12% 8% 4% 0% -4% 2006 2007 2008 2009 Net Income (LHS) 2010 2011 2012
500 400 300 200 100 0 -100
Net Income Margin (RHS)
Exhibits 2.99 highlights that, post 2010, Agriums return on assets and return on equity should return to more normalized levels of the 15% to 20% range.
Exhibit 2.99: SC Forecast Return on Assets and Return on Equity
40% 30% Forecast
Return (%)
20% 10% 0% -10% -20% 1998 2000 2002 2004 ROA 2006 ROE 2008 2010 2012
165
Income Margin (%)
Net Income ($M)
600
Forecast
24%
EBITDA Margin (%
30%
January 2011
Exhibit 2.100 compares our estimates against consensus estimates. While we do not know what our competitors estimates are based on, we believe we are generally in line with the Street averages.
Exhibit 2.100: Our 2011 and 2012 Agrium Estimates vs. Consensus
2011 Scotia Capital Est. Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/sh) 10,610 1,984 1,151 7.28 Low 10,135 1,137 631 5.50 Street Avg. 10,696 1,854 1,052 6.88 High 11,660 2,297 1,234 8.77 Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/sh) Scotia Capital Est. 10,927 1,938 1,120 7.09 2012 Low 10,066 1,166 658 5.31 Street Avg. 10,869 1,871 1,071 6.91 High 11,524 2,332 1,291 8.50
166
167
4,373 180 4,193 3,237 0 956 390 96 169 8 136 85 72 47 16 9 -24 33 0 33
131 25 133 132 1 133 136 159 157 158 158 1 1 0 1 1 135 158 157 157 157 158 157 157 157 157 157 157 1 158 -1 0 0 0 0 133 158 157 157 157 157 157 0 157 157 0 157
Exhibit 2.101: SC Forecast Agrium Income Statement (ex AWB)

2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 3/31/10 6/30/10 9/30/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 5,491 221 5,270 3,672 0 1,598 471 125 173 28 0 89 712 52 18 642 204 438 -3 441 1,322 -60 370 26 30 366 -30 0 0 0 -1 -1 1 -7
157 0 0 157 157 0 157
Agrium Inc.
($M)
Sales 237 10,031 6,592 216 3,223 815 192 110 162 87 -129 1,986 82 23 1,881 589 1,292 0 506
157 0 0 157 157 1 158
10,268 42 1,753 1,462 18 273 204 44 31 -23 0 73 -56 25 6 -87 -27 -60 21 6 516 146 370 23 3 37 11 26 22 4 4 -25 29 91 19 470 105 365 23 4 -47 -41 -6 22 4 706 200 506 20 4 79 22 57 0 57
157 0 0 157 157 1 158
1,795 50 4,090 3,168 32 890 281 56 29 7 0 -26 543 25 6 249 72 177 0 177
157 0 0 157 157 1 158
4,140 48 1,844 1,438 9 397 206 52 32 24 0 20 63 90 18 1,075 253 734 0 733

157 0 0 157 157 1 158
1,892 59 1,442 1,055 4 383 227 50 32 -4 0 48 30 1,943 918 202 124 4 0 115 580 361 211 48 32 3 0 87 -20 1,063 319 55 30 1 0 -74 732 500 234 51 30 7 0 75 103 635 260 53 30 13 0 0 279 2,559 1,024 207 122 24 0 0 1,182 541 211 43 31 14 0 0 243 25 6 212 61 151 0 151
157 0 0 157 157 1 158
1,501 199 9,129 7,123 63 1,437 0 3,304 0 1,509 0 1,276 0 7,526 0 1,321 0 3,134 0 1,150 291 59 34 19 0 0 747 22 6 719 208 510 0 510
157 0 0 157 157 1 158
9,328 50 1,798 64 4,367 57 2,009 57 1,911 228 10,085 50 1,862 80 4,284
1,848
4,431
2,066
1,968
10,313
1,912
4,365
2,571 60 2,511 1,741 0 770 233 63 33 15 0 0 427 17 6 403 117 286 0 286
157 0 0 157 157 1 158
2,010 59 1,952 1,268 0 684 273 55 31 14 0 0 310 17 6 287 83 204 0 204

157 0 0 157 157 1 158
10,858 249 10,610 7,465 0 3,145 1,007 220 129 62 0 0 1,727 82 24 1,621 470 1,151 0 1,151
157 0 0 157 157 1 158
11,181 253 10,927 7,769 0 3,158 1,057 228 133 68 0 0 1,673 70 26 1,577 457 1,120 0 1,120
157 0 0 157 157 1 158
Less Direct Freight Total Net Sales
Cost of Good Sold Inventory and Purchase Commitment Writedown
Gross Profit Selling General & Administrative Depreciation Royalties and other taxes Asset Impairment Other (Income) Expenses Earnings Before Interest & Taxes (EBIT)
Less: Interest Expense Other Interest Earnings Before Taxes (EBT) Less: Income Taxes Expense Net Income Before Controlling Interest
Non-Controlling Interest
Net Income
Basic shares - opening Plus: Equity issued Less: Share buyback Basic shares - closing Average Shares O/S - Basic (M) Average Dilution (M) Average Shares O/S - Diluted (M) 0.25 0.25 377 888 2,321 -1 602 3.28 3.25 8.39 8.34 -0.38 -0.38 2.36 2.35 0.17 0.16 127 0.19 0.19 95
EPS (Basic) EPS (Diluted)
2.33 2.33 823
-0.04 -0.04 47
3.22 3.20 829
0.37 0.37 194
1.13 1.12 339
4.67 4.65 1,409
0.96 0.95 305
3.25 3.23 815
1.82 1.81 492
1.30 1.29 372
7.33 7.28 1,984
7.13 7.09 1,938
EBITDA
January 2011
168
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 109 566 747 137 0 1,559 1,332 75 174 0 125 3,265 1,772 73 178 0 221 5,832 2,036 653 1,783 71 156 9,837 1,428 653 1,794 330 140 10,301 1,584 640 1,797 351 87 9,688 1,686 627 1,799 356 98 9,023 1,782 617 1,801 370 95 9,785 1,782 1,835 617 612 1,801 1,804 370 367 95 52 9,785 10,401 1,835 596 1,803 349 54 9,795 1,921 584 1,813 358 45 9,778 1,978 584 1,783 358 45 9,414 1,978 584 1,783 358 45 9,414 2,041 584 1,752 358 45 9,475 2,101 584 1,718 358 45 11,319 1,509 821 961 297 0 3,588 374 1,242 3,047 475 0 5,138 86 1,292 3,786 704 88 5,956 251 2,230 2,318 322 108 5,229 225 1,869 1,992 263 108 4,457 933 1,324 2,137 612 114 5,120 933 1,324 2,137 612 114 5,120 907 1,495 2,988 335 6 5,731 805 2,475 1,789 85 4 5,158 897 2,199 1,758 186 17 5,057 1,813 945 1,402 489 17 4,665 1,813 945 1,402 489 17 4,665 1,835 921 1,452 471 17 4,695 459 2,119 3,444 474 17 6,513 1,646 1,242 1,914 566 17 5,384 2,162 584 1,685 358 45 10,219 2,202 965 1,393 511 17 5,088 2,225 584 1,654 358 45 9,955 0 227 732 1 0 960 669 272 131 0 2,032 783 358 237 99 2,744 1,622 328 725 242 5,727 1,614 347 701 13 6,237 1,637 339 549 13 5,215 1,674 346 543 14 4,456 1,699 381 521 11 5,193 1,699 381 521 11 5,193 1,574 398 504 12 5,819 1,567 351 516 10 4,768 1,621 392 525 0 4,654 0 166 1,100 1 0 1,267 0 610 2,200 0 0 2,810 0 293 3,269 0 0 3,562 0 349 2,328 0 0 2,677 0 163 1,716 0 0 1,879 0 106 2,475 0 0 2,581 0 106 2,475 0 0 2,581 0 134 3,072 125 0 3,331 0 119 2,080 125 0 2,324 0 188 1,803 125 0 2,116 0 188 1,262 585 0 2,035 1,161 392 525 0 4,113 0 188 1,262 585 0 2,035 1,161 392 525 0 4,113 0 188 1,307 460 0 1,955 1,161 392 525 0 4,033 0 188 3,100 0 0 3,288 1,161 392 525 0 5,366 0 188 1,722 0 0 1,910 1,161 392 525 0 3,988 0 188 1,254 26 0 1,468 1,135 392 525 0 3,520 622 602 9 1,233 3,265 5,832 9,837 10,301 9,688 9,023 1,980 1,024 84 3,088 1,969 2,313 -172 4,110 1,971 2,253 -160 4,064 1,971 2,614 -112 4,473 1,971 2,640 -44 4,567 1,977 2,662 -47 4,592 9,785 1,977 2,662 -47 4,592 1,980 2,655 -53 4,582 9,785 10,401 1,980 3,152 -105 5,027 9,795 1,983 3,201 -60 5,124 9,778 1,983 3,378 -60 5,301 9,414 1,983 3,378 -60 5,301 9,414 1,983 3,520 -60 5,443 9,475 1,983 4,030 -60 5,953 11,319 1,983 4,308 -60 6,231 10,219 1,983 4,511 -60 6,434 9,955
Exhibit 2.102: SC Forecast Agrium Balance Sheet (ex AWB)
($M) Assets Current Assets Cash and Cash Equivalents A/R Inventory Prepaid Expenses/Deposits Other Current Assets
2012E
2,202 965 1,393 511 17 5,088 2,225 584 1,654 358 45 9,955
3,104 989 1,447 570 17 6,128 2,442 584 1,522 358 45 11,079
PP&E Intangibles Goodwill Investment in equity investee Other Assets Total Assets
Current Liabilities Revolver Bank indebtedness Accounts Payable Current Portion of long-term debt Other
0 188 1,254 26 0 1,468 1,135 392 525 0 3,520
0 188 1,302 0 0 1,490 1,135 392 525 0 3,542
Long-Term Debt Other Liabilities Future income tax liabilities Non-controlling Interests Total Liabilities
Shareholders' Equity Share Capital Retained earnings Translation/Comprehensive Income Total Shareholders' Equity
1,983 4,511 -60 6,434 9,955
1,983 5,614 -60 7,537 11,079
Total Liabilities and Shareholders' Equity
Note: Our Q4/10 ending cash balance is before payment for AWB.
January 2011
169
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 33 0 169 136 -14 -102 6 0 -20 208 -53 155 363 -6 -30 -29 2,141 -1,097 1,044 -2,740 -506 27 0 -156 -3,375 -15 -41 1 -65 -18 -138 0 -56 2 0 -54 -108 0 -78 4 0 -17 -91 0 -131 7 0 -48 -172 -15 -313 14 -65 -134 -513 0 -76 25 117 -6 60 0 -110 0 0 -9 -119 0 -120 0 0 7 -113 0 -88 0 0 0 -88 0 -394 25 117 -8 -260 -651 -209 93 0 28 -739 0 -454 17 -63 -61 -561 0 -94 0 0 0 -94 0 -94 0 0 0 -94 0 173 0 -4 119 -50 -3 170 846 -352 494 216 218 87 18 55 0 0 6 82 0 7 108 -40 68 32 59 0 0 -182 -3 0 -38 238 -39 199 9 64 0 0 -44 -12 0 9 52 177 229 4 64 0 0 -89 -5 -1 53 56 848 904 63 242 0 0 -309 62 -1 31 454 950 1,404 0 68 0 0 -27 6 1 82 123 -237 -114 0 97 0 0 22 -5 0 -65 555 -517 38 0 91 0 0 2 -2 0 63 211 -123 88 0 60 0 0 0 0 0 0 237 766 1,003 0 316 0 0 -3 -1 1 80 1,126 -111 1,015 0 62 0 0 0 0 0 0 212 37 250 0 68 0 0 0 0 0 0 578 -1,400 -822 441 1,322 -60 370 26 30 366 -7 733 506 57 177 151 510 286 0 65 0 0 0 0 0 0 352 938 1,290 0 -94 0 0 0 -94 204 0 62 0 0 0 0 0 0 266 384 649 0 -94 0 0 0 -94 212 159 3 -14 33 0 393 -191 300 109 1,400 109 1,509 -1,135 1,509 374 -271 357 86 165 86 251 -26 251 225 708 225 933 576 357 933 -26 933 907 -61 119 86 -15 1,337 1 1,467 261 813 171 -18 -31 0 1,196 -193 0 0 -9 1 0 -201 62 12 0 0 0 0 74 -189 33 0 -8 0 0 -164 -61 31 0 0 6 0 -24 -381 76 0 -17 7 0 -315 33 -1 0 -9 2 0 25 -5 -7 0 0 0 0 -12 -102 907 805 64 46 0 -8 3 0 105 92 805 897 0 0 0 0 0 0 0 916 897 1,813 92 38 0 -17 5 0 118 874 933 1,813 0 -125 0 -9 0 0 -134 22 1,813 1,835 0 -460 0 0 0 0 -460 -1,376 1,835 459 0 0 0 -9 0 0 -9 1,187 459 1,646 0 0 0 0 0 0 0 556 1,646 2,202
Exhibit 2.103: SC Forecast Agrium Cash Flow Statement (ex AWB)

2011E 2012E
Agrium Inc.
($M)
1,151 0 257 0 0 0 0 0 0 1,408 -42 1,366 0 -375 0 0 0 -375
1,120 0 265 0 0 0 0 0 0 1,385 -89 1,296 0 -350 0 0 0 -350
Operating Activities Net Income (Loss) Add/(deduct) non-cash items: Inventory and purchase commitment write-down Depreciation and Amortization Asset Impairment Gain on disposal of assets Provision for future income tax Unrealized foreign exchange (gain) loss Non-controlling interests Other CFO (pre-WC Adj.) Net change in non-cash WC CFO (post-WC Adj.) Investing Activities Acquisitions, net of cash acquired Capital expenditures Proceeds on Sale/Disposal of assets Investment Other assets CFI
Financing Activities (Repayment of) proceeds from S/T Debt Proceeds from (repayment of) L/T Debt Contributions from non-controlling interests Dividends Issuance/Repurchase of common shares Other CFF
0 -585 0 -17 0 0 -602 389 1,813 2,202
0 -26 0 -17 0 0 -43 903 2,202 3,104
Net change in cash (incl. FX) Cash and cash equivalents - beginning of period Cash and cash equivalents - end of period
Note: Our Q4/10 ending cash balance is before payment for AWB.
January 2011
January 2011
Earnings Sensitivities
Exhibit 2.104: Agrium 2011E EPS Sensitivity to Nitrogen Gross Margin Changes
2011 Nitrogen Gross Margin ($/mt) $341 $361 $381 $401 $421 $441 $461 $102 5.81 5.92 6.03 6.14 6.25 6.36 6.47 $122 6.19 6.30 6.41 6.52 6.63 6.74 6.85 $142 6.57 6.68 6.79 6.90 7.01 7.12 7.23 $162 6.95 7.06 7.17 7.28 7.39 7.50 7.61 $182 7.33 7.44 7.55 7.66 7.77 7.88 7.99 $202 7.71 7.82 7.93 8.04 8.15 8.26 8.37 $222 8.09 8.20 8.31 8.42 8.53 8.64 8.75
Exhibit 2.105: Agrium 2011E EPS Sensitivity to Natural Gas Price Changes
2011 Realized Potash Price
2011 NYMEX Natural Gas Change ($/mmBtu, ex N Price Changes) $341 $361 $381 $401 $421 $441 $461 +$3 5.78 5.89 6.00 6.11 6.22 6.33 6.44 +$2 6.17 6.28 6.39 6.50 6.61 6.72 6.83 +$1 6.56 6.67 6.78 6.89 7.00 7.11 7.22 Base 6.95 7.06 7.17 7.28 7.39 7.50 7.61 -$1 7.34 7.45 7.56 7.67 7.78 7.89 8.00 -$2 7.73 7.84 7.95 8.06 8.17 8.28 8.39 -$3 8.12 8.23 8.34 8.45 8.56 8.67 8.78
Exhibit 2.106: Agrium 2011E EPS Sensitivity to Phosphate Gross Margin Changes
2011 Phosphate Gross Margin ($/mt) $341 $361 $381 $401 $421 $441 $461 $6 6.68 6.79 6.90 7.01 7.12 7.23 7.34 $26 6.77 6.88 6.99 7.10 7.21 7.32 7.43 $46 6.86 6.97 7.08 7.19 7.30 7.41 7.52 $66 6.95 7.06 7.17 7.28 7.39 7.50 7.61 $86 7.04 7.15 7.26 7.37 7.48 7.59 7.70 $106 7.13 7.24 7.35 7.46 7.57 7.68 7.79 $126 7.22 7.33 7.44 7.55 7.66 7.77 7.88
Exhibit 2.107: Agrium 2011E EPS Sensitivity to Product Purchased for Resale Gross Margin Changes
2011 Product Purchased for Resale Margin ($/mt) $341 $361 $381 $401 $421 $441 $461 -$60 6.11 6.22 6.33 6.44 6.55 6.66 6.77 -$40 6.39 6.50 6.61 6.72 6.83 6.94 7.05 -$20 6.67 6.78 6.89 7.00 7.11 7.22 7.33 $0 6.95 7.06 7.17 7.28 7.39 7.50 7.61 $20 7.23 7.34 7.45 7.56 7.67 7.78 7.89 $40 7.51 7.62 7.73 7.84 7.95 8.06 8.17 $60 7.79 7.90 8.01 8.12 8.23 8.34 8.45
170
Agrium Inc.
January 2011
Exhibit 2.108: Agrium 2011E EPS Sensitivity to FX Rate Changes
2011 U.S. Dollar per Canadian Dollar $341 $361 $381 $401 $421 $441 $461 $0.86 6.50 6.61 6.72 6.83 6.94 7.05 7.16 $0.89 6.65 6.76 6.87 6.98 7.09 7.20 7.31 $0.92 6.80 6.91 7.02 7.13 7.24 7.35 7.46 $0.95 6.95 7.06 7.17 7.28 7.39 7.50 7.61 $0.98 7.10 7.21 7.32 7.43 7.54 7.65 7.76 $1.01 7.25 7.36 7.47 7.58 7.69 7.80 7.91 $1.04 7.40 7.51 7.62 7.73 7.84 7.95 8.06
Exhibit 2.109: Agrium 2011E EPS Sensitivity to Retail Crop Nutrient Gross Margin Changes
2011 Retail - Crop Nutrient Gross Margin (%) $341 $361 $381 $401 $421 $441 $461 20% 6.56 6.67 6.78 6.89 7.00 7.11 7.22 21% 6.69 6.80 6.91 7.02 7.13 7.24 7.35 22% 6.82 6.93 7.04 7.15 7.26 7.37 7.48 23% 6.95 7.06 7.17 7.28 7.39 7.50 7.61 24% 7.08 7.19 7.30 7.41 7.52 7.63 7.74 25% 7.21 7.32 7.43 7.54 7.65 7.76 7.87 26% 7.34 7.45 7.56 7.67 7.78 7.89 8.00
Exhibit 2.110: Agrium 2011E EPS Sensitivity to Retail Crop Protection Gross Margin Changes
2011 Retail - Crop Protection Gross Margin (%) $341 $361 $381 $401 $421 $441 $461 22% 6.59 6.70 6.81 6.92 7.03 7.14 7.25 23% 6.71 6.82 6.93 7.04 7.15 7.26 7.37 24% 6.83 6.94 7.05 7.16 7.27 7.38 7.49 25% 6.95 7.06 7.17 7.28 7.39 7.50 7.61 26% 7.07 7.18 7.29 7.40 7.51 7.62 7.73 27% 7.19 7.30 7.41 7.52 7.63 7.74 7.85 28% 7.31 7.42 7.53 7.64 7.75 7.86 7.97
Exhibit 2.111: Agrium 2011E EPS Sensitivity to Retail Seed Gross Margin Changes
2011 Retail - Seed Gross Margin (%) $341 $361 $381 $401 $421 $441 $461 35% 6.83 6.94 7.05 7.16 7.27 7.38 7.49 36% 6.87 6.98 7.09 7.20 7.31 7.42 7.53 37% 6.91 7.02 7.13 7.24 7.35 7.46 7.57 38% 6.95 7.06 7.17 7.28 7.39 7.50 7.61 39% 6.99 7.10 7.21 7.32 7.43 7.54 7.65 40% 7.03 7.14 7.25 7.36 7.47 7.58 7.69 41% 7.07 7.18 7.29 7.40 7.51 7.62 7.73
171
January 2011
Management & Directors

Exhibit 2.112: Management & Directors
FD Shares Controlled Directly or Indirectly
Name
Position President & CEO Director
Background Mr. Wilson joined Agrium in 2000 and became President and CEO three years later. Prior to joining Agrium, he gathered experience as an executive leader in the chemical industry. He was the President of Methanol and President and COO of Methanex Corporation. Mr. Waterman joined Agrium as Senior Vice President, Finance and CFO, in April of 2000. Prior to joining Agrium, he served as Vice President, Finance and CFO with Talisman Energy in Calgary. In 2008, Mr. Waterman was named "Canada's CFO of the Year". Mr. Gearheard has served as Senior Vice President of Agrium and President of its Retail unit since 1996. Previously, he was the CFO of Crop Production Services, Inc. and Northwest Vice President for Western Farm Service, Inc. Mr. Mittag joined Agrium in 2005 as Senior Vice President, Corporate Development and Strategy. In 2009 he was appointed Senior Vice President, Agrium and President of Agrium's Advanced Technologies unit. Mr. Mittag has over 25 years experience in business and strategy development, as well as in investment and commercial banking. Prior to joining Agrium, he co-founded Rockland Capital Partners and was its President and CFO. Before that he was a Senior Vice President at Koch Industries and TXU. He currently sits on the Board of Hanfeng Evergreen, Inc. Mr. Wilkinson is a Senior Vice President of Agrium and President of its Wholesale unit. He joined Agrium in 1996 through the acquisition of Viridian Inc. He has since held various leadership positions with the organization. Ron has also worked for Sherritt Inc., Imperial Oil, Exxon Chemical Pakistan Limited and Esso Chemical Canada. Ms. O'Donoghue joined Agrium in 1999 after serving as a partner with Blake, Cassels & Graydon LLP. She is Agrium's Chief Legal Officer and Senior Vice President, Business Development and is also currently a member of the Pembina Pipeline Corporation's Board of Directors. In 2009, the Canadian General Counsel Awards in Toronto recognized her with the distinguished Top Dealmaker award. Mr. Grossett joined Agrium in 2002. He brings over 25 years of experience as a human resource executive both in North America and internationally. Previously, he was Senior Vice President, Human Resources for both Molson Inc. and Coca-Cola Beverages, Ltd. Ms. Gibara is President of Avvio Management Inc. and serves on the Boards of Sun Life Financial Inc., Cogeco Cable Inc., and TECNHIP. She is also a director of the Canada Pension Plan Investment Board. She joined Agrium's Board in 2004. Mr. Girling is President, Pipelines for TransCanada, President and CEO of TC PipeLines, LP, Director, Bruce Power Inc., and former Chairman of TransCanada Power, L.P. He joined Agriums Board in 2006. Dr. Henry serves on the board of Seneca Foods Corporation, the Scientific Advisory Board of Cellomics, Inc., the Advisory Board of BioEconomy Partners and NRC Committee. She joined Agriums Board in 2001. Mr. Horner is the former President and Chief Executive Officer of Catalyst Paper Corporation. He joined Agriums Board in 2004. Ms. McLellan serves as Counsel for Bennett Jones LLP. In addition, she is on the Board of Directors for Nexen, Cameco Corporation, and is a member of the TD Securities Energy Advisory Board. She joined Agriums Board in 2006. Mr. Pannell is a Managing Partner of Brookfield Asset Management Inc. He was President and CEO of Noranda Inc. and Falconbridge Limited. He joined Agrium's Board in 2008. Mr. Proto is a former director of Nelson Group Inc. He joined Agrium's Board in 1993 and has served as Board Chair since 1998. Dr. Cunningham is a director and the President & CEO of Enterprise Products GP, L.L.C., the General Partner of Enterprise Products Partners LP. He also currently serves on the Boards of TETRA Technologies, Inc., and EnCana Corporation. He joined Agrium's Board in 1996. Mr. Zaleschuk serves as a director of Cameco Corporation, and is a director of Nexen Inc. He joined Agriums Board in 2002.
Michael Wilson
1,080,487
Bruce Waterman
Senior VP, Finance CFO
495,150
Richard Gearheard
Senior VP, Agrium President, Retail
76,762
Andrew Mittag
Senior VP, Agrium President, Advanced Technologies
49,675
Ron Wilkinson
Senior VP, Agrium President, Wholesale
128,300
Leslie O'Donoghue
Chief Legal Officer Senior VP, Business Development
117,300
James Grossett
Senior VP, Human Resources
138,525
Germaine Gibara
100
Russell Girling
Director
6,000
Susan Henry
Director
10,000
Russell Horner
Director
1,000
Anne McLellan
Director
200
Derek Pannell
Director
1,000
Frank Proto
Chairman of the Board
11,850
Ralph Cunningham
Director
Victor Zaleschuk Other
Director
2,000 3,459,071
Total Weighted Average Diluted Shares Outstanding % Insider Ownership
5,577,420 158,390,000 3.52%
Source: Reuters; Scotia Capital.
172
CF Industries Holdings, Inc.
January 2011

(CF-N)
Dec 31, 2010: Rating: Risk: IBES EPS 2010E IBES EPS 2011E 1-Yr Target: 1-Yr ROR: 2-Yr Target: 2-Yr ROR: Div. (Curr.): Yield Valuation: 8.5x 2012E EBITDA, 13.5x 2012E EPS, DCF @ 9.2%, 80% RCN Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather Qtly EPS (FD) (Next Release: Feb-11) Y/E DECEMBER-31 Mar Jun 2009A $1.28A $4.33A 2010E $-0.09A $1.54A 2011E $2.47 $4.33 2012E $1.97 $3.53 Qtly CFPS (FD) 2009A 2010E 2011E 2012E Mar $1.21A $0.40A $3.47 $2.97 Jun $5.15A $3.97A $5.92 $5.14 Sep $0.78A $0.67A $2.53 $1.99 Sep $1.24A $3.30A $3.65 $3.12 Dec $1.04A $3.29 $3.40 $2.74 Dec $1.40A $4.48 $4.71 $4.07 Year $7.43 $6.37 $12.73 $10.23 Year $10.77 $14.06 $17.74 $15.30 $135.15 2-Sector Perform High $7.33 $11.60 $140.00 3.9% $150.00 11.6% $0.40 0.3% Capitalization Shares O/S (M) Total Value ($M) Float O/S (M) Float Value ($M) S&P Weight 71.9 9,718.6 71.7 9,690.2 0.08%
P/E 12.2x 21.2x 10.6x 13.2x P/CF 8.4x 9.6x 7.6x 8.8x
North Americas Nitrogen Bellwether

Almost a nitrogen pure play. CF Industries Holdings, Inc. (CF) is North Americas largest nitrogen fertilizer producer (and second-largest in the world among public companies), boasting 13.5 million tons of net capacity. There is no other stock in North America with as much leverage to the nitrogen market.
Terra synergies exceeding expectations. After more than a year of fighting its peers, CF won the U.S. nitrogen war, with its $4.7 billion acquisition of Terra Industries Inc. (Terra). CF has already achieved a $100 million annual synergy run rate, and should exceed its $135 million goal shortly. Nitrogen drivers look solid, short term. Higher crop prices, low fertilizer inventories worldwide, an increase in global nitrogen plant outages, stronger 2011 U.S. corn-based ethanol demand, a more restrictive Chinese urea export tax, and low forward natural gas prices are all supporting superb nitrogen economics for CF, as well as other U.S. nitrogen producers.
Target valuation. One year from now, we expect CF Industries to trade at 8.5x 2012E EBITDA of $1.51 billion, 13.5x 2012E EPS of $10.23, and at about 80% of its replacement cost of $160 per share. We use these three metrics, as well as a DCF at a 9.2% WACC, to set our one-year target price of $140.
Current valuation. CF Industries is currently trading at 6.6x NTM EBITDA, 10.6x NTM EPS, and at 85% of its replacement cost. Our $140 target price implies a total rate of return of 3.9%.
Getting to the next level. We are focused on: (1) strong U.S. crop futures prices particularly corn; (2) 2011 U.S. nitrogen demand to track ~13 million tons; (3) the continuing integration of CFs acquisition of Terra; (4) the possible advancement of a nitrogen complex in Peru; (5) global ammonia/urea capacity announcements/delays/cancellations; (6) the development of MAPS a sulphurenhanced MAP product with premium margins over MAP; and (7) an eventual decision on how to return cash to shareholders.
We have initiated coverage on the common shares of CF Industries Holdings, Inc. and rate the shares 2-Sector Perform.
173
January 2011

CF Industries Holdings, Inc. (CF) offers investors the best exposure to North American nitrogen assets. With 13.5 million net product tons of nitrogen capacity, CF is the worlds second-largest publicly traded (~3% market share), and North Americas largest (~40% market share by capacity), nitrogen fertilizer producer. The company also has 2.2 million tons of phosphate fertilizer capacity.
CF is the second largest publicly traded nitrogen producer in the world.
While North American nitrogen producers, such as CF, currently enjoy strong feedstock and transportation cost advantages over their swing-producing peers in the Ukraine and now China, this advantage may not last indefinitely. Why? A large amount of new nitrogen capacity is due online over the mid-term, some of which will come from regions with access to lower-cost natural gas, possibly reducing the cost advantage that North American nitrogen producers currently enjoy. On the demand side, one of the largest headwinds facing nitrogen producers is the rapid growth of Monsanto (and other) GM corn seeds that may absorb nitrogen more efficiently. Over the long term, the cost/benefit for farmers utilizing low-nitrogen corn seeds could outweigh less expensive corn seeds that require higher nitrogen application. However, we do not see this as a near-term threat to our CF investment thesis. Following the transformational $4.7 billion acquisition of Terra in early 2010, CF has already achieved a $100 million annual synergy run rate, and should easily reach the upper end of its targeted $105 million to $135 million annual run rate shortly. We think there is no reason that CF will be unable to exceed its stated synergy targets.
MID-TERM FINANCIAL OUTLOOK
For fiscal 2011, we estimate net sales, EBITDA, and fully diluted EPS of $4.68 billion, $1.76 billion, and $12.73, respectively, fairly in line with consensus. In 2012, we are looking for a drop in net sales to $4.38 billion, EBITDA of $1.51 billion, and EPS of $10.23. Our forecast 2012 EPS decline of 19.6% is due to our expectation for lower U.S. nitrogen and phosphate benchmark prices.
INITIATING COVERAGE
We have initiated coverage on the common shares of CF Industries Holdings, Inc. with a 2-Sector Perform rating.
Our one-year target price is $140 per share.
Our one-year target price is $140 per share, which, when included with CFs $0.40 per share annual dividend, represents a one-year rate of return of 3.9%. We value CF using an equally weighted 8.5x 2012E EBITDA, 13.5x 2012E EPS, a DCF @ 9.2% WACC, and at 80% of its replacement cost. The stock is currently trading at 10.6x our NTM EPS estimate, or at a 2.9x P/E multiple discount to our targeted valuation of 13.5x NTM earnings. In our minds, the continued strength of crop prices and the global nitrogen complex through 2011, as well as the realization of full ($135+ million) Terra acquisition synergies, should close the gap toward our price objective.
Our CF risk ranking is High.
Our risk ranking for CF Industries is High. We believe this risk ranking is justified due to: (1) the cyclical nature of the fertilizer industry, partially offset by low nitrogen demand elasticity relative to potash and phosphate; (2) volatile crop price changes (and farmer incomes), to which changes in CFs share price is strongly correlated; (3) somewhat high customer concentration although lower with the integration of legacy Terra customers; (4) Terra acquisition integration risks; (5) the remote possibility of China reducing its urea export tax rates; and (6) the continued rollout of next-generation crop seeds that require less nitrogen fertilizer application.
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January 2011

Headquartered in Deerfield, Illinois, CF Industries is the second-largest publicly traded nitrogen fertilizer producer in the world, and one of North Americas leading phosphate fertilizer producers.
CF boasts 13.5 million tons of nitrogen capacity.
Following the completion of CFs transformational 2010 acquisition of Terra, the company now boasts 13.5 million net product tons of nitrogen fertilizer capacity, or about 6.3 million nutrient tons. Through 10 production facilities located across North America, the United Kingdom, and Trinidad, CF produces and markets ammonia, urea, ammonium nitrate (AN), and urea ammonium nitrate (UAN). CFs phosphate segment operates one 3.5 million ton rock mine in Florida, and a 2.2 million ton DAP/MAP complex nearby. CF Industries was founded in 1946 as a fertilizer brokerage operation, by a group of regional agricultural cooperatives seeking to pool their purchasing power. In 2002, CF changed its primary objective to focus on financial performance rather than fertilizer supply assurance for its pre-IPO owners. In 2005, CF raised $715 million (net) through the issuance of 47.4 million shares. A secondary offering for slightly over $1 billion was completed in 2010 to partially finance its acquisition of Terra, and an additional 9 million shares were exchanged for Terra shares. Led by President, CEO, and Chairman, Stephen R. Wilson, CFs management team is well regarded, and is stacked with seasoned industry executives. Mr. Wilson started with CF in 1991, and has been the Boards Chairman since 2005. Insiders and related parties control ~0.3% of CF on an undiluted basis. CFs 71.1 million common shares (71.9 million fully diluted) trade under the ticker symbol CF on the New York Stock Exchange. Exhibit 3.1 shows the stocks historical trading range and volume. As of December 31, 2010, CFs equity market capitalization was about $9.7 billion. Since 2008, CF Industries has paid its shareholders a quarterly dividend of $0.10 per share, which currently equates to a 0.3% dividend yield. We do not anticipate any changes to CFs dividend policy in the near term. CF reports in U.S dollars, using a December 31 year-end, and its financial statements are prepared in accordance with US GAAP.
Exhibit 3.1: CF Industries Stock Price Performance
$150 $140 $130 16,000 14,000 Daily Volume (000s) 12,000 10,000 8,000 6,000 4,000 2,000 Jun-09 CF (V olume)
Insiders and related parties control ~0.3% of CF shares.
Price
CF pays a quarterly dividend of $0.10 per share.
$120 $110 $100 $90 $80 $70 $60
Ticker: CF Last P rice: $ 135.15 M arket C ap: $ 9.7B 52 Wk H igh: $ 138.74 $ 57.56 52 Wk Lo w: FD Shares O/S: 71.9M
$50 Mar-09
Sep-09 CF (Price)
Dec-09
Mar-10
Jun-10
Sep-10
0 Dec-10
S&P 500 (rebased)
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January 2011
Corporate Profile
Since its days as a regional fertilizer cooperative in the U.S. Midwest, CF has grown to become the worlds second-largest nitrogen fertilizer producer among public companies, and a leading manufacturer of phosphate-based fertilizers (see Exhibit 3.2). The company has no involvement in potash production. CFs operations consist of 10 nitrogen facilities (seven of which are included in its consolidated results), an active phosphate rock mine, and a phosphate fertilizer production complex, as well as a wide array of storage and distribution assets. Historically, CF directed a large part of its fertilizer sales volumes to the U.S. Corn Belt1. More recently, however, CF has reduced its regional risk by increasing its export capabilities and its marketing presence in Western Canada.
Exhibit 3.2: Global NPK Producer Capacity Ranking
POTASH 2010 Global Capacity Share
(M mt KCl) (%)
PHOSPHATE
Unlike the rest of its North American peers, CF has no involvement in potash.
2010 Global Capacity Share (M mt P2O5) (%) 4.4 ~3.9 2.4 ~1.8 1.3 1.0 9% 8% 5% 4% 3% 2%
AMMONIA
2010 Capacity
(M mt)
Global Share
(%)
PotashCorp1 Mosaic 1,2 Belaruskali K+S Silvinit 3 Israel Chemicals Uralkali3 Arab Potash Qinghai Salt Lake Potash Agrium SQM Intrepid2 Vale
13.3 9.3 9.0 ~7.5 5.1 5.7 5.5 2.5 ~2.2 2.1 1.5 0.8 0.7
18% 13% 13% 10% 7% 8% 8% 3% 3% 3% 2% 1% 1%
Mosaic OCP4 PotashCorp PhosAgro Groupe Chimique Tunisien CF Industries
Yara International CF Industries5 PotashCorp Agrium Koch6 JSC Acron
8.2 7.0 3.5 3.4 ~2.3 1.7
4% 4% 2% 2% 1% 1%
1. Associates 1.3M mt of Esterhazy capacity w ith PCS. 2. Excludes langbeinite capacity. 3. Uralkali w ill have 10.6M mt post-Silvinit acquisition. 4. Implied 80% utilization at Jorf Lasfar. 5. 7.7M st (net 3M st) = ~7.0M mt. 6. Includes Koch's 35% interest in recently nationalized Fertinitro.
In 2009, CF (pre-Terra) realized net sales of $2.6 billion, or about one-third below the fertilizer sectors cyclical peak in 2008. Typically, between 75% and 90% of CFs profit is generated from nitrogen. Margins are traditionally tighter for nitrogen producers than for potash/phosphate producers, and CF is no exception. But since mid-2007, CFs EBITDA margins have ranged between ~20% and ~40%. We anticipate margins to jump over the coming quarters, as soaring 2H/10 nitrogen prices are realized. Exhibit 3.3 shows CFs net sales by over the past three years, excluding Terras historical results.
Exhibit 3.3: CFs Net Sales Contribution by Business Segment
$M $1,400 $1,200 $1,000
889 787 556 604 557 592 490 773 579 558
1,208
1,165
Typically, between 75% and 90% of CFs profit is generated from nitrogen.
$800 $600 $400 $200 $0 07
135 165 5 6 5
122
90
08
09
07
08
Urea
09
07
08
UAN
09
07
08
Other
09
07
08
DAP
09
07
08
MAP
09
07
08
Other
09
Am m onia
NITROGEN
Source: CF Industries; Scotia Capital.
PHOSPHATE
Geographic definitions of the U.S. Corn Belt vary. Typically, it includes Iowa, Illinois, Indiana, eastern Nebraska, eastern Kansas, southern Minnesota, and parts of Missouri. Iowa, Illinois, Nebraska, and Minnesota produce more than half of the total corn grown in the United States.
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January 2011
NITROGEN
Most of CFs nitrogen sales are to the U.S. Corn Belt.
CF is first and foremost a producer, marketer, and seller of nitrogen-based fertilizers, with its nitrogen fertilizer division historically contributing the bulk of its gross profits. With the Terra acquisition now behind CF, we expect nitrogen gross margins will make up a normalized 80% to 85% of its gross margins going forward. Accordingly, we believe that an investment in CFs common shares provides investors with the purest nitrogen fertilizer play in North America. With a nameplate capacity of 13.5 million product tons (6.3 million nutrient tons), most of which is located in the southern U.S. and in Alberta, CF is the worlds second-largest nitrogen fertilizer producer among public companies (behind Yara International ASA). CF presently enjoys both natural gas and transportation advantages over Ukrainian and now Chinese swing producers. Why is this important? Most of CFs nitrogen fertilizer sales are to the U.S. Corn Belt and surrounding areas. There is only enough domestic nitrogen capacity to supply about one-half of the United States annual requirements, resulting in material imports needed from offshore nitrogen producers. For full details on CFs nitrogen business, please refer to page 192.
PHOSPHATE
CFs phosphate mine has 23+ years of reserves.
Similar to Mosaic and PotashCorp, CF is a North American rock-integrated producer of finished phosphate fertilizers, such as DAP and MAP. Integrated producers have a material cost advantage over their non-integrated peers, due to their ability to own/process their own phosphate rock. Based on current costs and shipping rates, we estimate CF enjoys at least a $100/ton (landed) rock advantage over its nonintegrated peers. CF owns a high-quality 3.5 million ton phosphate rock mine in central Florida, with 23 years of reserves 13 years of which is currently permitted. Additionally, CF owns a phosphate fertilizer complex in Plant City, Florida, with production capacities of 2.8 million tons of sulphuric acid, and 2.2 million tons of DAP/MAP. On a P2O5 basis, CFs 1.055 million tons of nutrient capacity at its Plant City facility ranks sixth globally among phosphate fertilizer complexes, with about a 2% control of the market. For full details on CFs phosphate business, please refer to page 199.
DISTRIBUTION, TRANSPORTATION, AND STORAGE
CFs Donaldsonville nitrogen complex, which is located on the Mississippi River, includes a deep-water docking facility, access to an ammonia pipeline, and truck and railroad loading capabilities. CF owns six ammonia river barges with a total capacity of 16,400 tons. 16 UAN river barges are contracted on a dedicated basis with a total capacity of 48,000 tons. Additionally, CF leases about 1,200 ammonia tank cars, 2,624 UAN tank cars, 967 hopper cars, and 429 other cars. Most of the phosphate fertilizer produced at CFs Plant City complex is shipped by truck or rail to its deep-water port facility in Tampa. From Tampa, product is either loaded onto vessels for shipment to export customers or for transport across the Gulf of Mexico to the Mississippi River. At New Orleans, CFs phosphate fertilizer is transferred into river barges, which then deliver product to CFs storage facilities, or directly to customers. Exhibit 3.4 highlights CFs storage facilities.
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January 2011
Exhibit 3.4: CFs Storage Facilities
Ammonia Facilities Capacity

(000 st)
UAN Facilities Capacity

(000 st)
Dry Products Facilities Capacity

(000 st)
Plants Tampa Port In-Market Locations Owned Leased
2 1 3 19 19
130 38 168 680 680 848
1 1 9 13 22
135 135 283 152 435 570
3 1 4 5 1 6
210 75 285 360 26 386 671
CUSTOMER CONCENTRATION IMPROVING POST TERRA
Over the last several years, CF has increasingly relied upon four major customers to purchase about half of its sales volume. CHS Inc., Gavilon Fertilizer LLC, and Growmark, Inc. are significant CF customers of both nitrogen and phosphate. The fourth major customer is Keytrade AG, which is an international fertilizer distributor based in Europe. CF Industries owns a 50% stake in Keytrade, and now uses the company as its exclusive exporter of phosphate fertilizers. We are not too concerned about the June 2010 expiration of a CHS Inc. multi-year supply contract. The company notified CF that it would not renew the contract. In our view, the amount of business that CF does with CHS should not be diminished, despite the absence of a formal contract. We note that the recently retired (January 3, 2011) President and CEO of CHS is a member of CFs board of directors. Additionally, the Terra acquisition greatly increased CFs customer base and diluted the predominance of some of CFs legacy customers.
Exhibit 3.5: CF Industries Contract with CHS Expired in June But Business Should Remain Unchanged
We are not too concerned about the contract expiration of CFs largest customer.
2009 Revenue (pre-Terra)

CHS, $573M
2011E Revenue (post-Terra)

CHS, ~$500M Keytrade, ~$350M Grow mark, ~$350M
Other, $1,183M Keytrade, $315M
Gavilon, ~$300M Other, ~$3,000M Grow mark, $304M Gavilon, $234M
Source: CF Industries; Scotia Capital estimates.
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January 2011
TERRA ACQUISITION RECAP
Exhibit 3.6: CF and Terra Complementary Nitrogen Strengths

7,000 6,000 Legacy CF Legacy Terra
CF paid 7.6x 2010E EBITDA for TRA, or 6.3x if full synergies are realized (likely).
Product (000 st)
5,000 4,000 3,000 2,000 1,000 0 UAN Ammonia Urea AN 2,415 1,164 1,839 2,490 1,437 3,833
280
It took 14 months, two other players, and a final bid price 137% higher than its initial bid, for CF to successfully acquire Terra. When all was said and done, CF paid 7.6x 2010E EBITDA for Terra, which will drop to about 6.3x 2010E EBITDA when CF is able to realize the upper end (likely) of its estimated $105 million to $135+ million annual synergy range. CFs Terra acquisition metrics based on a three-year average EBITDA and EPS equate to 8x EBITDA and 14.8x diluted EPS (see Exhibit 3.7).
Exhibit 3.7: Implied EV/EBITDA and P/E Multiple Metrics from CF Acquisition of Terra
Terra Industries EBITDA reconciliation Net income from continuing operations Plus: non-recurring charges Interest income Interest expense Income tax provision Depreciation, depletion, and amoritization EBITDA 3-Year average EBITDA Transaction aggregate value/3-Year average EBITDA Terra reported diluted earnings per common share 3-Year average reported diluted earnings per common share Transaction price / Trailing 3-year average reported diluted EPS
2007
($M)
2008
($M)
2009
($M)
221 39 -17 29 127 101 500
633 0 -23 27 240 87 964
152 53 -4 32 75 94 402 622 8.0x
$1.90
$6.20
$1.53 $3.21 14.8x
Terra Assets Acquired
Five nitrogen fertilizer manufacturing facilities located in Port Neal, Iowa; Courtright, Ontario; Yazoo City, Mississippi; Woodward, Oklahoma; and Donaldsonville, Louisiana. A 75% interest in Terra Nitrogen Company, LP (TNCLP), a publicly traded limited partnership of which CF is the sole general partner and the majority limited partner. TNCLP operates a nitrogen fertilizer manufacturing facility in Verdigris, Oklahoma.
A 50% interest in an ammonia production JV located in Point Lisas, Trinidad. A 50% interest in GrowHow UK Limited, a nitrogen products production JV located in the United Kingdom, and serving the British agricultural and industrial markets. Terra Environmental Technologies, a supplier of nitrogen products to the stationary and mobile emissions control markets.
179
January 2011
Exhibit 3.8: How CF Won Terra

15-Jan-09 3-Feb-09 18-Feb-09 23-Feb-09 25-Feb-09 9-Mar-09 9-Mar-09 16-Mar-09 23-Mar-09 27-Mar-09 29-Mar-09 6-Apr-09 14-Apr-09 16-Apr-09 22-Apr-09 23-Apr-09 24-Apr-09 11-May-09 15-May-09 18-May-09 22-May-09 3-Jun-09 16-Jun-09 16-Jun-09 18-Jun-09 19-Jun-09 23-Jun-09 23-Jun-09 29-Jun-09 5-Aug-09 6-Aug-09 17-Aug-09 21-Aug-09 25-Aug-09 31-Aug-09 21-Sep-09 28-Sep-09 14-Oct-09 17-Oct-09 1-Nov-09 4-Nov-09 5-Nov-09 6-Nov-09 9-Nov-09 12-Nov-09 16-Nov-09 17-Nov-09 17-Nov-09 18-Nov-09 19-Nov-09 20-Nov-09 23-Nov-09 1-Dec-09 CF Industries proposes an all-stock acquisition of TRA. Offers TRA stockholders 0.4235 shares of CF stock. The proposal values TRA at $2.1B, or about $20/TRA share. CF seeks to nominate three directors to TRA's Board: John Lilly, David Wilson, and Irving Yoskowitz. CF files Hart-Scott-Rodino notification in connection with proposed TRA acquisition. CF sends letter to TRA in connection with commencing exchange offer. AGU submits acquisition proposal to CF, seeking to acquire all of CF's stock for cash and AGU shares, valued at $72/CF share. CF agrees to an exchange ratio of $27.50/TRA share (equivalent to a ratio of no less than 0.4129 and no more than 0.4539 CF shares). CF formally rejects AGU's Feb. 25, 2009 offer. AGU remains committed to CF acquisition. AGU re-structures bid for CF. Offers CF shareholders 1.7866 AGU shares or $72 cash per CF share. CF's Board recommends rejection of AGU's offer, re-affirms TRA business combination. Increases bid to $30.50 per share (exchange ratio). AGU increases offer for CF. CF stockholders to receive $35 cash plus one AGU share per CF share. Represents a 10.4% increase over previous offer. CF rejects AGU's revised bid as "grossly inadequate". AGU files definitive proxy statement with SEC, urging CF shareholders to withhold votes for CF's board. CF sends letter to TRA President and CEO, Michael Bennet, requesting response offer. AGU President and CEO, Michael Wilson, reaffirms AGU's serious commitment to acquire CF. AGU to withdraw and re-file Hart-Scott-Rodino notification with respect to proposed CF transaction. CF re-files Hart-Scott-Rodino notification with respect to proposed TRA acquisition. CF extends exchange offer for TRA until June 12, 2009. AGU substantially increases CF offer to $40 in cash plus one AGU share per CF share. CF's Board rejects AGU's latest revised offer. AGU expresses disappointment in CF rejection of increased offer. CF extends exchange offer for TRA until June 26, 2009. AGU reaffirms offer for CF. Declares offer as "best and final price". Extends expiration date until June 22, 2009. CF re-affirms commitment to proposed business combination with TRA. AGU urges CF shareholders to tender shares into the AGU offer, following RiskMetrics' positive review. AGU responds to misleading statements in CF filing. AGU re-affirms stance that CF is not acting in the best interests of its shareholders. CF extends exchange offer for TRA until July 10, 2009. CF rejects Agrium's offer. Maintains stance on offer being "undervalued". AGU reports 62% of CF shareholders have tendered into AGU's latest offer. CF has ability to stymie majority through poison pill and other defense mechanisms. AGU comments on CF acquisition - it believes CF is ignoring clear shareholder message. CF increases TRA offer to fixed exchange ratio of 0.465 CF shares for one TRA share. CF announces expiration of Hart-Scott-Rodino pre-merger waiting period. CF has satisfied regulatory conditions. AGU extends offer for CF until September 22, 2009. CF extends exchange offer for TRA until August 31, 2009. CF comments on TRA's latest rejection of CF's revised offer. CF commences litigation to compel TRA to hold an annual meeting promptly. AGU extends offer for CF until October 22, 2009. CF acquires 7% (~7M shares) stake in TRA at a purchase cost of $247M. CF sends merger agreement to TRA, with a proposed exchange ration of 0.465 CF shares for each TRA share. CF files definitive proxy materials to elect three members to TRA's Board. Sends open letter to TRA shareholders. AGU to sell portion of Carseland nitrogen facility to TRA, conditional on AGU closing CF acquisition. View sale as positive step toward financing CF acquisition. CF increases TRA offer to $40.50/TRA share. TRA rejects CF offer. Continues to seek "competitive offer". AGU makes best and final offer for CF. Deal valued at $45 cash plus one AGU share. Offer represents a 12.5% increase over previous offer. CF rejects AGU's most recent offer. CF sends letter to TRA shareholders regarding RiskMetrics' recommendation of CF's nominees to TRA's Board. AGU sends letter to CF shareholders informing them of the final offer and to tender shares by November 18, 2009. AGU reports RiskMetrics recommends CF shareholders tender shares into AGU's best and final offer. CF issues letter to TRA shareholders urging them to approve CF Board nominations. AGU signs consent agreement with FTC on CF acquisition. AGU places advertisement in The Wall Street Journal , urging CF shareholders to receive a premium, and not pay one. CF shareholders support AGU's offer with 62% of CF shares tendered. Deal currently valued at $101.90/CF share. Proposed nominees, John Lilly, David Wilson, and Irving Yoskowitz approved to join TRA's Board. AGU CEO, Michael Wilson, comments on overwhelming support from CF shareholders. CF extends financing for exchange offer of TRA until December 31, 2009.
Source: CF Industries; Yara International; Agrium; Scotia Capital.
180
January 2011
Exhibit 3.8: How CF Won Terra (contd)

1-Dec-09 2-Dec-09 4-Dec-09 7-Dec-09 15-Dec-09 21-Dec-09 21-Dec-09 14-Jan-10 14-Jan-10 15-Feb-10 15-Feb-09 19-Feb-09 2-Mar-10 10-Mar-10 10-Mar-10 11-Mar-10 12-Mar-10 15-Apr-10 CF extends financing for exchange offer of TRA until December 31, 2009. AGU to nominate slate of directors to CF's Board. Urges CF to drop poison pill and other defense mechanisms. AGU withdraws and re-files Hart-Scott-Rodino notification in connection with the proposed CF acquisition. CF increases offer for TRA by $4.75/TRA share to $36.75 cash and 0.1034 CF shares per TRA share. CF states it will not seek to extend financing for TRA acquisition. CF dismisses AGU's most recent offer as "the least compelling to date". AGU extends exchange offer for CF until January 22, 2010. CF withdraws TRA offer and is no longer pursuing the acquisition. Sells remaining 5% stake in TRA. AGU to nominate two directors to CF's Board. YAR signs cash merger agreement with TRA at a price of $41.10/TRA share. Offer represents a 23.6% premium above closing price as of February 12, 2010. YAR views offer as displaying commitment to U.S. market. AGU extends exchange offer for CF until March 22, 2010. CF offers $37.35 cash and 0.0953 CF shares per TRA share. Offer valued at $47.40/TRA share. TRA deems CF's offer as a superior proposal over YAR. YAR does not improve offer, but states continued interest in U.S. market. AGU terminates offer to acquire CF. YAR receives termination letter from TRA. YAR entitled to $123M break-fee CF closes acquisition of TRA at $37.15 cash and 0.0953 CF shares for one TRA share, or $47.40/TRA share, or $4.7B.
Source: CF Industries; Yara International; Agrium; Scotia Capital.
THE PATH FORWARD
Over the coming 12 to 24 months, we are looking for: (1) strong U.S. crop futures prices particularly corn; (2) 2011 U.S. nitrogen demand to track ~13 million tons; (3) the continuing integration and synergy realization of CFs acquisition of Terra; (4) the possible advancement of a nitrogen complex in Peru; (5) global ammonia/urea capacity announcements/delays/cancellations; (6) the development of MAPS a sulphur-enhanced MAP product with premium margins over MAP; and (7) an eventual decision on how to return cash to shareholders.
181
182
9-10 8 1-6
1 Corporate HQ
Exhibit 3.9: Map of CF Industries Operating and Investing Activities
12-13
Phosphate 12 Hardee, FL 13 Plant City, FL
11
Development 14 San Juan de Marcona, Peru
14
2 3 4 5 6 7 8 9 10 11
Nitrogen Donaldsonville, LA Port Neal, IA Verdigris, OK Woodward, OK Yazoo City, MS Medicine Hat, AB Courtright, ON Ince, UK Billingham, UK Point Lisas, Trinidad
January 2011
January 2011
What We Like About CF Industries

DOUBLE ECONOMIES OF SCALE
CFs economies of scale result in lower fixed costs and SG&A per ton.
With 13.5 million net product tons of nitrogen fertilizer capacity, CF is North Americas largest nitrogen producer, and the second-largest publicly traded producer in the world behind Yara International. Additionally, CF owns the two largest nitrogen complexes in North America the 4.9 million ton Donaldsonville facility in Louisiana, and the 1.6 million ton Medicine Hat complex in Alberta, of which CF owns a 66% interest (with Viterra Inc. owning the remaining 34%). In our view, both CFs overall capacity and the size of its two flagship facilities give the company scale advantages that no other North American nitrogen producer can compete with. These scale advantages are realized by lower fixed costs per ton and lower SG&A per ton.
ADVANTAGED FEEDSTOCK SUPPLY
CFs advantage over swing producers equates to $2/mmBtu to $3/mmBtu.
We believe that CF has a strong natural gas cost advantage over swing nitrogen producers in the Ukraine (and now in China). Specifically, we estimate that CFs natural gas cost advantage ranges between $2/mmBtu and $3/mmBtu, which enables the company (and other U.S. Gulf Coast nitrogen producers) to realize materially higher margins than its Ukrainian and Chinese peers.
INTEGRATED PHOSPHATE PRODUCER
As an integrated DAP/MAP producer, CF is immune from volatile phosphate rock price swings. We estimate that production of CFs phosphate rock, at full capacity, costs ~$45/ton (Mosaic could be up to $10/ton less expensive). This compares to current prices of about $130/metric tonne (FOB Morocco). The ~$70/ton spread is compounded further on a product ton basis, as between 1.6 and 1.7 tons of rock is required to produce one ton of DAP. We believe a non-integrated phosphate fertilizer producer is paying about $175 per DAP ton for phosphate rock, compared to about $75 per DAP ton for CF.
TERRA SYNERGY RAMP-UP ON TRACK
Exhibit 3.10: CF/TRA Acquisition Synergies
Recurring Annual Synergies SG&A Logistics and railcar leases Purchasing and procurement Distribution facilities optimization Other
$M $55 $25 $10 $5 $10 $105
$M $65 $30 $15 $10 $15 $135+
One of the rationales behind CFs acquisition of Terra was the high annual cost savings that CF could realize. CF estimated that it should be able to realize between $105 million and $135+ million in annual synergies for a one-time cash outlay of between $40 million and $60 million. Exhibit 3.10 highlights the areas of CFs proposed cost savings.
CF is now delivering on its cost savings promises. To date, the company has: (1) cancelled Source: CF Industries; Scotia Capital. leases on 349 redundant rail cars, with more to come; (2) used idled Terra barges to move UAN; (3) switched customer orders between legacy CF and Terra sites for transportation cost savings; (4) avoided costs for new storage facilities; (5) begun shipping ammonia from Point Lisas, Trinidad, to its Florida phosphate complex; and (6) eliminated or consolidated redundant vendor services. CF has identified synergies in excess of $135 million, with a $100 million run rate delivered by the end of 2010.
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January 2011
FORWARD PRICING PROGRAM
In mid-2003, CF implemented its Forward Pricing Program (FPP) book, through which it allows customers to purchase on a forward basis at prices and delivery dates that CF proposes. Advantages to the program include: (1) improved CF liquidity as cash payments are received from customers in advance of product shipments; (2) more efficient production scheduling and planning, as well as the better utilization of its manufacturing assets; and (3) greater ability to create value for customers. Exhibit 3.11 highlights CFs historical quarterly FPP book, prior to the company ending its FPP book disclosure.
Exhibit 3.11: CFs FPP Book
FPP Book at Quarter-End (M st)
4.0 3.5 3.0 2.5 2.0 1.5 End of CF Disclosure 1.0 0.5 0.0 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11
As customers enter into forward nitrogen fertilizer sales, CF manages its feedstock risk by using natural gas derivatives to lock in or hedge its margins. However, for phosphate forward sales, CF is unable to fix the cost of raw materials, such as sulphur and ammonia, which are among the largest components of phosphate fertilizer costs. Accordingly, in a period where phosphate prices/margins rise faster than CF forecasts, the company may underperform its phosphate peers on a relative basis. Exhibit 3.12 shows the 2007/08 downside to CFs FPP book.
Exhibit 3.12: The Downside to CFs FPP Book
$1,400 $1,200 $1,400
Monoammonium Phosphate (MAP)

$1,200 The dow nside of CF's FPP book.
CF is unable to fix its feedstock costs on phosphate forward sales.
$1,000
$1,000
DAP ($/st)
MAP ($/st)
Q1-06 CF Pacific NW Q3-06 Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09
$800 $600 $400
$800
$600 $400
$200 $0
$200 $0 Q1-06 Q3-06 CF New Orleans, LA Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09
Central Fla. U.S. Gulf Export
Mid-Corn Belt
Central Fla. Western Delivered
Source: Green Markets; CF Industries; Scotia Capital estimates.
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January 2011
Valuation
OVERVIEW
We have initiated coverage on the common shares of CF with a 2-Sector Perform rating and a oneyear target price of $140 per share. When coupled with our forecast NTM dividend of $0.40 per share, we expect investors to earn a one-year pre-tax total return of 3.9%. Our one-year CF target price of $140 is derived from four different valuation methodologies, as follows: (1) a discounted cash flow approach; (2) an enterprise value to forward EBITDA multiple; (3) a price to forward earnings multiple; and (4) a replacement cost new calculation. We weight each of the four approaches equally. Our valuation work is extremely sensitive to various price, volume, and other assumptions used within our financial forecast (see Exhibits 3.13 and 3.14). For full details on our earnings sensitivities, please refer to pages 216 and 217. We summarize our valuation work below.
Exhibit 3.13: CF Key Assumptions
2011E Nitrogen Ammonia (M st) Urea (M st) UAN (M st) Realized Ammonia ($/st) Realized Urea ($/st) Phosphate DAP (M st) MAP (M st) Realized DAP ($/st) Realized MAP ($/st) 2.9 3.0 5.9 $415 $340 2012E 3.0 3.0 5.9 $390 $312
Exhibit 3.14: CF Summary Sensitivities

2011E Sensitivity DAP/MAP ($/st) Urea ($/st) Ammonia ($/st) UAN ($/st) Natural Gas ($/mmBtu) DAP/MAP Volume (000 st) Ammonia Volume (000 st) Urea Volume (000 st) UAN Volume (000 st)
$10 $10 $10 $10 -$0.50 100 100 100 100
1.6 0.4 $452 $452
1.6 0.4 $409 $409
EPS +15 +20 +18 +41 +85 +14 +15 +13 +12
Our DCF approach yields a one-year price value of $135 per CF share. We apply a WACC of 9.2% and a long-term growth rate of 2.5%. Exhibit 3.15 highlights the build-up of our WACC calculation. Our CF terminal growth rate of 2.5% is in line with most senior fertilizer stocks that we cover, and above its nitrogen peers at 2.0%. Why? We believe that CFs North American scale advantage, coupled with a delivered natural gas cost advantage over swing producers (Ukraine and China), should offset a more mature nitrogen market relative to potash and phosphate.
Exhibit 3.15: CF WACC
Risk Free Rate Beta Country Risk Premium Cost of Equity Pre-Tax Cost of Debt Tax Rate After-Tax Cost of Debt L/T Equity Weight L/T Debt Weight WACC Terminal Growth Rate 2.6% 1.00x 8.5% 11.1% 4.6% 23.0% 3.5% 75% 25% 9.2% 2.5%
Exhibit 3.16: CF Summary DCF

($M) EBITDA Less: Taxes Less: Change in NWC + Net Other Less: CAPEX Free Cash Flow PV of Free Cash Flow 1 Net Present Value Less: Net Debt Equity Value Equity Value ($/sh) Equity Value, Rounded ($/sh) Last Price, Rounded Implied ROR 11,679 1,995 9,684 $134.66 $135 $135 0% 2011E 1,764 497 65 293 909 832 2 2012E 1,509 410 88 303 708 593 3 2013E 1,289 335 87 310 557 427 4 2014E 1,304 335 70 319 580 408 5
WACC 9.2% $125 $130 $135 $140 $145
2015E 1,320 335 70 328 587 377 6
Terminal 1,335 335 70 337 593 9,041
$134.66 2.00% 2.25% 2.50% 2.75% 3.00%
11.2% $98 $101 $104 $107 $111
10.2% $110 $114 $118 $121 $126
8.2% $145 $151 $157 $165 $172
7.2% $172 $180 $190 $200 $212
185
Terminal
January 2011
On an EV/NTM EBITDA basis, CF is currently trading at 6.6x our NTM EBITDA estimate of $1.76 billion. In our minds, CF should move toward 8.5x 2012E EBITDA, over time, which implies a $159 price value. Exhibit 3.17 summarizes our justification for an 8.5x forward EV/EBITDA multiple. Specifically, we made the following adjustments to our general fertilizer EV/EBITDA multiples:
1. We boosted our nitrogen-based EV/EBITDA multiple by 0.5x to 8.5x. Relative to PotashCorp, which serves as our nitrogen benchmark, CF is able to realize higher pricing and lower gas costs due to its location advantages. We estimate that 85% of CFs 2012E EBITDA will be generated from nitrogen fertilizer sales. 2. We increased our phosphate EV/EBITDA multiple by 0.5x to 9.5x to reflect the companys 23 years of
Florida-based phosphate rock reserves, as well as its position as a low-cost, rock-integrated producer.
Exhibit 3.17: CF EV/EBITDA Build-up
[A]

[B]
CF EV/EBITDA
[C=A+B]
2012E EBITDA
[D, $M]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
CF Price Value Calculation

($M)
Nitrogen Phosphate Potash Retail Other

Notes
8.0x 9.0x 11.0x 7.0x -
0.5x 0.5x 0.0x 0.0x -
[1] [2]
8.5x 9.5x 11.0x 7.0x -
1,288 221 0 0 0 1,509
85% 15% 0% 0% 0% 100%
7.3x 1.4x 0.0x 0.0x 0.0x 8.6x
2012E EBITDA CF EV/EBITDA Multiple* Implied EV Cash Debt Equity Value FD Shares O/S (M) Implied Price Value
*Rounded to nearest 0.5x.
1,509 8.5x 12,829 855 -2,251 11,433 71.9 $158.99
1. Higher pricing and low er gas costs relative to PotashCorp, w hich serves as our nitrogen benchmark. 2. Premium for sufficient rock reserves; low -cost integrated producer.
Exhibit 3.18 shows CFs historical one-year forward EV/EBITDA trading range, which has averaged 5.3x over the past several years. CF has historically traded well below its peers, due to a significant discount placed on nitrogen assets in general, as compared to both phosphate and potash. We believe that the current 6.6x NTM EBITDA does not fully value the upside momentum available to CF at this stage of the fertilizer cycle. On an EV/NTM EBITDA basis only, we expect the stock to move, over time, toward 8.5x 2012E EBITDA. However, we note that this is based on sharply lower 2012E EBITDA $1.51 billion (down 14%).
Exhibit 3.18: CF EV/NTM EBITDA Chart
14x NTM EV/EBITDA Multiples 12x 10x 8x 6x 4x 2x 0x Dec-06 Jun-07 Dec-07 Jun-08 CF Dec-08 CF Average Jun-09 Group Average Dec-09 AGU hostile offer Jun-10 Dec-10 Average NTM EV/EBITDA = 5.3x
186
January 2011
On a NTM P/E basis, CF is currently trading at 10.6x our NTM EPS estimate of $12.73. In our minds, CFs appropriate forward P/E multiple should be closer to the 13.5x area, which implies a one-year price value of about $138 per share. Exhibit 3.19 highlights our segmented P/E breakdown. For CF specifically, we made the following adjustments to our general P/E multiples:
1. We increased our nitrogen NTM P/E multiple by 1x to 13.5x. Relative to our nitrogen benchmark, CF is able to realize higher net prices and lower gas costs due to its location advantages. We estimate that 85% of CFs 2012E earnings will be generated from the sale of nitrogen products. 2. We increased our phosphate NTM P/E multiple by 1x to 14.5x to reflect the companys 23 years of
Florida-based phosphate rock reserves, as well as its position as a low-cost, rock-integrated producer.
Exhibit 3.19: CF NTM P/E Build-up
[A]

[B]
CF P/E Ratio
[C=A+B]
2012E EPS
[D, $/sh]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
CF Price Value Calculation

($/sh)

Notes
12.5x 13.5x 16.0x 11.0x -
1.0x 1.0x 0.0x 0.0x -
[1] [2]
13.5x 14.5x 16.0x 11.0x -
$8.73 $1.50 $0.00 $0.00 $0.00 $10.23
85% 15% 0% 0% 0% 100%
11.5x 2.1x
2012E EPS CF P/E Multiple* Implied Price Value
10.23 13.5x $138.10
0.0x 0.0x 0.0x 13.6x
1. Higher pricing and low er gas costs relative to PotashCorp, w hich serves as our nitrogen benchmark. 2. Premium for sufficient rock reserves; low -cost integrated producer.
Exhibit 3.20 shows CFs one-year forward P/E trading range, which has averaged 14.3x over the past several years, but only 10x forward earnings since the collapse in 2008. On a P/E basis, CF has historically traded approximately in line with its peers (but slightly below recently, due to premium valuations given to scarce potash asset exposure). We believe that, on a NTM P/E basis, 13.5x forward earnings is the most appropriate measure for CF at this stage of the fertilizer cycle, as the nitrogen cycle could peak over the next 12 months.
Exhibit 3.20: CF NTM P/E Chart
35x NTM P/E Multiples 30x 25x 20x 15x 10x 5x 0x Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 CF Jun-08 CF Average Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 Average NTM P/E = 14.3x
Group Average
187
January 2011
We believe that the replacement cost for CF, net of minority and JV interests, is about $160 per share, which is detailed in Exhibit 3.21. Our replacement cost estimates are derived from: (1) current projects under construction; (2) feasibility, pre-feasibility, and scoping studies; (3) inflation-adjusted costs for historical projects; and (4) professional judgment.
Exhibit 3.21: CF Replacement Cost New (RCN)
Production Plant Phosphate Hardee Plant City
Product
Capacity
(000 mt)

($M) ($/sh)
Phosphate Rock DAP
3,500 2,165 5,665
1,075 2,401 $3,475
14.95 33.39 $48.34
Nitrogen Donaldsonville, LA
Port Neal, IA
Yazoo City, MS
Courtright, ON
Verdigris, OK Woodward, OK
Medicine Hat, AB Billingham, UK Ince, UK
Point Lisas, Trinidad
Ammonia UAN Urea Ammonia UAN Urea Ammonia UAN AN Urea Ammonia UAN Urea Ammonia UAN Ammonia UAN Urea Ammonia Urea Ammonia AN Ammonia AN NPK Ammonia
2,800 2,415 1,680 370 735 60 500 525 775 20 480 350 175 1,050 1,925 440 298 25 1,250 810 287 319 201 343 340 360 17,490
2,221 966 866 293 294 31 397 210 310 10 381 140 90 833 770 349 119 13 991 418 228 128 159 137 170 286 $10,809
30.89 13.44 12.05 4.08 4.09 0.43 5.52 2.92 4.31 0.14 5.29 1.95 1.25 11.58 10.71 4.85 1.66 0.18 13.79 5.81 3.17 1.77 2.22 1.91 2.36 3.97 $150.34
Gross Replacement Cost New Plus: Working Capital @ September 30, 2010 Less: LT Debt O/S @ September 30, 2010 Less: Minority Interests (Medicine Hat @ 34%, UK/Trinidad @ 50%) Net Replacement Cost New1
1. Assumes 71.9 million shares outstanding.
$14,285 474 2,251 1,033 $11,475
$198.67 6.59 31.30 14.36 $159.59
188
January 2011
We set our one-year CF target price using 80% RCN, which yields a price value of $128. During the peak of a normal (i.e., not 2008) fertilizer cycle, we expect CF to trade between 70% and 80% RCN. Conversely, in market downturns, CF could trade as low as 25% RCN. We chose 80% due to a RCN discount generally placed on North American nitrogen assets. CF is currently trading at 85% RCN, compared to the group (ex SQM) at 82.9% RCN (see Exhibit 3.22).
SETTING OUR TARGET PRICE & RATING Exhibit 3.23: CF - Valuation Summary
We have set our one-year CF target price at $140, which we derived by equally weighting our four valuation methodologies (see Exhibit 3.23). Given our forecast CF total return of 3.9%, coupled with our average total return of 3.2% for the group (see Exhibit 3.24), we rate CF 2-Sector Perform.
CF Target Price

20% 15.7% 7.6% 3.9% 0.5% 8.8% 10.0%
15% 10% 5% 0% -5% -10% -15%
Top Pick
3-SU
3-SU
-9.2% YAR
2-SP
2-SP
1-SO
1-SO
1-SO
1-SO
-11.5% IPI
SQM
CF
MOS
POT
K+S
AGU
189
Scotia Capital Rating Last Price (local $) $91.75 $135.15 $89.27 $37.29 $76.36 $154.83 $106 $140 $33 $82 $168 -11.5% 7.6% 8.8% 3-SU 1-SO 1-SO 15.7% 3.9% 1-SO 2-SP 158.0 71.9 32.8 75.1 446.9 305.3 14,497 9,719 2,928 2,801 34,125 47,269 15,517 11,658 3,347 11,658 33,028 49,538 0.1% 0.3% 2.0% 0.3% 0.3% 0.6% 2.4% 6.3% 28.8% 10.8% 6.5% 10.9% 3.7% 15.0% 17.9% 7.5% 6.5% 8.5% 9.9% 8.4% 23.8% 114.0% 8.1% 9.6% 17.8% 30.3% 0.4x 0.0x 2.2x 0.2x 0.6x 0.7x 0.3x 0.0x 0.7x 0.1x 0.4x 0.3x 0.8x -1.1x 1.5x -0.7x 3.3x 0.7x Target (1-Yr) ROR (1-Yr) Rating Shares (FD M) Mkt Cap (M, local $) EV (M, local $) Div Yield (%) Div Payout (%) ROA (%) ROE (%) D/E (x) Debt/Cap (x) ND/EBITDA (x)
Overview Dividends & Returns Debt
Nam e
Ticker
Int. Cov. (x) 5.3x 378.4x 10.2x 12.4x 6.7x 82.6x
190
C$7.60 27.5% 1-SO 61 C$8.50 10.0% 9.3% 1-SO 1-SO JOD 45.50 HKD 5.57 C$5.96 A$3.96 ILs 1,732 JOD 17.25 56.36 C$7.78 RMB 66.24 $900.00 HKD 4.02 $58.42 RUB 219 NOK 338 $58 NOK 300 1.3% 24.3% -9.2% 3-SU 0.5% 2-SP 9.6% 21.3% 0.5x 83.3 1,771 61.4 1,629 1,269 75.0 191.4 52.2 767.6 7.8 7,021 263.2 2,124 288.8 3,791 25,678 366 6,450 77,459 1,294 10,787 406 50,843 7,043 28,224 15,376 465,815 97,481 3,699 21,383 339 7,519 22,921 1,232 11,658 384 51,720 31,462 16,117 473,760 109,065 1.5% 1.8% 2.2% 6.5% 0.0% 0.7% 0.6% 0.9% 1.2% 0.8% 1.9% 1.7% 44.3% 32.8% 30.9% 68.8% 0.0% 45.0% 25.2% 16.2% 50.0% 0.0% 21.0% 30.4% 15.0% 7.6% 10.2% 6.4% 13.2% 16.5% 2.2% 11.1% 14.0% 9.7% -5.2% 11.3% 14.5% 5.3% 9.4% 19.4% 9.9% 23.0% 11.8% 29.5% 20.9% 5.1% 14.3% 40.8% 22.4% -11.1% 22.3% 23.2% 13.0% 17.5% 0.1x 0.0x 0.0x 0.3x 0.5x 0.0x 0.6x 0.2x 0.2x 1.0x 0.7x 0.9x 0.3x 0.6x 0.4x 0.1x 0.0x 0.0x 0.2x 0.3x 0.0x 0.4x 0.2x 0.2x 0.5x 0.4x 0.5x 0.2x 0.4x 0.2x 0.3x -0.5x -1.0x -1.3x 1.5x 0.7x -1.5x 1.6x -0.1x -0.1x 2.1x 1.3x 0.5x 4.4x 0.6x 0.6x Margins Y/E Gross (%) 20.6% 32.2% 36.8% 40.5% 25.1% 25.8% 30.1% 57.3% 29.7% 14.8% 40.3% 35.9% 34.4% 23.3% 61.4% 74.4% -2.1% 36.2% 73.7% 40.0% 36.7% 28.6% 23.1% 27.2x 48.0% 34.3% 14.4% 24.1% 27.1% 24.9% 12.9% 18.5% 53.7% 62.5% -8.1% 41.4% 48.4% 6.1% 29.2% 40.2% 21.7% 12.0% 19.3% 22.6% 22.1% 8.0% 16.9% 49.6% 54.2% -9.2% 30.6% 39.0% 2.1% 23.5% 13.8x 27.4x 16.2x 20.4x 10.6x 17.4x 24.4x 12.3x 32.1x 19.4x 5.8% 2.8% 0.5% 3.6% 5.1% 4.9% 5.5% -13.3% 1.0% 4.1% 2.2% -3.2% 10.1% 2.3% 2.7% 5.2x 2.2x 1.3x 1.8x 8.7x 2.7x 4.4x 1.4x 13.4x 4.4x 1.9x 9.6x 2.9x 4.6x 4.7x 11.0% 29.9% 32.6% 36.6% 25.4% 28.3% 27.3% 8.3% 26.1% 28.1% 30.8% 18.8% 20.5% 22.1% 24.6x 10.5x 24.8x 86.7x 33.9x 53.1x 38.9x 11.2% 10.1% 1.1% -0.9% 2.2% -2.6% 3.5% 2.8x 2.5x 10.3x 3.8x 3.8x 5.9x 4.8x EBITDA (%) Operating (%) P/CF (x) FCF Yield (%) P/BV (x) 2009A (x) 11.8x 13.6x 11.6x 33.2x 16.5x 22.1x 18.1x 18.3x 10.6x 10.7x 10.7x 15.5x 10.8x 13.1x 7.6x 12.2x 21.9x 13.1x 13.1x 14.9x Metrics Enterprise Value to EBITDA 2010E (x) 11.0x 10.3x 11.6x 28.9x 19.8x 19.2x 16.8x 16.2x 8.3x 11.5x 8.5x 14.3x 9.4x 11.5x 7.3x 17.8x 10.0x 23.3x 18.7x 7.3x 12.6x 13.9x 2011E (x) 7.8x 6.6x 9.5x 14.0x 11.4x 12.6x 10.3x 12.2x 6.4x 8.3x 7.9x 11.4x 7.4x 9.7x 5.9x 14.2x 8.2x 13.7x 18.2x 14.3x 8.5x 10.4x 10.4x 2012E (x) 8.0x 7.7x 8.6x 11.8x 9.7x 11.4x 9.5x 8.8x 5.1x 7.4x 7.3x 10.1x 15.5x 8.5x 5.0x 12.0x 7.4x 11.3x 15.6x 11.7x 8.2x 9.6x 9.6x 2009A (x) 24.7x 17.6x 19.5x 81.1x 32.1x 29.7x 34.1x 28.3x 25.4x 14.0x 15.6x 22.3x 13.9x 31.8x 11.0x 38.1x 0.7x 35.3x 11.3x 20.6x 25.1x Price to Earnings 2010E (x) 19.7x 21.2x 18.8x 67.3x 41.2x 25.1x 32.2x 21.8x 20.3x 15.4x 12.7x 20.6x 10.5x 25.5x 11.5x 33.6x 0.5x 28.7x 40.7x 26.2x 11.2x 20.0x 23.6x 2011E (x) 12.6x 10.6x 15.4x 27.0x 18.7x 16.7x 16.8x 17.7x 14.5x 11.1x 12.1x 15.4x 8.9x 15.9x 9.2x 24.4x 0.4x 18.3x 29.8x 19.9x 12.4x 15.0x 15.6x 12/31 12/31 12/31 12/31 5/31 12/31 12/31 12/31 6/30 9/30 12/31 12/31 12/31 3/31 12/31 12/31 12/31 12/31 12/31 12/31
51.1x 80.8x 13.1x 20.4x 39.7x 2.0x 26.4x 29.0x 14.0x 28.3x 30.5x 47.9x
Peer Group Average
Nam e
Ticker
Peer Group Average
January 2011
January 2011
Exhibit 3.26: CF Tear Sheet
CF Industries
CF.N 1-Year Target: 2-Year Target: 1-Year Return: 2-Year Return: NTM Dividend Rating: Risk: $140 $150 3.9% 11.6% $0.40 2-SP High Last Price: $135.15 FY End: Dec. 31 Market Cap: $9.7B EV: $11.7B Avg. Volume: 2.0M FD Shares O/S: 71.9M Float: 99.7%
Valuation: 8.5x 2012E EBITDA, 13.5x 2012E EPS, DCF @ 9.2%, 80% RCN
Ownership Insider Ownership: Institutional Ownership: Target Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Operational Nitrogen Sales (M Product st) Realized Urea ($/st) Realized Ammonia ($/st) DAP & MAP Volume (M st) Realized DAP Price ($/st) EPS Estimates Q1 Q2 Q3 Q4 Total* Consensus** 2009 $1.28a $4.33a $0.78a $1.04a $7.43a Multiple 13.5x 8.5x 80% 9.2% 2010E 11.6 $295 $387 1.9 $412 2010E** -$0.09a $1.54a $0.67a $3.29 $6.37 $7.08 Value $138.10 $158.99 $127.67 $134.66 2011E 13.1 $340 $415 2.0 $452 2011E $2.47 $4.33 $2.53 $3.40 $12.73 $11.73
0.30% 97.8% Weight 25% 25% 25% 25% 2012E 13.2 $312 $390 2.0 $409 2012E $1.97 $3.53 $1.99 $2.74 $10.23 $11.00 EPS +15 +20 +18 +41 +85 +14 +15 +13 +12 2012E 0.2x 11.2x 0.26x
Financial EV/EBITDA P/E P/FCF P/BV Dividend Yield ROE ROA Gross Margin EBITDA Margin EBITDA Growth Income Statement Net Sales COGS Gross Profit Phosphate Nitrogen EBITDA Net Income to CS EPS (FD) Balance Sheet Cash & Equivalents PP&E Total Assets Short-Term Debt Long-Term Debt Total Liabilities Shareholders' Equity Cash Flow Statement Operating (post-WC) Investing Financing Cash Replacement Cost New Calculated: $160/sh
2009 14.9x 18.2x n.m. 5.6x 0.3% 21% 15% 14% 30% -38% 2009 2,608 1,769 839 55 784 781 366 $7.43 2009 697 794 2,495 0 0 750 1,745 2009 769 -488 -124 72
2010E 10.3x 21.2x 21.6x 2.1x 0.3% 8% 4% 10% 29% 45% 2010E 3,965 2,814 1,151 182 969 1,134 385 $6.37 2010E 855 3,952 8,904 0 2,251 4,356 4,548 2010E 922 -3,040 2,275 157
2011E 6.6x 10.6x 10.7x 1.8x 0.3% 17% 9% 20% 38% 55% 2011E 4,679 3,004 1,675 304 1,371 1,764 915 $12.73 2011E 1,804 4,033 9,942 0 2,251 4,428 5,514 2011E 1,271 -293 -28 950
2012E 7.7x 13.2x 13.7x 1.5x 0.3% 12% 7% 17% 34% -14% 2012E 4,382 2,985 1,397 256 1,141 1,509 736 $10.23 2012E 2,591 4,108 10,783 0 2,251 4,484 6,300 2012E 1,118 -303 -28 786
2011E Sensitivity DAP/MAP ($/st) Urea ($/st) Ammonia ($/st) UAN ($/st) Natural Gas ($/mmBtu) DAP/MAP Volume (000 st) Ammonia Volume (000 st) Urea Volume (000 st) UAN Volume (000 st) Credit Metrics Net Debt/EBITDA Interest Coverage Debt/Total Capital Moody's: Free Cash Flow EBITDA Less: Taxes Less: NWC Less: CAPEX Free Cash Flow 2009 -1.2x 453.2x 0.00x Ba3 2011E 1,764 497 65 293 909 2010E 1.2x 4.2x 0.33x
$10 $10 $10 $10 -$0.50 100 100 100 100 2011E 0.2x 14.2x 0.29x
Peak: Trough:
106% 17%
Target: Current:
80% 85%
* 2010 quarterly EPS does not sum to annual EPS due to changing sharecounts. ** Bloomberg.
2012E 1,509 410 88 303 708
2013E 1,289 335 87 310 557
2014E 1,304 335 70 319 580
Source: Bloomberg; Reuters; Company reports; Scotia Capital estimates.
191
January 2011
Nitrogen
LARGEST NORTH AMERICAN NITROGEN PRODUCER
CFs nitrogen facilities boast 13.5 million net product tons, or 6.3 million net nutrient tons, giving the company the second-largest ammonia and urea market shares in the world, among public companies, as well as top spots in all four key nitrogen products in North America (see Exhibits 3.27 and 3.28).
Exhibit 3.27: North American Ammonia Producers Exhibit 3.28: North American Urea Producers
AMMONIA CF Industries1 Agrium Koch PotashCorp Yara Honeywell International Mosaic Others
2010 Capacity
(M mt)
N.A. Share
(%)
UREA CF Industries Agrium Yara Koch PotashCorp Coffeyville LSB Industries Dyno Nobel Rentech Others
2010 Capacity
(M mt)
N.A. Share
(%)
6.3 2.4 2.3 1.3 0.8 0.5 0.5 2.0 16.1
39% 15% 14% 8% 5% 3% 3% 12% 100%
1. 7.74M st global ammonia capacity, less 0.85M st Trinidad/U.K. capacity, converted to mt.
Source: IFDC; CF Industries; Agrium; Scotia Capital.
2.5 1.9 1.2 1.1 0.9 0.3 0.2 0.2 0.1 1.9 10.4
24% 18% 12% 11% 9% 3% 2% 2% 1% 18% 100%
Outside the United States, CF owns facilities in Canada, Trinidad, and the United Kingdom.
Specifically, CF owns and operates seven major North American nitrogen facilities, five of which are located in or near the U.S. Corn Belt CFs primary market. The remaining two (and CFs largest) facilities are located next to major North American natural gas hubs, in the U.S. Gulf and in Alberta, as natural gas feedstock is the most important input for nitrogen fertilizer production. Donaldsonville is the largest nitrogen complex in North America, while Medicine Hat (34% owned by Viterra Inc.) is Canadas largest nitrogen fertilizer facility. Additionally, the company has several 50/50 JV interests in nitrogen assets located in both Trinidad and the United Kingdom. Exhibit 3.29 highlights CFs nitrogen portfolio.
Exhibit 3.29: Summary of CF Industries Nitrogen Assets
Location United States Donaldsonville, LA Port Neal, IA Verdigris, OK Woodward, OK Yazoo City, MS4 Canada Medicine Hat, AB Courtright, ON International Ince, UK5 Billingham, UK 5 Point Lisas, Trinidad5 Ammonia 1
(000 st)
Ammonia 6
(000 st)
UAN2,7
(000 st)
AN
(000 st)
Urea 3
(000 st)
Total 6
(000 st)
2,800 370 1,050 440 500 5,160 1,250 480 1,730 201 287 360 848 7,738
834 33 259 303 1,429 780 235 1,015 51 148 360 559 3,003
2,415 735 1,925 298 525 5,898
1,680 60 25 20 1,785 810 175 985 343 319 662
775 775
4,929 828 2,184 626 1,320 9,887 1,590 760 2,350 394 467 360 1,221
AN 11%
Urea 21%
Net Ammonia 22%
350 350
UAN 46%
Total
6,248
1,437
2,770
13,458
1. Gross capacity. A substantial amount of produced ammonia is used as a feedstock for other products. 2. Measured in tons of UAN, containing 32% N by w eight. 3. Granular urea (Donaldsonville, Medicine Hat, Courtright). Urea liqour (Port Neal, Woodw ard, Yazoo, Courtright). 4. Yazoo City AN capacity can be increased to 835,000 tons, but UAN capacity w ould be decreased to 450,000 tons. 5. Represents CF Industries' 50% interest in the capacity of the facility. 6. Scotia Capital estimates (Urea = 0.58 ammonia, AN = 0.436 ammonia, UAN32 = 0.398 ammonia) 7. Woodw ard UAN capacity is increasing by 0.5M tons shortly.
192
January 2011
Exhibit 3.30: Donaldsonville Nitrogen Complex
Exhibit 3.31: Medicine Hat Nitrogen Complex
Source: CF Industries.
NATURAL GAS & TRANSPORTATION COST ADVANTAGES OVER SWING PRODUCERS
We believe that CF has a material natural gas cost advantage over swing nitrogen producers in the Ukraine. Specifically, we estimate that CFs natural gas cost advantage ranges between $2/mmBtu and $3/mmBtu, which enables the company (and other U.S. Gulf Coast nitrogen producers) to realize much higher margins than their Ukrainian peers. Additionally, CFs largest nitrogen complex (Donaldsonville) is located at the U.S. Gulf, thereby avoiding significant shipping costs to the region. In our view, this adds a further $40/tonne (urea) to $55/tonne (ammonia) in potential nitrogen margin upside for CF against Ukraine-based producers. Exhibit 3.32 summarizes CFs natural gas and transportation cost advantages for both ammonia and urea.
Exhibit 3.32: Crunching the Numbers on CFs Natural Gas and Transportation Cost Advantages
CF
Old New Ukraine Ukraine? $6.20 35x $217 $30 $247 $55 $274 $420 $146 $112 $7.25 35x $254 $30 $284 $55 $307 $420 $113 $145
[A] [B] [C = A X B] [D] [E = C + D]
Transportation cost advantages over Ukrainian producers range from $40/tonne to $55/tonne.
Ammonia
Gas price Gas consumption Gas cost Conversion cost Ammonia cash cost Shipping to U.S. Gulf Delivered cash cost Current Price (FOB NOLA) Cash Margin CF Advantage
($/mmBtu) (x) ($/mt) ($/mt) ($/mt) ($/mt) ($/st) ($/st) ($/st)
$4.50 33x $149 $30 $179 $0 $162 $420 $258
Ammonia price Ammonia use Ammonia cost Gas consumption Gas cost Conversion cost Urea cash cost Shipping to U.S. Gulf Delivered cash cost Current Price (U.S. Gulf) Cash Margin CF Advantage
($/mt) (x) ($/mt) (x) ($/mt) ($/mt) ($/mt) ($/mt) ($/st) ($/st) ($/st)
$179 0.58x $104 5.5x $25 $23 $151 $0 $137 $370 $233
$247 0.58x $143 5.5x $34 $23 $200 $41 $219 $370 $151 $82
$284 0.58x $165 5.5x $40 $23 $227 $41 $244 $370 $126 $106
[E] [F] [G = E X F] [H] [I = A X H] [J] [K = G + I + J]
Source: Fertilizer Week; CF Industries; Scotia Capital estimates.
193
Urea
January 2011
Exhibit 3.33: CFs Nitrogen Distribution
STABLE DISTRIBUTION/LOGISTICS
We do not anticipate CF will continue exporting UAN beyond 2011.
CFs Donaldsonville nitrogen complex, which is located on the Mississippi River, includes a deepwater docking facility, access to an ammonia pipeline, and truck and railroad loading capabilities. CF owns six ammonia river barges with a total capacity of 16,400 tons. 16 UAN river barges are contracted on a dedicated basis with a total capacity of 48,000 tons. Additionally, CF leases about 1,200 ammonia tank cars, 2,624 UAN tank cars, 967 hopper cars, and 429 other cars. CF ships its 66% share of ammonia and urea produced at the Medicine Hat nitrogen fertilizer complex by truck and rail to customers in both the United States and Canada, as well as to its storage facilities in the northern United States. Exhibit 3.33 shows a CF nitrogen distribution map.
UAN EXPORTS ARE BACKBUT FOR HOW LONG?
In 2009, CF began exporting its UAN product for the first time since the 1990s, due to a combination of: (1) favourable offshore market conditions; and (2) lacklustre demand in key U.S. markets. We do not anticipate CF will continue exporting material amounts of UAN beyond 2011.
TERRA ENVIRONMENTAL TECHNOLOGIES
Unconventional demand for ammonia could increase by 2.5 million tons by 2018.
In our view, CFs acquisition of Terra opens new nitrogen-based opportunities to CF, such as Terra Environmental Technologies (TET). TET provides products and services to nitrogen-using customers to reduce nitrogen oxides and other emissions from sources such as power plants and wastewater. Specifically, TET serves two customer types: stationary and mobile. Stationary customers include coalfired power plants seeking to reduce NOX, while mobile customers are usually involved in the supply of diesel exhaust fluid (DEF) to consumers who use it to reduce harmful emissions from the exhaust system of diesel engines. TET has exclusive agreements with Volvo, Daimler, Chrysler, Ford, and numerous others. In 2009, Terra stated new and emerging opportunities (for TET) may increase North American demand for ammonia by up to 2.5 million tons by 2018. In 2009, TET revenues were negligible, and started ramping up in 2010 with the introduction of emissions-compliant engines.
Exhibit 3.34: CF Industries TET Process
194
January 2011
WHY CF IS FOCUSED ON PERU
Exhibit 3.35: CF Peru
Peru
With a nitrogen complex in Peru, CF will be able to serve west coast markets in North and South America.
Proposed location of CF Peru.
CF plans to build a world-class nitrogen fertilizer complex in San Juan de Marcona, Peru, about 300 miles south of Lima (see Exhibit 3.35). If constructed, the complex will consist of two plants, a net 160,000 ton ammonia facility, and a 1.3 million ton granulated urea plant. We anticipate the capital cost of the project to be somewhere in the $2 billion area, although it is unclear when production will begin. Other facilities in the complex will include urea granulation, storage facilities, truck cargo facilities, and docks. CF does not have any nitrogen capacity on the west coast of South or North America. The company believes, as we do, that Peru and neighbouring countries are under-served with respect to nitrogen products.
Source: Google Maps; Scotia Capital.
In late 2009, CF entered into a definitive agreement with 10 local natural gas suppliers in connection with its evaluation of the construction of a world-class nitrogen complex there. We are pleased that natural gas prices will be indexed to the price of urea, meaning a near-guaranteed fixed margin for CF. We believe this will result in CF not being economically forced to idle production if nitrogen fertilizer prices weaken.
HIGH SEASONALITY
CFs nitrogen business is highly seasonal, with strongest demand occurring during the spring planting season, and a second period of demand following the fall harvest (see Exhibit 3.36). Nitrogen producers and dealers generally build inventories during low demand periods, in order to ensure timely product availability during the peak seasons. Seasonality is highest for ammonia due to the short application season and limited customer storage ability. Accordingly, CFs working capital requirements are highest prior to the start of the season, but are mostly offset by customer deposits.
Exhibit 3.36: CF Industries Nitrogen Sales Seasonality
60% Ammonia Seasonality 50% 40% 30% 20% 10% 0% Q1 2006 Q2 2007 Q3 2008 2009 Q4 Urea Seasonality 60% 50% 40% 30% 20% 10% 0% Q1 2006 Q2 2007 Q3 2008 2009 Q4
CFs sales and earnings are highly seasonal.
60% Other Nitrogen Seasonality Q1 2006 Q2 2007 Q3 2008 2009 Q4 50% UAN Seasonality 40% 30% 20% 10% 0%
80% 70% 60% 50% 40% 30% 20% 10% 0% Q1 2006 Q2 2007 Q3 2008 2009 Q4
195
January 2011
OUTLOOK
Between mid-2006 and the mid-2008 peak of the fertilizer cycle, U.S. Gulf (NOLA) ammonia prices more than doubled to nearly $700/ton from about $300/ton. Since the collapse of fertilizer prices in 2009, ammonia prices have rallied to the $420/ton area (FOB NOLA). Urea, AN, and UAN have each followed a fairly similar trend. Going forward, we expect (seasonally adjusted) nitrogen fertilizer prices to be close to late 2007 levels. We forecast realized ammonia prices of $415/ton and $390/ton in 2011 and 2012, respectively, and realized urea prices of $340/ton in 2011, dropping to $312/ton the following year (see Exhibit 3.37). UAN and AN prices should hover around the $205/ton to $215/ton range through 2012.
Exhibit 3.37: SC Forecast Realized Nitrogen Fertilizer Prices
800 Forecast
Nitrogen Prices ($/st)
We are looking for lower nitrogen pricing in 2012.
700 600 500 400 300 200 100 0 2006 2007 2008 Ammonia 2009 Urea 2010 UAN AN
2011
2012
With the integration of Terra mostly behind CF, we are looking for strong, but highly seasonal nitrogen volumes through 2012, averaging 13.1 million tons per year. Based on current capacities and historical peak-cycle utilization rates, we forecast the bulk of annual nitrogen volumes will be realized through the sale of 5.9 million tons of UAN, 2.9 million tons of ammonia (net), and 2.97 million tons of urea. Exhibit 3.38 highlights our forecast quarterly sales volumes.
Exhibit 3.38: SC Forecast Nitrogen Fertilizer Sales Volumes and Gross Margins
Nitrogen Volumes (000 st)
5,000 Pre-Terra 4,000 3,000 2,000 1,000 0 2006 2007 Ammonia 2008 Urea 2009 UAN AN 2010 Other 2011 2012 Gross Margin (RHS) Forecast 60%
40% 30% 20% 10% 0% -10%
We are looking for 2011 and 2012 nitrogen revenue of $3.77 billion and $3.56 billion, respectively, and representing a 5.6% annual revenue decline. We have not included the Peru complex in our financial forecast, and accordingly, this represents possible upside to our numbers. For gross margins, we are looking for 36% and 32% in 2011 and 2012, respectively. These margins compare with 30% and 43% in 2008 and 2009, respectively.
196
Gross Margin (%)
50%

Exhibit 3.39: SC Forecast Nitrogen Sales by Product
1,500
January 2011
Nitrogen Sales ($M)
Pre-Terra 1,200 900 600 300 0 2006 2007 2008 Ammonia 2009 Urea UAN 2010 AN Other
Forecast
2011
2012
Exhibit 3.40: SC Forecast Implied Ammonia Margins

800 700 Forecast
Ammonia ($/st)
600 500 400 300 200 100 0 2006 2007 2008 2009 2010 2011 2012
Implied Ammonia Margin
Exhibit 3.41: SC Forecast Implied Urea Margins

$800 $700 $600
Forecast
Urea ($/st)
$500 $400 $300 $200 $100 $0 2006 2007 2008 2009 Implied Urea Margin 2010 2011 2012
Exhibit 3.42: SC Forecast Nitrogen Capex and Depreciation

50 Forecast 40
Cost ($/st)
30 20 10 0 2006 2007 2008 2009 2010 2011 2012
Nitrogen Depreciation
Nitrogen Maintenance Capex
197
198
Q2-09 6/30/09 335 211 206 0 4 755 352 403
53% 37% 31% 43% 30% 33% 19% 36% 30%
Exhibit 3.43: SC Forecast CFs Nitrogen Segment

Q3-09 09/31/09 58 129 89 0 1 276 174 102 242 109 1,055 784 229 98 755 368 594 141 635 363 2,213 969 456 230
34%
($M) Net Sales Ammonia Urea UAN AN Other Total 556 889 592 0 5 2,042 1,522 520
25% 30% 37%
2006 2007 2008 Q1-09 12/31/06 12/31/07 12/31/08 3/31/09 604 1,208 773 0 6 2,591 1,821 770 287 170 790 503
39%
Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/09 12/31/09 3/31/10 6/30/10 09/31/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 94 180 78 0 0 351 557 787 490 0 5 1,839 61 183 83 0 0 327 452 248 344 56 22 1,123 202 187 269 53 24 735 392 238 313 53 2 998 1,107 857 1,008 163 47 3,182 122 252 256 55 1 686 548 282 384 69 9 1,293 146 222 320 69 2 759 518 241
32%
444 657 417 0 4 1,522
70 268 118 0 1 457
402 252 320 55 2 1,031 635 396

38%
1,219 1,009 1,281 248 13 3,769 2,398 1,371

36%
1,181 925 1,204 233 15 3,559 2,417 1,141

32%
1,423 99
6%
Less: COGS Gross Profit Gross Margin 59 26 13 73 1,434 2,701 2,754 0 49 7,021 1,079 2,617 2,405 0 40 6,141 133 733 397 0 2 1,265 481 714 651 0 32 1,878 164 495 570 0 9 1,238 305 662 494 0 9 1,470 1,083 2,604 2,112 0 52 5,851 189 598 404 0 7 1,198 1,190 851 1,562 263 66 3,932 513 713 1,430 262 63 2,981 459 696 114 372 62 72 619 81 307 66 304 969 743 1,484 253 8 3,456 50 61 409 57 74 639 13 56 101 15 32 356 15 40 47 16 37 56 59 165 560 16 17 65 73 61 234 71 75 -4 38 59 266 197 211 562 759 2,861 2,905 4,880 778 144 11,567
Less: Depreciation Less: Maintenance Capex EBIT
30 43 157 187 294 743 1,187 253 4 2,480
52 75 377 428 1,321 832 1,781 322 44 4,299
34 49 158 192 352 653 1,484 322 8 2,820
41 61 294 335 969 743 1,484 253 9 3,457
157 228 986 1,142 2,936 2,970 5,936 1,150 65 13,056
171 237 733 905 3,029 2,970 5,936 1,150 75 13,160
EBITDA
Sales Tonnes (000 st) Ammonia Urea UAN AN Other Total
1,226 2,619 2,420 0 45 6,310
Realized Price ($/st) Ammonia Urea UAN AN 362 251 172 0 388 329 215 0 560 462 321 0 527 365 387 0 696 295 316 0 355 260 155 0 308 272 156 0 514 302 232 0
321 306 205 0
380 292 220 213
394 263 188 203
405 321 211 211
387 295 207 209
415 340 216 216
415 340 216 216
415 340 216 216
415 340 216 216
415 340 216 216
390 312 203 203
Production Volume (000 st) Ammonia Urea UAN AN Total 3,289 2,358 2,611 0 8,258 3,249 2,355 2,602 0 8,206 677 613 485 0 1,775 799 609 595 0 2,003 818 514 625 0 1,957
3,158 2,334 2,336 0 7,828
804 1,736 607 0 3,147
3,098 2,350 2,312 0 7,760
871 603 623 0 2,097
1,717 639 1,320 274 3,950
1,662 595 1,233 263 3,753
1,631 743 1,484 287 4,145
5,881 2,580 4,660 824 13,945
1,631 743 1,484 287 4,145
1,631 743 1,484 287 4,145
1,631 743 1,484 287 4,145
1,631 743 1,484 287 4,145
6,525 2,970 5,936 1,150 16,580
6,732 2,970 5,936 1,150 16,787
January 2011
January 2011
Phosphate
SECOND-LARGEST NORTH AMERICAN PHOSPHATE PRODUCER
CF is a major manufacturer of phosphate fertilizer products primarily DAP and MAP. The companys phosphate fertilizer manufacturing operations are located in central Florida and consist of a phosphate fertilizer chemical complex in Plant City, a phosphate rock mine, a beneficiation plant, and phosphate rock reserves in Hardee County. CF also owns a deep-water terminal facility in the port of Tampa. Total DAP/MAP capacity is slightly under 2.2 million tons per year, which we estimate results in a 12% to 14% market share of North American phosphate fertilizer capacity, when measured on a P2O5 basis (see Exhibit 3.44).
Exhibit 3.44: North American Phosphate Producers Exhibit 3.45: CFs Recent Phosphate Metrics
CF has a 12% to 14% market share of the North American phosphate market.
MAP/DAP Mosaic CF Industries PotashCorp Agrium J.R. Simplot Mississippi Phosphates Others
1
2010 Capacity (M mt) ~9.2 2.0 1.7 1.0 ~0.8 0.8 1.0 16.4
N.A. Share
(%)
Capacity
(000 st)
Production 2007 2008 2009

(000 st) (000 st) (000 st)
56% 12% 10% 6% 5% 5% 6% 100%
Phosphate rock
3,500
3,233 3,443 3,088

92% 98% 88%
Sulphuric acid
2,800
2,531 2,448 2,322

90% 87% 83%
Phosphoric acid
1,055
976
93%
985
93%
918
87%
1. Mosaic's finished phosphate capacity is 9.7M product mt, w hich includes feed/other. 9.2M product mt assumes 4.2M nutrient mt of DAP capacity.
DAP/MAP
2,165
1,948 1,980 1,830

90% 91% 85%
SUFFICIENT ROCK RESERVES OVER THE MID-TERM
CFs Hardee Phosphate Rock Mine currently boasts 3.5 million tons of phosphate rock capacity. Approximately 3.5 tons of rock are needed to produce one ton of P2O5. Between 1992 and 1995, the company spent $135 million increasing capacity from a 1 million ton operation. At the end of 2009, CFs Hardee rock mine had approximately 13 years of fully permitted recoverable phosphate reserves remaining (at current operating rates). However, CF has initiated the process of applying for authorization and permits to expand the geographical area at its Hardee property where it can mine. The proposed expansion area has an estimated 34 million tons of recoverable phosphate reserves, which we estimate will add an additional 10 years (to 23) of operations at the mine (see Exhibit 3.46).
Exhibit 3.46: CF Industries Has 23 Years of Phosphate Rock Reserves
10 years of phosphate reserves at Hardee still await permitting.
Status
Recoverable
(M st)
BPL
(%)
P2O5
(%)
Fe 2O3 + AI 2O3
(%)
MgO
(%)
Permitted Pending permit Total
46.4 34.0 80.4
64.68% 64.57% 64.64%
29.60% 29.55% 29.56%
2.39% 2.39% 2.39%
0.79% 0.79% 0.79%
@ 3.5M st per year = 23 years of reserves

199
January 2011
Exhibit 3.47: CFs Phosphate Operations
Other Phosphate Feedstock Supplies
CF has a material (landed) rock cost advantage over its non-integrated peers.
Sulphur. CFs Plant City phosphate complex uses about 0.9 million tons (0.8 million long tons) of sulphur annually, when the facility is operating at capacity. CF purchases its sulphur from several domestic and foreign producers. Martin Sulphur supplies about 60% of CFs requirements. Ammonia. CFs Plant City phosphate complex uses about 0.4 million tons of ammonia annually, when the facility is operating at capacity. CF purchases its ammonia from offshore sources, most notably from its joint venture in Trinidad, and stores it at its 38,000 ton ammonia storage tank in Tampa.
Source: SCF.
INTEGRATED PRODUCER ADVANTAGES OVER NON-INTEGRATED
As an integrated DAP/MAP producer, CF is immune from volatile phosphate rock price swings. We estimate that production of CFs phosphate rock, at full capacity, costs ~$45/ton. This compares to current prices of about $125/metric tonne (FOB Morocco). The ~$70/short ton spread is compounded further on a product ton basis, as between 1.6 and 1.7 tons of rock are required to produce one ton of DAP. Specifically, we estimate a non-integrated phosphate fertilizer producer is paying no less than $175 per DAP ton, compared to about $75/DAP ton for CF. We think Mosaic has a slightly stronger advantage.
KEYTRADE IS BETTER FOR CF THAN PHOSCHEM WAS
In late 2007, CF ended its membership in PhosChem, a U.S.-based phosphate fertilizer export association, which in many ways, is similar to Saskatchewan-based Canpotex. Why? We believe that CF had a limited influence in pricing and strategy, as it did not hold the lions share of allocated phosphate capacity.
CF owns a 50% stake in Keytrade.
Since then, CF started an exclusive marketing arrangement with Keytrade, under which Keytrade became the companys exclusive exporter of phosphate fertilizer outside the United States. In our view, CF is now able to exercise near-full control of its phosphate products once they leave the United States. How? CF owns a 50% of the common shares of Keytrade. Prior to joining PhosChem, CF was typically exporting about one-third of its phosphate fertilizers. At the time CF ended its membership in PhosChem, this had dropped to 22%. In 2009, CF was able to export 43% of its DAP/MAP through Keytrade.
CFS STOCK HAS A FAIRLY LOW LEVERAGE TO PHOSPHATES
Prior to CFs acquisition of Terra, we estimate that CFs EBITDA had a maximum phosphate exposure of between 29% (2007) and 36% (2008). With the consolidation of Terras nitrogen capacity, and no phosphate capacity, we estimate that phosphate-based annual EBITDA will range between 10% and 15% of overall EBITDA through our 2012 forecast period.
200
January 2011
OUTLOOK
Over the past decade, DAP prices have followed a similar trend to that of potash. Central Florida DAP prices hovered around the $200/ton area for years, before exploding to about $1,075/ton in Q3/08. Since then, Central Florida DAP prices have been hovering around the $550/ton (FOB) area - a price that we do not think is sustainable over the long-term. Given our outlook for sulphur, ammonia, and nonintegrated phosphate rock costs, we forecast that CF will realize 2011 blended DAP/MAP price of $452/ton (see Exhibit 3.48). As Saudi Arabias Maaden ramps up, we expect CFs realized 2012 blended DAP/MAP price to fall by 10% to about $409/ton.
Exhibit 3.48: SC Forecast Realized Phosphate Prices
Phosphate Prices ($/st)
$1,000 Forecast $800 $600 $400 $200 $0 2006 2007 2008 2009 DAP 2010 MAP 2011 2012
We are looking for realized DAP/MAP prices of $452/ton to $409/ton in 2011 and 2012.
With only one operating mine and production complex, CFs phosphate sales volume is fairly simple to forecast, assuming historical utilization rates are maintained. Specifically, we are looking for ~2 million tons of finished product sold in each of 2011 and 2012, as we think CF will produce flat out in order to take advantage of high prices. Exhibit 3.49 shows our quarterly phosphate sales volume forecast. In the past, CF had sporadically bought and sold potash, sometimes at a loss. We do not believe (nor forecast) that the company will continue the purchase and sale of potash going forward. We are looking for 2011 phosphate net sales of $910 million, followed by a pricing-based decline to $823 million in 2012. We forecast no material change to sulphur prices between 2011 and 2012, but believe that a supply/demand imbalance, as well as lower ammonia prices, will lead to a decline in finished phosphate fertilizer prices. Exhibit 3.50 shows our quarterly sales mix for CFs phosphate segment.
Exhibit 3.49: SC Forecast Phosphate Sales Volumes and Gross Margins
Phosphate Vol. (000 st)
800 700 600 500 400 300 200 100 0 2006 2007 2008 DAP MAP 2009 Other 2010 2011 2012 Gross Margin (RHS) Margin bum p expected as FPP book-based realized price lag falls aw ay. 50% 40% 30% 20% 10% 0% -10%
Forecast
201
Gross Margin (%)
January 2011
Exhibit 3.50: SC Forecast Phosphate Sales by Product

450 400 350 300 250 200 150 100 50 0 2006 2007 2008 2009 DAP MAP 2010 Other Forecast
Phosphate Sales ($M)
2011
2012
Exhibit 3.51: SC Forecast Phosphate Fertilizer Depreciation and Capex

50 40 Forecast
Cost ($/st)
30 20 10 0 2006 2007 2008 2009 2010 2011 2012
Phosphate Depreciation
Phosphate Maintenance Capex
202
203
2006 2007 2008 Q1-09 12/31/06 12/31/07 12/31/08 3/31/09 407 104 0 511 462 49
10% 31% 34% -3% 10% 14% 11% 7% 18% 16% 16% 39% 23% 33%
Exhibit 3.52: SC Forecast CFs Phosphate Segment

Q2-09 6/30/09 143 34 59 236 212 24 132 22 138 16 714 55 144 32 156 29 154 29 148 92 601 182 147 73 159 80
33%
($M) Net Sales DAP MAP Other Total 579 135 0 715 492 223 878 451 232 -7 1,165 165 0 1,329 186 38 0 224 93 30 31 154 136 19 0 155 558 122 90 769 135 40 0 175 142 43 0 185 133 49 0 182 198 42 0 240 608 174 0 783 182 38 0 220 189 49 0 238 167 55 0 222 147 75
34%
Q3-09 09/31/09
Q4-09 2009 Q1-10E Q2-10E Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/09 12/31/09 3/31/10 6/30/10 09/31/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 189 40 0 229 153 76
33%
728 182 0 910 606 304

33%
659 165 0 823 567 256

31%
Less: COGS Gross Profit Gross Margin 33 32 -17 17 183 385 -23 0 8 0 -15 19 15 19 77 130 32 40 152 41 66 344 8 16 -31 9 24 -9 12 14 -3 12 17 -12 40 70 -55 12 12 7 13 14 2 14 9 6 13 16 64 51 52 79 13 16 45 58
Less: Depreciation Less: Maintenance Capex EBIT
14 17 49 63
13 16 46 59
13 16 47 60
52 64 187 240
54 66 135 189
EBITDA
Sales Tonnes (000 st) DAP MAP Other (potash) Total 1,676 414 0 2,090 1,624 370 0 1,994 1,532 255 0 1,787 445 82 0 527 469 99 106 568 332 107 58 439 490 61 0 551 1,736 349 164 2,249 374 106 0 480 355 104 0 459 329 122 0 451
419 89 0 507
1,477 421 0 1,897
403 85 0 487
419 109 0 528
370 121 0 491
419 89 0 507
1,611 403 0 2,013
1,611 403 0 2,013
Realized Price ($/st) DAP MAP Other (potash) 230 234 0 377 366 0 760 646 0 418 466 0 304 346 558 281 283 527 277 309 0 321 348 548 361 379 0
400 414 0
403 404 0
473 473 0
412 415 0
452 452 0
452 452 0
452 452 0
452 452 0
452 452 0
409 409 0
Production Volume (000 st) DAP/MAP Phosphate Rock Sulfuric Acid Phosphoric Acid as P2O5 Total 2,023 3,805 2,598 1,009 9,435 1,948 3,233 2,531 976 8,688 1,980 3,443 2,488 985 8,896 390 568 489 197 1,644 503 786 592 251 2,132 443 914 600 223 2,180 494 820 641 247 2,202 1,830 3,088 2,322 918 8,158
438 721 577 221 1,957
454 877 619 230 2,180
473 965 639 236 2,313
503 831 630 231 2,196
1,868 3,394 2,465 918 8,646
503 831 630 231 2,196
503 831 630 231 2,196
503 831 630 231 2,196
503 831 630 231 2,196
2,013 3,325 2,520 924 8,782
2,013 3,325 2,520 924 8,782
January 2011
January 2011
Does CF Have Uranium Upside?

Amid surging uranium prices in mid-2007, CF began reviewing plans for a possible uranium-extraction project at its Plant City, Florida phosphate rock mine. By September 2007, the company had announced that it would go ahead with design and construction of a 0.9 million lb uranium (U3O8) extraction facility. We estimate this is the equivalent of between about 28 million barrels of oil or 9 million tons of coal annually. At the time, CF estimated it would spend $200 million to build the new facility. CF began seeking state and county permits to build and operate the facility. The initial feasibility study was to be conducted with Connecticut-based Nukem Inc., a global trader of uranium. The two companies were seeking long-term contracts with U.S. electric utilities. We believe CFs uranium project is indefinitely on hold due to uranium prices falling back to the $40/lb area, from a mid-2007 peak price of almost $140/lb (see Exhibit 3.53).
Exhibit 3.53: Historical Uranium (U3O8) Prices
160
Uranium U 3O 8 ($/lb)
CF has mulled over a 0.9 million uranium extraction plant for several years.
140 120 100 80 60 40 20 0 Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
We note that this is not new. Back in 1991, Nukem made an offer to purchase IMCs (Mosaics) uranium recovery operations at its New Wales facility, as well as CFs Plant City location. But recovery operations were concluded the following year because uranium prices were depressed, and the project lay dormant for 15 years.
Exhibit 3.54: Previously Proposed U.S. Uranium from Phosphate Facilities
Facility, Location Capacity Process
(t U/y)
We think uranium becomes more appealing to CF in the $70/lb to $80/lb area.
Farmland, Pierce, Florida Freeport Minerals, Uncle Sam, Louisiana Agrico, Donaldsonville, Louisiana IMC (Mosaic), New Wales, Florida CF Industries, Bartow, Florida CF Industries, Plant City, Florida WR Grace, Bartow, Florida Gardinier, East Tampa, Florida Western Corp., Calgary, Alberta Prayon, Puurs, Belgium China Phosphate, Taiwan
Source: M. Ragheb; Scotia Capital.
173 265 162 289 254 231 127 163 42 57 10
Depa-Topo Depa-Topo Depa-Topo Depa-Topo Depa-Topo Depa-Topo Opap Opap Opap Depa-Topo Depa-Topo
Uranium shows up in 50 to 200 ppm in phosphate-laden earth, with up to 24 million tons of uranium existing in phosphate deposits worldwide. Exhibit 3.54 shows actual or planned uranium recovery from the wet phosphoric acid process, according to University of Illinois Professor M. Ragheb. We think a CF decision to pursue the construction of a uranium extraction facility will hinge on future uranium prices. While the mid-$40s/lb appear too low for a CF greenlight, we believe the project will become much more appealing at the $70/lb to $80/lb area.
204
January 2011
Why Corn Farmer Economics Matter to CF

In North America, nitrogen fertilizer margins are more sensitive to changing corn prices than any other crop. Why? We estimate that 137 lb/acre of nitrogen is applied to corn crops annually. This compares to between 64 lb/acre and 72 lb/acre for wheat, and about 17 lb/acre for soybeans. Additionally, we note that farmers apply nitrogen 96% of the time on their corn crops, compared to 80%-95% for wheat, and only 18% for soybeans.
Exhibit 3.55: Current Corn vs. Soybean Economics
Corn Yield CBOT New Crop Revenue Fertilizers Crop Protection Seeds Other (Interest, Insurance) Variable Costs Cash Rent Other Fixed Total Cost
(bu/acre) ($/bu) ($/acre) ($/acre) ($/acre) ($/acre) ($/acre) ($/acre) ($/acre) ($/acre) ($/acre)
Soybeans 44.4 $13.00 $577 ~$20 $18 $53 $42 $133 $120 $140 $393
At close to $5.00/bu, we believe that new crop corn prices are currently priced to perfection again. Based on current fertilizer prices, we estimate that an average Corn Belt farmer could earn a return of between $370 and $380 per acre. At this level, we think farmers are not budget constrained on future fertilizer purchase decisions, nor are crop prices high enough to cause demand destruction. Additionally, corn economics are 100% more favourable than current soybean economics. Put another way, soybean futures prices would need to increase by ~30% to make a generic farmer economically neutral between the two crops.
At $5/bu, we think corn is priced to perfection for CF.
163.5 $5.50 $899 ~$100 $29 $80 $68 $277 $113 $135 $525
Return over Variable Return over Total
($/acre) ($/acre)
$622 $374
$444 $184
Exhibit 3.56: What Is the Optimal U.S. Corn Price for CF?
$1,400 $1,200 Corn Return over Variable Cost $1,000 $800 $600 $400 $200 $0 $3.00 Budget Constrained Demand Destruction
Optimal
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
Corn Price per Bushel

205
January 2011

We believe that CF carries a high risk profile. Key risk factors are outlined below.
NATURAL GAS EXPOSURE
As North Americas largest nitrogen producer, natural gas is CFs primary raw material to produce its fertilizers. Last year, about 43% of CFs total cost of sales was natural gas feedstock, with a materially greater percentage on a cash cost basis.
Natural gas comprises ~90% of the cash cost of producing ammonia.
The market price for natural gas in North America is higher than the price of natural gas in certain other major fertilizer-producing (and export-oriented) regions. In addition to having a steady supply of low-cost natural gas, many of CFs global competitors may also benefit from fixed-price natural gas contracts, some of which may be linked directly to the market price of nitrogen fertilizers. If nitrogen fertilizer market prices are below CFs cash cost of production due to the high cost of natural gas, we would expect the company to shift its sourcing of nitrogen fertilizers from manufactured products to purchased products, as it has done in the past at Donaldsonville. CF uses a variety of derivatives to manage its quarterly effective natural gas costs, as well as to lock in a substantial portion of its margin under its Forward Pricing Program. In 2009, net derivative losses totalled $28 million, slightly better than the average loss of $75 million in each of 2007 and 2008. Exhibit 3.57 shows that CF has historically not had a successful run in managing its natural gas costs. We estimate that a $0.50/mmBtu increase in CFs effective natural gas cost, all else equal, including unchanged nitrogen fertilizer prices, would reduce the companys 2011 EPS by about $0.85. Please refer to pages 216 and 217 for full details on earnings sensitivities.
Exhibit 3.57: Historically, CF Has Not Had a Successful Run at Managing Its Natural Gas Book
$12 $10 ($/mmBtu) $8 $6 $4 $2 Q1-06 Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1- 10 CF Donaldsonville $12 $10 ($/mmBtu) $8 $6 $4 $2 Q1-06 Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1- 10 CF Medicine Hat AECO Spot Alberta
Disclosure ended in Q1/10
Louisianna
Disclosure ended in Q1/10
Henry Hub Spot
Source: CF Industries; Bloomberg; Scotia Capital.
206
January 2011
HIGH CUSTOMER CONCENTRATION
CFs largest customer decided not to renew a multi-year supply contract that expired in June 2010.
Over the last several years, CF has increasingly relied upon four major customers to purchase about half of its sales volume. CHS Inc., Gavilon Fertilizer LLC, and Growmark are significant CF customers of both nitrogen and phosphate. The fourth major customer is Keytrade AG, which is an international fertilizer distributor based in Europe. CF owns a 50% stake in Keytrade, and accordingly uses the company as its exclusive exporter of phosphate fertilizers. We are not too concerned about the June 2010 expiration of a CHS Inc. multi-year supply contract. The company notified CF that it would not renew the contract. In our view, the amount of business that CF does with CHS should not be diminished, despite the absence of a formal contract. Additionally, the Terra acquisition greatly increased CFs customer base and diluted the predominance of some of CFs legacy customers.
HIGH NITROGEN GOVERNMENT INVOLVEMENT Exhibit 3.58: U.S. Delivered Ammonia Supply Cost
Despite being produced in more than 60 countries, over 50% of the nitrogen industry is under government control. Such influence can lead to capacity increases irrespective of demand, as supply is pushed forward for political (and not economic) reasons. Accordingly, this can result in a downward spiral of pricing and margins. CF mitigates this by: (1) having a natural gas cost advantage against swing producing nations Ukraine and China; and (2) its ability to pick up additional margin through its close proximity to Western Canada and the U.S. Corn Belt markets.
Source: Fertecon; CF Industries.
Changes in regional weather patterns can have a significant and unpredictable impact on the demand for nitrogen-based fertilizers. Farmers have limited windows of opportunity to complete crop cultivation. If adverse weather conditions occur during these seasonal windows, CFs sales and earnings could be negatively impacted, without the opportunity to recover until the following season. CF attempts to limit its weather risk by utilizing a strong distribution and storage system, which enables it to move product to locations where demand is strongest. Specifically, CFs distribution system includes 29 owned locations, in addition to the storage at the companys manufacturing plants and at more than 60 other locations. However, margins on product that is moved more than normal will be lower due to higher transport costs and potentially lower sales prices.
INTEGRATION RISK
There are numerous strategic benefits associated with CFs recent acquisition of Terra, including: (1) making CF a global leader in fertilizers; (2) significantly increasing the companys scale and capital markets presence; (3) further diversification of CFs asset base, as well as its product and customer mixes; (4) an expansion of the companys geographic reach; and (5) annual cost synergies of between $105 million and $135 million (for a one-time spend of between $40 million and $60 million), as follows:
207
January 2011
SG&A $55 million to $65 million; Logistics and railcar leases $25 million to $30 million; Purchasing and procurement $10 million to $15 million; Distribution facilities optimization $5 million to $10 million; and Other $10 million to $15 million.
The success of CFs acquisition will depend in part upon its ability to successfully integrate the two businesses, which we believe is well on track.
FERTILIZER CYCLICALITY AND DEMAND RECOVERY
The fertilizer industry is extremely cyclical, often undergoing varying periods of supply and demand imbalances. Demand is generally impacted by: (1) population growth; (2) changes in dietary habits, usually as a result of income changes; (3) non-food usage of crops, such as the production of biofuels; and planted acreage and fertilizer application rates. Similarly, fertilizer supply is typically impacted by: (1) available capacity; (2) operating rates; (3) raw material costs and availability; (4) government policies; and (5) global trade economics. During periods of nitrogen fertilizer oversupply, CFs product prices and margins will decline, resulting in reduced profitability, as well as possible writedowns in inventory values, and production curtailments.
CHINAS UREA EXPORT TAX RATE
China has a material amount of nitrogen capacity oversupply compared to its domestic needs; and capacity is still growing.
Increasing urea capacity in China could eventually cause export tax rates there to drop.
During Chinas peak fertilizer application seasons, the government implements a urea export tax rate of 110%, making it nearly impossible for domestic urea producers to profitably export urea internationally. During off-peak windows (recently narrowed to July 1 to October 31), the urea export tax rate drops sharply to 7%. It is only during this off-peak window that China becomes a swing nitrogen producer, as it Chinese urea floods into international markets. Our concern for CF shareholders is that increasing nitrogen oversupply in China could eventually prompt the Chinese government to: (1) reverse the recently narrowed urea export tax off-season; (2) reduce the on-peak urea export tax rate of 110%; and/or (3) eliminate the off-peak urea export tax rate of 7%.
LOW NITROGEN UTILIZATION SEEDS
Monsanto and BASF are jointly developing a new seed trait that is intended to help corn plants use nitrogen more efficiently by either: (1) boosting yield under normal nitrogen conditions; or (2) stabilizing yield under low nitrogen conditions. At the detriment of nitrogen producers such as CF, using nitrogen more efficiently could increase farmer profitability, as nitrogen fertilizer typically accounts for 6% to 10% of the operating costs for a U.S. corn producer.
208
January 2011
Exhibit 3.59: High Nitrogen Efficiency Monsanto/BASF Seeds Could Threaten Nitrogen Producers
Source: BASF; Monsanto.
ENVIRONMENTAL REGULATIONS
CFs operations and properties are subject to various foreign, federal, state, provincial, and municipal environmental laws. These laws pertain to issues concerning: air emissions, the use and disposal of hazardous materials, water contamination, and land reclamation. Additionally, the U.S. Environmental Protection Agency (EPA) recently adopted the Greenhouse Gas Mandatory Reporting Rule that requires the monitoring of emissions at several of CFs nitrogen and phosphate facilities. Other regulatory initiatives contemplate: (1) more stringent waste water discharge limits; and (2) and higher water quality standards with respect to nitrogen and phosphorous in lakes and inland flowing waters. In August 2010, CF agreed to pay $0.7 million as a civil fine with respect to a violation that occurred in 2005 at its Plant City, Florida, phosphate operation. Additionally, CF agreed to accelerate $55 million of funding for future closure, maintenance, and monitoring activities.
209
January 2011
Financial Forecast
On the top line, we are looking for 2011 and 2012 net sales of $4.7 billion and $4.4 billion, or a 6.3% year-over-year revenue decline in 2012 (see Exhibit 3.60). Why? In our view, benchmark nitrogen and phosphate fertilizer prices will begin to normalize (i.e., drop slightly) as new capacity comes on stream.
Exhibit 3.60: SC Forecast Net Sales by Business Unit
1,800
Quarterly Net Sales ($M)
Forecast
1,500 1,200 900 600 300 0 2006 2007 2008 2009 Nitrogen 2010 Phosphate 2011 2012
We expect CFs gross profit to follow a similar pattern to sales, although phosphate gross profits should become more prominent to CFs profile in 2012, as nitrogen margins begin to deteriorate faster than phosphate margins (see Exhibit 3.61). In our minds, CFs nitrogen and phosphate gross margins should peak in the mid-30% area in 2011, and begin declining from there (see Exhibit 3.62).
Exhibit 3.61: SC Forecast Gross Profits by Business Unit
700 600 Forecast
Gross Profit ($M)
500 400 300 200 100 0 2006 2007 2008 2009 Nitrogen 2010 Phosphate 2011 2012
Exhibit 3.62: SC Forecast Gross Margins by Business Unit

60%
Gross Margins (%)
Forecast 40% 20% 0% -20% 2006 2007 2008 2009 Phosphate 2010 Nitrogen 2011 2012
210
January 2011
We forecast 2011 EBITDA at $1.76 billion, dropping sharply to $1.51 billion in 2012. During our forecast period, we expect EBITDA margins to remain strong in the 34% to 38% range, or in between 2007 and 2008 levels. Our EPS estimates for CF are $12.73 (2011) and $10.23 (2012), versus a record $12.14 in 2008 (ex Terra). Exhibits 3.63 and 3.64 show our EBITDA and net income forecasts.
$700 $600 Forecast
EBITDA ($M)
$500 $400 $300 $200 $100 $0 -$100 2006 2007 2008 2009 2010 2011 2012
35% 25% 15% 5% -5%
EBITDA (LHS)
EBITDA Margin (RHS)

$350 Forecast 30% 25% 20% 15% 10% 5% 0% 2006 2007 2008 2009 2010 2011 2012
$250 $200 $150 $100 $50 $0 -$50
Net Income (LHS)

Income Margin (RHS)
We estimate that CF will generate $1.3 billion and $1.1 billion in cash flow from operations (post working capital adjustments) in 2011 and 2012. Exhibit 3.65 highlights that post 2010, CFs return on assets and return on equity should return to more normalized nitrogen asset levels, but still above pre-2006 levels.
80% Forecast 60%
Return (%)
40% 20% 0% -20% 2006 2007 2008 2009 ROA 2010 ROE 2011 2012
211
Income Margin (%)
Net Income ($M)
$300
EBITDA Margin (%)
45%
January 2011
Exhibit 3.66 compares our forecast through 2012 with consensus.

Exhibit 3.66: Our 2011 and 2012 CF Estimates vs. Consensus
2011 Scotia Capital Est. Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/sh) 4,679 1,764 915 12.73 Low 4,272 1,362 499 9.99 Street Avg. 4,791 1,834 837 11.73 High 5,439 2,112 1,040 14.00 Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/sh) Scotia Capital Est. 4,382 1,509 736 10.23 2012 Low 4,114 1,361 669 7.52 Street Avg. 4,678 1,747 846 11.00 High 5,419 2,043 985 13.70
DIVIDENDS
CFs dividend yield is in line with its peers.
Between the time of CFs IPO and the end of 2007, the company consistently paid a quarterly dividend of $0.02 per share. Since the start of 2008, CFs quarterly dividend has increased fivefold to $0.10 per share. The current dividend yield is 0.3%.
212
213
1,950 1,802 147
8% 24% 31% 24% 43% 29% 25% 32% 26% 30% 19% 37% 29% 33% 38% 32%
Exhibit 3.67: SC Forecast CF Industries Income Statement

2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 3/31/10 6/30/10 09/31/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 2,757 2,087 670 65 3 602
22% 29% 18% 40% 21% 14% 26% -5% 27% 15% 34% 22% 31%
($M)
Net Sales Cost of Goods Sold Gross Margin 55 21 71

4%
3,921 2,698 1,223 68 5 1,150 2 -26 -1 1,175 378 -4 802 117 685
55.5 0 0 55.3 55.3 1.1 56.4 49.1 49.2 49.3 49.2 49.2 0.7 0.8 0.8 0.7 0.7 48.4 48.4 48.5 48.5 48.5 48.6 0.0 48.6 48.4 48.4 48.5 48.5 48.5 48.6 -7 0 0 0 -7 0 0 0 0 0 0 0 0 0 71.1 67.4 0.8 68.2 55.3 48.4 48.4 48.5 55.3 48.5 48.6
681 518 162 15 23 124 0 -1 0 125 41 1 83 20 63 35 213 22 39 6 51 83 366 11 -4 32 105 23 48

71.1 0 0 71.1 71.1 0.8 71.9
991 564 427 17 15 395 0 -1 0 396 147 1 248 32 -1 60 26 0 57 246 1 449 -4 0 6 90 -5 137 19 -11 71 118 0 251 14 236
71.1 0 0 71.1 71.1 0.8 71.9
430 306 124 15 19 90 0 -2 0 92 222 -16 464 79 385

48.5 0 0 71.1 59.8 0.6 60.4
507 381 126 16 39 71 0 0 -12 84 2 -5 -13 696 0 0 -28 2 112 0 17 222 58 0 -1 79 56 -1 0 369 227 -2 -12 671 0 -2 0 280 90 0 190 13 178
71.1 0 0 71.1 71.1 0.8 71.9
2,608 1,769 839 63 97 680 16 139 -27 28 18 350 29 4 137 27 5 423 101 167 884 20 5 278 34 5 545
36%
502 373 129 22 5 290

30%
1,308 911 397
917 747 170
1,238 782 456
3,965 2,814 1,151
906 602 303
1,531 948 583
981 665 316
1,260 788 472

37%
4,679 3,004 1,675

36%
4,382 2,985 1,397

32%
Selling, General & Administrative Other Operating Operating Income 3 -13 -1 82 20 0 62 29 33

55.0 0 0 55.0 55.0 0.0 55.1 56.7 1.2 55.5 55.5 0 0 55.1
28 5 439
35%
103 20 1,552
33%
96 20 1,281
29%
Interest Expense Interest Income Other + Divestiture (Gains)/Losses Earnings Before Taxes (EBT) 200 -1 427 55 373
2 -24 -2 626
56 -2 0 491 157 0 334 22 311

71.1 0 0 71.1 71.1 0.8 71.9
0 -2 0 292 93 0 199 17 182

71.1 0 0 71.1 71.1 0.8 71.9
56 -3 0 386 124 0 263 18 245

71.1 0 0 71.1 71.1 0.8 71.9
112 -9 0 1,449 464 0 985 70 915

71.1 0 0 71.1 71.1 0.8 71.9
112 -16 0 1,185 379 0 806 70 736

71.1 0 0 71.1 71.1 0.8 71.9
Income Taxes Other Net Income
Minority Interest Net Income to Common Shareholders
Basic shares - opening Plus: Equity issued Less: Share buyback Basic shares - closing Average Shares O/S - Basic (M) Average Dilution Average Shares O/S - Diluted (M) 0.61 0.60 166
9% 25% 32% 21% 42% 27%
EPS (Basic) EPS (Diluted) 6.72 6.57 686 1,251 146 420 117 99
19%
12.38 12.14
1.30 1.28
4.40 4.33
0.79 0.78
1.06 1.04
7.54 7.43 781

30%
-0.09 -0.09 2
0%
1.56 1.54 436

33%
0.68 0.67 222

24%
3.32 3.29 475

38%
6.43 6.37 1,134

29%
2.50 2.47 322

36%
4.38 4.33 611

40%
2.56 2.53 337

34%
3.44 3.40 495

39%
12.87 12.73 1,764

38%
10.35 10.23 1,509

34%
EBITDA (Op. Income + Depreciation)
January 2011
214
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 25 300 114 176 0 18 633 597 1 2 12 46 1,290 624 1 0 22 87 2,013 662 1 0 29 263 2,388 706 1 18 36 249 2,506 739 1 0 37 219 2,279 767 1 0 37 468 2,357 794 1 0 37 381 2,495 794 1 0 37 381 2,495 790 1 0 40 253 2,633 3,908 2,096 0 40 1,284 8,595 3,929 2,096 0 40 1,353 8,618 3,952 2,096 0 40 1,353 8,904 3,968 2,096 0 40 1,353 9,022 3,994 2,096 0 40 1,353 9,530 367 495 149 232 0 38 1,279 625 0 175 589 26 18 1,433 804 0 35 185 460 11 1,495 816 105 138 214 0 11 1,284 498 205 143 220 0 19 1,085 697 185 167 208 15 11 1,283 697 185 167 208 15 11 1,283 1,011 25 198 287 23 6 1,550 601 0 347 287 8 24 1,267 648 0 229 271 29 22 1,199 855 0 299 258 29 22 1,462 1,096 0 219 199 29 22 1,564 1,313 0 370 313 29 22 2,047 1,602 0 237 219 29 22 2,109 4,011 2,096 0 40 1,353 9,610 1,804 0 305 260 29 22 2,419 4,033 2,096 0 40 1,353 9,942 855 0 299 258 29 22 1,462 0 3,952 2,096 0 40 1,353 8,904 0 172 103 12 0 67 353 4 0 0 166 523 5 0 32 159 826 0 0 6 225 1,050 0 0 0 216 1,082 0 0 78 203 590 0 0 64 205 598 5 0 68 197 750 5 0 68 197 750 5 0 56 200 894 5 2,578 935 302 4,400 0 210 306 33 0 80 629 0 208 348 66 0 196 818 0 192 16 439 103 117 866 0 176 71 55 0 9 310 0 140 123 59 0 7 329 0 173 160 53 0 95 480 0 173 160 53 0 95 480 0 181 283 58 0 112 633 0 332 11 118 19 102 581 0 330 321 44 0 31 725 5 2,251 1,032 303 4,316 0 353 321 44 0 31 748 5 2,251 1,049 303 4,356 0 271 321 44 0 31 667 5 2,251 1,063 303 4,289 0 427 321 44 0 31 823 5 2,251 1,086 303 4,468 0 300 321 44 0 31 696 5 2,251 1,100 303 4,355 0 355 321 44 0 31 751 5 2,251 1,119 303 4,428 752 49 -33 767 0 767 1,290 2,013 2,388 2,506 0 1,187 0 1,338 32 1,425 71 1,690 2,279 100 1,759 2,357 791 417 -21 1,187 710 703 -75 1,338 712 761 -80 1,393 715 970 -66 1,618 722 1,002 -64 1,659 724 1,048 -43 1,729 16 1,745 2,495 724 1,048 -43 1,729 16 1,745 2,495 727 1,039 -54 1,711 28 1,739 2,633 2,720 1,137 -85 3,771 424 4,195 8,595 2,722 1,178 -36 3,864 438 4,302 8,618 2,722 1,423 -36 4,109 438 4,548 8,904 2,722 1,609 -36 4,295 438 4,733 9,022 2,722 1,938 -36 4,624 438 5,062 9,530 2,722 2,131 -36 4,817 438 5,256 9,610 2,722 2,389 -36 5,075 438 5,514 9,942 0 353 321 44 0 31 748 0 5 2,251 1,049 303 4,356 0 0 2,722 1,423 -36 4,109 0 438 4,548 0 8,904
Exhibit 3.68: SC Forecast CF Industries Balance Sheet

2011E 2012E
($M) Assets Current Assets Cash and cash equivalents Short-term Investments Accounts Recievable Inventories Prepaid income taxes Other
PP&E Goodwill Deferred income taxes Asset retirement Investments/Other Total Assets
1,804 0 305 260 29 22 2,419 0 4,033 2,096 0 40 1,353 9,942
2,591 0 286 259 29 22 3,186 0 4,108 2,096 0 40 1,353 10,783
Current Liabilities Revolver Accounts Payable (+ accruals) Customer advances Income taxes payable/deferred Current portion long term debt Distributions/Other
Notes Payable LT Debt Deferred Income taxes Other + MI Total Liabilities
Shareholders' Equity Paid-in Capital + C.S. Retained Earnings Comprehensive Loss Total Shareholders' Equity
Non Controlling Interest Total Equity
Total Liabilities and S/E
0 355 321 44 0 31 751 0 5 2,251 1,119 303 4,428 0 0 2,722 2,389 -36 5,075 0 438 5,514 0 9,942
0 353 321 44 0 31 749 0 5 2,251 1,176 303 4,484 0 0 2,722 3,175 -36 5,861 0 438 6,300 0 10,783
January 2011
215
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 33 95 9 8 0 -2 144 -1 142 85 48 10 0 23 538 152 690 101 26 8 -6 209 1,023 -385 639 22 5 1 2 -54 59 233 292 24 40 2 -1 -60 253 -58 195 27 4 2 0 -31 61 22 83 28 -4 2 0 -15 69 43 111 101 46 7 1 -72 530 239 769 28 0 2 1 -18 19 28 48 150 -6 2 -1 -11 271 -272 -1 110 48 2 0 6 238 351 588.0 51 18 2 0 0 322 -34 288 340 59 8 0 -22 849 72 922 43 13 2 0 0 249 59 308 66 24 2 0 0 425 -109 316 47 14 2 0 0 262 99 361 373 685 83 248 60 57 449 6 137 71 251 465 190 334 199 263 55 19 2 0 0 339 -53 286 985 212 70 9 0 0 1,276 -5 1,271 -59 -121 -11 -191 -101 -194 -48 -343 -131 296 -5 160 -69 -32 -8 -109 -53 -21 0 -73 -51 -346 -3 -400 -54 95 52 94 -226 -57 42 -488 -23 329 -4 302 -72 32 -3,148 -3,188 -81 1 1 -80 -74 0 0 -74 -250 361 -3,151 -3,040 -59 0 0 -59 -92 0 0 -92 -65 0 0 -65 -77 0 0 -77 -293 0 0 -293 0 -4 0 -19 -23 -1 -12 37 25 341 25 367 259 367 625 179 625 804 12 804 816 -319 816 498 200 498 697 72 625 697 -1 1 0 6 -3 -1 2 0 313 697 1,011 0 -409 1,011 601 0 -5 0 0 -5 0 -22 -500 -18 -541 0 -5 0 0 -5 0 -5 0 -111 -115 0 -5 0 5 0 0 -5 0 1 -4 0 -19 0 -105 -124 0 -5 0 -32 -36 1,839 -27 1,150 -181 2,780 -350 -7 1 -105 -462 0 47 601 648 0 -7 0 0 -7 0 206 648 855 1,489 -46 1,151 -318 2,275 0 157 697 855 0 -7 0 0 -7 0 242 855 1,096 0 -7 0 0 -7 0 217 1,096 1,313 0 -7 0 0 -7 0 289 1,313 1,602 0 -7 0 0 -7 0 203 1,602 1,804 0 -28 0 0 -28 0 950 855 1,804
Exhibit 3.69: SC Forecast CF Industries Cash Flow Statement

2012E
($M)
Operating Activities Net Earnings Add/(deduct) non-cash items: Depreciation, depletion, amortization Deferred income taxes Stock compensation Disposal of PP&E/Investments Other CFO (pre-WC Adj.) Net change in non-cash WC CFO (post-WC Adj.)
806 228 57 9 0 0 1,100 18 1,118
Investing Activities (Purchases)/Sale of PP&E (Purchases)/Sale of Investments Other CFI
-303 0 0 -303
Financing Activities Long-Term debt Dividends payable Issuance/(Repurchase) of shares Other CFF
0 -28 0 0 -28 0 786 1,804 2,591
Effect of exchange rate on cash and cash equivalents
Net change in cash and cash equivalents Cash and cash equivalents - beginning of period Cash and cash equivalents - end of period
January 2011
January 2011
Exhibit 3.70: CF 2011E EPS Sensitivity to Ammonia Price Changes
2011 Realized Ammonia Price ($/st) $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $385 9.64 10.49 11.34 12.19 13.04 13.89 14.74 $395 9.82 10.67 11.52 12.37 13.22 14.07 14.92 $405 10.00 10.85 11.70 12.55 13.40 14.25 15.10 $415 10.18 11.03 11.88 12.73 13.58 14.43 15.28 $425 10.36 11.21 12.06 12.91 13.76 14.61 15.46 $435 10.54 11.39 12.24 13.09 13.94 14.79 15.64 $445 10.72 11.57 12.42 13.27 14.12 14.97 15.82
Exhibit 3.71: CF 2011E EPS Sensitivity to Urea Price Changes
Blended Natural Gas ($/mmBtu)
2011 Realized Urea Price ($/st) $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $310 9.58 10.43 11.28 12.13 12.98 13.83 14.68 $320 9.78 10.63 11.48 12.33 13.18 14.03 14.88 $330 9.98 10.83 11.68 12.53 13.38 14.23 15.08 $340 10.18 11.03 11.88 12.73 13.58 14.43 15.28 $350 10.38 11.23 12.08 12.93 13.78 14.63 15.48 $360 10.58 11.43 12.28 13.13 13.98 14.83 15.68 $370 10.78 11.63 12.48 13.33 14.18 15.03 15.88
Exhibit 3.72: CF 2011E EPS Sensitivity to UAN Price Changes
2011 Realized UAN Price ($/st) $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $186 8.95 9.80 10.65 11.50 12.35 13.20 14.05 $196 9.36 10.21 11.06 11.91 12.76 13.61 14.46 $206 9.77 10.62 11.47 12.32 13.17 14.02 14.87 $216 10.18 11.03 11.88 12.73 13.58 14.43 15.28 $226 10.59 11.44 12.29 13.14 13.99 14.84 15.69 $236 11.00 11.85 12.70 13.55 14.40 15.25 16.10 $246 11.41 12.26 13.11 13.96 14.81 15.66 16.51
Exhibit 3.73: CF 2011E EPS Sensitivity to Blended DAP/MAP Price Changes
2011 Realized DAP/MAP Price ($/st) $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $422 9.73 10.58 11.43 12.28 13.13 13.98 14.83 $432 9.88 10.73 11.58 12.43 13.28 14.13 14.98 $442 10.03 10.88 11.73 12.58 13.43 14.28 15.13 $452 10.18 11.03 11.88 12.73 13.58 14.43 15.28 $462 10.33 11.18 12.03 12.88 13.73 14.58 15.43 $472 10.48 11.33 12.18 13.03 13.88 14.73 15.58 $482 10.63 11.48 12.33 13.18 14.03 14.88 15.73
216
January 2011
Exhibit 3.74: CF 2011E EPS Sensitivity to Net Ammonia Volume Changes
2011 Net Ammonia Volume (M st) $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 2.6 9.73 10.58 11.43 12.28 13.13 13.98 14.83 2.7 9.88 10.73 11.58 12.43 13.28 14.13 14.98 2.8 10.03 10.88 11.73 12.58 13.43 14.28 15.13 2.9 10.18 11.03 11.88 12.73 13.58 14.43 15.28 3.0 10.33 11.18 12.03 12.88 13.73 14.58 15.43 3.1 10.48 11.33 12.18 13.03 13.88 14.73 15.58 3.2 10.63 11.48 12.33 13.18 14.03 14.88 15.73
Exhibit 3.75: CF 2011E EPS Sensitivity to Urea Volume Changes
2011 Urea Volume (M st) $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 2.7 9.79 10.64 11.49 12.34 13.19 14.04 14.89 2.8 9.92 10.77 11.62 12.47 13.32 14.17 15.02 2.9 10.05 10.90 11.75 12.60 13.45 14.30 15.15 3.0 10.18 11.03 11.88 12.73 13.58 14.43 15.28 3.1 10.31 11.16 12.01 12.86 13.71 14.56 15.41 3.2 10.44 11.29 12.14 12.99 13.84 14.69 15.54 3.3 10.57 11.42 12.27 13.12 13.97 14.82 15.67
Exhibit 3.76: CF 2011E EPS Sensitivity to UAN Volume Changes
2011 UAN Volume (M st) $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 5.6 9.82 10.67 11.52 12.37 13.22 14.07 14.92 5.7 9.94 10.79 11.64 12.49 13.34 14.19 15.04 5.8 10.06 10.91 11.76 12.61 13.46 14.31 15.16 5.9 10.18 11.03 11.88 12.73 13.58 14.43 15.28 6.0 10.30 11.15 12.00 12.85 13.70 14.55 15.40 6.1 10.42 11.27 12.12 12.97 13.82 14.67 15.52 6.2 10.54 11.39 12.24 13.09 13.94 14.79 15.64
Exhibit 3.77: CF 2011E EPS Sensitivity to Blended DAP/MAP Volume Changes
2011 DAP/MAP Volume (M st) $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 1.7 9.76 10.61 11.46 12.31 13.16 14.01 14.86 1.8 9.90 10.75 11.60 12.45 13.30 14.15 15.00 1.9 10.04 10.89 11.74 12.59 13.44 14.29 15.14 2.0 10.18 11.03 11.88 12.73 13.58 14.43 15.28 2.1 10.32 11.17 12.02 12.87 13.72 14.57 15.42 2.2 10.46 11.31 12.16 13.01 13.86 14.71 15.56 2.3 10.60 11.45 12.30 13.15 14.00 14.85 15.70
217
January 2011

FD Shares Controlled Directly or Indirectly 93,126
Name Stephen Wilson
Position Chairman of the Board, President & CEO
Background Mr. Stephen R. Wilson first joined CF Industries in 1991 as Senior VP and CFO. He had previously worked at Inland Steel Industries, Inc. Mr. Wilson was promoted to President and CEO in October 2003, and to Chairman in July 2005. Mr. Barnard has served as VP, General Counsel, and Secretary of CF Industries since January 2004. Between January 2001 and July 2003, Mr. Barnard served as an executive VP and general counsel of Bcom3 Group, Inc. Mr. Hoker has served as the company's vice president and corporate controller since he joined CF Industries in November 2007. Prior to CF, he was vice president, corporate controller, and the principal accounting officer for Sara Lee Corporation. He is a CPA, and holds an MBA as well. Mr. Frost joined CF in 2009 as VP, Sales and Market Development. Prior to joining CF he spent 13 years with Archer-Daniels-Midland Company, as Managing DirectorInternational Fertilizer/Inputs. Ms. Spertus has been VP, Human Resources of CF Industries since August 2007. Prior to joining CF, Ms. Spertus held senior HR positions at Fenwal, Inc., The Boler Company, Ideal Industries, Inc. Mr. Koch has been VP, Supply Chain since 2008. Prior to that he was the company's vice president, raw materials procurement. Mr. Koch spent nearly 25 years in the energy industry with Amoco Corporation and BP plc. Mr. Will was appointed VP, Manufacturing and Distribution in March 2009. He was previously VP, Corporate Development, a position he held from 2007. Prior to CF, Mr. Will spent time in the financial services industry, both at Accenture Ltd. and Boston Consulting Group. Mr. White has held the position of VP, Corporate Development since June 2009. Prior to that he was founder and managing director of Twemlow Group LLC. Mr. White also held positions at Deere & Company, most recently as President of John Deere Agri Services. Mr. Sanders has been with CF since 2010 as VP, Manufacturing Integration. Prior to joining CF, Mr. Sanders held various positions within Terra Industries, most notably as VP, General Manager of Terra Nitrogen Company, L.P. Mr. Harvey has been a member of the board since 2005 and is on the company's audit, corporate governance and nominating committees. Mr. Harvey served as chairman of the board of Sigma-Aldrich Corporation between 1999 and 2005. Mr. Arzbaecher has served as Chairman of the CF's compensation committee and as a member of the audit committee since 2005. He is also presently Chairman and CEO of Actuant Corporation. Mr. Creek joined CF Industries' board in 2005. He was previously controller of General Motors from 1992 to 2002. Mr. Creek also sits on the board of Columbus McKinnon Corporation. Mr. Schmidt has served on the board of CF since 2005. Mr. Schmitt served as chairman of the board, chief executive officer, and president of Georgia Gulf Corporation up until 2008. Mr. Davisson has served the board since August 2005. He has served as the CEO of GROWMARK, Inc., an agricultural cooperative system, since 1998. Prior to CF Industries' IPO, GROWMARK had been an owner of the company. It still remains one of CF's biggest customers. Mr. Johnson has served the board since 2005. He was formerly President and CEO of CHS Inc. - a former owner of CF Industries, before CF's IPO. From 2000 to 2005, Mr. Johnson served as a member of CF's board of directors, and he was Chairman of the board of directors of CF Industries between 2004 and 2005. Mr. Furbacher has been on the board of CF since 2007. Prior to that, served as President and CEO of Dynegy Inc. He was also President of Warren Petroleum. Mr Hagge currently serves as the COO of AptarGroup since January, 2008, where he previously served as CFO and corporate secretary. Hagge holds a B.S. degree in accounting from Illinois State University and is a Certified Public Accountant.
Douglas Barnard
VP, General Counsel, Secretary
13,437
Richard Hoker
VP, Corporate Controller
n.a.
Bert Frost
VP, Sales and Market Development
n.a.
Wendy Jablow Spertus VP, Human Resources
n.a.
Philipp Koch
VP, Supply Chain
3,243
W. Anthony Will
VP, Manufacturing & Distribution
10,800
Lynn White
VP, Corporate Development
n.a.
Richard Sanders
VP, Manufacturing Integration
n.a.
David Harvey
Director
11,509
Robert Arzbaecher
Director
18,109
Wallace Creek
Director
14,209
Edward Schmidt
Director
16,209
William Davisson
Director
10,298
John Johnson
Director
10,970
Stephen Furbacher
Director
4,583
Stephen Hagge
Director
n.a.
206,493 71,900,000 0.29%
218
Intrepid Potash, Inc.
January 2011

(IPI-N)
1-Yr Target: 1-Yr ROR: 2-Yr Target: 2-Yr ROR: Div. (Curr.): Yield Valuation: 12x 2012E EBITDA, 17.5x 2012E EPS, DCF @ 11.1%, 90% RCN Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather Qtly EPS (FD) (Next Release: Mar-11) Y/E DECEMBER-31 Mar Jun Sep Dec Year 2009A $0.33A $0.19A $0.13A $0.09A $0.74 2010E $0.16A $0.05A $0.16A $0.19 $0.55 2011E $0.32 $0.35 $0.37 $0.34 $1.38 2012E $0.38 $0.43 $0.45 $0.41 $1.68 Qtly CFPS (FD) 2009A 2010E 2011E 2012E Mar $0.47A $0.32A $0.51 $0.57 Jun $0.41A $0.19A $0.55 $0.63 Sep $0.30A $0.42A $0.57 $0.64 Dec $0.20A $0.43 $0.52 $0.59 Year $1.38 $1.37 $2.14 $2.45 Dec 31, 2010: Rating: Risk: IBES EPS 2010E IBES EPS 2011E $37.29 3-Sector Underperform High $0.52 $1.43 $33.00 -11.5% $38.00 1.9% $0.00 0.0% Capitalization Shares O/S (M) Total Value ($M) Float O/S (M) Float Value ($M) S&P Weight 75.1 2,801.4 49.7 1,853.1 0.02%
P/E 39.6x 67.3x 27.0x 22.2x P/CF 21.1x 27.3x 17.4x 15.3x
A Unique Potash Pure Play

A potash pure play. Intrepid Potash, Inc. (Intrepid) is the largest potash producer in the United States, the only North American publicly traded potash pure play, and one of only two companies worldwide with commercial-scale langbeinite production a specialty potash used on chloride-sensitive crops. We think potash-levered stocks have more torque than nitrogen/phosphates in the current fertilizer cycle.
Higher netback prices. Intrepid enjoys a net potash price advantage ($52/ton in Q3/10) over North American producers due to mine proximity-related transportation cost savings, as well as its ability to realize rising potash prices instantly due to its high U.S. spot market exposure.
Prudent growth plan. Intrepid has essentially completed a major compaction project at its Moab facility, both ahead of schedule and under budget. Additionally, Intrepid is increasing its langbeinite capacity by ~60% (Q4/11), permitting the re-opening of the HB Mine (~175,000 tons), moving ahead with Carlsbad compaction projects, and considering a major investment into re-opening the Carlsbad North Mine.
Strong financial position. Intrepid has no debt, ~$100 million of cash/investments, and a $125 million untapped credit line, which should fully support its near-term growth plan. Also, two (founding) executives control 31.3% of the company providing management and shareholder interest alignment. Target valuation. In one year from now, we expect Intrepid to trade at 12x NTM EBITDA of $230 million, 17.5x 2012E EPS of $1.68, and at about 90% of its replacement cost of $36 per share. We use these three metrics, as well as a DCF at an 11.1% WACC, to set our one-year target price of $33 per share. Current valuation. Intrepid is currently trading at 14x NTM EBITDA, 27x NTM EPS, and at 105% of its replacement cost. Our $33 one-year target price implies a total rate of return of negative 11.5%.
Getting to the next level. While we think Intrepids valuation is somewhat rich, upside can be found in: (1) higher realized net potash prices; (2) increased compaction at Moab; (3) the receipt of HB Mine permitting approvals; (4) progress on compaction projects at Carlsbad; and (5) an eventual decision on whether to proceed with the North Mine (not in our financial forecast).
We have initiated coverage on the common shares of Intrepid Potash, Inc. (Intrepid) and rate the shares 3-Sector Underperform.
219
January 2011

Intrepid is the largest potash producer in the U.S.
Intrepid offers investors exposure to potash demand recovery and growth within the United States. Intrepid is North Americas only potash pure play, and supplies potash to regional markets that consume about five times what Intrepid produces. In addition to traditional potash (MOP), Intrepid is one of two commercial-scale langbeinite producers in the world, a specialty potash fertilizer that is similar to potassium sulphate (SOP), and which is marketed under the brand name Trio. In our view, Intrepid has several key competitive advantages over its potash-producing peers, including: (1) a close proximity to customers that allows it to realize higher netback prices ($52/ton in Q3/10) due to lower transportation costs; (2) an ability to pay significantly lower potash royalty taxes than Saskatchewan-based producers; (3) an ability to realize rising potash prices almost immediately due to its significant spot business; and (4) a proven and low-cost track record of mine-life increases. Along with the positives, we see two key comparative disadvantages to be aware of, including: (1) low-quality potash reserves resulting in above-average (plant gate) operating cash costs; and (2) zero nutrient diversification (i.e., 100% potash and potash derivatives only).
We do not anticipate Intrepid will need to raise equity in the near future.
Intrepid has a successful record of acquiring under-capitalized and/or improperly managed potash assets, and subsequently boosting mine lives, capacities, and/or production utilization rates all at costs well below industry norms. Over the next several years, we believe Intrepid will increase its potash and langbeinite capacity by 19% and 62%, respectively. Additionally, we have not included in our forecast the potential for Intrepid to re-open the North Mine, which previously produced between 300,000 and 350,000 tons per year. Intrepids near-term growth pipeline is supported by the companys solid (but under-levered) financial position. Intrepid boasts ~$100 million of cash/investments and an untapped $125 million line of credit. Accordingly, we do not anticipate Intrepid will need to raise equity in the near future.
For fiscal 2011, we estimate sales, EBITDA, and fully diluted EPS of $423 million, $193 million, and $1.38, respectively, and generally slightly below consensus. In 2012, we are looking for sales of $477 million, EBITDA of $230 million, and EPS of $1.68. Our forecast 2011 and 2012 EPS growth rate of 22% is mainly due to higher langbeinite volumes, and improved realized potash prices.
INITIATING COVERAGE
Our one-year target price is $33 per share.
We have initiated coverage on the common shares of Intrepid Potash, Inc. with a 3-Sector Underperform rating. Our one-year target price is $33 per share, which represents a one-year rate of return of negative 11.5%. We value Intrepid based on an equal weighting of 12x 2012E EBITDA, 17.5x 2012E EPS, a DCF @ 11.1% WACC, and at 90% of its replacement cost. On a P/E basis, Intrepid Potash is currently trading at 27x our NTM EPS estimate of $1.38. In our minds, and relative to its peers, Intrepids appropriate NTM P/E multiple should be closer to the 17.5x area, which implies a price value of $29 per share one year out.
Our risk ranking for Intrepid is High.
Our risk ranking for Intrepid is High. We believe this is justified due to: (1) the highly cyclical nature of the fertilizer prices, as well as supply and demand; (2) volatile crop price changes, to which changes in Intrepids share price are strongly correlated; (3) exposure to possible delays and/or cost overruns associated with its mid-term growth pipeline; and (4) new greenfield potash supply risk that could erode long-term margins.
220
January 2011

Intrepid produces potash from four mines in the U.S.
Based in the United States, Intrepid is North Americas only publicly traded potash pure play. The company is a producer of traditional potash (MOP) in the United States, with an annual effective potash capacity of 910,000 tons. Intrepid has four mines, two of which are in New Mexico and utilize conventional mining, with the remaining two in Utah, utilizing solution and lake brine evaporation mining techniques. Additionally, Intrepid is one of only two commercial-scale producers of langbeinite (i.e., a chloride-free specialty potash) in the world, which it markets under the name Trio. Intrepids langbeinite operational capacity is about 210,000 tons. Intrepid Mining LLC was formed in January 2000 to acquire the Moab Mine from PotashCorp. In November 2007, Intrepid Mining was incorporated under the name Intrepid Potash. In mid-2008, Intrepid completed its IPO at $32 per share, raising net proceeds of ~$1.03 billion (Exhibit 4.1).
Exhibit 4.1: Intrepid Potash Corporate Timeline
Intrepid Mining acquires Moab solution mine from PotashCorp (UT) Doubled Moab production w ith expansion of vertical drilling Added 120 years of mine life at Moab through horizontal drilling Acquired Carlsbad facilities from Mississippi Chemical (NM) Acquired Wendover facility from Reilly Chemical (UT) Built deep brine w ell at Wendover adding 30 years of mine life Started langbeinite production at Carlsbad facility (NM) Intrepid Potash formed from the acquisition of Intrepid Mining Completed IPO on NYSE Langbeinite Expansion Plan should increase recoveries to 50%; HB Mine permitting target for 2H/11
Feb 2000
2001
2004
Feb 2004
Apr 2004
Sept 2004
Aug 2005
Nov 2007
Apr 2008
In Progress
Source: Intrepid Potash; Scotia Capital.
Insiders and related parties control 31.9% of Intrepid shares.
President and Chief Financial Officer David Honeyfield leads a management team with a variety of backgrounds in the fertilizer, mining, oil and gas, and asset management industries. Intrepids executive chairman and executive vice-chairman (i.e., the founders) own a combined 31.3% of the outstanding common shares, with overall insiders and related parties controlling (directly or indirectly) 31.9%. Listed on the New York Stock Exchange under the ticker IPI, Intrepid currently has a market capitalization of about $2.8 billion. We believe the companys policy of not paying dividends will continue for the foreseeable future, and is in line with its strategy to fund growth initiatives through free cash flow. Intrepid reports in U.S. dollars, using a December 31 year-end, and its financial statements are prepared in accordance with U.S. GAAP. Exhibit 4.2 shows Intrepids historical share price performance and average trading volumes since its inception.
Exhibit 4.2: Intrepid Potash Stock Price Performance
$50 $45 $40 Price $35 $30 $25 $20 $15 Mar-09
IP I Ticker: Last P rice: $ 37.29 $ 2.8B M arket C ap: $ 37.65 52 Wk H igh: $ 19.08 52 Wk Lo w: FD Shares O/S: 75.1M
10,000 9,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Dec-10 Daily Volume (000s) 8,000
Jun-09 IPI (V olume)
Sep-09 IPI (Price)
Dec-09
Jun-10
Sep-10
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January 2011
Corporate Profile
Last year, Intrepid supplied ~10% of U.S. potash consumption.
Intrepid Potash, Inc. is a producer and marketer of potash, with 100% of its operations in the U.S. The company is the largest producer of potash in the U.S., a country that trails only China in annual potash consumption. Last year, Intrepids potash production represented ~10% of U.S. consumption, and slightly less than 2% of global demand.
Exhibit 4.3: Map of Intrepid Potash Assets
Operating Solar Evaporation Mine Operating Underground Mine HB Developmental Asset North Mine Development Asset Corporate Headquarters Potash & Trio Potash Only Trio Only
(Represents sales of at least 500 st in 2009)
Source: Intrepid Potash.
Products include: (1) potassium chloride (KCl or MOP); (2) a low-chloride potash (i.e., sulphate of potash magnesia) known as langbeinite - marketed under the brand name Trio; and (3) a small amount of metal recovery salts. The company owns and operates four mines with effective operational capacities of 0.91 million tons of potash and 0.21 million tons of langbeinite. Two conventional underground mines (plus a compaction plant) are located in New Mexico, with the remaining two mines located in Utah, which are solar evaporate solution mines (Exhibit 4.4). Intrepid also owns two development assets in New Mexico the HB Mine and the North Mine. If commissioned, we estimate that these projects could add about 0.5 million tons of annual potash capacity to Intrepids portfolio.
90% of Intrepids sales are in the U.S.
Exhibit 4.4: Intrepids Mines
Mine Potash Carlsbad West Carlsbad East Moab Wendover Langbeinite Carlsbad East State Mining Method Start-Up Nameplate Date Capacity
(000 st)
Operational Capacity
(000 st)
About 90% of Intrepids sales are made within the U.S., although this is starting to trend lower. The remainder of the companys potash sales are mostly spread across Mexico, South America, and Canada. Intrepids primary market is the agriculture sector (~70% of 2009 sales), where potash and langbeinite are applied as crop nutrients. Industrial (~20%) and animal feed (~10%) markets round out the rest of its volumes. The industrial segment consists of oil and gas customers that use standardgrade potash to drill and fracture oil and gas wells.
NM NM UT UT
Conventional Conventional Solution Shallow Brine
1931 1965 1965 1932
510 390 180 120 1,200 250 1,450
430 250 130 100 910 210 1,120
NM
Conventional
1965
Note: Effective or operational capacity is a more accurate measure as it reflects the amount and quality of ore that can currently be mined.
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January 2011
Exhibit 4.5: Intrepids Sales by Geography and Customer Chain

4% 3% 1% 2%
Intrepid Potash
Fertilizer Distributors, Independent Dealers or Co-ops
Retailers/Dealers
91%
Intrepids industrial business realizes higher margins than its agricultural sales, and is less seasonal. Despite similar production costs, Intrepid realizes higher margins in its industrial business, due to: (1) not having to granulate the potash; (2) lower transportation costs; and (3) it sells on a spot basis, so there is little to no time lag until it realizes higher prices. Intrepids potash sales are not made directly to farmers, but rather to distributors, dealers, co-operatives, and retailers (Exhibit 4.5).
Farmer (IPI does not sell directly to farmers)
Mexico/Latam Canada U.S.
Caribbean Other
Exhibit 4.6: Intrepid Potashs Production Profile

2009 Mine Potash Carlsbad West Carlsbad East Moab Wendover Langbeinite Carlsbad East Total Nameplate Operational Capacity Capacity
(000 st) (000 st)
2008 Ore Mill Feed Finished Production Grade Product

(000 st) (%) (000 st)
2007 Ore Mill Feed Finished Production Grade Product

(000 st) (%) (000 st)
Ore Mill Feed Finished Production Grade Product

(000 st) (%) (000 st)
510 390 180 120 1,200 250 1,450
430 250 130 100 910 210 1,120
1,564 1,947 427 297 4,235 1,947 6,182
12.0% 8.0% 14.1% 19.0% 10.9%

Declining
219 150 75 60 504 192 696
2,547 2,239 490 456 5,732 2,239 7,971
12.8% 9.2% 15.5% 18.6% 12.1% 6.1% 10.4%
391 247 97 101 836 197 1,033
2,519 2,259 396 461 5,635 2,259 7,894
13.4% 11.4% 14.4% 16.9% 13.0% 4.8% 10.6%
409 288 77 103 877 177 1,054
6.5% 9.5%
Note: Effective or operational capacity is a more accurate measure as it reflects the amount and quality of ore that can currently be mined.
A BRIEF HISTORY OF INTREPID POTASH
Intrepid has been built on acquisitions.
Intrepid was built on strategic acquisitions. Specifically, the company identified and acquired several U.S. potash assets that it believed had been under-developed (Exhibit 4.7). Through capital investment, and in Moabs case, the implementation of horizontal drilling (see page 240), Intrepid upgraded the productive capacity, reliability, technology, and recovery rates at each of its mines and facilities. In our minds, evidence of Intrepids success can been seen at its Moab Mine, where the company has stabilized production levels at nearly twice pre-acquisition levels through the implementation of horizontal drilling.
Exhibit 4.7: A Brief History of Intrepid Potash
2000 2004 2004 2007 2008
Intrepid Mining is formed through the acquisition of the Moab (Utah) solution mine from PotashCorp for $29.6 million. Intrepid Mining acquires the Carlsbad East and West conventional mines and the North facility from Mississippi Chemical for $246.6 million. Intrepid Mining acquires the Wendover (Utah) shallow brine facility from Reilly Chemical for $19.1 million. Intrepid Potash formed for purpose of continuing the business of Intrepid Mining. Intrepid Potash completes a net $1.03 billion IPO. Trading begins on the NYSE under the ticker symbol "IPI".
223
January 2011
What We Like About Intrepid Potash

BEST NORTH AMERICAN LEVERAGE TO POTASH
Intrepid is North Americas only potash pure play.
Intrepid is North Americas only publicly traded potash pure play, while Russias Uralkali is the only major European potash pure play. Other potash pure plays do exist, such as Chinas Qinghai Salt Lake Potash, as well as Luobupo. Why only potash: (1) limited government involvement results in investment decisions being driven by economics and not by politics; (2) economically viable potassium deposits are rare; (3) greenfield development is costly, and can take up to seven years to construct, resulting in high barriers to entry; and (4) potash has no known substitutes.
Exhibit 4.8: Intrepid Is the Only Potash Pure Play in North America (2009 Revenue)
Intrepid Potash PotashCorp Mosaic Agrium
K 4% P 35% K 33% Other 24% K 27%
Intrepid realizes high margins on its industrial business.
N 14% P 5%
K 100%
N 32%
Other 77% P 49%
HISTORY OF SUCCESSFUL DEBOTTLENECKING PROJECTS
200+ years of mine life has been added by Intrepid since inception.
Exhibit 4.9: Capex of Historical Mine Life Additions

$250
$200 $150 $28M $100 $50 +120 Yrs to Mine Life $12M +30 Yrs to Mine Life $231M +53 Yrs to Mine Life
$0 Moab Wendover Carlsbad East & West
Since inception, Intrepid has added 200+ years to its mines lives, through investing a mere $271 million. This has been achieved through superb recovery rates (i.e., increased recovery from the same quantity of ore), whereas increase tonnage produced through capacity expansions does the opposite (unchanged recovery from increased capacity to process ore thereby shortening mine lives). For example, $28 million was spent at its Moab Mine to increase productivity through the use of horizontal drilling. The result was an increase of 120 years to the mines life.
However, we expect the cost of future mine life additions to rise as the costs associated with past mine life increases were due to: (1) one-time changes in mining techniques (horizontal drilling); and (2) onetime additions of key equipment.
MANAGEMENT ALIGNED WITH SHAREHOLDER INTERESTS
Intrepids 31.9% insider ownership is the highest amongst its fertilizer peer group that we are aware of. We view Intrepids material management stakes as a significant positive that aligns management and shareholder interests. Mr. Jornayvaz (executive chairman) and Mr. Harvey (executive vice chairman) each hold between 15% and 16% of Intrepids outstanding shares, representing a combined ownership of 31.3%.
224
January 2011
GEOGRAPHIC NICHE IN THE SECOND-LARGEST POTASH MARKET
In our opinion, Intrepid has a geographic niche, supplying slightly less than 10% of (normalized) annual potash consumption in the U.S. Additionally, and due to its close proximity to end-user markets, Intrepid is able to consistently realize higher net potash prices relative to its North American peers. Intrepids potash assets are strategically located within markets that consume about five times the amount of potash Intrepid produces. This excess demand has allowed Intrepid to be selective in its customers, making sales with customers that offer the highest netbacks, as well as adopting a Canpotex production strategy of matching production to demand. Mosaic is the only other potash producer in the U.S., with a total capacity of ~0.6 million tons from its Carlsbad and Hersey mines.
Exhibit 4.10: United States Potash Consumption
IPI Portion of U.S. KCl Consumption 10,000 9,000 8,000 Potash (000 st KCl) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2005
IP I Sales (LHS)
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2006 2007 2008 2009 2010E

U.S. Co nsumptio n (LHS)
Intrepid has historically sold its potash into spot markets.
IP I M arket Share (RHS)
Source: Intrepid Potash; Scotia Capital estimates.
On average, Intrepids potash sales represent 8%-10% of U.S. consumption (Exhibit 4.10). Since the collapse of potash demand in 2009, there has been a shift away from annual contract pricing to quarterly and/or spot pricing. This is the direct result of the negotiating power shift from sellers to buyers. Intrepid has historically sold the majority of its potash into the spot market and is positioned well to benefit from its North American peers adopting spot-based contracts. Also, Intrepids U.S. potash sales are often produced just-in-time and can be delivered in a shorter time at a net sales price advantage relative to its peers.
WELL CAPITALIZED TO FUND FUTURE GROWTH
In our minds, Intrepid has sufficient capital to fund its mid-term growth objectives. By the end of 2013, Intrepid plans to have deployed between $230 million and $250 million of incremental capital expenditures. Intrepid currently has ~$100 million of cash/investments, no debt, and an additional $125 million available to it through credit facilities. If one assumes that Intrepid does not proceed with its North Mine, we forecast that the company will have more than enough capital necessary to finance all other projects without having to tap its credit facilities.
Exhibit 4.11: Royalty Breakdown THE U.S. IS MORE MINING FRIENDLY THAN SASKATCHEWAN
Intrepids royalty rates are more favourable than those of Saskatchewan producers.
Private 5%
State, 13%
Total Project Area: 38,453 acres (800 acres for evaporation ponds; 20% public lands)
Intrepid has consistently paid royalties in a range of 3.5% to 4% of net sales. This compares favourably with Saskatchewan potash producers that now face materially higher royalties and/or potash production taxes. Federal royalties make up over 80% of Intrepids total annual royalty payments. New Mexico royalty rates range between 2% and 5%, while Utah rates fall in a tighter 2% to 3% band. These compare much more favourably to Intrepids private leasehold royalty rates of between 5% and 7.5%, which only make up ~5% of its total royalty payment (Exhibit 4.11).
Federal, 82%
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January 2011
Valuation
OVERVIEW
We have initiated coverage on the common shares of Intrepid Potash, Inc. with a 3-Sector Underperform rating and a one-year target price of $33 per share. When coupled with our expectation that Intrepid will not begin paying a regular dividend anytime soon, our one-year ROR is negative 11.5%. Our one-year target price of $33 per share for Intrepid Potash is derived from four different valuation methodologies, as follows: (1) a discounted cash flow approach; (2) an enterprise value to forward EBITDA multiple; (3) a price to forward earnings multiple; and (4) a replacement cost new calculation. We weight each of the four approaches equally. Our valuation work is extremely sensitive to various price, volume, and other assumptions used within our financial forecast (Exhibits 4.12 and 4.13). For full details on our earnings sensitivities, please refer to page 255. We summarize our valuation work below.
Exhibit 4.12: Intrepid Key Assumptions
2011E Potash Volume (000 st) Realized Price ($/st) Trio Volume (000 st) Realized Price ($/st) 261 218 306 237 2012E
Exhibit 4.13: Intrepid Summary Sensitivities

2011E Sensitivity Potash ($/st) Potash Sales (000 st) Potash Margin (%) Trio ($/st) Trio Sales (000 st) Trio Margin (%)
$10 10 2% $10 50 5%
827 442
827 489
EPS +7.0 +3.0 +6.0 +1.0 +1.5 +3.5
Our DCF approach yields a one-year out $33 price value.
Our DCF approach yields a one-year price value of $33 per Intrepid share. We apply a WACC of 11.1% and a long-term growth rate of 2.5%. Exhibit 4.14 highlights the buildup of our WACC calculation. Our terminal growth rate of 2.5% is in line with Intrepids peer group. The company has substantial upside associated with both rising potash volumes (i.e., expansion projects) and realized pricing. Additionally, we do not completely rule out that Intrepid may one day become involved in the nitrogen business.
Exhibit 4.14: Intrepid WACC
Exhibit 4.15: Intrepid Summary DCF

($000) EBITDA Less: Taxes Less: Change in NWC Less: CAPEX Free Cash Flow PV of Free Cash Flow 2011E 192,972 63,885 12,726 125,000 -8,639 -7,778 1 2,383,709 -98,009 2,481,718 $33.03 $33 $37 -12% 2012E 229,542 77,510 5,574 50,000 96,458 78,180 2
$33.03 2.00% 2.25% 2.50% 2.75% 3.00%
2013E 250,426 85,446 -979 50,000 115,959 84,614 3

13.1% $27 $27 $28 $28 $29
2014E 295,322 100,927 11,375 25,000 158,020 103,807 4

12.1% $29 $29 $30 $31 $31
2015E 295,279 100,911 -1,425 25,000 170,794 101,010 5

WACC 11.1% $31 $32 $33 $34 $35 10.1% $35 $36 $37 $38 $39
Terminal 295,234 100,894 0 25,000 169,341 2,023,877 6

9.1% $39 $40 $41 $43 $44
Equity Value, Rounded ($/sh) Last Price, Rounded Implied ROR
226
Terminal
Net Present Value Less: Net Debt Equity Value Equity Value ($/sh)
January 2011
On an EV/NTM EBITDA basis, Intrepid is currently trading at 14x our NTM EBITDA estimate of $193 million. In our minds, Intrepids EV/NTM EBITDA multiple should ease to 12x, which based on a soaring 19% 2012E EBITDA growth rate, implies a $37 price value one year out. We note that our EV/NTM EBITDA-based price value is materially higher than the tight $29 to $33 price value range that our other three valuation methods suggest. The reason for the gap between our EV/EBITDA and P/E value is due to Intrepids tax rate, which is much higher than its peers. For Intrepid, we adjusted our general potash EV/NTM EBITDA multiple by 1x to 12x, as we believe that Intrepids ability to realize higher net potash prices than its peers more than offsets its lack of economies of scale.
Exhibit 4.16: Intrepid EV/NTM EBITDA Buildup
[A]

[B]
Intrepid EV/EBITDA
[C=A+B]
2012E EBITDA
[D, $M]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
Intrepid Price Value Calculation

($M)
Nitrogen Phosphate Potash
8.0x 9.0x 11.0x 7.0x -
0.0x 0.0x 1.0x 0.0x [1]
8.0x 9.0x 12.0x 7.0x -
0 0 230 0 0 230
0% 0% 100% 0% 0% 100%
0.0x 0.0x 12.0x 0.0x 0.0x 12.0x
2012E EBITDA IPI EV/EBITDA Multiple* Implied EV Cash Debt Equity Value FD Shares O/S (M) Implied Price Value
230 12.0x 2,755 61 0 2,816 75.1 $37.48
Our EV/NTM EBITDA approach yields a one-year out price value of $37.
Retail Other
Notes
1. Higher net realized potash prices than its peers (due to closer end-market proximity), w hich more than offsets its limited economies of scale.
Exhibit 4.17 shows Intrepids historical one-year forward EV/EBITDA trading range, which has averaged 7.1x since the company began trading in mid-2008. In our view, and on an EV/EBITDA basis only, Intrepids stock price has already exceeded its cyclical peak, and is mostly why we have initiated coverage at a 3-Sector Underperform rating. Intrepid has historically traded at a 1.5x to 2x EV/NTM EBITDA multiple premium to its peers, due to its 100% focus on KCl and specialty potash. Given where we are in the potash cycle, we believe that the current 14x NTM EBITDA multiple is rich and not sustainable.
Exhibit 4.17: Intrepid EV/NTM EBITDA Chart
14x NTM EV/EBITDA Multiples 12x 10x 8x 6x 4x 2x 0x Jun-08 Dec-08 Jun-09 IPI IPI Average Dec-09 Group Average Jun-10 Dec-10
Average NTM EV/EBITDA = 7.1x
227
January 2011
On an NTM P/E basis, Intrepid Potash is currently trading at 27x our 2011E EPS estimate of $1.38. In our minds, and relative to its peers at this point of the cycle, Intrepids appropriate NTM P/E multiple should be closer to the 17.5x area, which implies a price value of about $29 per share one-year from now. Exhibit 4.18 highlights our segmented P/E breakdown. For Intrepid, we adjusted our general potash NTM P/E multiple by 1.5x, to 17.5x, as we believe that Intrepids ability to realize higher net potash prices than its peers more than offsets its lack of economies of scale.
Exhibit 4.18: Intrepid NTM P/E Buildup
[A]

[B]
Intrepid P/E Ratio

[C=A+B]
2012E EPS
[D, $/sh]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
Intrepid Price Value Calculation

($/sh)
Nitrogen Phosphate Potash
12.5x 13.5x 16.0x 11.0x -
0.0x 0.0x 1.5x 0.0x [1]
12.5x 13.5x 17.5x 11.0x -
$0.00 $0.00 $1.68 $0.00 $0.00 $1.68
0% 0% 100% 0% 0% 100%
0.0x 0.0x
2012E EPS IPI P/E Multiple* Implied Price Value
1.68 17.5x $29.35
17.5x 0.0x 0.0x 17.5x
Our NTM P/E approach yields a one-year out price value of $29.
Retail Other
Notes
1. Higher net realized potash prices than its peers (due to closer end-market proximity), w hich more than offsets its limited economies of scale.
Exhibit 4.19 shows Intrepids historical one-year NTM P/E trading range, which has averaged 13.9x over the past year. In our view, and on a P/E basis only, Intrepids stock price appears to be fully priced, and is partially why we have initiated coverage at a 3-Sector Underperform rating. Intrepid has historically traded at a 3x to 4x earnings multiple premium to its peers (now 10x!), due to its 100% focus on commodity and specialty potash. The current NTM P/E multiple of 27x 2011E earnings is well above its range. We believe such a high premium valuation multiple is not warranted for Intrepid. Specifically, we think 17.5x NTM earnings is more appropriate for Intrepid, and implies a 3.7x NTM P/E premium to its peer group (ex SQM).
Exhibit 4.19: Intrepid NTM P/E Chart
30x NTM P/E Multiples 25x 20x 15x 10x 5x 0x Jun-08 Dec-08 Jun-09 IPI IPI Average Dec-09 Group Average Jun-10 Dec-10 Average NTM P/E = 13.9x
228
January 2011
We believe that the replacement cost for Intrepid is almost $36 per share, which is detailed in Exhibit 4.20. Our replacement cost estimates are derived from: (1) current projects under construction; (2) feasibility, pre-feasibility, and scoping studies; (3) inflation-adjusted costs for historical projects; and (4) professional judgment. We note that we have given 25% RCN value for Intrepids North Mine, as the previous owner of the facility had spent significant capex toward re-opening the mine.
Exhibit 4.20: Intrepid Replacement Cost New (RCN)
Production Plant
Product
Capacity
(000 st)

($M) ($/sh)
90% of Intrepids replacement cost yields a one-year out price value of $32.
Operating Assets Carlsbad West, New Mexico Carlsbad East, New Mexico Carlsbad East, New Mexico Moab, Utah Wendover, Utah Development Assets HB Mine, New Mexico North Mine, New Mexico @ 25%
Potash Potash Langbeinite Potash Potash
510 390 250 180 120 1,450 175 ~350 525
796 609 390 281 187 $2,265 116 137 $252
10.60 8.11 5.20 3.74 2.49 $30.14 1.54 1.82 $3.36
Potash Potash
Gross Replacement Cost New Plus: Working Capital @ September 30, 2010 Less: LT Debt O/S @ September 30, 2010 Net Replacement Cost New1
$2,517 151 0 $2,668
$33.49 2.01 0 $35.51
We think that Intrepid should be trading closer to 90% RCN, which yields a price value of $32. During the peak of a normal (i.e., not 2008) fertilizer cycle, we expect Intrepid to trade between 85% and 95% RCN. Conversely, in normal market downturns, it could trade as low as 35% to 45% RCN. While an RCN premium should be placed on potash assets in general, we note that Intrepid is not a first-quartile cash-cost producer. We estimate that Intrepid is currently trading at 105% RCN compared with the group (ex SQM) at 82.9% RCN (Exhibit 4.21).
229
January 2011
Exhibit 4.22: Intrepid Valuation Summary

Valuation Metric Value $29.37 $37.48 $31.96 $33.03 Weight 25% 25% 25% 25% Contribution $7.34 $9.37 $7.99 $8.26 $32.96 $33.00
Price to Earnings (2012E) 17.5x EV/EBITDA (2012E) 12.0x Replacement Cost New 90% Discounted Cash Flow 11.1%
We have set our one-year Intrepid Potash target price at $33 per share, which we derived by equally weighting our four valuation methodologies as shown in Exhibit 4.22. Given our forecast one-year total return of negative 11.5% for Intrepid, coupled with our average total return of 3.2% for the group (Exhibit 4.23), we rate the company a 3-Sector Underperform.
IPI Target Price
Our $33 Intrepid one-year price target implies a one-year ROR of negative 11.5%.

20% 15% 10% 5% 0% -5% -10% -15% -11.5% IPI 3.9% 0.5% Group Average ROR = 3.2% 7.6% 8.8% 10.0% 15.7%
Top Pick
3-SU
3-SU
-9.2% YAR
2-SP
2-SP
1-SO
1-SO
1-SO
1-SO
SQM
CF
MOS
POT
K+S
AGU
230

Scotia Capital Rating Last Price (local $) $106 $140 $33 $82 $168 -11.5% 7.6% 8.8% 3-SU 1-SO 1-SO 15.7% 3.9% 1-SO 2-SP Target (1-Yr) ROR (1-Yr) Rating Shares (FD M) Mkt Cap (M, local $) EV (M, local $) Div Yield (%) Div Payout (%) ROA (%) ROE (%) D/E (x) Debt/Cap (x) ND/EBITDA (x) Overview Dividends & Returns Debt Int. Cov. (x)
Nam e
Ticker
231
C$7.60 27.5% 1-SO 61 C$8.50 10.0% 9.3% 1-SO 1-SO JOD 45.50 HKD 5.57 C$5.96 A$3.96 ILs 1,732 JOD 17.25 56.36 C$7.78 RMB 66.24 $900.00 HKD 4.02 $58.42 RUB 219 NOK 338 $58 NOK 300 1.3% 24.3% -9.2% 3-SU 0.5% 2-SP 9.6% 21.3% 0.5x 83.3 1,771 61.4 1,629 1,269 75.0 191.4 52.2 767.6 7.8 7,021 263.2 2,124 288.8 3,791 25,678 366 6,450 77,459 1,294 10,787 406 50,843 7,043 28,224 15,376 465,815 97,481 3,699 21,383 339 7,519 22,921 1,232 11,658 384 51,720 31,462 16,117 473,760 109,065 1.5% 1.8% 2.2% 6.5% 0.0% 0.7% 0.6% 0.9% 1.2% 0.8% 1.9% 1.7% 44.3% 32.8% 30.9% 68.8% 0.0% 45.0% 25.2% 16.2% 50.0% 0.0% 21.0% 30.4% 15.0% 7.6% 10.2% 6.4% 13.2% 16.5% 2.2% 11.1% 14.0% 9.7% -5.2% 11.3% 14.5% 5.3% 9.4% 19.4% 9.9% 23.0% 11.8% 29.5% 20.9% 5.1% 14.3% 40.8% 22.4% -11.1% 22.3% 23.2% 13.0% 17.5% 0.1x 0.0x 0.0x 0.3x 0.5x 0.0x 0.6x 0.2x 0.2x 1.0x 0.7x 0.9x 0.3x 0.6x 0.4x 0.1x 0.0x 0.0x 0.2x 0.3x 0.0x 0.4x 0.2x 0.2x 0.5x 0.4x 0.5x 0.2x 0.4x 0.2x 0.3x Margins Y/E Gross (%) 20.6% 32.2% 36.8% 40.5% 25.1% 25.8% 30.1% 57.3% 29.7% 14.8% 40.3% 35.9% 34.4% 23.3% 61.4% 74.4% -2.1% 36.2% 73.7% 40.0% 36.7% 28.6% 23.1% 27.2x 48.0% 34.3% 14.4% 24.1% 27.1% 24.9% 12.9% 18.5% 53.7% 62.5% -8.1% 41.4% 48.4% 6.1% 29.2% 40.2% 21.7% 12.0% 19.3% 22.6% 22.1% 8.0% 16.9% 49.6% 54.2% -9.2% 30.6% 39.0% 2.1% 23.5% 13.8x 27.4x 16.2x 20.4x 10.6x 17.4x 24.4x 12.3x 32.1x 19.4x 5.8% 2.8% 0.5% 3.6% 5.1% 4.9% 5.5% -13.3% 1.0% 4.1% 2.2% -3.2% 10.1% 2.3% 2.7% 5.2x 2.2x 1.3x 1.8x 8.7x 2.7x 4.4x 1.4x 13.4x 4.4x 1.9x 9.6x 2.9x 4.6x 4.7x 11.0% 29.9% 32.6% 36.6% 25.4% 28.3% 27.3% 8.3% 26.1% 28.1% 30.8% 18.8% 20.5% 22.1% 24.6x 10.5x 24.8x 86.7x 33.9x 53.1x 38.9x 11.2% 10.1% 1.1% -0.9% 2.2% -2.6% 3.5% 2.8x 2.5x 10.3x 3.8x 3.8x 5.9x 4.8x EBITDA (%) Operating (%) P/CF (x) FCF Yield (%) P/BV (x) 2009A (x) 11.8x 13.6x 11.6x 33.2x 16.5x 22.1x 18.1x 18.3x 10.6x 10.7x 10.7x 15.5x 10.8x 13.1x 7.6x 12.2x 21.9x 13.1x 13.1x 14.9x Metrics Enterprise Value to EBITDA 2010E (x) 11.0x 10.3x 11.6x 28.9x 19.8x 19.2x 16.8x 16.2x 8.3x 11.5x 8.5x 14.3x 9.4x 11.5x 7.3x 17.8x 10.0x 23.3x 18.7x 7.3x 12.6x 13.9x 2011E (x) 7.8x 6.6x 9.5x 14.0x 11.4x 12.6x 10.3x 12.2x 6.4x 8.3x 7.9x 11.4x 7.4x 9.7x 5.9x 14.2x 8.2x 13.7x 18.2x 14.3x 8.5x 10.4x 10.4x 2012E (x) 8.0x 7.7x 8.6x 11.8x 9.7x 11.4x 9.5x 8.8x 5.1x 7.4x 7.3x 10.1x 15.5x 8.5x 5.0x 12.0x 7.4x 11.3x 15.6x 11.7x 8.2x 9.6x 9.6x 2009A (x) 24.7x 17.6x 19.5x 81.1x 32.1x 29.7x 34.1x 28.3x 25.4x 14.0x 15.6x 22.3x 13.9x 31.8x 11.0x 38.1x 0.7x 35.3x 11.3x 20.6x 25.1x 2010E (x) 19.7x 21.2x 18.8x 67.3x 41.2x 25.1x 32.2x 21.8x 20.3x 15.4x 12.7x 20.6x 10.5x 25.5x 11.5x 33.6x 0.5x 28.7x 40.7x 26.2x 11.2x 20.0x 23.6x 12/31 12/31 12/31 12/31 5/31 12/31 12/31 12/31 6/30 9/30 12/31 12/31 12/31 3/31 12/31 12/31 12/31 12/31 12/31 12/31
Agrium CF Industries Compass Minerals Intrepid Potash Mosaic PotashCorp North Am erican Average -0.5x -1.0x -1.3x 1.5x 0.7x -1.5x 1.6x -0.1x -0.1x 2.1x 1.3x 0.5x 4.4x 0.6x 0.6x
$91.75 $135.15 $89.27 $37.29 $76.36 $154.83
158.0 71.9 32.8 75.1 446.9 305.3
14,497 9,719 2,928 2,801 34,125 47,269
15,517 11,658 3,347 11,658 33,028 49,538
0.1% 0.3% 2.0% 0.3% 0.3% 0.6%
2.4% 6.3% 28.8% 10.8% 6.5% 10.9%
3.7% 15.0% 17.9% 7.5% 6.5% 8.5% 9.9%
8.4% 23.8% 114.0% 8.1% 9.6% 17.8% 30.3%
0.4x 0.0x 2.2x 0.2x 0.6x 0.7x
0.3x 0.0x 0.7x 0.1x 0.4x 0.3x
0.8x -1.1x 1.5x -0.7x 3.3x 0.7x
Peer Group Average
Price to Earnings 2011E (x) 12.6x 10.6x 15.4x 27.0x 18.7x 16.7x 16.8x 17.7x 14.5x 11.1x 12.1x 15.4x 8.9x 15.9x 9.2x 24.4x 0.4x 18.3x 29.8x 19.9x 12.4x 15.0x 15.6x 2012E (x) 12.9x 13.2x 13.8x 22.2x 15.5x 15.0x 15.4x 11.4x 10.2x 9.8x 11.5x 13.8x 12.1x 13.5x 7.5x 21.9x 0.4x 14.8x 24.9x 20.8x 11.9x 13.2x 13.9x
Nam e
Ticker
Peer Group Average
January 2011
January 2011
Exhibit 4.25: Intrepid Potash Tear Sheet
Intrepid Potash
IPI.N 1-Year Target: 2-Year Target: 1-Year Return: 2-Year Return: NTM Dividend Rating: Risk: $33 $38 -11.5% 1.9% $0.00 3-SU High Last Price: $37.29 FY End: Dec. 31 Market Cap: $2.8B EV: $2.7B Avg. Volume: 0.9M FD Shares O/S: 75.1M Float: 66.1%
Valuation: 12x 2012E EBITDA, 17.5x 2012E EPS, DCF @ 11.1%, 90% RCN
Ownership Insider Ownership: Institutional Ownership: Target Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Operational Potash Volume (000 st) Realized Price ($/st) Trio Volume (000 st) Realized Price ($/st) EPS Estimates Q1 Q2 Q3 Q4 Total Consensus* 2011E Sensitivity Potash ($/st) Potash Sales (000 st) Potash Margin (%) Trio ($/st) Trio Sales (000 st) Trio Margin (%) Credit Metrics 2009 Net Debt/EBITDA n.a. Interest Coverage n.a. Debt/Total Capital n.a. Standard & Poor's/Moody's: Free Cash Flow EBITDA Less: Taxes Less: NWC Less: CAPEX Free Cash Flow 2011E 193 64 13 125 -9 2010E n.a. n.a. n.a. n.a. 2012E 230 78 6 50 96 2009 $0.33a $0.19a $0.13a $0.09a $0.74a Multiple 17.5x 12.0x 90% 11.1% 2010E 809 $359 214 $170 2010E $0.16a $0.05a $0.16a $0.19 $0.55 $0.52 Value $29.37 $37.48 $31.96 $33.03 2011E 827 $442 261 $218 2011E $0.32 $0.35 $0.37 $0.34 $1.38 $1.43
31.9% 68.3% Weight 25% 25% 25% 25% 2012E 827 $489 306 $237 2012E $0.38 $0.43 $0.45 $0.41 $1.68 $1.79 EPS +7.0 +3.0 +6.0 +1.0 +1.5 +3.5 2012E n.a. n.a. n.a.
Financial EV/EBITDA P/E P/FCF P/BV Dividend Yield ROE ROA Gross Margin EBITDA Margin EBITDA Growth Income Statement Net Sales COGS Gross Profit** Potash Langbeinite (Trio) EBITDA Net Income EPS (FD) Balance Sheet Cash & Equivalents PP&E Total Assets Short-Term Debt Long-Term Debt Total Liabilities Shareholders' Equity Cash Flow Statement Operating (post-WC) Investing Financing Cash Replacement Cost New Calculated: $36/sh
2009 26.3x 50.6x n.m. 4.0x 0.0% 8% 7% 44% 37% -51% 2009 280 150 122 113 9 103 55 $0.74 2009 90 221 769 0 0 60 709 2009 81 -107 -1 -27
2010E 28.7x 67.3x n.m. 3.7x 0.0% 6% 5% 32% 30% -8% 2010E 315 204 104 101 2 94 42 $0.55 2010E 61 286 804 0 0 51 753 2010E 100 -128 -1 -28
2011E 14.0x 27.0x n.m. 3.3x 0.0% 12% 11% 47% 46% 105% 2011E 423 214 198 182 16 193 104 $1.38 2011E 82 386 913 0 0 56 857 2011E 146 -125 0 21
2012E 11.8x 22.2x 29.0x 2.8x 0.0% 13% 12% 49% 48% 19% 2012E 477 232 234 210 24 230 126 $1.68 2012E 208 410 1,041 0 0 58 983 2012E 176 -50 0 126
$10 10 2% $10 50 5% 2011E n.a. n.a. n.a.
2013E 250 85 -1 50 116
2014E 295 101 11 25 158
Peak: Trough:
206% 40%
Target: Current:
90% 105%
* Bloomberg. ** 2010E gross profit unadjusted.
232
January 2011
I. Potash
Intrepids MOP capacity is 0.91 million tons.
Intrepid has five potash facilities (four operational mines and a compaction plant) with an operational capacity of 910,000 (MOP) tons (Exhibit 4.26). The development of its HB Mine represents 150,000 to 200,000 tons of potash capacity upside, which we expect will gradually be commissioned in late 2013. Further growth in Intrepids potash portfolio exists in the potential re-opening of its North Mine. Before being idled in the early 1980s, the North Mine produced between 300,000 and 350,000 tons of potash per year. Given technology improvements, we would not be surprised if Intrepid was able to exceed the historical effective production capacity at the North Mine.
Exhibit 4.26: Intrepid Potashs Asset Portfolio
Start-Up Date Proven Proven Ore Reserves Grade
(000 st KCl) (% K2O)
Mine Potash Carlsbad West Carlsbad East Moab Wendover HB Langbeinite Carlsbad East
Mining Method
Probable Reserves
(000 st KCl)
Probable Minimum Life Ore Grade Remaining

(% K2O) (Years)
Conventional Conventional Solution Shallow Brine Solution
1931 1965 1965 1932 2H/13E
32,400 8,160 5,890 0 4,750 51,200 18,500
15% 11% 24% 0% 21% 15% 35%
22,400 9,250 5,300 3,336 205 40,491 23,400
14% 11% 24% 1% 19% 15% 35%
130 57 126 30 28
Conventional
1965
51
ONLY NON-CANPOTEX POTASH PRODUCER IN NORTH AMERICA
Intrepid is the only North American potash producer that is not a member of Canpotex, due to having no operations in Saskatchewan. However, Intrepid has consistently been able realize a net sales price advantage over its Canpotex peers.
Intrepid is the highest cash cost potash producer in North America.
About 90% of potash produced at Intrepids mines is predominantly sold within the U.S., allowing it to realize a material transportation cost advantage over its peers. Intrepids net potash sales price advantage, relative to its North American competitors, has ranged from $39/ton in 2007 to $151/ton in 2009. In the most recent quarter, Intrepids net sales price advantage was $52/ton.
LONG MINE LIVESBUT LOW ORE GRADES
While Intrepids potash mines have long reserve lives, they are relatively old. Specifically, the companys mines are about 20 years older than those of its North American peers, with an average mine start-up date of 1948. Through capital investment and implementing mining techniques better suited for the resource and climate, Intrepid has successfully increased the life at each of its mines. Intrepids potash ore grades are generally considered to be low. When coupled with low economies of scale, Intrepid is one of the higher cash cost producers in North America. Exhibit 4.27 compares Intrepids potash ore grades to those of international potash producers, while Exhibit 4.28 highlights Intrepids average mine life of 86 years.
233
January 2011
Exhibit 4.27: Ore Grades Are Slightly Low

EuroChem Agrium Cleveland Potash (ICL) PotashCorp M osaic Uralkali IberPotash (ICL) Silvinit Intrepid Belaruskali K+S
Exhibit 4.28: But Intrepids Mine Lives Are Long

24.6% 24.4%
IPI - Carlsbad West IPI - Moab AGU - Vanscoy
24.0% 23.3% 21 .0% 1 9.5% 1 8.0% 1 7.0% 1 5.5% 1 4.9% 1 0.0% Producers
MOS - Belle Plaine POT - Cory POT - New Brunswick POT - Allan MOS - Colonsay POT - Lanigan
Athabasca Potash* BHP Allana Potash Western Potash Potash One* Western Potash Amazon M ining
23.0% 22.8% 1 9.5% 1 8.4% 1 8.0% 1 7.0% 1 .8% 1 5% 10 % 15 % 20% 25% 30% Non Producers
POT - Rocanville IPI - Carlsbad East MOS - Esterhazy IPI - Wendover IPI - HB Mine
Not com m issioned
0%
* Acquired.
Grade (% K2O)
1920
1950
1980
2010
2040
2070
2100
2130
Source: Company reports; Scotia Capital.
PRODUCTION COST PROFILE SHOULD IMPROVE
Although Intrepid has historically operated as one of the most expensive North American potash cash cost producers, we expect the gap to narrow slightly going forward. With two key debottlenecking projects underway, and operating rates expected to increase, Intrepids operating cash costs should trend lower. Exhibit 4.29 shows the absolute and per ton capital costs for its operating and planned mines.
Exhibit 4.29: Additional Low-Cost Greenfield and Brownfields Planned
1000 800 $800
?
Strategic Acquisitions
$700
600 400 Cost-Effective 200 0 Carlsbad East & West Moab Wendover Completed (LHS) HB Mine In Progress (LHS) Carlsbad East Expansion North Mine
$500
$400 $300 $200 $100 $0
Capex per Ton (RHS)
Contributing to Intrepids high-cost operations are: (1) old mines about 20 years older than average Saskatchewan mines; and (2) low economies of scale relative to Canpotex producers with potash mine portfolios of up to 10+ times the size. The operating cost disadvantage of Intrepids smaller operations escalates during times of weak demand, when production is curtailed.
INTREPID ADOPTS A PRODUCTION-TO-DEMAND STRATEGY
Similar to its Canpotex peers, Intrepid adopts a strategy of curtailing production to meet demand, as opposed to producing outright to the detriment of prices. Since 2005, which is the first full year of operational data for Mosaic, Intrepids operating capacity has been within 10% of the average of the Canpotex producers. The average operating rate of Canpotex producers ranged from a high of 86% in 2005 to a low of 42% in 2009.
234
Capex ($ per st)
$600
(000 st KCl)
January 2011
To achieve a 55% operating rate in 2009, Intrepid (1) shut down its two Carlsbad facilities for several weeks, and (2) reduced other mine operating rates and staffing. This compares with curtailments by Canpotex producers that included: (1) PotashCorp cutting year-over-year production by ~5.3 million tonnes; (2) ~4.4 million tonnes by Mosaic; and (3) ~0.9 million tonnes by Agrium.
Exhibit 4.30: Historical Operating Rates Among North American Potash Producers
16
68% 54% 69% 66% 26%
14 12
Million Tons of Potash
92% 65% 70% 81% 39%
10 8 6 4 2 0
POT MOS AGU IPI POT MOS AGU IPI POT MOS AGU IPI POT MOS
IPI follows suit of N.A. producers and for the 1st time operates well below 75%
96% 93%
59% 75%
84% 91%
86% 87%
43% 55%
AGU
IPI
POT
MOS
AGU
IPI
2005
2006
2007 Production Capacity
2008
2009
NEW MEXICO OPERATIONS
Intrepid owns and operates two conventional mines and a granular compaction plant with storage and shipping facilities near Carlsbad, New Mexico. The Carlsbad West Mine produces potash exclusively, while its Carlsbad East Mine also produces langbeinite. Potash mined from the West mine is transported to Intrepids North facility for compaction into granular fertilizer. Intrepid holds the mining rights to ~110,000 acres of land northeast of Carlsbad. Approximately 75% of the land is leased from the federal government, with the remaining ~25% leased from the state of New Mexico (only ~200 acres is leased from private landowners). State leases have 10-year terms, and are renewable for as long as potash can be produced in commercial quantities. This compares with federal leases with indefinite terms, subject to readjustment every 20 years. State and federal royalties range from 2% to 5% (versus royalties of 5% to 7.5% for private leaseholds).
Carlsbad East
The East facility consists of a mine and mill, compaction, warehousing, and load-out facilities, which allows for sales of both standard and granular product directly to customers. Conventional underground mining began in 1965 with mining occurring at depths of 275 to 335 metres, which is more favourable than 1,000+ metres in Saskatchewan. The East mine has an annual (white) potash nameplate capacity of 390,000 tons and an annual langbeinite nameplate capacity of 250,000 tons, which on an operational capacity basis amounts to 354,000 and 210,000 tons, respectively.
235
January 2011
Exhibit 4.31: Carlsbad Potash Map
Carlsbad West
The Carlsbad West facility consists of a mine and mill built in 1931. Conventional mining at the West Mine occurs at depths between 240 metres and 335 metres. The facility has an annual nameplate capacity of 510,000 tons of red potash (standard and granular), or an effective operational capacity of 440,000 tons. Refined product is shipped to Intrepids North facility where it is converted and sold to dealers and distributors.
North Mine
The North Mine operated for 27 years to 1984, when it was shut down due to low potash prices and inefficient processing facilities. While operating, the North Mine was producing ~300,000 tons per year with an annual capacity of 350,000 tons of red granular potash. The North facility continues to operate by means of Source: Intrepid Potash. granulating, storing, and shipping potash from the West Mine. Currently in place are two mine shafts and the majority of the transportation and utility infrastructure needed to re-open the mine. This infrastructure includes permits, leases, rail access, and storage facilities. In our view, the next North Mine stock catalyst is the completion of engineering studies to determine the best way to re-open the mine (currently ongoing).
UTAH OPERATIONS
Moab
In 1965, Moab was commissioned as a conventional underground mine, but was converted in 1971 to a solution mining using solar evaporation processing. Intrepid acquired the mine in 2000 for $29.6 million and shortly thereafter doubled production through the use of horizontal drilling (used more frequently in oil and gas mining). The annual nameplate capacity is 180,000 tons of potash, or 130,000 tons of operational capacity.
Wendover
In 2004, Intrepid acquired the Wendover facility, which is located 122 miles west of Salt Lake City, Utah, for $19.1 million. Lake brine evaporation is used to produce potash, with brine sourced from a shallow aquifer, as well as three wells reaching aquifers 300 metres below ground. Brine is pumped into an 8,000 acre solar evaporation pond to evaporate water and precipitate salts. The facility has an annual potash capacity of 120,000 tons, or 93,000 tons of effective annual capacity.
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January 2011
Exhibit 4.32: Moab Mine Surface Facilities
Exhibit 4.33: Solar Evaporation Ponds at Moab Facility
FOCUS ON NATURAL GAS RIG COUNTS
The correlation between industrial potash sales volumes and natural gas rig counts is high.
Intrepids (industrial-based) potash sales volumes have closely tracked North Americas natural gas rig counts (but not oil rig counts). Specifically, and based on Baker Hughes data going back several years, we estimate an 85%+ correlation between potash sales volumes and quarterly changes in U.S. natural gas rigs. Yet, for oil rigs, the correlation drops to less than 15%. Accordingly, Intrepids industrial sales volumes are closely tied to sustainable step-level changes of Henry Hub natural gas prices on a lagged basis. Intrepid has stated that lower natural gas prices, which have naturally led to reduced drilling activity, will directly have a negative impact on the companys higher-margin industrial sales volumes. In our minds, this was most recently seen in Q2/10, when Intrepids industrial sales began to show signs of weakness. We note, however, that Intrepid does have the ability to adjust to fluctuating industrial customer demand, as it is able to compact standard potash into granular form for agricultural customer application. Additionally, Intrepids facilities are flexible, such that the company can alter production based on specific changes in product demand. In our minds, this should provide investors with some comfort that the downside is somewhat protected.
OUTLOOK
For 2011 and 2012, we forecast flat potash sales volumes of 827,000 tons per year. While we do model a 175,000 ton capacity increase to Intrepids potash business, as a result of the HB Mine project, we do not expect first production tons until late 2013. For 2011 and 2012, we forecast realized potash prices of $442/ton and $489/ton, respectively. For comparative purposes, these prices equate to $487/tonne and $538/tonne, respectively.
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January 2011
Exhibit 4.34: SC Forecast Potash Sales Volumes and Realized Prices

300
Volume (000 st)
250 200 150 100 50 0 2007 2008 2009 2010
2011
2012
Volume (LHS)
Realized Price (RHS)
We are looking for 2011 net potash sales of $366 million, followed by a healthy pricing-based increase to $405 million in 2012. Excluding warehousing and handling costs, we expect potash costs to remain stable in the $212/ton to $225/ton area through 2012 (Exhibit 4.35). Accordingly, potash-based gross profits should rise to $182 million and $210 million over the next two years, respectively.
Exhibit 4.35: SC Forecast Potash COGS and COGS per Ton
70,000 60,000 Forecast 350 300
COGS ($000)
40,000 30,000 20,000 10,000 0 2007 2008 2009 2010 2011 2012
200 150 100 50 0
COGS (LHS)
COGS per Ton (RHS)
Exhibit 4.36: SC Forecast Potash Gross Profit and Gross Margins

90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2007 2008 2009 2010 Forecast 70%
Gross Profit ($000)
50% 40% 30% 20% 10% 0% 2011 2012
Gross Profit (LHS)

Gross Margin (RHS)
238
Gross Margin (%)
60%
COGS ($/st)
50,000
250
Realized Price ($/st)
Forecast
900 800 700 600 500 400 300 200 100 0
239
729 179 130,491 893 194 173,184 724 486 352,080 99 727 71,973 80 674 53,920 111 458 50,838 150 408 61,200 440 541 237,931 243 354 86,022 160 376 60,259 221 343 75,803 185 368 68,080 809 359 290,164 203 428 86,674 207 437 90,398 219 447 97,894 198 456 90,535 92,583 5,832 4,374 102,789 3,645 106,434 108,053 6,436 6,221 119,586 4,465 124,051 114,392 4,909 11,840 130,940 5,792 136,732 24,750 1,782 2,475 29,007 1,089 30,096 15,040 1,600 1,760 18,400 1,440 19,840 19,647 2,109 1,998 23,754 1,443 25,197 27,900 2,700 3,000 33,600 2,100 35,700 86,240 8,191 9,233 104,761 6,160 110,921 48,357 5,832 3,159 57,348 2,187 59,535 33,577 4,648 2,161 40,386 2,083 42,469 37,791 5,746 2,873 46,410 2,431 48,841 28,608 4,625 2,383 35,616 2,590 38,206 148,334 20,851 10,576 179,760 9,291 189,051 34,116 5,065 3,034 42,215 1,896 44,111 35,262 5,168 3,164 43,594 1,975 45,569 37,855 5,478 3,426 46,759 2,136 48,895 34,715 4,961 3,169 42,845 1,974 44,819 24,057 18% 49,133 28% 215,348 61% 41,877 58% 34,080 63% 25,641 50% 25,500 42% 127,010 53% 26,487 31% 17,790 30% 26,962 36% 29,874 44% 101,112 35% 42,563 49% 44,828 50% 48,998 50% 45,716 50% 179 127 8 6 141 5 146 33 54 297 423 426 231 170 293 109 121 7 7 135 5 140 158 7 16 181 8 189 250 18 25 293 11 304 188 20 22 230 18 248 177 19 18 214 13 227 186 18 20 224 14 238 196 18 20 234 14 248 199 24 13 236 9 245 210 29 13 252 13 265 111 194 486 727 674 458 408 541 354 376 343 171 26 13 210 11 221 122 368 155 25 13 193 14 207 161 359 183 26 13 222 11 234 125 428 168 25 15 208 9 218 210 437 171 25 15 211 10 220 217 447 173 25 16 213 10 223 224 456 175 25 16 216 10 226 230
Exhibit 4.37: SC Forecast Intrepids Potash Segment
($000)
Sales Volume (000 st) Realized Price ($/st) Net Sales
827 442 365,501
827 489 404,581
Costs Preliminary COGS Depreciation Royalties Total COGS Warehousing & Handling Total Costs
141,948 20,673 12,793 175,413 7,981 183,394
150,937 20,673 14,160 185,769 8,790 194,559
Profitability Gross Profit ($000) Gross Margin (%)
182,106 50%
210,022 52%
Per Ton Metrics Realized Price
442 172 25 15 212 10 222 220
489 183 25 17 225 11 235 254
COGS Depreciation Royalties Total COGS Warehousing & Handling Total Costs
Gross Profit
January 2011
January 2011
Horizontal Potash Drilling 101

Horizontal drilling, specific to the Moab mine, is a method most commonly used in the oil and gas industry, including its recent application in shale gas drilling activity. With Intrepids management team having previous experience in oil and gas, Intrepid is the first and only potash company to successfully implement horizontal potash drilling, as far as we know. The outcome of this unique potash extraction method has resulted in increased recoverable tons, and therefore a longer reserve life at its Moab mine. In our view, Intrepids capability to boost capacity through the implementation of horizontal potash drilling is a major competitive advantage for the company. Vertical shafts serve as injection wells while the horizontal bores are drilled across the ends of the vertical shaft to form a cavern. Hot salt saturated brine is then injected into the input wells through the horizontal bores and into the reserve zones. The potash is then collected and pumped to the surface where it dissolves into the brine. Intrepids Moab mine in Utah was purchased from PotashCorp in 2000, after production at the PCS mine began to decline rapidly. Through the implementation of horizontal potash drilling, Intrepid estimates that production volume increased to nearly two times that of pre-acquisition levels. Intrepid is currently evaluating the possibility of further horizontal potash drilling. Specifically, Intrepid is focused on: (1) reaching both Potash #9 and #19, which are below current mining depths at its Moab mine; and (2) applying horizontal drilling at its Carlsbad West mine. Intrepid intends to spend between $15 million and $17 million on continuing the application of horizontal drilling at Moab. The company began drilling horizontal solution mining caverns into previously untapped potash ore zones at depths of up to ~1,200 metres. This process will continue to add new solution mining caverns as a way of providing more potassium-rich brine to its solar evaporation ponds.
Exhibit 4.38: Intrepids Horizontal Potash Drilling Schematic
Intrepid is the only potash producer in the world to successfully implement horizontal potash drilling.
240
January 2011
II. Langbeinite
Exhibit 4.39: Carlsbad East
Intrepid mines langbeinite from its Carlsbad East facility in New Mexico (Exhibit 4.39), and markets the product under the brand name Trio. Langbeinite, or sulphate of potash magnesia, is a potassium-based fertilizer that is mostly applied to chloride-sensitive crops such as fruits, vegetables, and tobacco. Nameplate capacity is 250,000 tons (210,000 tons operational capacity), with 2009 production of 219,000 tons, or at an 88% utilization rate.
Intrepid has a strong marketing agreement with PotashCorp.
PotashCorp and Intrepid have a marketing arrangement for Trio that consists of: (1) exclusive rights for PCS to market Trio outside of North America; and (2) non-exclusive rights for PCS to market Trio in Mexico. Intrepid Potash handles all of its own sales of langbeinite-based products within both Canada and the U.S. The Trio marketing agreement between Intrepid and PotashCorp includes a provision whereby either party may cancel the agreement at any time subject to 30 days notification. Ancillary benefits of the agreement to Intrepid include: (1) access to PotashCorps vast international sales network; and (2) the ability to obtain overseas potash-related market knowledge. On a global scale, langbeinite capacity is small due to: (1) limited global resources the only economically and commercially viable resources in the world are in New Mexico; and (2) the market is still, in our view, in its infancy.
OUTLOOK
For 2011 and 2012, we forecast Trio sales volumes of 261,000 tons and 306,000 tons, respectively. This assumes that half of Intrepids 120,000 ton to 140,000 ton langbeinite recovery improvement project will be available in 2011, with the remainder commissioned in 2012. Additionally, we assume a relatively conservative utilization rate throughout our forecast period, compared with 97% utilization between 2006 and 2008. Intrepids realized Trio pricing has historically come in at a stable proportion to its net realized potash prices. For 2011 and 2012, we forecast net realized Trio sales prices of $218/ton and $237/ton, respectively.
Exhibit 4.40: SC Forecast Langbeinite Sales Volumes and Realized Prices
120 Forecast 400 350 300 250 200 150 100 50 0 2007 2008 2009 2010 2011 2012
Volume (000 st)
100 80 60 40 20 0
Volume (LHS)
Realized Price (RHS)
241
Realized Price ($/st)
We expect Trio to produce gross margins of 28% to 33% through 2012.
January 2011
We are looking for 2011 net sales of $57 million, followed by a pricing and volume-based increase to $72.6 million in 2012. On a per ton basis, and including warehousing and handling costs, we expect actual langbeinite production costs to remain flat in the $155/ton to $160/ton range through 2012 (Exhibit 4.41). We anticipate gross profits of the division will rise to $15.8 million and $23.8 million over each of the next two years, respectively.
Exhibit 4.41: SC Forecast Langbeinite COGS and COGS per Ton
18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2007 2008 2009 2010 Forecast 200 150 100 50 0 2011 2012
COGS ($000)
COGS (LHS)
COGS per Ton (RHS)
Exhibit 4.42: SC Forecast Langbeinite Gross Profit and Gross Margins

9,000 70%
Gross Profit ($000)
7,500 6,000 4,500 3,000 1,500 0 2007 2008 2009 2010 2011 2012
50% 40% 30% 20% 10% 0%
Gross Profit (LHS)

Gross Margin (RHS)
242
Gross Margin (%)
Forecast
60%
COGS ($/st)
243
159 119 18,935 207 192 39,916 38 330 12,540 45 338 15,210 40 246 9,840 25 190 4,750 148 286 42,340 70 167 11,690 63 162 10,206 45 173 7,785 36 189 6,752 214 170 36,433 65 213 13,925 91 217 19,843 60 221 13,268 44 225 9,976 6,270 1,425 475 8,170 475 8,645 12,127 2,086 934 15,147 954 16,101 16,669 2,280 1,898 20,847 2,070 22,917 5,434 570 646 6,650 418 7,068 6,750 630 765 8,145 675 8,820 5,240 480 480 6,200 680 6,880 3,400 250 250 3,900 450 4,350 20,824 1,930 2,141 24,895 2,220 27,115 8,330 1,190 560 10,080 630 10,710 7,875 1,008 504 9,387 630 10,017 5,940 810 360 7,110 540 7,650 4,371 571 236 5,179 401 5,580 26,516 3,579 1,660 31,756 2,201 33,957 8,184 1,045 487 9,716 552 10,269 11,499 1,463 694 13,657 548 14,205 7,584 961 464 9,009 538 9,547 5,625 711 349 6,685 463 7,148 1,520 15% 2,834 15% 16,999 43% 5,472 44% 6,390 42% 2,960 30% 400 8% 15,225 36% 980 8% 189 2% 135 2% 1,171 17% 2,475 7% 3,656 26% 5,638 28% 3,721 28% 2,828 28% 107 66 15 5 86 5 91 16 18 79 144 142 74 16 103 14 76 13 6 95 6 101 82 11 10 103 10 113 143 15 17 175 11 186 150 14 17 181 15 196 131 12 12 155 17 172 136 10 10 156 18 174 141 13 14 168 15 183 119 17 8 144 9 153 125 16 8 149 10 159 3 119 192 330 338 246 190 286 167 162 173 132 18 8 158 12 170 3 189 122 16 7 145 11 156 33 170 124 17 8 149 10 159 12 213 125 16 7 149 8 157 56 217 126 16 8 149 6 155 62 221 126 16 8 150 9 159 62 225 127 16 8 151 10 161 64
Exhibit 4.43: SC Forecast Intrepids Langbeinite Segment
($000)
Sales Volume (000 st) Realized Price ($/st)
95 107 10,165
261 218 57,011
306 237 72,554
Costs 32,892 4,180 1,995 39,068 2,101 41,168 39,212 4,896 2,539 46,648 2,117 48,764
Preliminary COGS Depreciation Royalties Total COGS Warehousing & Handling Total Costs
Profitability Gross Profit ($000) Gross Margin (%)
15,843 28%
23,790 33%
Per Ton Metrics Realized Price
218 126 16 8 150 8 158 61
237 128 16 8 152 7 159 78
COGS Depreciation Royalties Total COGS Warehousing & Handling Total Costs
Gross Profit
January 2011
January 2011
Langbeinite 101
Increasing crop quality and yield requires a complete and balanced soil fertility program that supplies more than just NPK macronutrients. Secondary nutrients, such as sulphur (S), magnesium (Mg), and various other micronutrients are also required. As can be seen in Exhibit 4.44, langbeinite offers growers many nutrients.
Exhibit 4.44: Langbeinite Chemical Analysis
Component Symbol K2O K Na Ca Mg S Cl (%) 21.7 18.0 0.5 0.3 10.6 21.2 2.3
Intrepid and Mosaic are the only two major langbeinite producers in the world.
Potassium Oxide Equivalent Potassium Sodium Calcium Magnesium Sulphur Chloride

Source: The Mosaic Company.
According to Mosaic, deficiencies of K, Mg, and S exist in nearly every major crop-producing area. Heavy cropping practices, erosion, and leaching all contribute to shortages. Langbeinite provides three essential nutrients, ensuring plant nutrition is not the limiting factor in achieving optimal crop yields. Potassium, magnesium, and sulphur are constantly mined by high-yielding crops, and are often not replaced by typical high-analysis fertilizers.
Langbeinite is 100% water soluble (unlike many magnesium sources), and offers a maximum chloride content of less than 3%. It contains ~22% K2O vs. ~63% K2O for potassium chloride (MOP), and is typically harder to mine, given its harder composition and more abrasive nature. In our view, langbeinite is an ideal fertilizer for chloride-sensitive fruits and vegetables, and does not change soil pH levels, regardless of application rates. While farmers continue to report enhanced profitability per acre with the use of langbeinite, the exact economics ultimately depend on crop and cropping methods, soil type, the degree of soil nutrient deficiencies, as well as climate and weather. Mosaic and Intrepid are the only two major producers of langbeinite worldwide (~4 million tons in 2009). Production of langbeinite occurs mostly in Carlsbad, New Mexico, which is the only known commercial resource in the world. We note that langbeinite also exists in Germany, Austria, England, Ukraine, India, and China although no material amounts are commercially produced. The demand for langbeinite (mostly Chinese) has historically been relatively low, mostly due to limited availability.
POLYHALITE & INTERCONTINENTAL POTASH
ICP could compete with Intrepid by 2014.
Intercontinental Potash Corp. (ICP) is a U.S.-based potassium sulphate (SOP) development company. The company currently trades on the TSX Venture Exchange under the ticker ICP, and hopes to one day become a first-quartile cash-cost producer of SOP. ICP intends to produce SOP through the mining and processing of polyhalite.1 ICP intends to mine polyhalite at its Ochoa mine in New Mexico. This region is informally known as the Carlsbad Potash District and houses operations to both Intrepid Potash and Mosaic. The property consists of 36,000 acres of federal land with a potential mine life of about 30 years. According to ICP, the Ochoa project could produce up to 0.9 million tons of SOP and 0.5 million tons of polyhalite per year. We recently met with ICPs CEO, who stated that ICPs cost per ton could be around $180, compared with $220 to $400 for competitors. The project could cost about $1,000/ton, and begin production by mid-2014.
1
Polyhalite is a hydrated sulphate of potassium, calcium, and magnesium, with formula. K2Ca2Mg(SO4)42(H2O).
244
January 2011
Strong Brownfield Growth Pipeline

Over the next three years, we expect Intrepid to work towards the addition of ~175,000 tons of effective annual potash capacity and up to 140,000 tons of langbeinite capacity. Potash capacity additions will come primarily from the re-opening of its HB Mine, while increased langbeinite capacity will be due to enhancing recoveries at its Exhibit 4.45: Intrepid's Near Term Potash Growth East mine. Exhibit 4.45 highlights Intrepids near-term growth plans. Product Commission
Project Potash Debottlenecking Carlsbad: Digital Controls Moab: Additional Compaction Moab: Additional Caverns HB Solution Mine Langbeinite Recovery Tonnage
(000 st)
Date
Estimated Capital Cost

($M) ($/st)
We forecast HB commissioning in 2H/13.
n.a. n.a. n.a. 150 - 200 120 - 140 270 - 340
2010 2010 2010 2H/13E 2011
$7 $16 $6 $120 - $130 125 $85 - $90 $234 - $249
n.a. n.a. n.a. ~$715 ~$675 ~$700
Additionally, there is a reasonably strong possibility of Intrepids North Mine being re-opened; however, it is not a near-term focus. Following 2008 testing, which showed no fatal flaws to the mine that was shut down in 1982, Intrepid has initiated engineering and design work required to re-open the mine.
TOP PRIORITY REMAINS HB MINE RE-OPENING
The HB Mine, located in New Mexico, is a conventional mine that was idled in 1996 by its previous owner Mississippi Chemical (now bankrupt). Intrepid is planning on re-opening HB as a solution mine with solar evaporate processing a mining method similar to what Intrepid uses at its Moab facility.
Exhibit 4.46: About Half of the HB Mine Is Flooded
In 1H/08, Intrepid filed a proposed mine plan for the project, but was notified by the Bureau of Land Management (BLM) that an Environmental Impact Statement (EIS) would be required. Intrepid expects the preparation of an EIS to be completed by late 2011. A review period will likely drag the receipt of approvals/permits out until mid- to late 2012. We estimate initial HB Mine production in 2H/13. The HB Mine could boast one of the lowest production cash costs among all potash mines in North America. A feasibility study estimates an operating cost per ton of between $65 and $70.
HB Mine opex could come in at $65/ton to $70/ton.
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January 2011
Exhibit 4.47: HB Mine Operational Overview
Intrepid estimates a capital cost of between $120 million and $130 million. Part of the capital cost is attributable to infrastructure sharing with Intrepids existing Carlsbad facilities.
LANGBEINITE RECOVERY PROJECT
Langbeinite expansion plans should increase recovery to 50%, from 35% today.
Through a langbeinite recovery project at Intrepids East mine, we expect operational capacity to increase to between 330,000 and 350,000 tons. In our opinion, increased production will start as early as Q1/11, although we do not expect to see commissioning of the full expansion until mid-2012. Intrepid is currently involved in project engineering work at the mine, and has commenced studies on the impact of constructing production facilities capable of producing granular-sized Trio product. An investment decision has now been approved by the board.
246
January 2011

We believe that Intrepid Potash carries a high-risk profile. Key risk factors are outlined below.
Intrepid Potashs profitability is highly dependent on crop input demand, which can be affected by the outlook for crop prices, nutrient prices, farmer economics, government policies and subsidies, farmer/customer credit, a buildup of inventories, and competitor actions such as decisions to build or close production facilities, and/or changes to production operating rates.
Soaring potash prices between 2006 and 2008 led to a surge of interest among new entrants looking to join the potash party. These new entrants ranged from pre-IPO junior resource companies to global mining giants such as BHP Billiton. In Saskatchewan alone, there are approximately 200 potash exploration permits that cover about 11 million acres, 90% of which were applied for and granted post-2006. If new supply, including existing producer-announced brownfield expansions, were to come online faster than warranted, potash prices could be depressed for a prolonged period. This would negatively impact Intrepids potash margins, profitability, and ultimately, its share price. Additionally, we suspect this could also impact the companys decision to further develop its North Mine project. For further details on the future of greenfield potash supply, please refer to our January 2010 report titled Finding Value in Growth.
WEATHER CONDITIONS
Unseasonal rainfall can severely impact Intrepids solar evaporation.
Weather conditions can have materially adverse effects on Intrepids mines and evaporation ponds. In 2006, heavy rainfall caused a production disruption at its West mine, losing almost two months of operations. Unseasonal weather during the year, such as excessive rainfall in September and October (i.e., just after the evaporation season ends), will lead to reduced potash production, as potash crystals dissolve. In July 2010, Intrepid shut down its East facility for two weeks due to heavy rainfall. Intrepid intends to use solar evaporation when it re-opens the HB Mine, thereby increasing the proportion of the companys potash production that is subject to weather-related risks.
FLOODING RISK
In the 70+ years of mining at Carlsbad, there has never been a mine lost to flooding or water incursion. Despite this long-standing track record, flooding of conventional underground mines is an unpredictable and material risk. Of Intrepids mines, the three located in Carlsbad are susceptible to brine inflow. These mines represent almost 90% of its annual potash capacity that is exposed to the risks of mine floods.
RE-OPENING THE HB MINE
Permit approvals required to commission the HB Mine have yet to be granted. The most essential approval required is the EIS that was filed in February 2009, with a decision expected in 2H/11. Nearby oil & gas lessees continue to oppose the project, which may lead to further delays in receiving approvals from state and/or federal regulators such as the Bureau of Land Management.
247
January 2011
COMPETING LANGBEINITE PRODUCTS
Intrepid and Mosaic produce langbeinite from the only known reserves in North America. The market for langbeinite is small and new players in China and Germany are arising with synthesized products with similar, low chloride benefits. If a Chinese company or another player is successful in developing a similar product that is more economical than Intrepids Trio, the company would likely realize a sizeable reduction in Trio-based revenue. Approximately 40% of Intrepids Trio sales are generated overseas.
Compass Minerals
Compass Minerals International, Inc. (CMP-N) is a chemical, specialty fertilizer (i.e., SOP), and salt producer that is headquartered in Kansas. SOP is somewhat comparable to Intrepids Trio product line both are used as a specialty potash for chloride-sensitive crops, including fruits and vegetables, as well as tobacco. We believe that Compass SOP business poses a material threat to Intrepids Trio business.
LACK OF DIVERSIFICATION
Intrepid has very poor product and geographic diversification.
While all of Intrepids North American peers are diversified, Intrepid is dedicated exclusively to the production and marketing of potash and langbeinite. Accordingly, potash price changes, as well as potash supply/demand changes, impact Intrepid Potashs share price more than any of its competitors (ex Uralkali).
LABOUR
The labour market in the Carlsbad area is very competitive. Accordingly, employee turnover at Intrepids Carlsbad locations continues to be high. Why? Intrepid competes for experienced labourers with several other industries, including a nuclear waste management facility in southeast New Mexico, oil fields, other potash facilities, as well as a uranium enrichment facility that is currently under construction. Partially offsetting, only 5% of Intrepids workforce is represented by labour unions all at its Wendover site. The current collective bargaining agreement with hourly employees at Wendover expires May 31, 2011.
248
January 2011
Financial Forecast
We forecast that Intrepid will realize 2011 and 2012 net sales of $422.5 million and $477.1 million, respectively. Our 2011 forecast represents a 34% year-over-year increase to our 2010 estimate. We think this is easily achievable based on our expectation for higher realized potash prices, as well as our expectation that Intrepid will commission about half of its langbeinite expansion project.
Exhibit 4.48: SC Forecast Realized Potash and Trio Prices
$900
Realized Prices ($/st)
Forecast
$750 $600 $450 $300 $150 $0 2007 2008 2009 Potash 2010 Trio 2011 2012
Exhibit 4.49: SC Forecast Net Sales by Segment

160,000 Forecast
Net Sales ($000)
140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2007 2008 2009 Potash 2010 Trio
2011
2012
We are looking for ~48% gross margins through 2012.
We expect Intrepids 2011 gross profit growth to outperform most of its industry peers. Specifically, were looking for almost a 100% gross profit increase in 2011 to $197.9 million, followed by a more modest 18% growth rate the following year to $233.8 million. Strengthening realized prices, expanded Trio capacity, and our expectation of minimal fluctuation in COGS per ton are the reasons why. On a gross margin basis, were looking for 47% and 49% in 2011 and 2012, respectively. This compares with a high of 59% in 2008, followed by 44% in 2009, and our forecast of only 32% for 2010.
Exhibit 4.50: SC Forecast Cost of Goods Sold per Ton by Segment
$350 $300
Forecast
COGS ($/st)
$250 $200 $150 $100 $50 $0 2007 2008 2009 Potash 2010 Trio 2011 2012
249
January 2011
Exhibit 4.51: SC Forecast Gross Margins by Segment

70%
Gross Margin (%)
60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 Potash 2010 Trio
Forecast
2011
2012
Our 2011 and 2012 EPS estimates are $1.38 and $1.68, respectively.
We forecast 2011 and 2012 EBITDA and EBITDA margins to be in the $193 million to $230 million and 45% to 49% range, respectively. Our EPS estimates for Intrepid Potash are $1.38 (2011) and $1.68 (2012), versus a record $1.90 realized in 2008. We estimate that Intrepid will generate $146 million and $176 million in cash flow from operations in 2011 and 2012, respectively.
$90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 2007 2008 2009 2010 Forecast 70% 60% 50% 40% 30% 20% 10% 0% 2011 2012
EBITDA (LHS)
EBITDA Margin (RHS)

$60,000 40% 30% 25% 20% 15% 10% 5% 0% 2007 2008 2009 2010 2011 2012
Net Income ($000)
$50,000 $40,000 $30,000 $20,000 $10,000 $0 -$10,000
Net Income (LHS)

Income Margin (RHS)
On the following page, Exhibit 4.54 shows our forecast return on assets and return on equity metrics through 2012. As Intrepid Potash is effectively debt free, note that the returns are nearly identical. Exhibit 4.55 compares our estimate against consensus estimates. Our financial forecast is generally between the low end and the average of the Street through 2012.
250
Income Margin (%)
Forecast
35%
EBITDA Margin (%)
EBITDA ($000)
January 2011

60% 50% Return (%) 40% 30% 20% 10% 0% 2007 2008 2009 ROA 2010 ROE 2011 2012
Pre-IPO
Forecast
Exhibit 4.55: Our 2011 and 2012 Intrepid Estimates vs. Consensus
2011 Scotia Capital Est. Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/sh) 423 193 104 1.38 Street Avg. 424 208 109 1.43 Scotia Capital Est. Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/sh) 477 230 126 1.68 2012 Street Avg. 476 251 134 1.79
Low 386 173 83 1.10
High 480 275 160 1.95
Low 416 193 102 1.36
High 568 323 225 2.31
251
252
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 3/31/10 152,709 213,459 12,178 21,095 140,531 192,364 3,879 5,479 110,995 134,387 25,657 52,498 10,054 0 -4,386 19,989 2,907 0 -7,016 10,066 9,349 -3,202 210 30,105 5,616 186 -266 -6,946 14 2 92 141 -323 202,442 39,877 27,459 597 -5 -266 15,912 128 -1 -37 8,999 645 10 485 92,247 555 0 -143 19,507 301 0 -102 6,092 223 0 -147 19,846 302 0 -107 23,380 1,381 0 -499 68,825 15,997 579 -120 36,042 28,866 6,783 7,763 656 168 173 1,195 -12 589 201,020 40,218 26,872 6,475 169 18 16,238 7,354 170 48 9,089 28,375 680 643 92,417 6,613 176 168 19,919 7,969 176 305 6,291 6,439 176 271 19,922 7,094 179 198 23,575 28,115 707 942 69,707 7,029 185 236 38,770 345 0 -125 38,549 7,995 1,529 2,098 152,463 35,508 31,775 231,737 47,157 35,397 2,137 35,819 22,900 2,668 8,432 46,685 149,787 16,661 122,115 2,725 67,992 26,876 2,317 41,687 14,741 2,893 53,939 26,808 2,991 10,926 40,795 204,413 31,045 99,470 2,448 51,931 46,219 2,523 57,251 50,466 7,133 185 252 42,896 293 0 -120 42,723 415,334 88,901 73,392 23,139 4,707 4,122 392,195 84,194 69,270 66,449 5,593 60,856 73,061 301,803 107,359 7,047 21,469 9,766 66,014 280,334 97,593 64,318 5,573 58,745 91,471 7,831 83,640 Q2-10 6/30/10 Q3-10 Q4-10E 2010E Q1-11E 9/30/10 12/31/10 12/31/10 3/31/11 Q2-11E 6/30/11 2,674 55,769 52,719 6,924 185 239 45,371 291 0 -125 45,205 10,066
74,968 75,043 74,983 75,030 75,056 75,098 66 200 7 13 24 66 27 75,042 74,902 74,843 74,976 75,017 75,032 75,033 75,015 74,843 74,847 74,985 75,032 75,035 75,037 75,037 -116 0 0 0 0 0 0 116 4 138 47 3 2 190 0 0 75,044 75,043 89 75,132 74,843 74,843 74,847 74,985 75,032 75,035 74,847 75,044
Exhibit 4.56: SC Forecast Intrepid Potash Income Statement
($000)
Q3-11E Q4-11E 2011E 2012E 9/30/11 12/31/11 12/31/11 12/31/12
Gross Sales Less: Freight Net Sales
82,315 345,463 110,658 121,264 122,278 110,562 464,763 524,849 7,483 30,653 10,060 11,024 11,116 10,051 42,251 47,714 74,832 314,810 100,598 110,240 111,162 100,511 422,512 477,135 2,437 10,082 10,907 49,530 214,481 232,417 48,544 197,949 233,811 7,045 28,129 28,104 185 742 779 231 958 955 41,083 168,120 203,973 308 1,236 1,215 0 0 0 -119 -489 -487 40,895 167,373 203,245 8,885 14,496 27,223 41,603 14,649 23,901 16,235 26,488 17,178 28,027 15,540 63,602 77,233 25,355 103,771 126,012
Warehousing & Handling Costs Costs of Good Sold Gross Profit
Selling, General & Administrative ARO Accretion Other Earnings Before Interest & Taxes (EBIT)
Less: Net Interest Expense Less: Excess Insurance Settlements Other Income Earnings Before Taxes (EBT) 11,586 18,519
75,043 0 0 75,086 75,086 40 75,126
Income Taxes Net Income
59,588 15,196 13,023 142,854 24,681 14,436
6,392 9,520
2,294 6,705
36,905 55,342
7,661 11,846
2,490 3,602
8,187 11,659
75,086 0 0 75,101 75,101 42 75,144
75,101 0 0 75,101 75,101 42 75,143
75,037 0 0 75,037 75,083 53 75,136
75,037 0 0 75,037 75,037 42 75,079
75,037 0 0 75,037 75,037 42 75,079
75,037 0 0 75,037 75,037 42 75,079
75,037 0 0 75,037 75,037 42 75,079
75,037 0 0 75,037 75,037 42 75,079
75,037 0 0 75,037 75,037 42 75,079
Basic Shares - Opening Plus: Equity Issued Less: Share Buyback Basic Shares - Closing Average Shares O/S - Basic (000s) Average Dilution (000s) Average Shares O/S - Diluted (000s) 27,246 44,564 208,209 42,570 29,102 18,827 0.25 0.25 1.91 1.90 0.33 0.33 0.19 0.19 0.13 0.13 0.09 0.09 0.74 0.74 0.16 0.16 26,941
0.05 0.05 11,947
0.16 0.16 26,478
0.19 0.19 28,771
0.55 0.55 94,137
0.32 0.32 44,879
0.35 0.35 49,527
0.37 0.37 51,811
0.34 0.34
1.38 1.38
1.68 1.68 46,755 192,972 229,542
EBITDA
12,039 102,538
January 2011
253
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 286 28,268 20,995 0 1,305 50,853 0 18,431 3,809 2,816 25,056 128,381 96,350 7,203 7,779 133 1,239 160,772 136,330 0 8,138 5,121 53,478 0 8,306 7,077 48,950 0 8,666 7,690 53,554 0 8,835 7,707 55,337 0 8,619 15,217 59,768 0 8,619 15,217 59,768 0 8,805 15,099 59,102 0 8,981 15,370 55,147 0 25,176 5,005 781 30,962 0 38,267 0 1,952 40,219 0 31,665 0 1,902 33,567 0 35,260 0 1,938 37,198 0 34,707 0 4,088 38,795 0 33,083 0 2,849 35,932 0 33,083 0 2,849 35,932 0 33,538 0 1,660 35,198 0 29,271 0 1,525 30,796 0 45,132 0 1,633 46,765 0 9,157 16,511 72,433 0 23,376 0 1,633 25,009 0 9,157 16,511 50,677 0 23,376 0 1,633 25,009 0 9,157 16,511 50,677 0 29,756 0 1,633 31,389 0 9,157 16,511 57,057 0 32,805 0 1,633 34,438 0 9,157 16,511 60,106 0 31,955 0 1,633 33,588 0 9,157 16,511 59,256 0 28,381 0 1,633 30,014 0 9,157 16,511 55,682 -31,458 0 0 -31,458
Exhibit 4.57: SC Forecast Intrepid Potash Balance Sheet

2011E 2012E
($000) Assets Current Assets Cash and Cash Equivalents A/R Inventory Prepaid Expenses Other (incl. S/T investments)
1,960 116,573 102,459 118,673 87,247 89,792 89,792 100,331 98,009 66,692 61,297 61,297 52,228 55,398 67,022 82,194 82,194 23,763 15,492 37,837 19,598 31,970 19,640 19,640 27,389 13,079 38,911 27,514 27,514 36,987 40,532 40,871 36,955 36,955 18,501 49,318 55,193 63,223 68,827 61,949 61,949 42,264 50,563 45,963 46,751 46,751 59,513 65,609 63,911 56,762 56,762 3,223 5,804 3,551 2,042 2,685 2,632 2,632 1,776 2,054 4,958 2,839 2,839 2,814 2,920 3,023 3,118 3,118 0 11,189 2,292 8,357 19,119 30,326 30,326 26,188 27,173 41,632 41,132 41,132 40,632 40,132 39,632 39,132 39,132 47,447 198,376 201,332 211,893 209,848 204,339 204,339 197,948 190,878 198,156 179,533 179,533 192,174 204,592 214,459 218,161 218,161
208,201 41,779 61,401 3,549 37,132 352,062
PP&E Mineral Properties and Development Costs Long-Term Inventory Non-Current Deferred Tax Asset Other Assets Total Assets
42,371 63,519 138,790 157,203 176,703 202,565 221,403 221,403 234,633 237,709 261,954 285,508 285,508 310,648 335,267 360,077 385,655 385,655 410,087 24,329 23,255 30,244 32,380 33,575 33,850 33,929 33,929 33,365 33,306 33,033 33,033 33,033 33,033 33,033 33,033 33,033 33,033 33,033 3,371 4,634 3,973 4,480 4,237 4,396 7,149 7,149 7,013 7,280 7,327 7,327 7,327 7,327 7,327 7,327 7,327 7,327 7,327 0 0 327,641 321,924 310,352 298,295 290,449 290,449 287,624 286,219 278,563 266,372 266,372 258,872 251,372 243,872 236,372 236,372 206,372 8,390 7,872 6,053 7,911 8,060 7,904 11,721 11,721 20,398 25,834 32,094 32,094 32,094 32,094 32,094 32,094 32,094 32,094 32,094 129,314 146,727 705,077 725,230 744,820 756,858 768,990 768,990 780,981 781,226 811,127 803,866 803,866 834,148 863,684 890,863 912,643 912,643 1,040,974
Liabilities Current Liabilities Revolver A/P and Accrued Liabilities Current Portion of Long-Term Debt Other
0 28,381 0 1,633 30,014 0 9,157 16,511 55,682
0 30,700 0 1,633 32,333 0 9,157 16,511 58,001
Long-Term Debt Accrued Environmental Costs and AROs Deferred Credits and Other Total Liabilities
Shareholders' Equity Share Capital Comprehensive Income/Contributed Surplus Retained Earnings/(Deficit) Total Shareholders' Equity
11,035 554,818 554,272 554,822 555,557 556,403 556,403 557,139 557,855 558,788 558,788 558,788 558,788 558,788 558,788 558,788 558,788 -638 -1,385 -839 -839 -839 -689 -689 -689 -732 -710 -710 -710 -710 -710 -710 -710 -710 0 98,166 122,847 137,283 146,803 153,508 153,508 165,178 168,956 180,616 195,112 195,112 219,012 245,501 273,528 298,883 298,883 10,397 651,599 676,280 691,266 701,521 709,222 709,222 721,879 726,079 738,694 753,190 753,190 777,090 803,579 831,606 856,961 856,961
558,788 -710 424,895 982,973
129,314 146,727 705,077 725,230 744,820 756,858 768,990 768,990 780,981 781,226 811,127 803,866 803,866 834,148 863,684 890,863 912,643 912,643 1,040,974
January 2011
254
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 36,022 0 0 8,028 -9,185 2,771 -392 37,245 -22,454 14,791 9,468 777 -279 -17 32,692 6,258 38,950 9,982 105 3,964 10,162 169,871 -20,776 149,095 3,492 0 -369 517 35,065 -18,523 16,542 4,255 0 -846 1,347 30,497 4,335 34,832 4,270 0 405 572 22,826 -16,210 6,616 5,310 0 -631 977 15,326 7,748 23,074 17,327 0 -1,441 3,413 103,714 -22,650 81,064 6,539 0 -89 1,168 23,997 11,818 35,815 6,687 6,860 0 0 -28 -56 1,431 1,250 14,323 31,905 17,757 -23,291 32,080 8,614 5,196 0 0 500 32,383 -9,028 23,355 25,282 6,110 0 0 -173 0 4,349 500 102,607 38,010 -2,744 -15,829 99,863 22,181 6,631 0 0 500 41,120 -6,699 34,420 29,684 0 -6,941 131,234 21,370 -6,946 24,681 6,730 14 14,436 11,303 2 9,520 8,064 -5 6,705 2,966 -1 55,342 29,063 10 11,846 4,533 0 3,602 2,631 0 11,660 12,191 0 14,496 12,191 0 41,603 31,546 0 23,901 7,500 0 26,488 7,500 0 28,027 7,500 0 6,440 0 0 500 42,467 407 42,874 25,355 7,500 0 5,672 0 0 500 39,027 7,395 46,422 0 10,227 -12,150 -27,970 -241 -373 0 0 18,653 500 -4,937 -57 1,324 -17,673 6,946 -72,846 -5,725 0 446 424 -70,755 -14 -26,317 -3,461 0 16 0 -29,776 1,998 -18,144 -1,318 -751 0 0 -18,215 5 8,125 10,114 -32,438 -18,284 -95,183 -769 -685 -6,233 -6,944 -10,534 -18,479 0 889 1,139 2,104 1 2,121 -38,042 -20,488 -106,521 0 -13,950 0 -11,636 486 0 -25,100 157 -97,156 -86,445 0 64,728 1,032,269 0 0 0 -16,143 12,825 -907,760 -15,986 -19,603 38,064 129 157 286 1,674 286 1,960 116,573 -14,114 16,214 -31,426 0 116,573 102,459 118,673 116,573 102,459 118,673 87,247 2,545 87,247 89,792 0 0 0 -880 -880 0 0 0 -403 -403 0 0 0 0 0 0 0 0 -41 -41 0 0 0 -1,324 -1,324 0 0 0 -176 -176 0 0 0 -487 -487 0 0 0 -45 -45 0 0 0 0 0 -5,395 66,692 61,297 0 0 0 -708 -708 -28,495 89,792 61,297 0 0 0 0 0 -9,069 61,297 52,228 0 0 0 0 0 3,170 52,228 55,398 0 0 0 0 0 11,624 55,398 67,022 0 0 0 0 0 15,172 67,022 82,194 -26,781 10,539 -2,322 -31,317 116,573 89,792 100,331 98,009 89,792 100,331 98,009 66,692
Exhibit 4.58: SC Forecast Intrepid Potash Cash Flow Statement

2011E 2012E
($000)
Operating Activities Net Income (Loss) Deferred Income Taxes Insurance Reimbursements Add/(deduct) Non-Cash Items: Depreciation and Amortization (Gain) Loss on Sale of Assets and Other Financial Instruments Unrealized Loss (Gain) Other Cash Flow from Operations Net Change in Non-Cash WC
103,771 30,000 0 24,853 0 0 2,000 160,624 -14,726 145,897
126,012 30,000 0 25,569 0 0 2,000 183,581 -7,574 176,006
Investing Activities Proceeds from Insurance Reimbursements Additions to Property, Plant and Equipment Additions to Mineral Properties & Dev. Costs Purchase of Long-Term Investments Proceeds on Sale/Disposal of Assets Other Assets
0 1,576 0 1,576 0 0 0 0 0 -23,733 -20,161 -28,750 -86,594 -31,250 -31,250 -31,250 -31,250 -125,000 -381 159 0 -222 0 0 0 0 0 -12,002 -38,271 0 -61,909 0 0 0 0 0 2,201 16,811 0 19,498 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -33,915 -39,886 -28,750 -127,651 -31,250 -31,250 -31,250 -31,250 -125,000
0 -50,000 0 0 0 0 -50,000
Financing Activities Proceeds from Long-Term Debt Obligations Issuance of Common Shares Dividends Other (Payments Related to Intrepid Mining)
0 0 0 0 0 20,897 61,297 82,194
0 0 0 0 0 126,006 82,194 208,201
Net Change in Cash and Cash Equivalents Beginning Cash and Cash Equivalents Ending Cash and Cash Equivalents
January 2011
January 2011
Exhibit 4.59: Intrepid 2011E EPS Sensitivity to Potash Sales Volume Changes
2011 Potash Volume (000 st KCl) $412 $422 $432 $442 $452 $462 $472 797 1.08 1.15 1.22 1.29 1.36 1.43 1.50 807 1.11 1.18 1.25 1.32 1.39 1.46 1.53 817 1.14 1.21 1.28 1.35 1.42 1.49 1.56 827 1.17 1.24 1.31 1.38 1.45 1.52 1.59 837 1.20 1.27 1.34 1.41 1.48 1.55 1.62 847 1.23 1.30 1.37 1.44 1.51 1.58 1.65 857 1.26 1.33 1.40 1.47 1.54 1.61 1.68
Exhibit 4.60: Intrepid 2011E EPS Sensitivity to Potash Gross Margin Changes
2011 Netback Potash Price ($/st)
2011 Potash Gross Margin (%) $412 $422 $432 $442 $452 $462 $472 44% 0.99 1.06 1.13 1.20 1.27 1.34 1.41 46% 1.05 1.12 1.19 1.26 1.33 1.40 1.47 48% 1.11 1.18 1.25 1.32 1.39 1.46 1.53 50% 1.17 1.24 1.31 1.38 1.45 1.52 1.59 52% 1.23 1.30 1.37 1.44 1.51 1.58 1.65 54% 1.29 1.36 1.43 1.50 1.57 1.64 1.71 56% 1.35 1.42 1.49 1.56 1.63 1.70 1.77
Exhibit 4.61: Intrepid 2011E EPS Sensitivity to Realized Trio Price
2011 Realized Trio Price ($/st) $412 $422 $432 $442 $452 $462 $472 $188 1.14 1.21 1.28 1.35 1.42 1.49 1.56 $198 1.15 1.22 1.29 1.36 1.43 1.50 1.57 $208 1.16 1.23 1.30 1.37 1.44 1.51 1.58 $218 1.17 1.24 1.31 1.38 1.45 1.52 1.59 $228 1.18 1.25 1.32 1.39 1.46 1.53 1.60 $238 1.19 1.26 1.33 1.40 1.47 1.54 1.61 $248 1.20 1.27 1.34 1.41 1.48 1.55 1.62
Exhibit 4.62: Intrepid 2011E EPS Sensitivity to Trio Sales Volume Changes
2011 Trio Volume (000 st) $412 $422 $432 $442 $452 $462 $472 111 1.13 1.20 1.27 1.34 1.41 1.48 1.55 161 1.14 1.21 1.28 1.35 1.42 1.49 1.56 211 1.16 1.23 1.30 1.37 1.44 1.51 1.58 261 1.17 1.24 1.31 1.38 1.45 1.52 1.59 311 1.19 1.26 1.33 1.40 1.47 1.54 1.61 361 1.20 1.27 1.34 1.41 1.48 1.55 1.62 411 1.22 1.29 1.36 1.43 1.50 1.57 1.64
255
January 2011

Intrepids management team and board of directors have extensive experience in mining, as well as in the oil and gas industries. Additionally, the companys two founders, Robert P. Jornayvaz III and Hugh E. Harvey, Jr., have a vast knowledge of the fertilizer industry. The companys management and directors (directly and indirectly) control approximately 31.3% of Intrepids shares on a fully diluted basis, with Mr. Jornayvaz and Mr. Harvey together controlling 31.9% (Exhibit 4.63).
Exhibit 4.63: Intrepid Potashs Management & Directors
Name
Position
Background Mr. Harvey serves as Intrepid's Executive Vice Chairman of the Board. Prior to the recent May 2010 management changes, Mr. Harvey Jr. was CTO of Intrepid. Mr. Harvey has 11 years of experience in the potash mining industry and over 25 years of experience in the oil and gas industry. Mr. Jornayvaz III serves as Executive Chairman of the Board of Intrepid, a position he was recently appointed to in May, 2010. Previously, he was CEO and Chairman of the Board. Mr. Jornayvaz has been with Intrepid since its formation. Mr. Jornayvaz has 29 years of experience in the oil and gas industry and 11 years of experience in the potash industry. Mr. Honeyfield was recently promoted to President of Intrepid, and will continue serving as CFO and Treasurer. Before joining Intrepid Mr. Honeyfield held various positions with St. Mary Land & Exploration Company, most recently as Senior VP and CFO. Mr. Moore has been Senior VP of Marketing and Sales of Intrepid since 2007. Prior to that he was Senior VP of Marketing of Intrepid Potash New Mexico, LLC. Mr. Mansanti has served as VP - Operations of Intrepid since October 2009. From 2006 until joining Intrepid, Mr. Mansanti worked for Barrick Gold Corporation. Mr. Mansanti brings a wealth of experience from a long career in the mining industry.
Hugh Harvey, Jr
Executive Vice Chairman of the Board
11,939,923
Robert Jornayvaz, III
Executive Chairman of the Board
11,550,043
David Honeyfield
President, CFO, Treasurer
15,508
R.L. Moore
Senior VP - Marketing & Sales
11,315
John Mansanti
VP - Operations 3,007
J. Landis Martin
Director
337,224
Mr. Martin serves as a director of Intrepid, joining the Board in 2007. He is the founder of the private equity firm Platte River Ventures and has held the position of Managing Director since 2005. Mr. Martin is Chairman of the Board of Directors of Crown Castle International Corp. Mr. Considine has been a Director of Intrepid since 2008. He has served as CEO and Chairman of Apartment Investment Management Company since 1994. Mr. Whitham has served as Director of Intrepid since 2008. Mr. Whitman offers Intrepid a wealth of experience as he has previously held executive positions public in oil and gas, and energy related companies.
Terry Considine
Director
55,366
Barth Whitham
Director
14,466
23,926,852 75,104,000 31.9%
Source: SEDI; Bloomberg; Intrepid Potash; Scotia Capital.
256
K+S AG
January 2011
K+S AG
(SDF-DE)
Dec 31, 2010: Rating: Risk: IBES EPS 2011E IBES EPS 2012E 1-Yr Target: 1-Yr ROR: 2-Yr Target: 2-Yr ROR: Div. (Curr.): Yield Valuation: 8.5x 2012E EBITDA, 12.5x 2012E EPS, DCF @ 11%, 75% RCN Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather Qtly EPS (FD) (Next Release: 10-Mar-11) Y/E DECEMBER-31 Mar Jun 2009A 0.74A -0.27A 2010E 0.92A 0.51A 2011E 1.27 0.73 2012E 1.43 0.71 Qtly CFPS (FD) 2009A 2010E 2011E 2012E Mar 1.05A 1.39A 1.66 1.83 Jun 0.25A 0.98A 1.10 1.08 Sep -0.01A 0.21A 0.57 1.14 Sep 0.12A 0.42A 0.94 1.54 Dec 0.10A 0.57 0.97 4.17 Dec 0.54A 0.97 1.37 5.70 Year 0.56 2.21 3.55 4.17 Year 3.22 5.10 4.36 5.40 56.36 1-Sector Outperform High n.a. n.a. 61.00 10.0% 68.00 24.2% 0.99 1.8% Capitalization Shares O/S (M) Total Value (M) Float O/S (M) Float Value (M) 191.4 10,787.3 143.2 8,073.3
P/E 71.0x 25.5x 15.9x 13.5x P/CF 12.4x 11.1x 12.9x 10.4x
All financial data is in euros unless otherwise noted. Regular Voting Note: Historical price multiple calculations use FYE price. Source: Reuters; company reports; Scotia Capital estimates.
Welcome Back to Saskatchewan!

Potash reserve boost achieved. Aging potash mines, declining reserves and ore grades, and high production costs led K+S AG, the worlds fourth-largest potash producer, to acquire Canadas Potash One in late 2010 developer of the 2.7 million tonne Legacy potash project. The move marks a return by K+S to Saskatchewan after having its Lanigan potash mine expropriated by Saskatchewan in the 1970s.
Largest salt producer. Following its 2009 acquisition of Morton Salt, K+S is the worlds largest salt (i.e., food grade, industrial, and de-icing) producer, boasting a capacity of nearly 30 million tonnes. We expect the integration of the acquisition to enhance the stability of K+Ss earnings profile due to reduced macroeconomic cyclicality from its potash and nitrogen segments.
Looking to exit COMPO? Since acquiring COMPO (consumer nitrogen) from BASF a decade ago, margins have generally been below expectations, and K+S wants to focus more on the potash and salt businesses. We think K+S will firm up a decision to exit the business by the spring. Target valuation. In one year from now, we expect K+S to trade at 8.5x 2012E EBITDA of 1.3 billion, 12.5x 2012E EPS of 4.17, and at 75% of its replacement cost of 86 per share. We use these three metrics, as well as a DCF at an 11% WACC, to set our one-year target price of 61. Current valuation. K+S is currently trading at 9.7x NTM EBITDA, 15.9x NTM EPS, and at 66% of its replacement cost. Our 61 target price implies a total rate of return of 10%.
Getting to the next level. We are focused on: (1) continued evidence of potash demand recovery; (2) further details with respect to its Canadian potash strategy more acquisitions?; (3) a board decision on whether to exit COMPO; (4) the development of the 2011 winter in both the United States and Europe for de-icing salt demand; and (5) Q1/11 approval of the Integrated Package of Measures to halve the volume of saline waste water over the next five years. We have initiated coverage on the common shares of K+S AG with a 1-Sector Outperform rating.
257
January 2011

K+S is the fourthlargest potash producer and the #1 salt producer.
K+S is the fourth-largest potash producer in the world, with a technical capacity of about 7.5 million tonnes. However, its potash mines are old, which has led to: (1) declining potash reserves; (2) lower ore grades; (3) more challenging mining conditions; and (3) an increasing distance between its mining location and its shaft. As a result, operating expenses continue to rise, placing K+S at a higher spot on the potash cash cost production curve. To address declining reserves, K+S acquired Potash One (KCL-T) in November 2010 for C$434 million. Potash One has developed the most advanced greenfield potash project in the world that is not already under construction. The Saskatchewan-based Legacy project should provide K+S with a 2.7 million tonne solution potash mine for 40+ years. The move marks a return by K+S to Saskatchewan, after the province expropriated its Lanigan potash mine (now PotashCorps) in the 1970s. K+Ss 2009 acquisition of Morton Salt secured the company as the worlds largest salt producer, with 29.8 million tonnes of capacity and an 11% global market share. The acquisition of Morton Salt was completed at 6.2x 2008 EBITDA, or 8.2x the trailing three-year average EBITDA. While we believe the transaction price that K+S paid Dow Chemical was attractive, we think the acquisition was also beneficial for the following reasons, as it: (1) reduced earnings exposure to its cyclical potash and nitrogen businesses; (2) increased its regional diversification; and (3) strengthened its ability to tap into higher-growth salt markets, which are somewhat driven by population and economic growth. We are pleased to see that K+S is considering a divestment of its COMPO business. Margins are poor, and have generally ranged between 3% and 5% over the past 10 years, compared with its salt and potash businesses, which have generated average annual margins of 18% and 20%, respectively.
K+S paid 6.2x 2008 EBITDA for Morton Salt.
For fiscal 2011, we estimate sales, EBITDA, and fully diluted EPS of 5.2 billion, 1.1 billion, and 3.55, respectively slightly above consensus estimates. In 2012, we are looking for sales of 5.5 billion, EBITDA of 1.3 billion, and EPS of 4.17. Our forecast 2012 EPS growth rate of 17.5% is mostly driven by higher realized potash prices and improved potash and salt sales volumes.
INITIATING COVERAGE
We rate K+S 1-Sector Outperform.
We have initiated coverage on the common shares of K+S AG with a 1-Sector Outperform rating. Our one-year target price is 61 per common share, which when included with our forecast 2011 annual dividend of 0.99 per share, represents a one-year total rate of return of 10%. We value K+S using an equally weighted 8.5x 2012E EBITDA, a 12.5x 2012E EPS, a discounted cash flow using an 11% WACC, and at 75% of replacement cost. K+S is currently trading at 9.7x our NTM EBITDA estimate, which reflects a premium to its five-year average multiple of 6.8x NTM EBITDA, but remains below its peer group at 10.4x. Despite K+S currently trading at a premium to our NTM EBITDA, we anticipate upside from 14.4% 2012E EBITDA growth. As fertilizer demand recovery continues to improve, we expect K+S to move toward our 61 price objective.
Our one-year target price is 61 per share.
Our risk ranking for K+S is High. We believe this risk is justified due to: (1) the cyclical nature of the fertilizer industry, compounded by high potash demand price elasticity; (2) volatile crop price changes (and farmer incomes) to which changes in K+Ss share price are strongly correlated; (3) new greenfield potash supply risk that could further erode long-term margins; (4) declining potash deposits that continue to increase operating cash costs; and (5) environmental risks related to saline water discharge permits.
258
K+S AG
January 2011

Headquartered in Kassel, Germany, K+S is the worlds top producer of salt, the fourth-largest potash player, and a leading supplier and distributor of nitrogen and specialty fertilizers. K+Ss roots date back as far as 1889, with the production of phosphate and super-phosphate products in Germany. Over time, the company consolidated with other national entities, switched to potash from phosphate, and has grown substantially since the reunification of Germany. In late 1998, K+S Beteiligungs AG (later renamed K+S Aktiengesellschaft) acquired Kali und Salz GmbH and began trading on the MidCap Deutscher Aktien Index (MDAX).
24.9% of K+S is controlled by BASF (10%) and the controller of EuroChem (14.9%).
Led by Chairman of the Board of Executive Directors, Norbert Steiner, K+Ss executive team comprises an array of agricultural and fertilizer industry veterans. Prior to his current position, which he has held since 2007, Mr. Steiner served as Vice-Chairman of the Executive Board, and has been with the company since 1993, and prior to that, at BASF SE. Insiders and related parties control (directly and/or indirectly) about 24.9% of K+S, with MCC Holding Company at 14.9% and BASF at 10%. Meritus Trust manages the industrial shareholdings of Andrei Melnichenko. Melnichenko is Chairman (and 95% beneficiary) of EuroChem, which itself plans to operate 8 million tonnes of potash capacity by 2021. K+Ss 191.4 million common shares trade under the ticker symbol SDF on all exchanges in Germany. In 2009, K+S increased its investor exposure by establishing an American Depository Receipts (ADR) program in the United States. Two ADRs underlie one K+S share. Of the 75.1% of K+S shares that freely float, the company estimates that 22% of the shares are held by domestic (German) institutional investors, 28% by foreign institutions, with the remainder held by private investors. Exhibit 5.1 shows the stocks historical trading range and volume. As at December 31, 2010, K+Ss market capitalization was approximately 10.8 billion (~$14.4 billion). K+Ss 2009 annual dividend was 0.20 per share, which equates to a dividend yield of about 0.5% above its peers. K+Ss dividend policy is to pay out between 40% and 50% of adjusted group earnings on an annual basis. K+S reports in Euros, using a December 31 year-end, and its financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).
Exhibit 5.1: K+S Stock Price Performance
K+S aims to pay out between 40% and 50% of earnings as dividends.
55 Price 50 45 40 35
5,000 4,000 3,000 2,000 1,000
30 Mar-09
Jun-09 SDF (Volume)
Sep-09 SDF (Price)
Dec-09
Mar-10 DAX (rebased)
Jun-10
Sep-10
0 Dec-10
259
Daily Volume (000s)
K+S and its peer, Israel Chemicals, have among the highest payout ratios in the industry.
70 65 60
Ticker: Last P rice: M arket Cap: 52 Wk High: 52 Wk Lo w: FD Shares O/S:
SDF 56.36 10.8B 57.40 35.55 191.4M
8,000 7,000 6,000
January 2011
Corporate Profile
K+S is the worlds top producer of salt, the fourth-largest potash player, and a leading supplier and distributor of nitrogen and specialty fertilizers. Following its 2009 acquisition of Morton Salt, K+Ss salt capacity now stands at 29.8 million tonnes, while its potash and magnesium capacity is about 7.5 million tonnes (see Exhibit 5.2). The company also produces magnesium and sulphur products, and is involved in waste management, recycling, animal hygiene products, logistics, and basic chemicals trading.
Exhibit 5.2: K+S is the Largest Salt Producer and the Fourth-Largest Potash Producer
POTASH 2010 Capacity
(M mt KCl)
Global Share
(%)
SALT K+S China National Salt Compass Minerals Cargill Dampier Salt Artyomsol Exportadora del Sal Sudsalz Salins Group Mitsui
2010 Capacity
(M mt)
Global Share
(%)
K+S is the fourthlargest potash producer.
PotashCorp1 Mosaic 1,2 Belaruskali K+S Silvinit 3 Israel Chemicals Uralkali3 Arab Potash Qinghai Salt Lake Potash Agrium SQM Intrepid2 Vale
13.3 9.3 9.0 ~7.5 5.1 5.7 5.5 2.5 ~2.2 2.1 1.5 0.8 0.7
18% 13% 13% 10% 7% 8% 8% 3% 3% 3% 2% 1% 1%
29.8 18.7 14.4 14.0 9.0 7.5 7.0 5.3 4.1 3.8
11% 7% 5% 5% 3% 3% 3% 2% 2% 1%
1. Associates 1.3M mt of Esterhazy capacity w ith PCS. 2. Excludes langbeinite capacity. 3. Uralkali w ill have 10.6M mt post-Silvinit acquisition.
Source: K+S; Company reports; Scotia Capital estimates.
Between 2001 and 2008, K+S Potash & Magnesium accounted for about 40% of the companys annual revenues and almost 60% of its annual EBITDA generation. When potash prices soared to ~$1,000/tonne at the peak of the fertilizer cycle, the segment naturally became more prominent to K+Ss financial profile, only to collapse hard in 2009. With the Q4/09 acquisition of Morton Salt behind it, we anticipate that the potash and magnesium business will drop to about 40% of the companys annual revenue. Of course, our estimate is highly dependent on our fertilizer price forecasts being realized. Exhibit 5.3 shows EBITDA generation by K+S since 2007, on a segmented basis.
Exhibit 5.3: Annual K+S EBITDA by Segment
M 1,400 1,200 1,000 800
1,286
Potash should drop to about 40% of annual revenue going forward.
600 400 200 0 - 200 07 08 09 07 08

Nitrogen Potash & Magnesium -94 255 317 68 134 200* 77 78 46 31 22
09
07
08
Salt
09
07
08
09
Com plem entary
* Represents Morton Salt's EBITDA contribution to K+S Salt for Q4/09 only.
260
K+S AG
January 2011
K+S POTASH & MAGNESIUM
K+S boasts five operational potash mines (i.e., actually six mines, but two are combined) in Germany where it extracts both potash and magnesium crude salts with an annual production capacity of about 7.5 million tonnes, making it the fourth-largest potash producer in the world.
K+S is a high-cost potash producer.
Its no secret that K+Ss potash mines are old, which has led to: (1) declining potash reserves; (2) lower ore grades; (3) difficult mining conditions; and (4) an ever-increasing distance between its mining locations and shafts. Accordingly, to maintain a constant volume of potash extraction, operating expenses continue to increase, placing K+S at a higher position on the potash cash cost production curve. While there are technically about 34 years of potash mine life left, the Sigmundshall mine has less than 10 years of economical life left. In addition to the Potash One acquisition, we believe K+S will soon evaluate re-opening the Rossleben and Siegfried-Giesen sites. K+S is in contact with the owner of Rossleben, and is considering a feasibility on Siegfried-Giesen over the next year.
K+S SALT
K+S Salt is the largest salt producer in the world, with 29.8 million tonnes of capacity. China National Salt is the worlds second-largest manufacturer, with a capacity of 18.7 million tonnes, or 11.1 million tonnes less than K+S.
K+S paid 6.2x 2008 EBITDA for Morton Salt.
In 2009, K+S acquired Morton Salt from Dow Chemical for $1.675 billion, in order to increase its North American presence in salt. Morton Salt is the largest salt producer in North America, with six rock salt mines, seven brine plants, and 10 salt evaporation plants, resulting in 13.1 million tonnes of operational capacity. The consumption of de-icing salt is driven by winter weather conditions. Therefore, de-icing salt demand can fluctuate significantly year to year (i.e., regional diversification is key). Consumer-grade salt consumption is affected by population growth and improvements in living standards. Industrial and chemical salt consumption drivers are economic growth and industrialization.
K+S NITROGEN
K+S Nitrogen and its subsidiary, COMPO, are leading distributors and marketers of nitrogen-based products, including ammonium sulphate, complex fertilizers, straight nitrogen fertilizers, as well as consumer and expert (e.g., golf courses, nurseries) fertilizers.
We expect to see K+S sell COMPO soon.
K+S Nitrogen focuses on providing nitrogen fertilizer to traditional agricultural crops, while COMPO concentrates on the consumer and expert segments. In our view, there is a fairly even sales mix among the five business lines, although we note that between 70% and 80% of K+S Nitrogen revenue is generated in Europe. Over the past several years, K+S Nitrogen has supplied between 4.1 million and 5.2 million tonnes of fertilizers to 60+ countries worldwide.
K+S COMPLEMENTARY
The K+S Complementary segment is composed of four business lines: (1) Waste Management & Recycling; (2) Logistics; (3) Animal Hygiene Products; and (4) Trading. The contribution of the segment is nominal, with between 120 million and 130 million earned in sales in each of the last two years, and between 15 million and 30 million in annual EBITDA. To put this in perspective, the group contributes between 2% and 4% of K+Ss annual EBITDA.
261
January 2011
A BRIEF HISTORY OF K+S
K+Ss existence can be traced back to 1889 and the formation of Aktiengesellschaft fr Bergbau und Tiefbohrung (see Exhibit 5.4). The German fertilizer industry experienced significant resistance following the Second World War with the division of East and West Germany. It was not until 1970 that West German potash producers merged to form Kali und Salz AG.
K+S is the only resource company on Germanys DAX Index.
In 1993, Kali und Salz merged with East German rock salt producer Mitteldeutsche Kali AG into the newly named Kali und Salz GmbH. Five years later, the company began trading on the MDAX and ended up renaming the brand to K+S Aktiengesellschaft (K+S). In 2008, the company was included on the DAX, and to this date, remains the only natural resource company in the index. The company has made several strategic acquisitions over the past 20 years to bolster its European exposure. The COMPO and Fertiva nitrogen businesses, as well as European Salt Company (Esco), are all examples of the companys desire to strengthen its core European markets before expanding internationally. Since then, K+S has grown its overseas profile, mostly through salt acquisitions in the Americas. In 2006, K+S acquired Chilean salt producer Sociedad Punta de Lobos (SPL), with about 7 million tonnes of capacity. In late 2009, the company closed its transformational acquisition of Morton Salt, adding a further 13.1 million tonnes of salt capacity, to bring its total current capacity to 29.8 million tonnes. K+S presently holds an investment grade outlook of stable and a rating of Baa2 and BBB from S&P and Moodys, respectively.
Exhibit 5.4: A Brief History of K+S
1889 Formation of Aktiengesellschaft fr Bergbau und Tiefbohrung. 1970 Merger of three West German potash producers to form Kali und Salz AG. Kali und Salz AG expands into the salt business by merging with East German producer 1993 Mitteldeutsche Kali AG. Renamed Kali und Salz GmbH. BASF is the majority shareholder. 1997 BASF reduces its stake to 49.5%. 1998 BASF further reduces its stake to 25.1%. Kali und Salz GmbH included on the MDAX. Company changes its name to K+S Aktiengesellschaft. Acquisition of COMPO and Fertiva 1999 nitrogen businesses. BASF reduces its stake to 15%. 2000 Expansion of the COMPO and Fertiva businesses through acquisitions. 2002 Joint venture Esco - European Salt Company with Solvay is founded. (K+S stake: 62%) 2003 BASF reduces its stake to 10%. 2004 Acquired the remaining 38% in European Salt Company (Esco) from Solvay. 2005 COMPO cooperates with Syngenta on plant protection products. 2006 Acquired Chilean salt producer Sociedad Punta de Lobos (SPL). 2008 K+S included on the DAX. 2009 Acquired Morton Salt, North America's largest salt producer. Acquired Potash One, owner of the most advanced greenfield potash project in the world that is 2010 not currently under construction.
262
263
17 39-43 93 7 2, 18-36 3
72 73 74 75 76 77 78 79 Nitrogen Fertilizers Florianopolis, BR Santiago de Chile, CL Muenster, DE Krefeld, DE Uchte, DE Gnarrenburg, DE Mannheim, DE Roche-lez-Beaupr, FR 80 81 82 83 84 85 86 87 Chteau Renault, FR Cesano Maderno, IT Ravenna, IT La Vall d'Uixo, SP Lissabon, PORT Allschwil, CH Deinze, BE Livani, LV
K+S AG
Exhibit 5.5: Map of K+Ss Operating and Investing Activities
6 4, 4446, 72
5 47-48, 73
Complementary Business Segments 1 Kassel, DE 88 Hamburg, DE 60 Heringen/Philippsthal/ 89 Rostock, DE Unterbreizbach/Merkers, DE 90 Langelsheim, DE 62 Wunstorf Bokeloh, DE 91 Bad Salzdetfurth, DE 63 Sehnde-Ilten, DE 92 Cologne, DE 64 Zielitz, DE 70 Frauenkappelen, CH
Corporate HQ Kassel, DE
12
11 37,71
1, 49-53, 6064, 74-78, 8892 38,86 8, 54-55, 66-69, 79-80 10, 56, 83 57-58, 84 13 70, 85
Potash & Magnesium 1 Kassel, DE 60 Heringen/Philippsthal/ Unterbreizbach/Merkers, DE 61 Neuhof, DE 62 Wunstorf Bokeloh, DE 63 Sehnde-Ilten, DE 64 Zielitz, DE 65 Reims, FR 66 Wittenheim, FR 67 Le Teil, FR 68 Pr en Pail, FR 69 Onet le Chteau, FR 70 Frauenkappelen, CH 71 Breda, NLD 93 Legacy, SK
14
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Multisegments New York, US Mexico City, MEX Sao Paulo, BR Buenos Aires, AR Singapore, SG Shenzhen, CN Levallois-Perret, FR Verona, IT Barcelona, SP Hertford, UK Gothenburg, SWE Prague, CZ Poznan, PL Marousi/Korinth, GR Istanbul, TR Moscow, RF
18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38
Esco, SPL, Morton Salt Clarks Summit, US Newark, US Long Beach, US Grantsville, US Glendale, US Grand Saline, US Hutchinson, US Weeks Island, US St. Paul, US Chicago, US Port Canaveral, US Cincinnati, US Rittman, US Windsor, US Manistee, US Inagua, US Fairport, US Silver Springs, US Perth Amboy, US Harlingen, NLD Brussels, BE 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 Lindbergh, CA Regina, CA Ojibway, CA Mines Seleine, CA Pugwash, CA Natal, BR Galinhos, BR Rio Grande, BR Santiago de Chile, CL Salar Grande de Tarapaca, CL Hanover, DE Grasleben, DE Bernburg, DE Rheinberg, DE Staudt, DE Dombasle, FR Bayonne, FR Torrelavga, SP Povoa/Alverca, PORT Olhao, PORT
9, 8182
16 15
January 2011
Source: K+S, Scotia Capital.
January 2011
What We Like About K+S

MORTON WAS THE BEST K+S ACQUISITION OF THE DECADE
There are several reasons why we like K+Ss acquisition of Morton Salt from Dow Chemical:
Combines highly complementary operations to create the global leader in salt, with a total capacity of 29.8 million tonnes, or an 11% global market share;
Adds the leading salt consumer brand (Umbrella Girl), as well as a nationwide distribution network;
Extends and diversifies K+Ss geographic presence in the North American market, and enhances its access to North American industrial and consumer markets;
Enables K+S to optimize logistics between Chile, Brazil, and North America; and Provides strong cash flow generation, strengthened by $24 million to $29 million in annual synergies.
CONSIDERING A COMPO EXIT
In June 2010, K+S announced that it was considering selling COMPO. Unlike the potash industry, the nitrogen industry is highly fragmented, especially in the consumer and expert business segments in which COMPO operates. To put this in perspective, K+S Nitrogen (including COMPO) reported negative EBITDA of 94 million last year, compared to positive EBITDA of 134 million in 2008.
COMPO margins have historically been low.
In our minds, the divestiture of the COMPO business unit makes sense, and ultimately, will benefit K+S shareholders. Why: (1) K+S will be better aligned with its stated growth strategy that includes potash and salt; (2) the marketing and distribution structure of the consumer nitrogen fertilizer business is vastly different than the wholesale fertilizer industry; and most importantly (3) K+S Nitrogen has returned very low margins over the past decade. We estimate that nitrogen EBITDA margins have averaged between 3% and 5% since 2001, compared with 18% for salt and 20% for potash.
MINOR AND PARTIAL OFFSET TO HIGH POTASH COST OF GOODS SOLD
We acknowledge that K+Ss potash production cash costs are clearly high. This is mostly due to declining potash reserves, low ore grades, difficult mining conditions, and an increasing distance between mining locations and shafts. In our view, K+S will likely never be able to compete with FSU potash producers on cash costs simply due to the inexpensive energy and labour costs that FSU producers enjoy. To partially offset its relatively high potash cost of goods sold, K+S has found a way to earn a revenue stream from back-filling mined-out caverns with garbage. Specifically, the Waste Management & Recycling business line (i.e., part of K+S Complementary), operates two underground storage sites, as well as five underground plants for the reutilization of waste. The salt deposits used by K+S for waste disposal are impervious to gas and liquids, as well as being far removed from ground water. Most importantly, we think K+Ss decision to return to the Saskatchewan potash scene, through its November 2010 acquisition of Potash One, provides the start of a long-term potash solution that has weighed on its share price for the past several years.
264
K+S AG
January 2011
Valuation
OVERVIEW
We have initiated coverage on the common shares of K+S AG with a 1-Sector Outperform rating and a one-year target price of 61 per share. When coupled with our forecast NTM dividend of 0.99 per share, we expect investors to earn a one-year pre-tax return of 10%. Our one-year K+S target price of 61 is derived from four different valuation methodologies, as follows: (1) a discounted cash flow approach; (2) an enterprise value to forward EBITDA multiple; (3) a price to forward earnings multiple; and (4) a replacement cost new calculation. We weight each of the four approaches equally. Our valuation work is extremely sensitive to various pricing, volume, and other assumptions used within our financial forecast (see Exhibits 5.6 and 5.7). For full details on our earnings sensitivities, please refer to pages 300 and 301. We summarize our valuation work below.
Exhibit 5.6: K+S Key Assumptions
2011E Potash & Magnesium Europe ( /mt) Overseas ( /mt) Europe (M mt) Overseas (M mt) Salt De-icing ( /mt) All other ( /mt) De-icing (M mt) All other (M mt) 57 100 12.5 9.5 58 102 12.8 9.7 286 301 3.8 3.1 2012E 306 323 3.8 3.1
Exhibit 5.7: K+S Summary Sensitivities

2011E Sensitivity Potash (/mt) De-icing Salt (/mt) Potash COGS (/mt) Comp EBITDA Margin K Sales (M mt) De-icing Salt Sales (M mt) N Sales (M mt) Industrial/Chem Sales (M mt) US$ ( )
10 5 - 10 5% 0.1 1.0 0.5 1.0 2
EPS +21c +10c +26c +3c +10c +5c +3c +8c +11c
Our DCF approach yields a one-year value of 70 per K+S share. We apply a WACC of 11% and a long-term growth rate of 2%. Exhibit 5.8 highlights the buildup of our WACC calculation. Our K+S terminal growth rate of 2% is lower than most senior fertilizer peers that we cover. Why: (1) long-term economic, population, and income growth rates are generally lower for many European markets over those in Asia and the Americas; (2) K+S operates some of the oldest potash mines in the industry; and (3) the salt business is somewhat of a mature industry.
Exhibit 5.8: K+S WACC
Exhibit 5.9: K+S Summary DCF

( M) EBITDA Less: Taxes Less: Change in NWC Less: CAPEX Free Cash Flow PV of Free Cash Flow 1 Net Present Value Less: Net Debt Equity Value Equity Value ( /sh) Equity Value, rounded ( /sh) Last Price, rounded Implied ROR 13,631 248 13,383 70 70 56 24% 2011E 1,122 245 -136 200 813 732 2 2012E 1,284 288 -58 200 854 693 3 2013E 1,454 333 -14 200 935 684 4 2014E 1,462 335 -6 250 884 583 5
WACC 11.0% 67 68 70 71 73
2015E 1,517 349 -12 350 829 493 6
Terminal 1,518 350 -1 250 920 10,445
$75.03 1.50% 1.75% 2.00% 2.25% 2.50%
13.0% 57 58 59 60 61
12.0% 61 63 64 65 67
10.0% 73 75 77 79 81
9.0% 81 84 86 89 92
265
Terminal
January 2011
On an EV/NTM EBITDA basis, K+S is currently trading at 9.7x our 2011E EBITDA of 1.1 billion. In our minds, K+S should be trading closer to 8.5x our sum-of-parts NTM EBITDA estimate. This implies a one-year out price value of about 58 per share. Exhibit 5.10 highlights our segmented EV/NTM EBITDA breakdown. For K+S specifically, we made the following adjustments to our general fertilizer EV/NTM EBITDA multiples:
We reduced our nitrogen multiple to 7x from 8x to reflect the poor margins that K+S realizes in this segment (usually between 3% and 5%) largely due to its production agreement with BASF that limits K+Ss upside (and downside) nitrogen earnings potential.
We lowered our potash multiple by 2x to 9x to reflect the companys current position as a high-cost producer, as well its declining potash reserves and aging mines.
Exhibit 5.10: K+S EV/NTM EBITDA Buildup
[A]

[B]
K+S EV/EBITDA
[C=A+B]
2012E EBITDA
[D, M]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
K+S Price Value Calculation

( M)
Nitrogen Phosphate Potash Retail Salt

Notes
8.0x 9.0x 11.0x 7.0x -
-1.0x 0.0x -2.0x 0.0x -
[1]
7.0x 9.0x
58 0 697 0 528 1,284
5% 0% 54% 0% 41% 100%
0.3x 0.0x 4.9x 0.0x 3.3x 8.5x
2012E EBITDA K+S EV/EBITDA Multiple* Implied EV Cash Debt Equity Value FD Shares O/S (M) Implied Price Value
1,284 8.5x 10,911 915 -802 11,024 191.4 57.59
[2]
9.0x 7.0x
[3]
8.0x
1. Historically poor margins in the 3% to 5% range. 2. High-cost producer, poor reserves, old mines. 3. Largest salt producer in the w orld.
Exhibit 5.11 shows K+Ss historical forward EV/EBITDA trading range, which has averaged 6.8x over the past several cycles. K+S has historically traded in line with its peers, due to a discount placed on its high-cost potash operations and poor reserve life, fully offset by potash assets receiving a premium multiple over nitrogen and phosphate assets. While we believe that K+Ss current 9.7x NTM EBITDA multiple is rich, as the fertilizer demand recovery continues to improve, we expect a 14.4% increase in 2012E EBITDA to offer upside to the stock.
Exhibit 5.11: K+S EV/NTM EBITDA Chart
14x NTM EV/EBITDA Multiples 12x 10x 8x 6x 4x 2x 0x Dec-06 Jun-07 Dec-07 Jun-08 SDF Dec-08 SDF Average Jun-09 Group Average Dec-09 Jun-10
266
K+S AG
January 2011
On a NTM P/E basis, K+S is currently trading at 15.9x our 2011E EPS estimate of 3.55. In our minds, K+S should be trading closer to 12.5x our sum-of-parts earnings estimate. This implies a one-year price value of about 52 per share, or slightly below with where the stock is currently priced. Exhibit 5.12 highlights our segmented P/E breakdown. For K+S specifically, we made the following adjustments to our general P/E multiples:
We reduced our nitrogen multiple to 11x from 12.5x to reflect the poor margins that K+S realizes in this segment (usually between 3% and 5%) largely due to its production agreement with BASF that limits K+Ss upside (and downside) nitrogen earnings potential.
We lowered our potash multiple by 3x to 13x to reflect the companys current position as a high-cost producer, as well its declining potash reserves and aging mines.
Exhibit 5.12: K+S NTM P/E Buildup
[A]

[B]
K+S P/E Ratio

[C=A+B]
2012E EPS
[D, /sh]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
K+S Price Value Calculation

(/sh)
Nitrogen Phosphate Potash Retail Salt

Notes
12.5x 13.5x 16.0x 11.0x -
-1.5x 0.0x -3.0x 0.0x -
[1]
11.0x 13.5x
0.19 0.00 2.26 0.00 1.71 4.17
5% 0% 54% 0% 41% 100%
0.5x 0.0x
2012E EPS K+S P/E Multiple* Implied Price Value
4.17 12.5x 52.08
[2]
13.0x 11.0x
7.1x 0.0x 5.1x 12.7x
[3]
12.5x
1. Historically poor margins in the 3% to 5% range. 2. High-cost producer, poor reserves, old mines. 3. Largest salt producer in the w orld.
Exhibit 5.13 shows K+Ss historical NTM P/E trading range, which has averaged 12.7x over the past several years. On an NTM P/E basis, K+S has historically traded in line with its peers. We believe that the current 15.9x NTM EPS multiple should fall due to a 17.5% year-over-year increase in 2012E EPS.
Exhibit 5.13: K+S NTM P/E Chart
Jun-07
Dec-07
Jun-08 SDF
Dec-08 SDF Average
Dec-09
Jun-10
Dec-10
267
January 2011
4. REPLACEMENT COST NEW Exhibit 5.14: K+S Replacement Cost New (RCN)
Production Plant Potash & Magnesium Verbundwerk Hattorf-Wintershall Unterbreizbach Zielitz Neuhof-Ellers Sigmundshall Bergmannssegen-Hugo Salt Esco (K+S Subsidiary) Bernburg Bernburg Braunschwieg-Lueneburg Borth Harlingen Bayonne Other Facilities Product Capacity
(000 mt)

( M) (/sh)
Potash (Conventional) Potash (Conventional) Potash (Conventional) Potash (Conventional) Potash (Conventional) Potash (Production, no mining
~2,100 ~1,500 ~1,850 ~1,200 ~850 ~7,500 392
2,676 1,911 2,357 1,529 1,083 9,556 48
13.98 9.99 12.32 7.99 5.66 49.93 0.25
Salt Salt Salt Salt Salt Salt Salt
(Rock) (Brine) (Rock) (Rock) (Brine) (Brine) (Evaporation)
1,430 250 520 1,280 1,000 100 5,100 9,680
303 29 110 271 116 12 624 1,466
1.58 0.15 0.58 1.42 0.61 0.06 3.26 7.66
SPL (K+S Subsidiary) Rio Grande de Norte Tarapaa
Salt (Evaporation) Salt (Open-Cast)
500 6,500 7,000
61 481 542
0.32 2.51 2.83
Morton Salt (K+S Subsidiary) Ojibway Pugwash Mines Seleine Weeks Island Fairport Grand Saline Rittman Hutchinson Silver Springs Manistee Windsor Lindbergh Inaqua Grantsville Glendale
Salt Salt Salt Salt Salt Salt Salt Salt Salt Salt Salt Salt Salt Salt Salt
(Rock) (Rock) (Rock) (Rock) (Rock) (Rock + Brine) (Brine) (Brine) (Brine) (Brine) (Brine) (Brine) (Evaporation) (Evaporation) (Brine)
2,900 1,300 1,400 1,400 1,300 400 500 300 300 300 200 100 1,100 700 100 12,300
615 276 297 297 276 131 58 35 35 35 23 12 135 86 12 2,320
3.21 1.44 1.55 1.55 1.44 0.69 0.30 0.18 0.18 0.18 0.12 0.06 0.70 0.45 0.06 12.12
Nitrogen K+S Nitrogen (includes COMPO)
~5,800 5,800
1,717 1,717
8.97 8.97
1. Note: 1 = US$1.25
15,649 1,488 769 16,369
81.76 7.77 4.02 85.52
268
K+S AG
January 2011
We believe the replacement cost for K+Ss asset portfolio is about 86 per share, which is detailed in Exhibit 5.14. Our replacement cost estimates are derived from: (1) current projects under construction; (2) feasibility, pre-feasibility, and scoping studies; (3) inflation-adjusted costs for historical projects; and (4) professional judgment. We partially set our one-year K+S target price using 75% replacement cost new (RCN), which implies a price value of 64. During the peak of a normal (i.e.; not 2008) fertilizer cycle, we expect K+S to trade between 70% and 80% RCN. Conversely, in a normal market downturn, K+S could trade as low as 25% RCN. We chose 75% due to continued evidence of fertilizer demand recovery, although we estimate the stock is currently trading at 66% RCN compared with the group (ex SQM) at 82.9% RCN (see Exhibit 5.15). Generally, we expect K+S to trade at an RCN discount to its peer group due to poor nitrogen margins, as well as high-cost and low reserve life potash assets.
SETTING OUR TARGET PRICE & RATING Exhibit 5.16: K+S Valuation Summary
Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Metric 12.5x 8.5x 75% 11.0% Value 52.08 57.59 64.14 69.92 Weight 25% 25% 25% 25% Contribution 13.02 14.40 16.04 17.48 60.93 61.00
We have set our one-year K+S target price at 61, which we derived by equally weighting our four valuation methodologies (see Exhibit 5.16). Given our forecast K+S total return of 10%, coupled with our average total return of 3.2% for the group (see Exhibit 5.17), we rate K+S AG 1-Sector Outperform.
K+S Target Price

20% 15.7% 7.6% 3.9% 0.5% 8.8% 10.0%
15% 10% 5% 0% -5% -10% -15%
Top Pick
3-SU
3-SU
-9.2% YAR
2-SP
2-SP
1-SO
1-SO
1-SO
1-SO
-11.5% IPI
SQM
CF
MOS
POT
K+S
AGU
269

Scotia Capital Rating Last Price (local $) $106 $140 $33 $82 $168 -11.5% 7.6% 8.8% 3-SU 1-SO 1-SO 15.7% 3.9% 1-SO 2-SP Target (1-Yr) ROR (1-Yr) Rating Shares (FD M) Mkt Cap (M, local $) EV (M, local $) Div Yield (%) Div Payout (%) ROA (%) ROE (%) D/E (x) Debt/Cap (x) ND/EBITDA (x) Int. Cov. (x) Overview Dividends & Returns Debt
Nam e
Ticker
270
C$7.60 27.5% 1-SO 61 C$8.50 10.0% 9.3% 1-SO 1-SO JOD 45.50 HKD 5.57 C$5.96 A$3.96 ILs 1,732 JOD 17.25 56.36 C$7.78 RMB 66.24 $900.00 HKD 4.02 $58.42 RUB 219 NOK 338 $58 NOK 300 1.3% 24.3% 9.6% -9.2% 3-SU 0.5% 2-SP 21.3% 0.5x 83.3 1,771 61.4 1,629 1,269 75.0 191.4 52.2 767.6 7.8 7,021 263.2 2,124 288.8 3,791 25,678 366 6,450 77,459 1,294 10,787 406 50,843 7,043 28,224 15,376 465,815 97,481 3,699 21,383 339 7,519 22,921 1,232 11,658 384 51,720 31,462 16,117 473,760 109,065 1.5% 1.8% 2.2% 6.5% 0.0% 0.7% 0.6% 0.9% 1.2% 0.8% 1.9% 1.7% 44.3% 32.8% 30.9% 68.8% 0.0% 45.0% 25.2% 16.2% 50.0% 0.0% 21.0% 30.4% 15.0% 7.6% 10.2% 6.4% 13.2% 16.5% 2.2% 11.1% 14.0% 9.7% -5.2% 11.3% 14.5% 5.3% 9.4% 19.4% 9.9% 23.0% 11.8% 29.5% 20.9% 5.1% 14.3% 40.8% 22.4% -11.1% 22.3% 23.2% 13.0% 17.5% 0.1x 0.0x 0.0x 0.3x 0.5x 0.0x 0.6x 0.2x 0.2x 1.0x 0.7x 0.9x 0.3x 0.6x 0.4x 0.1x 0.0x 0.0x 0.2x 0.3x 0.0x 0.4x 0.2x 0.2x 0.5x 0.4x 0.5x 0.2x 0.4x 0.2x 0.3x -0.5x -1.0x -1.3x 1.5x 0.7x -1.5x 1.6x -0.1x -0.1x 2.1x 1.3x 0.5x 4.4x 0.6x 0.6x Margins Y/E Gross (%) 20.6% 32.2% 36.8% 40.5% 25.1% 25.8% 30.1% 57.3% 29.7% 14.8% 40.3% 35.9% 34.4% 23.3% 61.4% 74.4% -2.1% 36.2% 73.7% 40.0% 36.7% 28.6% 23.1% 27.2x 2.7% 48.0% 34.3% 14.4% 24.1% 27.1% 24.9% 12.9% 18.5% 53.7% 62.5% -8.1% 41.4% 48.4% 6.1% 29.2% 40.2% 21.7% 12.0% 19.3% 22.6% 22.1% 8.0% 16.9% 49.6% 54.2% -9.2% 30.6% 39.0% 2.1% 23.5% 13.8x 27.4x 16.2x 20.4x 10.6x 17.4x 24.4x 12.3x 32.1x 19.4x 5.8% 2.8% 0.5% 3.6% 5.1% 4.9% 5.5% -13.3% 1.0% 4.1% 2.2% -3.2% 10.1% 2.3% 5.2x 2.2x 1.3x 1.8x 8.7x 2.7x 4.4x 1.4x 13.4x 4.4x 1.9x 9.6x 2.9x 4.6x 4.7x 11.0% 29.9% 32.6% 36.6% 25.4% 28.3% 27.3% 8.3% 26.1% 28.1% 30.8% 18.8% 20.5% 22.1% 24.6x 10.5x 24.8x 86.7x 33.9x 53.1x 38.9x 11.2% 10.1% 1.1% -0.9% 2.2% -2.6% 3.5% 2.8x 2.5x 10.3x 3.8x 3.8x 5.9x 4.8x 11.8x 13.6x 11.6x 33.2x 16.5x 22.1x 18.1x 18.3x 10.6x 10.7x 10.7x 15.5x 10.8x 13.1x 7.6x 12.2x 21.9x 13.1x 13.1x 14.9x EBITDA (%) Operating (%) P/CF (x) FCF Yield (%) P/BV (x) 2009A (x) 2010E (x) 11.0x 10.3x 11.6x 28.9x 19.8x 19.2x 16.8x 16.2x 8.3x 11.5x 8.5x 14.3x 9.4x 11.5x 7.3x 17.8x 10.0x 23.3x 18.7x 7.3x 12.6x 13.9x Metrics Enterprise Value to EBITDA 2011E (x) 7.8x 6.6x 9.5x 14.0x 11.4x 12.6x 10.3x 12.2x 6.4x 8.3x 7.9x 11.4x 7.4x 9.7x 5.9x 14.2x 8.2x 13.7x 18.2x 14.3x 8.5x 10.4x 10.4x 2012E (x) 8.0x 7.7x 8.6x 11.8x 9.7x 11.4x 9.5x 8.8x 5.1x 7.4x 7.3x 10.1x 15.5x 8.5x 5.0x 12.0x 7.4x 11.3x 15.6x 11.7x 8.2x 9.6x 9.6x 2009A (x) 24.7x 17.6x 19.5x 81.1x 32.1x 29.7x 34.1x 28.3x 25.4x 14.0x 15.6x 22.3x 13.9x 31.8x 11.0x 38.1x 0.7x 35.3x 11.3x 20.6x 25.1x Price to Earnings 2010E (x) 19.7x 21.2x 18.8x 67.3x 41.2x 25.1x 32.2x 21.8x 20.3x 15.4x 12.7x 20.6x 10.5x 25.5x 11.5x 33.6x 0.5x 28.7x 40.7x 26.2x 11.2x 20.0x 23.6x 2011E (x) 12.6x 10.6x 15.4x 27.0x 18.7x 16.7x 16.8x 17.7x 14.5x 11.1x 12.1x 15.4x 8.9x 15.9x 9.2x 24.4x 0.4x 18.3x 29.8x 19.9x 12.4x 15.0x 15.6x 12/31 12/31 12/31 12/31 5/31 12/31 12/31 12/31 6/30 9/30 12/31 12/31 12/31 3/31 12/31 12/31 12/31 12/31 12/31 12/31
$91.75 $135.15 $89.27 $37.29 $76.36 $154.83
158.0 71.9 32.8 75.1 446.9 305.3
14,497 9,719 2,928 2,801 34,125 47,269
15,517 11,658 3,347 11,658 33,028 49,538
0.1% 0.3% 2.0% 0.3% 0.3% 0.6%
2.4% 6.3% 28.8% 10.8% 6.5% 10.9%
3.7% 15.0% 17.9% 7.5% 6.5% 8.5% 9.9%
8.4% 23.8% 114.0% 8.1% 9.6% 17.8% 30.3%
0.4x 0.0x 2.2x 0.2x 0.6x 0.7x
0.3x 0.0x 0.7x 0.1x 0.4x 0.3x
0.8x -1.1x 1.5x -0.7x 3.3x 0.7x
Peer Group Average
Nam e
Ticker
Peer Group Average
January 2011
K+S AG
January 2011
Exhibit 5.19: K+S Tear Sheet
K+S Aktiengesellschaft
SDF 1-Year Target: 2-Year Target: 1-Year Return: 2-Year Return: NTM Dividend Rating: Risk: 61.00 68.00 10.0% 24.2% 0.99 1-SO High Last Price: FY End: Market Cap: EV: Avg. Volume: FD Shares O/S: Float: 56.36 Dec. 31 10.8B 10.9B 1.3M 191.4M 74.8%
Valuation: 8.5x 2012E EBITDA, 12.5x 2012E EPS, DCF @ 11%, 75% RCN
Ownership Insider Ownership: Institutional Ownership: Target Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Operational Potash Volume (M mt) Potash Europe (/mt) Potash Overseas (/mt) Salt (M mt) Salt De-icing/Other (/mt) EPS Estimates Q1 Q2 Q3 Q4 Total Consensus* 2009 0.74a - 0.27a - 0.01a 0.10a 0.56a Metric 12.5x 8.5x 75% 11.0% 2010E 6.8 264 272 22.0 54/101 2010E 0.92a 0.51a 0.21a 0.57 2.21 2.18 Value 52.08 57.59 64.14 69.92 2011E 7.0 286 301 22.0 57/100 2011E 1.27 0.73 0.57 0.97 3.55 3.47
24.9% 22.1% Weight 25% 25% 25% 25% 2012E 7.0 306 323 22.5 58/102 2012E 1.43 0.88 0.71 1.14 4.17 4.00 EPS +21c +10c +26c +3c +10c +5c +3c +8c +11c 2012E -1.2x 3.2x 0.2x Baa2 2014E 1,462 335 -6 250 884
Financial EV/EBITDA P/E P/FCF P/BV Dividend Yield ROE ROA Gross Margin EBITDA Margin EBITDA Growth Income Statement Sales COGS Gross Profit EBITDA Potash Salt Nitrogen Other Net Income EPS (FD) Balance Sheet Cash & Equivalents PP&E Total Assets Short-Term Debt Long-Term Debt Total Liabilities Shareholders' Equity Cash Flow Statement Operating (post-WC) Investing Financing Cash Replacement Cost New Calculated: 86/sh
2009 24.5x 100.0x n.m. 5.1x 0.4% 5% 2% 34% 12% -70% 2009 3,574 -2,344 1,230 445 317 200 -94 22 94 0.56 2009 529 1,728 5,213 121 1,146 3,118 2,095 2009 535 -1,346 1,168 360
2010E 11.5x 25.5x 27.7x 4.2x 0.7% 17% 8% 39% 20% 113% 2010E 4,842 -2,960 1,882 947 514 360 43 29 423 2.21 2010E 915 1,754 5,598 34 769 3,002 2,596 2010E 976 -157 -437 386
2011E 9.7x 15.9x 13.3x 3.5x 1.8% 22% 11% 43% 22% 18% 2011E 5,208 -2,990 2,218 1,122 688 337 66 30 679 3.55 2011E 1,360 1,696 6,134 34 769 3,016 3,118 2011E 835 -200 -190 445
2012E 8.5x 13.5x 12.6x 3.0x 2.8% 22% 12% 45% 24% 14% 2012E 5,462 -3,026 2,436 1,284 834 351 68 31 797 4.17 2012E 1,888 1,631 6,662 34 769 3,022 3,639 2012E 1,033 -200 -305 528
2011E Sensitivity Potash (/mt) De-icing Salt (/mt) Potash COGS (/mt) Comp EBITDA Margin K Sales (M mt) De-icing Salt Sales (M mt) N Sales (M mt) Industrial/Chem Sales (M mt) US$ ( ) Credit Metrics Net Debt/EBITDA Interest Coverage Debt/Total Capital Standard & Poor's: Free Cash Flow EBITDA Less: Taxes Less: NWC Less: CAPEX Free Cash Flow 2009 2.2x 4.2x 0.4x BBB 2011E 1,122 245 -136 200 813 2010E 0.2x 9.2x 0.2x
10 5 - 10 5% 0.1 1.0 0.5 1.0 2 2011E 0.2x 6.2x 0.2x Moody's: 2013E 1,454 333 -14 200 935
Peak: Trough:
105% 11%
Target: Current:
75% 66%
2012E 1,284 288 -58 200 854
All figures in M, unless otherwise noted. * Bloomberg.
Source: Bloomberg; Reuters; Company Reports; Scotia Capital estimates.
271
January 2011
I. K+S Potash & Magnesium

K+S boasts five potash mines in Germany, where it extracts both potash and magnesium crude salts, with an annual production capacity of about 7.5 million tonnes (or ~6.2 million tonnes of KCl), making it the fourth-largest potash producer in the world.
Exhibit 5.20: K+S Potash & Magnesium Reserves
Exploitable Reserves Site Ore
(M mt)
2008 Production Ore

(M mt)
KCl
(M mt)
K2O
(M mt)
1 K2O Life Kieserite
KCl
(M mt)
K2O
(M mt)
(Years)
(M mt)
K+S is the worlds fourth-largest potash producer.
Neuhof-Ellers Sigmundshall Verbundwerk Hattorf-Wintershall Unterbreizbach Zielitz
108.4 27.8 715.1 110.2 406.3 1,367.8
17.6 5.1 96.2 32.4 31.7 183.0
11.1 3.2 60.8 20.5 51.6 147.2
27.0 9.0 43.0 25.0 37.0 34.8
22.4 4.0 96.0 9.5 131.9
3.8 2.5 16.5 3.1 10.7 36.6
0.6 0.5 2.1 1.3 2.2 6.7
0.4 0.3 1.3 0.8 1.4 4.2
1. 100% kieserite corresponds to 86.98% MgSO4.
K+S markets its potash and magnesium products within three business lines: (1) potassium chloride, or MOP; (2) fertilizer specialties; and (3) industrial products. Potash (MOP) is the prominent product sold by the segment, accounting for between 45% and 50% of the groups sales. Fertilizer specialties consist of various blends of potash, magnesium, sulphur, and other elements. Production from the segments industrial products business line is used in a wide variety of industries, ranging from chemicals to textiles to pharmaceuticals to cosmetics. Within the K+S Potash & Magnesium segment, up to 20% of sales volumes contain no potash at all. About half of K+S Potash & Magnesiums revenue is generated within Europe, with between 10% and 15% of sales in Germany (see Exhibit 5.21), although we note that this varies widely from year to year. K+Ss biggest overseas customers are located in Brazil (10% of 2009 sales) and Southeast Asia both high-growth potash demand regions (see Exhibit 5.22).
Exhibit 5.21: European Potash & Magnesium Sales Exhibit 5.22: Overseas Potash & Magnesium Sales
About 20% of the divisions sales volumes contain no potash at all.
Specialty 52% MOP 16%
Specialty 26% MOP 68% Industrial 6%
Industrial 32%
The groups sales accounted for approximately 40%+ of the companys total revenues last year, making it the most important division to K+S. In 2009, the segments revenue collapsed to 1.4 billion from 2.4 billion in 2008, due to a combination of materially lower realized fertilizer prices, coupled with an effective farmer strike on potash consumption.
272
K+S AG
January 2011
POTASH RESERVE BOOST ACHIEVED
K+S is a high cash-cost potash producer.
K+Ss potash mines are old, which has led to: (1) declining potash reserves; (2) low ore grades; (3) difficult mining conditions; and (4) an ever-increasing distance between mining locations and shafts. Accordingly, to maintain a constant volume of potash extraction, operating expenses continue to increase, placing K+S at a fairly high position on the potash cash cost production curve. Over the past several years, K+S has spent more than 100 million per year on various programs designed to improve its raw material exploitation and optimize its processes. We think K+S Potash and Magnesium annual capex could increase to 200 million for several years due to the Package of Measures (see below). We estimate there are between 33 and 34 years of potash mine life left, on average, assuming the company were to produce potash at 2008 levels. In particular, the Sigmundshall mine has less than 10 years of economical life left. To address declining reserves, K+S acquired Potash One (KCL-T) in November 2010 for C$434 million. Potash One has developed the most advanced greenfield potash project in the world that is not already under construction. The Saskatchewan-based Legacy project should provide K+S with a 2.7 million tonne solution potash mine for at least 40 years. The move marks a return by K+S to Saskatchewan, after having its Lanigan potash mine (now PotashCorps) expropriated by Saskatchewan in the 1970s. We have not eliminated the possibility that K+S acquires more than just Potash One as a long-term solution to its aging potash mines in Germany. We think that Western Potash could fit will in a Saskatchewan potash development portfolio held by K+S.
THE "INTEGRATED PACKAGE OF MEASURES"
Within the Hessian-Thuringian potash district in which K+S operates, ~14 million m3 of saline water is produced each year. About half is injected underground, while the rest is discharged into the Werra River. K+Ss permits for saline water discharge expire in 2012. For subsequent years, various government bodies have called for improvements to Werras water quality. To comply, K+S has offered a 360 million Integrated Package of Measures (IPM) to the Hesse and Thuringia state parliaments, as per Exhibit 5.23. By 2015, the IPM should lead to a 50% reduction in saline waste water and a 30% reduction in salt concentration, provided permits are granted on time. K+S received a recommendation to completely cease the discharging of saline water into the Werra River, as well as underground, by 2020. K+S is also preparing applications of saline waste water pipelines possibly to the Upper Weser and to the North Sea.
Exhibit 5.23: Integrated Package of Measures
Sw itching the w et extraction of kieserite to the dry ESTA process at the Hattorf site Construction of a deep-freezing system for saline w ater at the Hattorf site Further technical development of kieserite mining at the Wintershall site Construction of a system for evaporation and a gas pow er plant at the Unterbreizbach site Expansion of saline w ater control (i.e., storage ponds) at the Hessian-Thuringian potash locations 60 75 25 160 2012 2011 2011 2015
Exhibit 5.24: Saline Water Should Halve by 2015
40 360
2012
Source: K+S.
273
January 2011
OUTLOOK
K+Ss realized potash prices in both Europe and overseas have tracked one another remarkably well over the last several years. We do not anticipate any deviation from this trend, unless the USD-EUR FX rate swings wildly. We are looking for a realized blended Potash & Magnesium segment price of 286/tonne for 2011 and 306/tonne in 2012 for K+Ss European business, and 301/tonne in 2011 and 323/tonne in 2012 on the overseas markets (see Exhibit 5.25). K+S recently raised granular MOP prices by 18/tonne to 335/tonne (CIF Northwest Europe). There are two key points to consider with respect to our realized potash price forecast and its suitability as a metric for comparison to other potash producers:
1. Approximately half of the K+S Potash & Magnesium segments revenue is generated from the sale of
MOP. The remainder is derived from specialty fertilizers such as SOP (that is priced at a steep premium to MOP), and various industrial products such as high-purity potassium and magnesium salts used in the pharmaceutical and cosmetics industries.
2. Our price forecast through 2012 is ultimately derived from benchmark prices of $430/tonne to $480/tonne (FOB Vancouver), coupled with a constant FX rate of $1.25 per 1.
Exhibit 5.25: SC Forecast K+S Potash & Magnesium Realized Prices by Region
500 Forecast
Realized Price (/mt)
450 400 350 300 250 200 150 100 2007 2008 2009 Europe 2010 Implied Overseas
2011
2012
Source: K+S; Scotia Capital estimates.
On volume, we are looking for 7 million tonnes of product sold in each of 2011 and 2012, respectively. If there is any upside to our overall K+S earnings forecast, we think it will probably not come from stronger potash sales volumes in both years. In 2006 and 2007, K+S sold an average of 8.1 million tonnes per year, but a portion of that was carried over inventory from 2007 production. Our forecast regional sales mix is a constant 55% Europe and 45% overseas, and in line with historical sales trends.
Exhibit 5.26: SC Forecast K+S Potash & Magnesium Sales Volumes by Region
2.5 Forecast 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 Europe 2010 Overseas 2011 2012
274
Sales Volume (M mt)
K+S AG
January 2011
On the top line, we forecast K+S Potash & Magnesium to generate 2 billion and 2.2 billion in 2011 and 2012 net sales, respectively (see Exhibit 5.27). Specifically, we expect slightly more than half of the segments revenues to come from MOP sales, about one-third from the sale of specialty fertilizers, and the remainder from industrial applications.
Exhibit 5.27: SC Forecast K+S Potash & Magnesium Sales by Product
3,000 2,500 Forecast
Sales ( M)
2,000 1,500 1,000 500 0 2001 2002 2003 2004 2005 2006 KCl 2007 Specialty 2008 Industrial 2009 2010 2011 2012
One of the biggest areas of concern for K+S investors has been where on the cost curve does K+Ss potash operations fall. Third quartile? Fourth quartile? K+S has stated that its potash cash cost position is above average. While we know that K+S is high on the cost curve, we have no confidence that publicly available data will lead us to the right number. Why? As we have stated previously, the disclosed data to provide quarterly potash cash cost per tonne values include other products such as potassium sulphate and highgrade industrial potassium and magnesium applications. In our view, the data are therefore not meaningful. Perhaps K+Ss Zielitz mine offers the only true comparison. Irrespective of the above, we anticipate that K+S Potash & Magnesiums quarterly cash cost per tonne will range between 175/tonne and 219/tonne over the eight quarters during 2011 and 2012. To put this in perspective, we estimate that the lowest and highest quarterly operating costs since 2008 were 149/tonne (Q2/08) and 278/tonne (Q1/09).
Exhibit 5.28: SC Forecast K+S Potash & Magnesium COGS and Gross Margins
300 250 70% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012
200 150 100 50 0
COGS per mt (LHS)

Gross Margin (RHS)
275
Gross Margin (%)
Forecast
60%
COGS (/mt)
January 2011
For K+S Potash & Magnesium EBITDA, we are looking for 688 million in 2011 (i.e., up 33.8% over our 2010 estimate of 514 million), followed by a 21.2% increase to 834 million in 2012. The year-over-year rise to 2012E EBITDA is driven solely by improved pricing. Exhibit 5.29 highlights our quarterly EBITDA and EBITDA margin forecasts through 2012.
Exhibit 5.29: SC Forecast K+S Potash & Magnesium EBITDA and EBITDA Margins
Potash EBITDA ( M)
600 500 400 300 200 100 0 2007 2008 2009 2010 2011 2012 Forecast 70% 60% 50% 40% 30% 20% 10% 0%
EBITDA (LHS)
EBITDA Margin (RHS)
Exhibit 5.30 shows our quarterly capex and depreciation expectations through 2012. .
Exhibit 5.30: SC Forecast K+S Potash & Magnesium Capex and Depreciation
50 Forecast
( Millions)
40 30 20 10 0 2007 2008 2009 2010 2011 2012
Capex
Depreciation
276
EBITDA Margin (%)
277
4.8 3.2 8.0 5.0 3.2 8.2 4.5 2.6 7.0 0.5 0.5 0.9 0.4 0.7 1.1 0.5 0.7 1.1 0.6 0.7 1.3 1.9 2.5 4.4 1.3 0.7 1.9 0.9 0.8 1.7 0.8 0.8 1.6 0.9 0.7 1.5 3.8 2.9 6.8 1.1 0.8 1.9 1.0 0.8 1.8 0.8 0.8 1.5 1.0 0.8 1.7 3.8 3.1 7.0 154 157 170 238 173 338 525 357 425 512 391 362 444 326 305 441 308 266 431 292 332 452 324 251 368 266 263 350 275 273 333 258 278 366 293 264 354 272 280 369 295 284 374 299 289 380 304 293 385 308 286 377 301 742 497 1,239 1,003 236 77 159 126 29
19% 13% 13% 50% 26% 15% 16% 7% 16% 30% 18% 53% 32% 21% 22% 14% 22% 35% 30% 26%
K+S AG
Exhibit 5.31: SC Forecast K+Ss Potash & Magnesium Segment
( M)
Sales (M mt) Europe Overseas
3.8 3.1 7.0
Realized Price ( /mt) Europe Overseas ($/mt) Implied Overseas
306 404 323
Revenue Europe Overseas 857 556 1,413 1,158 255 77 178 141 31 161 184 278 130 268 71 241 66 240 40 255 73 167 88 188 81 203 63
24% 19%
1,504 911 2,414 1,128 1,286 83 1,203 217 67

24% 18%
191 176 367 250 117 20 97 281 74 20 54 267 74 20 54 309 52 25 27 1,108 317 86 232 325 172 21 151 325 140 21 119 320 100 21 79 333 103 24 79 1,303 514 87 428 192 76
28% 24%
134 221 355
140 201 341
160 202 361
625 800 1,425
316 181 496
234 231 464
227 193 420
239 197 436
1,015 802 1,817
322 231 553 339 214 22 193 175 111

39% 35%
272 253 525 340 185 22 163 189 103

35% 31%
221 228 449 332 117 22 95 219 77

26% 21%
280 232 512 340 172 25 147 199 101

34% 29%
1,095 944 2,039 1,351 688 90 598 194 99

34% 29%
1,173 1,011 2,184 1,351 834 93 741 194 120

38% 34%
COGS EBITDA Depreciation EBIT I
COGS per tonne EBITDA per tonne
EBITDA (%) EBIT I (%) 84 80 111 21 29 30 28 107 12
Maintenance Capex
15
24
35
85
15
22
29
35
100
100
January 2011
January 2011
II. K+S Salt

K+S Salt is the largest salt producer in the world, with 29.8 million tonnes of capacity. China National Salt is the worlds second-largest manufacturer, with a capacity of 18.7 million tonnes, or 11.1 million tonnes less than K+S. Exhibit 5.32 shows the top salt producers in the world.
Exhibit 5.32: Worlds Top Salt Producers
35 30 25 (M mt) 20 15 10 5 0 K+S China Compass National Salt Minerals Cargill Dampier Salt Artyomsol Exportadora del Sal Sudsalz Salins Group Mitsui Akzo 18.7 29.8 European Salt Com pany (9.7M m t) Sociedad Punta de Lobos (7M m t) Morton Salt (13.1M m t) 14.4 14.0 9.0 7.5 7.0 5.3
K+S is the worlds largest salt producer.
4.1
3.8
3.6
Within the salt industry, sales can generally be broken down into the following five categories: (1) deicing; (2) food grade; (3) chemical use; (4) industrial; and (5) other uses. Exhibit 5.33 shows a breakdown of the 1.01 billion in revenue K+S Salt earned in 2009, while Exhibit 5.34 highlights regional revenues.
Exhibit 5.33: K+S Salt Revenue (2009) Exhibit 5.34: K+S Salt Revenue (2009)
Overseas 60%
Half of K+S Salts revenue is from de-icing salt sales.
Food-Grade 15%
Industrial 24%
Chem ical 6% Other 6% De-icing 49%

Rest of Europe 22% Germ any 18%
DOMINANCE THROUGH FORMATIVE ACQUISITIONS
European Salt Company (Esco)
Between 2002 and 2006, K+Ss salt business was primarily based on its share of European Salt Company (Esco). Esco is the largest salt supplier in Europe, with a production capacity of 9.7 million tonnes. Esco operates three rock salt mines, three brine plants, and several evaporated salt facilities. K+S purchased all remaining shares in Esco from Solvay in 2004.
Sociedad Punta de Lobos (SPL)
In 2006, K+S acquired Sociedad Punta de Lobos (SPL), a Chilean salt producer, for 390 million. SPLs capacity is 7.0 million tonnes, with annual production in the 6 million tonne area. SPL operates an open-pit mine in the Atacama Desert at Salar Grande Tarapaca, as well as a sea salt facility in Brazil, known as Salinas Diamante Branco. Along with the acquisition came SPLs shipping company, Empremar, which provides maritime logistics for SPL.
278
K+S AG
January 2011
Morton Salt
In 2009, K+S acquired Morton Salt from Dow Chemical for $1.675 billion, in order to increase its North American presence in the salt business. Morton Salt is the largest salt producer in North America, with six rock salt mines, seven brine plants, and 10 salt evaporation plants, resulting in 13.1 million tonnes of operational capacity (see Exhibit 5.35). In recent history, Morton Salt has managed one of the best-known U.S. consumer brands in the food-grade salt sector: the Umbrella Girl (see Exhibit 5.36). Morton Salt also produces salt for water softening, meat curing, food services, industrial purposes, de-icing, as well as swimming pool chlorinators. In 2008, Morton Salt had revenue of $1.2 billion on sales of 12.1 million tonnes.
Exhibit 5.35: Map of Morton Salt Sites Exhibit 5.36: The Umbrella Girl
Morton Salt was acquired for 6.2x 2008 EBITDA.
Source: K+S.
Source: Morton Salt.
On a valuation basis, K+Ss acquisition of Morton Salt was completed at 6.2x 2008 EBITDA of $270 million, or 8.2x the trailing three-year average EBITDA of $204 million. We believe the acquisition was beneficial for the following reasons: (1) attractive valuation with between $24 million and $29 million in annual synergies; (2) reduced earnings exposure to cyclical sectors, such as potash and nitrogen; (3) increased regional diversification; and (4) an increased ability to tap into higher-growth salt markets that are somewhat driven by population and economic growth.
Exhibit 5.37: K+Ss Profile Before and After Morton Salt Acquisition
Although K+S had some exposure to the North American salt market through SPL, the Morton Salt acquisition made K+S the #1 player. Customer proximity is key to profitability in the salt business, due to the relatively high shipping costs versus the value of rock salt. Many of Morton Salts mines are concentrated in or near major de-icing salt demand regions. Exhibit 5.38 summarizes K+Ss global salt operations.
Source: K+S.
279
January 2011
Exhibit 5.38: K+S Salts Production Profile

K+S Sub. Production Method Rock Brine Rock Rock Brine Plant Brine plant Salt Average Reserves Extraction
(M mt) (M mt)
Site Bernburg Bernburg Braunschwieg-Lueneburg Borth Harlingen Bayonne
Country Germany Germany Germany Germany The Netherlands France
Life
(years)
42.9 91.5 21.6 49.7 8.8 0.4 214.9 205.0 >500.0 48.6 22.0 25.5 85.0 67.5 60.0 12.5 9.0 12.0 6.0 10.5 10.0 7.5 >400.0
1.4 0.3 0.5 1.3 1.0 0.1 4.6 0.5 6.5 7.0 2.9 1.3 1.4 1.4 1.3 0.4 0.5 0.3 0.3 0.3 0.2 0.1 1.1 0.7 0.1 12.3
30 >100 42 39 9 4 47 >100 32 >71 17 17 18 61 52 >100 25 30 40 20 53 >100 >100 >100 75 >33
Esco
SPL
Rio Grande de Norte Tarapaa
Brazil Chile
Evaporation Open-Cast
Ojibway Pugwash Mines Seleine Weeks Island Fairport Grand Saline Rittman Hutchinson Silver Springs Manistee Windsor Lindbergh Inaqua Grantsville Glendale
Canada Canada Canada United States United States United States United States United States United States United States Canada Canada Bahamas United States United States
Rock Rock Rock Rock Rock Rock + Brine Brine Brine Brine Brine Brine Brine Evaporation Evaporation Brine
SALT PRODUCTION METHODS
Solar Evaporation Salt production is quite similar to potash production.
Natural evaporation of seawater or brine produces solar salt; thus, sun and wind conditions are extremely important to the process. The most important step is to pump the salt solution into separate evaporation ponds. After months of exposure to the sun, the sodium chloride crystallizes and is then harvested. This is nearly identical to the solar evaporation of potash, which typically yields 30 cm or product every eight to nine months.
Rock Mining
Rock salt is typically found in underground deposits; however, at SPLs Tarapaca site, open-pit mining is used. Large diesel-powered equipment is required to drill, blast, and remove the salt from the rock. Once the salt is free, it is sent through crushing and screening processes, where the product is then sized, graded, and further processed for eventual sale.
Brine Plant
Fresh or recycled water is injected into a well drilled into an underground salt deposit to dissolve the salt. Once the brine solution is saturated with sodium chloride, it is then pumped to the surface for further processing (and is sometimes treated to reduce calcium, magnesium, and sulphate levels). Above ground, the water is then evaporated from the brine using either steam-powered multiple-effect evaporators or electric-powered vapour compression evaporators. In both cases, the steam/vapour is recycled.
280
Morton Salt
K+S AG
January 2011
Exhibit 5.39: Salt Mining Chamber in Germany
Exhibit 5.40: Salt Extraction in Atacama Desert
Source: K+S.
Source: K+S.
KEY DRIVERS FOR THE SALT BUSINESS
The consumption of de-icing salt is (obviously) driven by winter weather conditions. Therefore, de-icing salt volumes will fluctuate significantly year to year (i.e., regional diversification is key). Consumer-grade salt consumption is affected by population growth and improvements to living standards. Industrial and chemical salt consumption drivers are economic growth and industrialization. Exhibit 5.41 shows regional salt production and consumption growth profiles since 2000.
Exhibit 5.41: Regional Salt Consumption Since 2000
Asia has the largest supply/demand imbalance for salt.
Source: K+S; Roskill 2007.
281
January 2011
OUTLOOK
We estimate that K+S Salt will realize 57/tonne and 58/tonne for its de-icing business in 2011 and 2012, respectively. On a blended basis, we forecast that K+S Salts other business segments will realize 2011 and 2012 prices of 100/tonne and 102/tonne (see Exhibit 5.42).
Exhibit 5.42: SC Forecast K+S Salt Realized Price by Business Line
150
125 100 75 50 25 0 2007 2008 2009 De-icing 2010
Forecast
2011
2012
Industrial, Chemical, and Food-Grade
We are looking for 22 million and 22.5 million tonnes of salt sales in 2011 and 2012, respectively. This is approximately flat with our 22 million tonne forecast for 2010 and is approximately in line with the companys guidance. Previous years are not comparable, as K+Ss acquisition of Morton Salt was first included in the companys financials in Q4/09. Exhibit 5.43 highlights our quarterly sales volume forecast, which is heavily weighted toward Q1 and Q4 due to the seasonality associated with northern hemisphere de-icing salt demand.
Exhibit 5.43: SC Forecast K+S Salt Sales Volume by Business Line
10
Salt Volume (M mt)
Pre-Morton 8 6 4 2 0 2007 2008 2009 2010
Forecast
2011
2012
De-icing
Exhibit 5.44: SC Forecast K+S Salt Sales by Business Line

700
Salt Revenue ( M)
600 500 400 300 200 100 0 2007 2008
Pre-Morton
Forecast
2009
2010
2011
2012
De-icing
Other
282
K+S AG
January 2011
On an EBITDA basis, we are looking for 337 million and 351 million in 2011 and 2012, respectively. We note that this is a very slight decline from our 2010 forecast of 360 million. Why? We do not think the Q1/10 COGS (and other expenses) of ~50/tonne is sustainable, and was due to a large volume push on the back of a harsh winter. This led to an EBITDA margin of 24% for the quarter. Prior to the Morton Salt acquisition, a 12% to 17% EBITDA margin range more accurately reflected the segment.
Exhibit 5.45: SC Forecast K+S Salt EBITDA and EBITDA Margins
160 30% 25% 20% 15% 10% 5% 0% 2007 2008 2009 2010 2011 2012
Salt EBITDA ( M)
140 120 100 80 60 40 20 0
15% to 20% quarterly EBITDA margins should be sustainable going forward.
EBITDA (LHS)
EBITDA Margin (RHS)
Exhibit 5.46 highlights our quarterly capex and depreciation forecast through 2012.
Exhibit 5.46: SC Forecast K+S Salt Capex and Depreciation
40 35 Pre-Morton
Forecast
( Millions)
30 25 20 15 10 5 0 2007 2008 2009 2010 2011 2012
Capex
Depreciation
283
EBITDA Margin (%)
Forecast
284
4.1 3.9 8.0 45 68 61 186 264 0 36 486 407 79 11 68
16% 14% 9% 7% 24% -1% 11% 10% 14% 18% 8% 14% 13% 26% 8% 18% 18% 20% 24% 20% 20% 10%
Exhibit 5.47: SC Forecast K+Ss Salt Segment

( M)
Volume (M mt) De-icing Industrial, Chemical, and Food-Grade 4.0 4.7 8.8 45 64 62 184 303 0 59 545 469 77 29 48 32 45 9 80 9 -1 9 14 34 47 60 140 39 108 35 22 29 32 541 78 249 89 91 8 99 22 374 81 814 200 470 146 219 56 244 61 387 97 33 64
20% 13%
4.5 5.0 9.5 49 67 65 218 335 0 66 619 1,321 360 125 226
21% 13%
4.0 1.2 5.2 61 68 61 239 81 0 18 338 15 76 -3 12 99 26 83 -2 14 121 218 205 14 19 455 498 445 9 63 1,014 376 218 0 23 617 27 232 0 17 276 58 228 0 19 305 242 228 0 14 484 703 906 0 72 1,681 295 260 0 17 572 435 137 34 103
24% 18%
0.3 1.1 1.4 44 70 44 45 65 45 53 91 53 56 76 49 53 99 61 55 103 44 53 101 86 55 99 70 54 101 73 59 106 74 53 96 87 33 217 0 8 258 227 31 29 2
12% 1%
0.6 1.3 1.9
4.1 2.3 6.4
9.0 5.9 14.8
7.1 2.2 9.3
0.5 2.3 2.8
1.1 2.2 3.3
4.4 2.3 6.7
13.0 9.0 22.0
5.0 2.5 7.5
0.6 2.3 2.9
1.9 2.3 4.2 54 98 78 102 222 0 10 334 274 60 30 30

18% 9%
5.0 2.5 7.5 56 101 71 281 248 0 16 545 436 109 33 76

20% 14%
12.5 9.5 22.0 57 100 75 711 948 0 50 1,709 1,372 337 127 210
20% 12%
12.8 9.7 22.5 58 102 77 741 987 0 52 1,779 1,428 351 130 221
20% 12%
Selling Price ( /mt) De-icing Industrial, Chemical, and Food-Grade
Revenue De-icing Industrial, Chemical, and Food-Grade Reconciliation Other
COGS & Other Expenses EBITDA
Depreciation EBIT I
EBITDA (%) EBIT I (%) 21 48 59 5 10 7 27 48 11 15
Maintenance Capex
16
16
58
17
15
15
17
64
65
January 2011
K+S AG
January 2011
III. K+S Nitrogen

K+S Nitrogen and its subsidiary COMPO are leading distributors and marketers of nitrogen-based products, including ammonium sulphate, complex fertilizers, straight nitrogen fertilizers, as well as consumer and expert (i.e., golf courses, nurseries) fertilizers. K+S Nitrogen focuses on providing nitrogen fertilizer to traditional agricultural crops, while COMPO concentrates on the consumer and expert segments. In our view, there is a fairly even sales mix among the five business lines, although we note that between 70% and 80% of K+S Nitrogen revenue is generated in Europe (see Exhibits 5.48 and 5.49).
Exhibit 5.48: K+S Nitrogen Revenue (2009) Exhibit 5.49: K+S Nitrogen Revenue (2009)
Rest of Europe 58%
~75% of K+S Nitrogen revenue is Europe-based.
Complex 12%
Straight 21%
Expert 31% Ammonium Sulphate 12%
Germ any 20%
Consumer 24%
Overseas 22%
Over the past several years, K+S Nitrogen has supplied between 4.1 million and 5.2 million tonnes of fertilizers to 60+ countries worldwide. Exhibits 5.50 and 5.51 highlight K+S Nitrogens and COMPOs product mixes.
K+S Nitrogen EBITDA margins are low at 3% to 5%.
Prior to the wild 2007-2008 run-up in fertilizer prices, K+S Nitrogen generated about 1 billion in annual revenues, on average. However, over the same period, EBITDA grew steadily to almost 60 million from less than 30 million in 2001. The real story is told on an EBITDA margin basis. Over the last decade, K+S has realized an average EBITDA margin of only 3% to 5% on its nitrogen business, compared with 18% on salt and 20% on potash. K+Ss nitrogen margins are lower than its peers nitrogen margins due to the capped upside placed on the business through historical agreements with BASF discussed next.
Exhibit 5.50: K+S Nitrogen Product Mix
Complex Fertilizers ENTEC -NPK S ENTEC -NPK C ENTEC -NP NITROPHOSKA S (containing potassium sulphate) NITROPHOSKA C (containing potassium sulphate) NITROPHOS Stabilized NPK fertilizers for chloride-sensitive specialty crops (fruit and vegetables) Stabilized NPK fertilizers on the basis of potassium chloride for chloride-tolerant crops Stabilized NP fertilizers for all crops in combination with straight potassium fertilizers NPK formulations for chloride-sensitive crops (fruit and vegetables) NPK formulations on the basis of potassium chloride for all agricultural crops NP formulation for all crops in combination with straight potassium fertilizers
Exhibit 5.51: COMPO Product Mix

Consumer Brands COMPO , Algoflash Gesal , Sem , Gardiflor Branded Products for Home & Garden Full range of potting soils, flower and garden care products as well as pesticides Potting soil, flower and garden care as well as pesticides for selected countries and distribution channels Special Products for Use as Supplies Granulated fertilizers containing sulphate for nurseries, horticulture and special crops with protected cultivation Stabilized complex fertilizers for nurseries, horticulture and special crops with protected cultivation For nutrient salts in fertigation Slow-release fertilizers for lawns, sports fields, public green areas, and other special crop applications Coated slow-release fertilizers for nurseries, ornamental plants, public green areas, forestry and special applications for other crops Water soluble salts/liquid fertilizers for special crop fertigation Micronutrient fertilizers
EXPERT- Products Blaukorn
NovaTec NovaTec Solub Floranid
Straight Nitrogen Fertilizers Calcium ammonium nitrate Ammonium nitrat ass (ammonium sulphate nitrate) ENTEC 26 Ammonium Sulphate Ammonium sulphate (standard) Granammon (coarse-crystalline)
All agricultural crops All agricultural crops All agricultural crops (nitrogen-sulphur fertilizers) Stabilized nitrogen sulphur fertilizers for all crops
Basacote
Agriculture, raw material used in complex fertilizer industry and for bulk blending Agriculture, raw material for bulk blending
Hakaphos /Kamasol Fetrilon
Source: K+S.
Source: K+S.
285
January 2011
THE NITROGEN ROLE OF BASF
K+S bought COMPO from BASF 10 years ago.
K+S Nitrogens fertilizers are produced exclusively by BASF SE the worlds largest chemical company. Additionally, COMPO has some of its products manufactured by BASF, while the remainder of its product line is produced at its own Western European plants. As a reminder, BASF is the ex-parent company of K+S, and currently a 10% shareholder of K+S. In late 1999, BASF sold COMPO to K+S, as well as marketing and sales of all nitrogen-based fertilizers produced by BASF. The transaction price was 215 million. Sales of the relevant nitrogen business activities in 1998 amounted to 920 million, of which COMPO products accounted for 307 million. While the relationship between K+S and BASF is certainly strong, we believe the earnings agreement between the two companies is more favourable for BASF. Specifically, the agreement provides K+S with a 50% share of earnings up to 10 million, and a 25% share for earnings above 10 million. On the downside, K+S is protected beyond 5 million loss. The contract is valid until the end of 2014.
LOOKING TO EXIT COMPO?
In June 2010, K+S announced that it was considering selling COMPO. Unlike the potash industry, the nitrogen fertilizer industry is highly fragmented, especially in the consumer and expert business segments in which COMPO operates. To put this in perspective, K+S Nitrogen (including COMPO) reported negative EBITDA of 94 million last year, compared with positive EBITDA of 134 million in 2008. Free-falling prices combined with high-cost inventory led to the sharp volatility in earnings. COMPOs products can really be manufactured anywhere that natural gas supply and costs allow for positive economics. Recently, competitive pressure has been increasing from Bayer AG, The Scotts Miracle-Gro Company, as well as several small, regional European suppliers. In addition to the highly competitive nature of the sector, we see three additional reasons why K+S is seeking to exit COMPO, after having owned the business for about a decade:
1. To remain compliant with its growth strategy of focusing on the Potash & Magnesium and Salt
business segments. A sale of COMPO would likely generate immediate cash needed to fund potash growth plans.
2. Different marketing and sales structures from core products. Unlike K+Ss other products that are targeted toward wholesale customers, COMPOs consumer products are focused on amateur gardeners, which are sold through distribution channels such as garden centres, DIY stores, cooperative outlets, and/or food retailers. 3. Lower margins than core products. Historically, K+S has earned materially stronger margins on its potash and salt businesses (i.e., 18% to 20% since 2001), as compared with its nitrogen business (~3%).
Due to the nature of the production and marketing agreement between K+S and BASF, with respect to COMPO products only, we do not anticipate that a COMPO sale will yield a substantial return over book value (not disclosed).
286
K+S AG
January 2011
OUTLOOK
Our pricing forecasts for K+S Nitrogens business lines (ex consumer) are based on historical blended product pricing disclosure and not necessarily on specific product prices. In general, we expect complex and expert business lines to realize weighted average prices that are at slight and large premiums to our straight nitrogen fertilizer price forecasts, respectively. Conversely, our ammonium sulphate price forecast is at an average discount of 40% to straight nitrogen fertilizers, but varies with forecast sulphur price changes. For straight nitrogen fertilizers, we have assumed a realized price of 196/tonne in 2011, dropping by 10/tonne in 2012 (see Exhibit 5.52).
Exhibit 5.52: SC Forecast K+S Nitrogen Realized Prices by Business Line
1,000
Forecast 800 600 400 200 0 2007 2008 Expert 2009 Complex 2010 Straight 2011 Ammonium Sulphate 2012
On volume, we expect K+S Nitrogen to break through 5 million tonnes of product sold in 2011 (i.e., the first time since 2007), followed by 5.4 million tonnes over the following year. As Exhibit 5.53 shows, we expect about two-thirds of K+S Nitrogen sales volumes will be generated from straight nitrogen fertilizers and ammonium sulphate. Of course, for now, we have assumed that it is business as usual for COMPO.
Exhibit 5.53: SC Forecast K+S Nitrogen Sales Volumes by Business Line
Nitrogen Volume (M mt)
1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 2007 2008 2009 2010 Forecast
K+S Nitrogen should surpass 5M tonnes in 2011.
2011
2012
Expert
Complex
Straight
Ammonium Sulphate
We are looking for 2011 and 2012 K+S Nitrogen sales of 1.3 billion and 1.4 billion, respectively. We note that the entire 2.7% year-over-year sales increase in 2012 is due to volumes, as our price forecast is declining for straight nitrogen and ammonium sulphate, and flat for expert and consumer products. Exhibit 5.54 shows our quarterly sales forecast by business line for the K+S Nitrogen segment.
287
January 2011
Exhibit 5.54: SC Forecast K+S Nitrogen Sales by Business Line

Nitrogen Revenue ( M)
600 500 400 300 200 100 0 2007 2008 2009 2010 2011 2012 Forecast
K+S Nitrogen has stronger sales in Q1 and Q2.
Consumer
Expert
Complex
Straight
Ammonium Sulphate
EBITDA margins have historically been poor relative to K+Ss other business segments, ranging between 3% and 5%. Our forecast does not deviate from this trend. We model K+S Nitrogen EBITDA of 66 million and 68 million in 2011 and 2012, respectively. Our forecast implies an EBITDA margin of about 5% in both years. On a seasonality basis, we expect a 1H/2H EBITDA split of 56%/44%. Exhibit 5.55 highlights our quarterly EBITDA and EBITDA margin forecast through 2012, while Exhibit 5.56 forecasts the segments quarterly capex and depreciation.
Exhibit 5.55: SC Forecast K+S Nitrogen EBITDA and EBITDA Margins
60 12% 8% 4% 0% -4% -8% -12% 2007 2008 2009 2010 2011 2012
40 20 0 -20 -40 -60
EBITDA (LHS)
EBITDA Margin (RHS)
Exhibit 5.56: SC Forecast K+S Nitrogen Capex and Depreciation

10 Forecast
( Millions)
8 6 4 2 0 2007 2008 2009 2010 2011 2012
Capex
Depreciation
288
EBITDA Margin (%)
Nit. EBITDA ( M)
Forecast
289
1.0 1.0 1.8 1.4 5.2 0.9 0.7 1.5 1.3 4.4 0.2 0.1 0.4 0.4 1.0 0.1 0.1 0.3 0.4 1.0 0.1 0.2 0.5 0.4 1.1 0.1 0.1 0.3 0.4 0.9 0.5 0.5 1.5 1.5 4.1 0.2 0.3 0.5 0.4 1.2 0.1 0.3 0.5 0.4 1.3 0.1 0.4 0.6 0.4 1.4 0.1 0.2 0.4 0.3 1.1 0.5 1.1 1.9 1.5 5.0 0.3 0.2 0.4 0.4 1.3 0.2 0.2 0.4 0.5 1.3 0.2 0.3 0.6 0.4 1.4 0.1 0.2 0.4 0.4 1.1 0.9 0.8 1.8 1.6 5.1 415 202 164 106 624 364 267 195 657 288 184 84 659 178 114 99 307 283 149 84 439 447 199 85 554 303 161 88 360 450 195 116 421 210 125 114 346 273 190 112 400 230 192 116 449 234 189 121 436 223 196 128 436 223 196 128 436 223 196 128 436 223 196 128 454 239 196 128 207 411 208 289 151 1,266 1,197 68 11 57
5% 5% 7% 2% -10% -23% -20% -11% 4% 8% 3% -9% -21% -18% -9% 4% 10% 9%
K+S AG
Exhibit 5.57: SC Forecast K+Ss Nitrogen Segment
( M)
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 9/31/09 12/31/09 12/31/09 3/31/10 6/30/10 9/31/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 0.9 0.9 1.9 1.7 5.4
Sales Volume (M mt) Expert Complex Straight Ammonium Sulphate
1.0 1.6 1.5 4.1
Implied Price (/mt) Expert Complex Straight Ammonium Sulphate
189 159 78
454 239 186 118
Revenue Consumer Expert Complex Straight Ammonium Sulphate 208 543 247 403 252 1,652 1,519 134 13 121 3 8 3 -27 4 -47 5 -42 14 -108 3 15 3 26 331 11 281 -24 248 -44 250 -38 1,111 -94 368 17 259 29 301 5 3 3
2% 1%
196 357 184 257 116 1,109 246 -8 3 -11

-4% -5%
91 119 34 69 29 342
70 87 20 38 43 257
25 29 48 69 33 205
21 37 59 66 30 212
207 271 161 242 135 1,016
87 54 113 88 44 386
70 46 63 61 47 287
22 45 96 104 39 306
25 56 45 71 41 238
204 201 316 325 170 1,217 1,173 43 11 32

4% 3%
88 140 40 88 47 404 384 20 3 17

5% 4%
69 102 39 77 58 345 328 17 3 14

5% 4%
27 72 59 109 54 320 304 16 3 13

5% 4%
25 64 46 77 47 260 247 13 3 10
5% 4%
209 379 184 351 206 1,329 1,263 66 12 55

5% 4%
215 401 194 353 202 1,365 1,297 68 12 56

5% 4%
COGS + Other Expenses EBITDA
1,052 57
Depreciation EBIT I
11 46
5%
EBITDA (%) EBIT I (%) 17 11 1 1 4 5 11 3
4%
Maintenance Capex
12
11
12
12
January 2011
January 2011
IV. K+S Complementary

The K+S Complementary segment is composed of four business lines: (1) Waste Management & Recycling; (2) Logistics; (3) Animal Hygiene Products; and (4) Trading. The contribution of the segment is minimal, with between 120 million and 130 million earned in sales in each of the last two years, and between 15 million and 30 million in annual EBITDA. To put this in perspective, the group contributes between 2% and 4% of K+Ss annual EBITDA. Waste Management & Recycling provides about two-thirds of the segments sales, and 80%+ of the segments revenue is earned in Germany (see Exhibits 5.58 and 5.59). We briefly highlight each of the four business lines below.
Exhibit 5.58: K+S Complementary Revenue (2009) Exhibit 5.59: K+S Complementary Revenue (2009)
Germ any 82%
K+S Complementary contributes between 2% and 4% of annual EBITDA.
Waste Managem ent & Recycling 56% Logistics 10%
Anim al Hygiene 27%
Trade 7%
Rest of Europe 18%
Waste Management & Recycling
The Waste Management & Recycling line uses underground caverns created as a result of the extraction of crude salts for the long-term disposal of waste and for waste recycling. It operates two underground storage sites, as well as five underground plants for the reutilization of waste. The salt deposits used by K+S for waste disposal are impervious to gas and liquids, as well as being far removed from ground water. For the secondary aluminum industry, the business line offers smelting salts and the recycling of salt slags.
Logistics
The Logistics business line, called KTG, operates Kalikai in Hamburg, one of Europes largest transshipment facilities for bulk goods, and is therefore of strategic importance to K+Ss Potash & Magnesium segment. Following an expansion project between 2006 and 2008, storage capacity now stands at about 0.4 million tonnes.
Animal Hygiene
At K+Ss Salzdetfurth site (a depleted potash mine), the company granulates animal hygiene products for the Mars Company (ex Masterfoods).
Trading
The Trading businesses line known as CFK trades basic chemicals such as calcium chloride for pre-wetted salt spreading in winter maintenance, sodium carbonate, caustic soda, and sodium sulphate. CFKs customers include well-known European chemical companies, glass manufacturers, metal processing businesses, as well as local governments.
290
K+S AG
January 2011
OUTLOOK
Given: (1) the high proportion of intra-group services; (2) the diverse nature of the individual business lines; (3) the limited disclosure of the segment; and (4) the immateriality of the group relative to the company as a whole, we have limited our K+S Complementary financial forecast to revenue-based growth rates. For 2011 and 2012, we are looking for overall K+S Complementary revenue of 131 million and 133 million, respectively. On an EBITDA basis, we forecast 23 million in each of 2011 and 2012. Exhibits 5.60 through 5.62 highlight our quarterly sales forecast by business line, EBITDA and EBITDA margins, and capex and depreciation for the segment.
Exhibit 5.60: SC Forecast K+S Complementary Sales by Business Line
Comp Revenue ( M)
50 Forecast 40 30 20 10 0 2007 2008 2009 2010 2011 2012
Waste Management & Recycling should make up the bulk of Complementary sales.
Trading
Animal Hygiene
Logistics
Waste Management & Recycling
Exhibit 5.61: SC Forecast K+S Complementary EBITDA and EBITDA Margins

Comp EBITDA ( M)
14 12 10 8 6 4 2 0 2007 2008 2009 2010 2011 2012 Forecast 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
EBITDA (LHS)
EBITDA Margin (RHS)
Exhibit 5.62: SC Forecast K+S Complementary Capex and Depreciation

7 6 Forecast
( Millions)
5 4 3 2 1 0 2007 2008 2009 2010 2011 2012
Capex
Depreciation
291
EBITDA Margin (%)
292
2007 12/31/07 2008 Q1-09 Q2-09 Q3-09 Q4-09 12/31/08 3/31/09 6/30/09 9/31/09 12/31/09 2009 12/31/09 Q1-10 3/31/10 55 69 124 76 48 9 39
39% 32% 30% 20% 7% 12% 14% 17% 13% 19% 19% 14% 18% 37% 25% 12% 17% 17% 24% 18% 24% 24% 18% 24% 23% 18% 22% 17%
Exhibit 5.63: SC Forecast K+S Complementary

Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 6/30/10 9/31/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12
( M)
2006 12/31/06
Revenue Trading Animal Hygiene Logistics Waste Management & Recycling 55 71 126 79 46 9 38 94 31 6 25 26 4 2 2 23 5 2 3 26 5 1 4 25 8 2 6 99 22 6 15 25 8 2 6 24 8 2 6 26 6 2 4 24 8 2 6 100 29 6 23 30 9 2 6 22 7 2 6
25% 19%
8 32 15 71 125
2 8 3 16 29
2 8 3 15 28
2 8 3 17 31
2 9 3 18 33
8 33 12 67 121
4 9 4 17 33
3 8 4 17 32
2 9 3 18 32
2 9 3 18 32
11 34 13 71 129
3 11 3 21 38
2 7 3 16 29
3 7 3 17 30 24 6 2 4
20% 15%
3 9 3 19 34 26 8 2 6
24% 18%
11 34 13 73 131 101 30 8 23
23% 17%
12 33 14 75 133 103 31 8 23
23% 17%
COGS + Other Expenses EBITDA Depreciation EBIT I
EBITDA (%) EBIT I (%) 13 17 10 1 0 3 1 5 0 1 2 2
Maintenance Capex
January 2011
K+S AG
January 2011

We believe K+S carries a High risk profile. Key risk factors are outlined below.
MACROECONOMIC TRENDS
Fertilizer demand is considerably influenced by economic growth.
K+Ss profitability is highly dependent on fertilizer demand, which itself is considerably influenced by general economic growth. Why? Greater prosperity in emerging markets lead to improved diets, which is particularly reflected in an increased per-capita consumption of meat. As the production of meat requires significant amounts of grains used as animal feed, crop demand and futures prices typically rise (all else being equal). Conversely, lower market prices for crops and other agricultural products could result in farmers being less certain about their future earnings, which could ultimately impact their demand for fertilizers. However, partially offsetting the impact of macroeconomic trends on the companys fertilizer business is its salt segment, which we believe is relatively stable as well as independent of economic conditions.
FERTILIZER DEMAND & PRICE CHANGES
Exhibit 5.64: K+Ss Potash Outlook
Unlike most global commodities, fertilizers are not typically sold forward beyond one year out and cannot be price-hedged in a futures market. K+Ss profitability is highly dependent on crop input demand, which can be affected by crop prices, crop nutrient prices, farmer economics, government policies, and subsidies, farmer/customer credit, a buildup of inventories, and competitor actions such as decisions to build or close production facilities, and/or changes in production operating rates. Investors should expect significant fluctuation in the pricing of K+Ss fertilizer products, which could lead to unstable earnings. Exhibit 5.64 shows K+Ss forecast for potash supply and demand through 2014.
Source: IFA; K+S.
WEATHER & SEASONALITY
The majority of K+Ss products are affected by weather conditions.
The majority of K+Ss products are affected by weather conditions and therefore exhibit high degrees of seasonality. Prolonged cold and wet weather during Europes spring planting season could negatively impact sales volumes of its fertilizer products. Why? Farmers have limited windows of opportunity to complete crop cultivation. If adverse weather conditions occur during these seasonal windows, K+Ss sales and earnings could be negatively impacted without the opportunity to recover until the following season. On the salt side of K+Ss business, mild winter weather could lead to a decline of de-icing salt demand. As a partial risk mitigation, K+Ss expansion into North and South American markets helps to reduce its weather risk through regional diversification.
293
January 2011
Soaring potash prices between 2006 and 2008 led to a surge of interest among new entrants looking to join the potash party. These new entrants range from pre-IPO junior resource companies to global mining giants such as BHP Billiton. If new supply, including existing producer-announced brownfield expansions, were to come online faster than warranted, potash prices could be depressed for a prolonged period. This would negatively impact K+Ss potash margins, profitability, and ultimately, its share price.
FX RATE CHANGES
K+Ss fertilizers are produced in Europe; therefore, its cost of goods sold are incurred in euros. However, almost half of its potash sales and about one-fifth of its nitrogen fertilizer sales are priced in U.S. dollars. A depreciation of the U.S. dollar against the euro will result in lower reported revenues and earnings for the companys fertilizer segment. We estimate that a 2 depreciation of the U.S. dollar could result in an earnings decline of about 0.11 per share.
Exhibit 5.65: EUR-USD FX History
1.70
Euro (U.S. Dollar)
A 2 depreciation of the U.S. dollar could result in an earnings decline of 0.11/share.
1.60 1.50 1.40 1.30 1.20 1.10 1.00 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
+1 SD Avg
-1 SD
ANTI-DUMPING
K+S is challenged by potash producers from Russia and Belarus, which receive considerable government-based subsidies such as gas costs that are well below market prices or subsidized rail transport. Accordingly, competitors such as Uralkali, Silvinit, and Belaruskali can offer their products on better terms than K+S, as it does not receive state subsidies. In 2006, the regulations on anti-dumping protection against unfair competition with potash fertilizers from Russia and Belarus for the European market were updated until mid-2011. In our view, increased competitive pressure from Russia and Belarus will likely result in K+S marketing more of its potash to overseas markets.
Exhibit 5.66: SC Forecast K+S Quarterly Sales by Division
Occurrence External & Sector-Specific Economic trends Fluctuations in demand and price Seasonal fluctuations in demand Effects of political and social changes Energy costs and energy supply risks Financial FX rate fluctuations Credit rating changes Interest rate changes Liquidity risks Customer payment default Legal Environment Reduced anti-dumping protections Tax laws Possible Possible Possible Unlikely Possible Impact Significant Significant Moderate Significant Moderate Operational & Strategic Acquisitions and investments Loss of suppliers and supply bottlenecks Increased ammonia costs Freight costs and transport availability Production risks Environmental damage from rock bursts Carbon dioxide pockets in deposits Saline solution access Research and development Personnel Compliance IT Occurrence Unlikely Unlikely Possible Possible Possible Unlikely Possible Unlikely Unlikely Unlikely Unlikely Unlikely Impact Significant Moderate Moderate Moderate Moderate Significant Moderate Significant Significant Moderate Significant Moderate
Possible Unlikely Unlikely Unlikely Unlikely
Moderate Moderate Moderate Significant Moderate
Possible Possible
Moderate Moderate
294
K+S AG
January 2011
Financial Forecast
On the top line, we are looking for gross sales of 5.21 billion for 2011 and 5.46 billion in 2012, or an increase of 4.8% year over year in 2012 (see Exhibit 5.67). By 2012, we believe that K+S potash sales volumes will have fully recovered from record-low demand in 2009. We also see minimal growth in its salt business and near-flat nitrogen and complementary businesses.
Exhibit 5.67: SC Forecast Sales by Division
1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2007 Forecast
Revenue ( M)
De-icing salt sales peak in Q1 and Q4.
2008
2009 Potash & Magnesium
2010 Nitrogen Salt
2011 Complementary
2012
We expect K+Ss gross profit to follow a similar pattern to sales, driven by strong Q1s/Q4s due to materially higher North American and European de-icing salt sales volumes (see Exhibit 5.68). Specifically, we are looking for 2.2 billion and 2.4 billion in 2011 and 2012, respectively. On an EBITDA basis, potash will continue to dominate, providing 60% to 64% of the 1.1 billion and 1.3 billion we forecast for 2011 and 2012, respectively (see Exhibit 5.69).
Exhibit 5.68: SC Forecast Gross Profit and Gross Profit Margins
900 800 700 600 500 400 300 200 100 0 2007 2008 2009 2010 Forecast 60% 50% 40% 30% 20% 10% 0% 2011 2012
We see gross profit margins in the 43% to 45% area.
Gross Profit (LHS)

Gross Profit Margin (RHS)
Exhibit 5.69: SC Forecast EBITDA by Division and EBITDA Margins

600 500 Forecast 60% 50% 40% 30% 20% 10% 0% -10% 2007 2008 2009 2010 2011 2012
Potash should account for ~60% of annual EBITDA.
400 300 200 100 0 -100
Potash & Magnesium

Nitrogen
Salt
Complementary
EBITDA Margin (RHS)
295
EBITDA Margin (%)
EBITDA ( M)
Gross Profit Margin (%)
Gross Profit ( M)
January 2011
We forecast 2011 adjusted group earnings per share at 3.55, followed by an 18.7% bump to 4.17 per share in 2012 (see Exhibit 5.70). Our K+S financial forecast is generally in line with consensus (see Exhibit 5.71). However, we believe that there is upside earnings room available to our estimates, as our potash pricing estimates may be too conservative.
Exhibit 5.70: SC Forecast Adjusted Group Earnings and Earnings Margins
Earnings Margin (%)
5.20
400 60% Forecast 300 200 100 0 -100 2007 2008 2009 2010 2011 2012 50% 40% 30% 20% 10% 0% -10%
Our potash pricing estimates may be too conservative.
Adj. Earnings ( M)
Adj. Earnings (LHS)

Earnings Margin (RHS)
Exhibit 5.71: Our 2011 and 2012 K+S Estimates vs. Consensus
2011 2012 Street Avg. 5,230 1,218 680 3.50 High 5,823 1,515 905 4.73 Scotia Capital Est. 5,462 1,284 797 4.17 Low 4,986 1,100 619 3.23 Street Avg. 5,450 1,360 769 3.97 High 6,087 1,771 1,097
We are generally slightly above consensus.
Scotia Capital Est. Net Sales ( M) EBITDA ( M) Group Earnings ( M) EPS (/sh) 5,208 1,122 679 3.55
Low 4,779 904 428 2.24
We estimate that K+S will generate 0.8 billion and 1 billion in cash flow from operations in 2011 and 2012, respectively. This should enable it to pay dividends of 1.05 and 1.48 per share (NTM of 0.99 per share), a material increase 0.20 in 2009, in but about half of the record 2.40 from 2008 earnings. Exhibit 5.72 highlights that, post 2010, K+Ss return on assets and return on equity should return to more normalized levels.
100% 80% 60% 40% 20% 0% -20% -40% -60% 2007 2008 2009 2010 2011 2012 Forecast
Return (%)
ROA
ROE
Exhibits 5.73 through 5.75 provide detailed financial statement forecasts, while Exhibits 5.76 through 5.83 show 2011 K+S earnings sensitivities to assumption changes.
296
297
2006 2007 2008 12/31/06 12/31/07 12/31/08 2,958 1,305 1,122 489 43 -1,928 1,030 -714 -82 -14 56 85 362 0 0 -28 7 341 -70 271 0 271 362 -84 278 -20 258 -40 218
165 0 0 165 165 165 165 165 165 165 165 165 165 0 0 0 0 0 0 0 0 0 0 165 165 165 165 165 165 165
Exhibit 5.73: SC Forecast K+S Income Statement

Q1-09 3/31/09 1,076 366 342 338 29 -664 412 -189 -27 -4 -6 -33 153 0 1 -9 0 145 -37 107 0 107 153 21 174 -8 166 -43 123 14 -44 0 -2 0 18
165 26 0 191 170
K+S AG
( M) Q2-09 6/30/09 739 355 257 99 28 -474 265 -160 -33 -5 -39 9 38 0 1 -8 -69 -39 9 -30 0 -30 38 -20 18 -77 -59 -12 -2 -19 18 -115 123 -29 94
165 26 0 165 166
Q3-09 Q4-09 2009 09/31/09 12/31/09 12/31/09 698 341 205 122 31 -474 224 -156 -24 -6 -20 -2 17 0 1 -25 12 6 -2 4 0 4 17 -8 9 34 3 36 242 -4 238 263 5 268 -30 238 -62 176
191 0 0 191 191
Q1-10 3/31/10 1,534 498 386 616 33 -893 641 -294 -40 -4 -25 -15 263 0 1 -31 -1 233 -60 173 0 172 -28 77 0 76 126 29 156 -22 134 -37 98
191 0 0 191 191
Q2-10 Q3-10 Q4-10E 2010E 6/30/10 09/31/10 12/31/10 12/31/10 1,059 464 287 275 32 -646 413 -235 -45 -4 30 -34 126 0 2 -21 -2 105 -29 77 0 77 159 -50 109 -53 56 -16 40
191 0 0 191 191
Q1-11E 3/31/11 1,567 553 404 572 38 -848 719 -329 -44 -6 0 0 340 -678 480 -243 -32 -5 0 0 200 1,157 525 345 258 29 1,134 449 320 334 30 -701 432 -238 -32 -5 0 0 158
Q2-11E 6/30/11
Q3-11E Q4-11E 2011E 2012E 9/30/11 12/31/11 12/31/11 12/31/12 1,350 512 260 545 34 -763 587 -284 -38 -5 0 0 260 5,208 2,039 1,329 1,709 131 -2,990 2,218 -1,094 -146 -21 0 0 958 5,462 2,184 1,365 1,779 133 -3,026 2,436 -1,147 -153 -22 0 0 1,114
Revenue Potash and Magnesium Products Nitrogen Fertilizers Salt Complimentary Segments/Reconciliation -2,197 1,147 -767 -90 -16 6 -388 -107 0 0 -36 0 -143 50 -93 268 175 -107 393 286 -36 250 -75 175 -370 979 7 1,350 1,192 150 1,343 -1 871 0 16 -1 96 -328 871 1 16 -30 97 0 25 -30 11 1,199 0 2 -20 -1 15 0 5 -62 -58 127 0 2 -58 4 106 0 2 -11 0 150 -40 110 0 110 159 0 159 -9 150 -40 110
191 0 0 191 191
3,344 1,480 1,287 549 28 -2,553 2,242 -776 -104 -18 -7 -143 1,192 0 6 -121 1 593 -157 436 -1 435 707 -16 690 -114 577 -154 423
191 0 0 191 191
4,794 2,501 1,663 623 50 -733 329 -208 -40 -5 -33 -9 34 -712 -123 -19 -99 -35 242 -224 -38 -3 -6 49 159 -250 -33 -5 0 0 159 -1,003 -156 -15 0 -1 707 -2,344 1,230 -679 382 -743 447 -2,960 1,882
1,061 361 212 455 33
3,574 1,500 1,020 1,019 35
1,061 418 306 305 32
1,189 436 238 484 32
4,842 1,816 1,217 1,681 129
Cost of sales Gross profit
Selling expenses General and administrative expenses Research costs Other net operating income/(expenses) Hedging gains / (losses) + other Earnings before interest and taxes (EBIT II)
Write-downs on financial assets & short term securities Interest income, net Interest expenses Other financial result Earnings before income taxes (EBT)
0 2 -11 0 331 -88 243 0 243 340 0 340 -9 331 -88 243
191 0 0 191 191
0 2 -11 0 191 -51 140 0 140 200 0 200 -9 191 -51 140
191 0 0 191 191
0 3 -11 0 150 -40 110 0 110 158 0 158 -8 150 -40 110
191 0 0 191 191
0 3 -11 0 253 -67 186 0 185 260 0 260 -8 253 -67 186
191 0 0 191 191
0 11 -44 0 924 -245 679 -1 678 958 0 958 -33 924 -245 679
191 0 0 191 191
0 16 -44 0 1,086 -288 798 -1 797 1,114 0 1,114 -28 1,086 -288 797
191 0 0 191 191
Taxes Net income
Minority interest + FMV changes Group earnings
EBIT II Hedging adjustments EBIT I
Write-downs, net interest, other financial EBT I
Taxes, minority interest + FMV changes Group earnings, adjusted
Basic shares - opening (M) Plus: Equity issued (M) Less: Share buyback (M) Basic shares - closing (M) Average Shares O/S (M) 1.32 401
14% 12% 31%
Adjusted EPS 1.06 414 1,484 221

21%
5.94
0.74
-0.27 63
9%
-0.01 57
8%
0.10 104
10%
0.56 445
12%
0.92 343
22%
0.51 233
22%
0.21 172
16%
0.57 199
17%
2.21 947
20%
1.27 380
24%
0.73 240
21%
0.57 199
18%
0.97 302
22%
3.55 1,122
22%
4.17 1,284
24%
EBITDA
January 2011
298
2006 64 629 370 371 1,083 189 52 72 2,831 1,257 181 52 49 3,432 1,244 173 56 49 3,161 1,242 166 46 46 4,180 1,728 915 33 295 5,213 1,762 970 44 296 5,373 1,812 1,063 31 324 5,562 1,771 969 42 190 5,381 1,754 969 42 190 5,598 1,754 969 42 190 5,598 1,738 969 42 190 5,922 1,727 969 42 190 5,765 1,715 969 42 190 5,899 140 995 581 177 43 808 566 223 1,200 700 541 239 529 850 680 182 505 1,048 569 179 667 816 672 178 713 787 713 195 915 993 539 195 915 993 539 195 863 1,309 615 195 1,183 967 491 195 1,332 947 509 195 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 1,360 1,128 554 195 1,696 969 42 190 6,134 2011E 1,360 1,128 554 195 1,696 969 42 190 6,134 49 757 369 349 0 1,125 173 70 73 2,965 168 902 685 186 0 1,246 177 46 64 3,474 529 850 680 182 0 1,728 915 33 295 5,213 0 371 361 17 92 195 0 128 338 80 125 1,707 360 126 358 22 139 2,033 107 93 378 59 119 1,756 104 93 382 62 129 1,595 30 93 385 62 111 1,772 1,050 93 389 62 115 2,835 1,146 182 419 245 239 3,118 1,146 182 419 245 239 3,118 871 191 426 259 250 2,993 883 182 433 277 264 2,964 769 187 513 254 262 2,904 769 187 513 254 262 3,002 0 328 409 6 85 200 0 159 465 26 61 288 0 97 285 29 69 345 0 363 246 27 129 327 0 502 0 29 317 279 0 121 0 42 424 300 0 121 0 42 424 300 0 65 387 77 113 355 0 31 356 79 145 314 0 34 408 80 70 329 0 34 506 80 70 329 0 34 506 80 70 329 769 187 513 254 262 3,002 0 34 578 80 70 329 769 187 513 254 262 3,074 0 34 462 80 70 329 769 187 513 254 262 2,958 0 34 478 80 70 329 769 187 513 254 262 2,974 0 34 520 80 70 329 769 187 513 254 262 3,016 0 34 520 80 70 329 769 187 513 254 262 3,016 117 1 1,007 1,124 2,831 2,965 3,474 3,432 3,161 4,180 5,213 5,213 117 815 1 932 170 1 1,548 1,718 170 1 1,666 1,837 166 2 1,222 1,389 166 2 1,177 1,345 840 2 1,253 2,095 840 2 1,253 2,095 840 2 1,538 2,380 5,373 838 2 1,758 2,598 5,562 838 2 1,637 2,477 5,381 838 2 1,756 2,596 5,598 838 2 1,756 2,596 5,598 838 2 2,008 2,848 5,922 838 2 1,967 2,807 5,765 838 2 2,085 2,925 5,899 838 2 2,278 3,118 6,134 838 2 2,278 3,118 6,134
Exhibit 5.74: SC Forecast K+S Balance Sheet

2012E 1,888 1,185 560 195 1,631 969 42 190 6,662
( M) Assets Cash & Equivalents Accounts Receivable Inventories Prepaids/Other
Fixed Assets Intangible Assets Deferred Taxes Other
Liabilities Revolver Bank loans and overdrafts Accounts Payable Income tax liabilities Other liabilities Provisions
0 34 526 80 70 329 769 187 513 254 262 3,022
Bank loans and overdrafts Provisions for pensions and similar obligations Provisions for mining operations Provisions for taxes Other Total Liabilities
Equity Subscribed + paid-in capital Minority interests Retained earnings Total Equity
838 2 2,799 3,639 6,662
January 2011
299
2006 278 123 -50 -9 343 -12 -34 -75 0 -9 -4 -6 202 -467 43 -6 0 -430 -227 -8 -74 254 0 171 3 -53 74 64 64 49 49 168 168 140 140 43 0 -171 -3 312 1 -28 0 -162 -5 1,093 43 1,200 7 -544 1,200 529 -6 -83 131 37 79 -5 -83 -234 4 -318 -7 0 -68 0 -74 -7 -396 130 8 -266 0 0 1,124 0 1,124 668 0 -284 0 385 654 -396 155 8 1,168 3 360 168 529 -249 633 46 104 -26 -935 -811 337 -9 0 -358 0 -367 8 -22 529 507 225 1 -38 -40 6 -72 9 162 507 669 -139 8 -9 0 -141 -159 -5 -7 0 -170 -28 -1 -1 0 -30 -40 0 -1 0 -41 -42 0 -1 -88 -130 -1,142 -1 -3 0 -1,145 -1,252 -2 -5 0 -1,346 -26 -2 0 0 -28 -29 -2 -2 0 -33 -45 0 -2 0 -46 54 0 0 2 0 2 -12 44 669 713 -50 0 0 0 -50 202 0 0 0 0 0 0 202 713 915 -149 -4 -4 0 -157 819 -8 -38 -397 6 -437 5 386 529 915 -5 2 -501 0 6 27 -9 -109 -10 -315 -181 38 86 14 -7 803 0 104 -96 0 58 -163 0 75 0 15 152 0 -18 -44 -2 145 0 25 107 0 -52 7 0 104 0 66 9 0 -18 62 0 210 0 210 172 0 -31 -139 -2 535 0 131 -157 0 47 80 -2 365 1 -71 242 0 -50 -50 -1 258 0 -75 20 0 20 55 -1 100 0 174 -206 0 0 98 0 252 1 159 -101 0 17 184 -3 976 0 -77 -316 0 0 72 0 -2 -50 0 0 0 -50 -52 0 0 0 0 0 0 -52 915 863 0 124 342 0 0 -116 0 560 -50 0 0 0 -50 510 0 -190 0 0 -190 0 319 863 1,183 128 -20 -22 372 142 -266 -40 1,178 35 -42 5 172 35 7 -18 41 36 11 -37 19 68 -14 1 91 174 -38 -50 324 65 -76 9 266 62 -19 -12 187 56 -24 -59 81 67 -40 0 186 250 -158 -62 720 66 -88 0 318 61 -51 0 210 286 1,343 174 18 9 37 238 268 156 109 159 690 340 200 158 62 -40 0 180 0 -17 20 0 0 16 0 199 -50 0 0 0 -50 149 0 0 0 0 0 0 149 1,183 1,332 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 260 69 -67 0 262 0 -45 -181 0 0 42 0 78 -50 0 0 0 -50 28 0 0 0 0 0 0 28 1,332 1,360
K+S AG
Exhibit 5.75: SC Forecast K+S Cash Flow Statement

Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 958 258 -245 0 971 0 -15 -135 0 0 14 0 835 -200 0 0 0 -200 635 0 -190 0 0 -190 0 445 915 1,360 2012E 1,114 265 -288 0 1,091 0 -7 -57 0 0 6 0 1,033 -200 0 0 0 -200 833 0 -305 0 0 -305 0 528 1,360 1,888
( M)
EBIT I Add/(deduct) non-cash items: Depreciation/write ups on fixed assets Income tax received/paid Other non-cash expenses/income Gross Cash Flow
Gain/loss on disposals of fixed assets Increase/decrease in inventories Increase/decrease in receivables Payments from exercise of options Decrease/increase in short-term provisions Decrease/increase in liabilities (payables) Out-financing activities Cash flow from operating activities
Purchase/sale of fixed assets Purchase/sale of financial assets, securities Disbursements for intangible assets Other Cash flow from investing activities
Free cash flow
Issuance / repurchase of shares Dividends paid Issuance / repayment of debt/leases Other Cash flow from financing activities
Adjustments Net change in cash and cash equivalents
Cash and cash equivalents - beginning of period Cash and cash equivalents - end of period
January 2011
January 2011
Exhibit 5.76: K+S 2011E EPS Sensitivity to Potash Volume Changes
2011 Potash (KCl e) Volume (M mt) 263 273 283 293 303 313 323 6.7 2.63 2.84 3.04 3.25 3.45 3.66 3.86 6.8 2.73 2.94 3.14 3.35 3.55 3.76 3.96 6.9 2.83 3.04 3.24 3.45 3.65 3.86 4.06 7.0 2.93 3.14 3.34 3.55 3.75 3.96 4.16 7.1 3.03 3.24 3.44 3.65 3.85 4.06 4.26 7.2 3.13 3.34 3.54 3.75 3.95 4.16 4.36 7.3 3.23 3.44 3.64 3.85 4.05 4.26 4.46 Realized Potash & Mg Price (/mt)
Exhibit 5.77: K+S 2011E EPS Sensitivity to Potash COGS Changes
2011 Potash COGS (/mt) 263 273 283 293 303 313 323 30 2.15 2.36 2.56 2.77 2.97 3.18 3.38 20 2.41 2.62 2.82 3.03 3.23 3.44 3.64 10 2.67 2.88 3.08 3.29 3.49 3.70 3.90 Base 2.93 3.14 3.34 3.55 3.75 3.96 4.16 - 10 3.19 3.40 3.60 3.81 4.01 4.22 4.42 - 20 3.45 3.66 3.86 4.07 4.27 4.48 4.68 - 30 3.71 3.92 4.12 4.33 4.53 4.74 4.94 Realized Potash & Mg Price (/mt)
Exhibit 5.78: K+S 2011E EPS Sensitivity to De-Icing Salt Volume Changes
2011 De-Icing Salt Volume (M mt) 263 273 283 293 303 313 323 9.5 2.78 2.99 3.19 3.40 3.60 3.81 4.01 10.5 2.83 3.04 3.24 3.45 3.65 3.86 4.06 11.5 2.88 3.09 3.29 3.50 3.70 3.91 4.11 12.5 2.93 3.14 3.34 3.55 3.75 3.96 4.16 13.5 2.98 3.19 3.39 3.60 3.80 4.01 4.21 14.5 3.03 3.24 3.44 3.65 3.85 4.06 4.26 15.5 3.08 3.29 3.49 3.70 3.90 4.11 4.31 Realized Potash & Mg Price (/mt)
Exhibit 5.79: K+S 2011E EPS Sensitivity to Industrial, Chemical, and Food-Grade Salt Volume Changes
2011 Industrial, Chemical, and Food-Grade Salt Volume (M mt) 263 273 283 293 303 313 323 6.5 2.71 2.91 3.12 3.32 3.53 3.73 3.94 7.5 2.78 2.99 3.19 3.40 3.60 3.81 4.01 8.5 2.86 3.06 3.27 3.47 3.68 3.88 4.09 9.5 2.93 3.14 3.34 3.55 3.75 3.96 4.16 10.5 3.01 3.21 3.42 3.62 3.83 4.03 4.24 11.5 3.08 3.29 3.49 3.70 3.90 4.11 4.31 12.5 3.16 3.36 3.57 3.77 3.98 4.18 4.39 Realized Potash & Mg Price (/mt)
300
K+S AG
January 2011
Exhibit 5.80: K+S 2011E EPS Sensitivity to Realized De-icing Salt Price Changes
2011 Realized De-Icing Salt Price (/mt) 263 273 283 293 303 313 323 42 2.63 2.84 3.04 3.25 3.45 3.66 3.86 47 2.73 2.94 3.14 3.35 3.55 3.76 3.96 52 2.83 3.04 3.24 3.45 3.65 3.86 4.06 57 2.93 3.14 3.34 3.55 3.75 3.96 4.16 62 3.03 3.24 3.44 3.65 3.85 4.06 4.26 67 3.13 3.34 3.54 3.75 3.95 4.16 4.36 72 3.23 3.44 3.64 3.85 4.05 4.26 4.46 Realized Potash & Mg Price (/mt)
Exhibit 5.81: K+S 2011E EPS Sensitivity to (Average) Nitrogen Volume Changes
2011 (Average) Nitrogen Volume (M mt) 263 273 283 293 303 313 323 3.6 2.84 3.05 3.25 3.46 3.66 3.87 4.07 4.1 2.87 3.08 3.28 3.49 3.69 3.90 4.10 4.6 2.90 3.11 3.31 3.52 3.72 3.93 4.13 5.1 2.93 3.14 3.34 3.55 3.75 3.96 4.16 5.6 2.96 3.17 3.37 3.58 3.78 3.99 4.19 6.1 2.99 3.20 3.40 3.61 3.81 4.02 4.22 6.6 3.02 3.23 3.43 3.64 3.84 4.05 4.25 Realized Potash & Mg Price (/mt)
Exhibit 5.82: K+S 2011E EPS Sensitivity to Complementary EBITDA Margin Changes
2011 Complementary EBITDA Margin 263 273 283 293 303 313 323 8% 2.84 3.05 3.25 3.46 3.66 3.87 4.07 13% 2.87 3.08 3.28 3.49 3.69 3.90 4.10 18% 2.90 3.11 3.31 3.52 3.72 3.93 4.13 23% 2.93 3.14 3.34 3.55 3.75 3.96 4.16 28% 2.96 3.17 3.37 3.58 3.78 3.99 4.19 33% 2.99 3.20 3.40 3.61 3.81 4.02 4.22 38% 3.02 3.23 3.43 3.64 3.84 4.05 4.25 Realized Potash & Mg Price (/mt)
Exhibit 5.83: K+S 2011E EPS Sensitivity to FX Rate Changes
2011 FX Rate (US$ per Euro) 263 273 283 293 303 313 323 $1.31 2.60 2.81 3.01 3.22 3.42 3.63 3.83 $1.29 2.71 2.92 3.12 3.33 3.53 3.74 3.94 $1.27 2.82 3.03 3.23 3.44 3.64 3.85 4.05 $1.25 2.93 3.14 3.34 3.55 3.75 3.96 4.16 $1.23 3.04 3.25 3.45 3.66 3.86 4.07 4.27 $1.21 3.15 3.36 3.56 3.77 3.97 4.18 4.38 $1.19 3.26 3.47 3.67 3.88 4.08 4.29 4.49 Realized Potash & Mg Price (/mt)
301
January 2011

Name
Position Chairman of the Board of Executive Directors
Background Mr. Steiner has been Chairman of the Executive Board since 2007. Mr. Steiner previously served as Vice Chairman of the Executive Board, a position he held since 2000. Prior to joining K+S in 1993, he held a position within the department of taxes and customs duties at BASF AG. Dr. Ralf Bethke has been Chairman of the Supervisory Board and a shareholder representative since 2008. Additionally, he acts as Chairman of the Mediation, Nomination as well as Personnel committees, and is a member of the Audit Committee. Since beginning with BASF AG in 1972, where he held various sales and marketing positions at its fertilizer division, Dr. Bethke continues to hold senior posts at several other prominent European agricultural and/or fertilizer companies. Mr. Vassiliadis is Vice Chairman of the Supervisory Board and an employee representative of K+S. Additionally, he acts as a member of the Personnel Committee, Audit Committee, as well as the Mediation Committee. Mr. Vassiliadis is also a Member of the Supervisory Board at BASF SE, and occupies the position of Vice Chairman of the Supervisory Board at Evonik STEAG GmbH. Mr. Felker has been a member of the Executive Board of K+S AG since August 24, 2005. He is responsible for the Potash & Magnesium and Nitrogen business segments at K+S. He has been with the company since 2000, where he started in management of Fertiva. Mr. Grimmig has been a member of K+S' Executive Board since 2000. He is responsible for Mining and Geology, Technology and Energy, Research and Development, Environmental Protection, Occupational Safety, Quality Management, Inactive Plants, Consulting, as well as the Waste Management & Recycling and Animal Hygiene business segments. Mr. Grimmig brings to K+S a wealth of experience, having worked at a variety of mining operations since 1982. Mr. Nonnenkamp has served as a member of the Executive Board at K+S since 2009. Mr. Nonnenk is responsible for Finance and Accounting, Purchase, Logistics, Audit, Taxes and Insurances at the company. Dr. Ncker has been a member of the Executive Board and a Director of K+S since 2003. He is responsible for the Personnel, Information Technology (IT) Services, Organization and Project Management, Health Management, Property Management, Knowledge Management, Logistics and Trading Businesses at the company. Dr. Ncker began working for RAG Aktiengesellschaft in 1981 and held various legal positions before joining K+S.
Norbert Steiner
n.a.
Dr. Ralf Bethke
Chairman of the Supervisory Board
n.a.
Michael Vassiliadis
Vice Chairman of Supervisory Board
n.a.
Joachim Felker
Executive
n.a.
Gerd Grimmig
Executive
n.a.
Jan P. Nonnenkamp
Executive
n.a.
Dr. Thomas Ncker
Director
n.a.
n.a. 191,400,000 <1%
302
The Mosaic Company
January 2011
The Mosaic Company

(MOS-N)
1-Yr Target: 1-Yr ROR: 2-Yr Target: 2-Yr ROR: Div. (Curr.): Yield Valuation: 10.5x 2012E EBITDA, 15x 2012E EPS, DCF @ 11.5%, 85% RCN Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather Qtly EPS (FD) (Next Release: 30-Mar-11) Y/E MAY-31 Aug Nov Feb May Year 2009A $2.65A $2.15A $0.13A $0.33A $5.27 2010A $0.23A $0.24A $0.50A $0.89A $1.85 2011E $0.67A $0.91 $1.04 $1.48 $4.09 2012E $1.20 $1.30 $0.97 $1.45 $4.93 Qtly CFPS (FD) 2009A 2010A 2011E 2012E Aug $3.13A $0.41A $0.91A $1.37 Nov $1.91A $0.60A $1.09 $1.48 Feb $0.37A $0.72A $1.18 $1.14 May $0.17A $1.15A $1.66 $1.65 Year $4.72 $2.89 $4.83 $5.63 Dec 31, 2010: Rating: Risk: IBES EPS 2011E IBES EPS 2012E $76.36 1-Sector Outperform High $3.83 $4.88 $82.00 7.6% $94.00 23.6% $0.20 0.3% Capitalization Shares O/S (M) Total Value ($M) Float O/S (M) Float Value ($M) S&P Weight 446.9 34,125.3 159.9 12,206.9 0.30%
P/E 10.4x 24.9x 18.7x 15.5x P/CF 11.6x 16.0x 15.8x 13.6x
Phosphate Leader with Potash-Focused Growth

Largest phosphate producer. The Mosaic Companys (Mosaics) integrated phosphate operations allow it to capture strong margins and outperform non-integrated producers when rock prices rise. Strong potash operations and growing. Currently number two in the world, Mosaic plans to spend ~$5 billion by 2020 to increase its potash capacity by 5.1 million tonnes to 16.8 million tonnes. This would position the company as a potash player first, with enhanced margins through economies of scale.
Cargill-controlled. We view Cargill Limiteds (Cargills) 64.1% interest in Mosaic as a mild stock overhang, despite several positives. Unless Cargill is a seller, or wants to take the company private, Mosaics stock should not reflect a material takeover premium.
Waiting for Maaden. A 3 million tonne DAP complex, being built by Maaden, is scheduled to begin production in Q3/11. If the project does not continue to be chronically delayed, we expect phosphate prices to come under pressure, at least until demand soaks up the incremental capacity. Target valuation. One year from now, we expect Mosaic to trade at 10.5x 2012E EBITDA of $3.4 billion, 15x 2012E EPS of $4.93, and at about 85% of its replacement cost of $91 per share. We use these three metrics, as well as a DCF at an 11.5% WACC, to set our one-year target price of $82.
Current valuation. Mosaic is currently trading at 11.4x NTM EBITDA, 18.7x NTM EPS, and at 84% of its replacement cost. Our $82 target price implies a total rate of return of 7.6%. Getting to the next level. We are focused on: (1) continued evidence of fertilizer demand recovery; (2) certainty surrounding the future of the South Fort Meade mine; (3) Mosaics long-term phosphate rock supply; (4) the on-time and on-budget advancement of Mosaics potash expansion projects; and (5) a conclusion to the Esterhazy (potash) tolling agreement dispute between Mosaic and PotashCorp. We have initiated coverage on the common shares of The Mosaic Company with a 1-Sector Outperform rating.
303
January 2011

We rate Mosaic a 1-Sector Outperform.
The Mosaic Company (Mosaic) offers investors superb exposure to continued global demand recovery of both phosphate and potash. Mosaic is the worlds largest phosphate producer, currently controlling about 11% of global phosphoric acid (P2O5) supply at 4.4 million tonnes, and 8% of the worlds phosphate rock capacity at 16.4 million tonnes. Mosaics integrated phosphate operation allows it to capture higher margins than both its non-integrated U.S. competitors, as well as most Chinese and Indian phosphate producers. Mosaic also boasts 10.4 million tonnes of potash capacity, ranking it second globally behind PotashCorp. Through the pending expiry of a 1.3 million tonne Esterhazy tolling agreement with PotashCorp, as well as 5.1 million tonnes of planned brownfield potash expansion projects, we expect Mosaic to achieve 16.8 million tonnes of potash capacity by 2020. Strong control over global phosphate and potash markets is the primary reason we like Mosaics story. Specifically, the company controls 85% to 90% of PhosChem and holds a 37% economic stake in Canpotex. Both export marketing associations match production to demand, in order to maximize market prices.
Our one-year Mosaic target price is $82 per share.
We view Cargills 64.1% stake in Mosaic as a mild stock overhang. While we have no doubt that there are several operational positives/synergies between Mosaic and Cargill, we think that Cargills control over Mosaic results in: (1) relatively lower Mosaic stock liquidity; (2) the potential for misalignment with minority shareholder interests; and (3) an inability for a takeout without Cargills blessing. Mosaic has made significant financial progress since its 2004 inception, including: (1) debt reduction from a peak 6.5x net debt to EBITDA to a current net cash position of about $1 billion; (2) earning investment-grade debt credit ratings; (3) the Q1/09 adoption of a regular $0.05 quarterly dividend; and (4) the Q3/09 one-time special dividend of $1.30 per share.
For fiscal 2011, we estimate sales, EBITDA, and fully diluted EPS of $9 billion, $2.9 billion, and $4.09, respectively, generally above consensus estimates. In 2012, we are looking for sales of $9.9 billion, EBITDA of $3.4 billion, and EPS of $4.93. Our forecast 2012 EPS growth rate of 20.5% is mostly due to stronger potash sales volumes, coupled with higher potash (MOP and K-Mag) pricing.
INITIATING COVERAGE
We have initiated coverage on the common shares of The Mosaic Company with a 1-Sector Outperform rating. Our one-year target price is $82 per share, which, when included with Mosaics $0.20 per share annual dividend, represents a one-year rate of return of 7.6%. We value Mosaic using an equally weighted 10.5x 2012E EV/EBITDA, 15x 2012E EPS, a DCF @ 11.5%, and 85% of $91 per share replacement cost. Mosaic is currently trading at 11.4x NTM EBITDA, but we expect 2012E EBITDA growth of 17.7% will help Mosaic achieve our price objective of $82.
We consider Mosaic a high-risk investment.
Our risk ranking for Mosaic is High. We believe this risk ranking is justified due to: (1) the cyclical nature of the fertilizer industry, and high potash price elasticity in particular; (2) volatile crop price changes (and farmer incomes), to which changes in Mosaics share price is strongly correlated; (3) new greenfield phosphate and potash supply risk that could erode long-term margins; (4) commodity price exposure, which for most fertilizers is difficult to hedge beyond one year; and (5) conventional potash mines being susceptible to water inflow that could increase opex and possibly suspend operations.
304
The Mosaic Company
January 2011

Mosaic is the worlds largest producer of phosphate fertilizers.
Headquartered in Plymouth, Minnesota, Mosaic is the worlds largest producer of phosphates and a leading producer of potash. Specifically, Mosaic is the largest phosphate company by finished product capacity (13% market share), and the second-largest potash company (13% to 14% market share). Mosaic is a rock-integrated phosphate producer of crop nutrients and blends, as well as animal feed products. The company operates five phosphate rock mines in Florida, with two new mines currently in various permitting stages. Mosaic also operates five phosphate production plants (three in Florida and two in Louisiana) that produce phosphoric acid and processed phosphate. The company owns and operates five potash mines three in Saskatchewan, one in Michigan, and one in New Mexico. Mosaic was formed through the 2004 merger of IMC Global Inc. (IMC) and Cargill Crop Nutrition (CCN), the former fertilizer business of Cargill. Cargill remains the majority shareholder of Mosaic, controlling 64.1% of the companys common shares. Led by President and CEO James Prokopanko, Mosaics management team is well represented by former Cargill and IMC employees with expertise in the agricultural and fertilizer businesses. Prior to his current position, which he has held since 2007, Mr. Prokopanko served as Executive Vice President and COO of Cargill and has held various positions over a 28-year career at Cargill. He is also on the Board of Canpotex, the offshore marketing and distribution company for Saskatchewan-based potash producers. Together, insiders and related parties (ex Cargill) control about 0.1% of Mosaic. Mosaics 445 million common shares (446.9 million fully diluted) trade under the ticker symbol MOS on the New York Stock Exchange. Mosaic began trading on October 24, 2004 at $15.00 per share. Exhibit 6.1 shows the stocks historical trading range and volume. As at December 31, 2010, Mosaics market capitalization was $34.1 billion. Mosaic currently pays a quarterly dividend of $0.05 per share, which equates to a dividend yield of 0.3% - in line with its peers. Mosaic reports in U.S. dollars, using a May 31 year-end, and its financial statements are prepared in accordance with U.S. GAAP.
Exhibit 6.1: The Mosaic Company Stock Price Performance
$80 $75 $70 $65 $60 Price $55 $50 $45 $40 $35 $30 Mar-09 Jun-09 MOS (Volume)
Ticker: Last P rice: M arket Cap: 52 Wk H igh: 52 Wk Lo w: FD Shares O/S: M OS $ 76.36 $ 34.1B $ 76.80 $ 37.68 446.9M
Mosaics CEO spent 28 years at Cargill.
30,000 25,000 20,000 15,000 10,000 5,000 0 Dec-10 Daily Volume (000s)
Cargill controls about 64.1% of Mosaics shares.
Sep-09 MOS (Price)
Dec-09
Jun-10
Sep-10
305
January 2011
Corporate Profile
Headquartered in Plymouth, Minnesota, Mosaic is the worlds largest producer of phosphate and a top producer of potash. Specifically, Mosaics facilities account for 9% to 11% of global P2O5 capacity (#1), and 13% to 14% of global potash capacity (#2). In fiscal 2010, Mosaics (finished) phosphate and potash production represented 13% and 12% of the global markets, respectively. Exhibit 6.2 highlights where the companys global capacity is ranked among major macronutrient producers.
Exhibit 6.2: Mosaics Global Market Share
POTASH 2010 Global Capacity Share
(M mt KCl) (%)
1
PHOSPHATE
AMMONIA
2010 Capacity
(M mt)
Global Share
(%)
Mosaic ranks first in P and second in K by capacity.
PotashCorp Mosaic1,2 Belaruskali K+S Silvinit3 Israel Chemicals Uralkali3 Arab Potash Qinghai Salt Lake Potash Agrium SQM Intrepid2 Vale
13.3 9.3 9.0 ~7.5 5.1 5.7 5.5 2.5 ~2.2 2.1 1.5 0.8 0.7
18% 13% 13% 10% 7% 8% 8% 3% 3% 3% 2% 1% 1%
Yara International CF Industries 5 PotashCorp Agrium Koch6 JSC Acron ~ Mosaic
8.2 7.0 3.5 3.4 ~2.3 1.7 ~ 0.5
4% 4% 2% 2% 1% 1% ~ 0%
Source: Company Reports; Fertecon; Scotia Capital estimates.
PHOSPHATE
Mosaic is a lowcost integrated phosphate producer.
First and foremost, Mosaic is an integrated producer, marketer, and seller of phosphate fertilizers. Integrated producers such as Mosaic have a material cost advantage over their non-integrated peers, due to an ability to own and process their own phosphate rock resources. Specifically, Mosaic has 16.4 million tonnes of phosphate rock capacity (including South Fort Meade and excluding a 35% interest in Bayovar), 9.7 million tonnes of finished phosphate products (i.e., DAP, MAP, TSP, etc.), which is produced from 4.4 million tonnes of phosphoric acid production capacity. All of the companys 100%-owned phosphate assets are located in central Florida and Louisiana, with associated warehousing terminals in Florida and Texas. The company also has SSP plants in Argentina and Brazil, and blending and bagging facilities in several Asian and Latin American countries. Mosaic boasts the largest phosphate processing capacity in the world, at 4.4 million tonnes P2O5, and the second-largest phosphate rock capacity behind Moroccos state-owned OCP. In 2010, Mosaics rock production represented roughly 8% of the worlds capacity and about 48% of North Americas. We estimate that about 85% of Mosaics phosphate sales are for fertilizer application, with the remaining volume sold to industrial and feed customers. Historically, Mosaics phosphate division has realized greater sales volumes than its potash division, although this could switch over the long term.
POTASH
K-Mag is a specialty potash that is rich in magnesium.
Mosaic is the worlds second-largest potash company, with a nameplate capacity of 10.4 million tonnes (ex a 1.3 million tonne tolling agreement with PotashCorp) from five mines: three in Saskatchewan, and two in the United States. The companys potash segment contributed ~50% and ~30% of its overall gross profit in fiscal 2009 and 2008, respectively. In addition to traditional potash (MOP), Mosaic is also one of two major langbeinite producers, which it markets under the K-Mag brand. The majority of Mosaics international potash sales are made through Canpotex and represent ~40% of its potash sales volumes.
306
The Mosaic Company
January 2011
Mosaic has historically followed a strategy of matching its potash production to meet anticipated demand, which we believe conserves the long-term value of its potash resources.
NITROGEN
Mosaic is out of the nitrogen business for now.
Mosaic is no longer a player in the nitrogen business. July 2008 marked the end of Mosaic as player in the nitrogen industry, following the sale of its 50% interest in Saskferco Products to Yara International for C$1.59 billion. Investment Saskatchewan, owner of a 49% stake in Saskferco, approved the Norwegian company as an investor in one of North Americas top nitrogen-based fertilizer producers. Nitrogen sales represented less than 25% of the companys revenues, and proceeds from the sale have been, and will be, applied toward Mosaics brownfield potash capacity expansion projects.
A BRIEF HISTORY OF MOSAIC
Cargill holds a 64.1% stake in Mosaic.
In early 2004, Cargill Crop Nutrition (CCN) merged with IMC Global (IMC) to produce the worlds second-largest crop nutrition company, The Mosaic Company. Cargill, the worlds largest private company at the time, entered the crop nutrition business in the 1960s. Up until the merger, the division grew to be one of the worlds top producers of phosphate and nitrogen fertilizers. Cargill owns 64.1% of Mosaic, or nearly all of its beginning two-thirds position, which has been reduced slightly due to the dilution from convertible preferred shares. IMC, on the other hand, had been mining phosphate for nearly a century, and in the 1940s, broadened its mining capabilities to include potash. At the time of the merger, both companies had prior fiscal year revenues of ~$2 billion, while Cargills earnings were $75 million versus IMCs low $5.7 million. IMC contributed potash and phosphate assets, while Cargill offered phosphate and nitrogen assets, as well as its global distribution operations. Going back farther, IMCs assets are partially a result of a merger with Phosphate Resource Partners. Since 2007, Mosaic has gone a long way to improve its leverage as shown by: (1) paying down over half of its 2004 debt by 2007; and accordingly (2) receiving investment-grade status by credit rating agencies. IMCs high leverage position was courtesy of a $450 million (all-cash) acquisition of Harris Chemical in 1997, which resulted in the company taking on ~$1 billion of debt. Exhibit 6.3 details key events in Mosaics short history following the IMC and CCN merger.
Exhibit 6.3: A Brief History of Mosaic
Cargill Crop Nutrition, a former business unit of Cargill, and IMC Global combine to form The Mosaic Company. The merger w as contingent upon IMC Global successfully acquiring Phosphate Resource Partners LP. In October, Mosaic begins trading on the NYSE under the ticker symbol MOS. Mosaic announces a 400,000 tonne expansion at its Esterhazy potash mine. The Kingsford phosphate mine in Florida is closed. Mosaic restructures its phosphate business by closing dow n its Green Bay and South Pierce phosphate fertilizer production facilities, as w ell as the Fort Green mine in Central Florida. The mine is identified as a high-cost operation. An incremental 1.1M mt of potash capacity expansion projects is completed at Esterhazy, bringing the mine's total capacity to ~5.3M mt. Mosaic unveils a strategy to increase capacity by ~5.1M mt to ~15.5M mt over the next 12 years. For the first time in Mosaic's history, investment-grade status is achieved. Mosaic sells its 50% interest in Saskferco (nitrogen capacity) to Yara International. A quarterly dividend of 5 per common stock is initiated. Mosaic sells its Thailand distribution business in order to better align its North American assets. Mosaic sells its 20% stake in Fosfertil and Fertifos, as w ell as its Cubatao operations for just over $1 billion. Mosaic invests $385 million for a 35% stake in the Peru-based Bayovar Phosphate Project. The JV w ith Vale S.A. and Mitsui & Co. provides the company w ith an offtake agreement for 35% of the phosphate rock produced. Mosaic receives its final approval to begin operations at its South Fort Meade (SFM) mine extension in Florida's Hardee county. Several w eeks later, a preliminary injunction w as initiated due to litigation brought against the Army Corps of Engineers by several NGOs. Mosaic is currently operating a 200 acre portion of SFM under a partial settlement.
2004 2005 2005 2006 2007 2008 2008 2008 2008 2009 2010 2010 2010
Source: Mosaic; Scotia Capital.
307
308
Exhibit 6.4: Map of Mosaics Operating and Investment Assets
Entity Name
1 Corporate HQ
2 3 4 5 6
Potash Belle Plaine Colonsay Esterhazy K1 & K2 Hersey Carlsbad
2-4 1 5
6 7-8 21 9-16
17
7 8 9 10 11 12 13 14 15 16 17 18 19
Phosphate Faustina Uncle Sam Bartow Riverview Gibsonton Four Corners Hopewell Hookers Prairie South Fort Meade Wingate Yangzhong City (JV) Cubatao Quebracho
18
Port Operations 20 Quebracho 21 Rozy
19-20
Denotes w arehouse and blending facilities.
January 2011
Date
The Mosaic Company
January 2011
What We Like About Mosaic

VERTICALLY INTEGRATED PHOSPHATE LEADER
Mosaic is the largest integrated phosphate fertilizer producer in the world, with a finished product capacity exceeding that of the next two largest competitors combined. Mosaics vertically integrated phosphate operations (through rock and some ammonia production), economies of scale, and strategically located phosphate assets, allows it to operate as a first-quartile cash cost producer.
Exhibit 6.5: Largest Global Phosphate Producer Exhibit 6.6: MOS Is a First-Quartile DAP Producer
Mosaics phosphate operation is larger than its next two competitors combined.
Mosaic Average
Source: Mosaic.
Source: Mosaic.
SIGNIFICANT LOW-COST POTASH EXPANSION STRATEGY
Mosaic is currently the worlds second-largest potash producer, a position we expect it to hold for at least the next decade. The company is planning to add an incremental 6.4 million tonnes of potash capacity by 2020 (largest growth behind PotashCorp) through: (1) 1.3 million tonnes of no-cost capacity from the expiration of an Esterhazy tolling agreement with PotashCorp; and (2) 5.1 million tonnes from its three Canadian mines. We estimate that Mosaics weighted average cost of completed and planned brownfield expansion projects is ~$1,000/tonne (see Exhibit 6.7). This is well below our Saskatchewan greenfield cost estimate of about $1,400/tonne, which excludes ~$500/tonne of infrastructure capex.
Exhibit 6.7: Cost Per Tonne of Mosaics Potash Expansion Plan
We favour Mosaics decision to invest more in its potash business going forward than in phosphates. Why? Simply put, we believe that potash fundamentals are superior to phosphate fundamentals, for the following reasons: (1) lower government control that drives investment decisions based on economics and not politics; (2) scarcity of economically viable potassium deposits; and (3) materially higher barriers to entry through both high capital investment costs, and a lengthy fiveto-seven-year development timeline.
Colonsay
2016 Future 2016-19
We think Mosaics brownfield potash projects will cost, on average, ~$1,000/tonne.
Belle Plaine
Esterhazy
2011-17
Colonsay
2014
WIP
Belle Plaine
2012
Esterhazy
2006 Complete
Esterhazy
2006
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400
Potash Capacity Capex ($/mt)
Source: Mosaic; Scotia Capital estimates.
309
January 2011
PHOSCHEM AND CANPOTEX STRATEGIES
We believe that Mosaics membership in PhosChem allows it to achieve improved margins through increased economies of scale, and more importantly, offshore supply contract coordination. Mosaic and PotashCorp are the only members of PhosChem, the phosphate fertilizer export marketing association in the United States. CF Industries opted out several years ago. Mosaic had an 87% economic interest in PhosChem for fiscal 2010.
In 2010, Mosaic had a 37% economic stake in Canpotex and an 87% stake in PhosChem.
Similar to PhosChem, most of Mosaics international potash sales are exclusively through Canpotex the export marketing association equally owned by PotashCorp (54% economics), Mosaic (37%), and Agrium (9%). Canpotex utilizes two West Coast terminals (with plans to nearly double capacity), ~5,500 railcars, and charters vessels for offshore delivery. Usually, about 70% of Canpotex sales are made on a CFR basis, whereby Canpotex takes on ocean freight risk to deliver potash for a premium. Exhibit 6.8 highlights recent PhosChem and Canpotex contracts.
Exhibit 6.8: Recent PhosChem and Canpotex Contracts
PhosChem Deal Date 22-Mar-10 20-Jul-09 18-Feb-09 11-Feb-08 12-Dec-07 6-Aug-07 29-May-07 3-Apr-06 30-Mar-06 Contract Period Party Apr/10 - Mar/13 Aug/09 - Oct/10 Mar/09 - Mar/10 Feb/08 - Mar/09 Feb/08 - Oct/08 Aug/07 - Mar/08 Jun/07 - Nov/07 Apr/06 - Mar/07 Apr/06 - Sep/06 IFFCO, IPL India India India India Inda India CNAMPGC India Price Volum e 6.0M mt 0.5M mt 1.25M mt 1.0M mt 0.5M mt 0.6M mt 1.1M mt 1.0M mt 0.33M mt Deal Date 3-Nov-10 1-Nov-10 28-Oct-10 20-Oct-10 19-Feb-10 8-Feb-10 23-Jul-09 8-Jul-09 30-Jun-09 Contract Period Apr/11 - Mar/14 Jan/11 - Dec/15 Apr/11 - Mar/16 Jan/11 - Dec/13 Feb/10 - Jun/10 Feb/10 - Mar/10 Jul/09 - Mar/10 Jul/09 - Dec/09 Jul/09 - Dec/09 Canpotex Party Tata Chemicals Unid Coromandel Sinofert India Sinofert India Korea/Taiw an Japan Price Volum e 1.5M mt 2.2M mt 3.0M mt 3.15M mt 0.6M mt 0.35M mt 0.85M mt
$370/mt $460/mt $700/mt $700/mt
$495/mt $477/mt
Source: Company reports; Mosaic; Scotia Capital.
INVESTMENT-GRADE DEBT ACHIEVED
The merger of IMC and CCN (to form Mosaic) resulted in a highly levered capital structure, with net debt/EBITDA peaking at 6.8x in 2006. Prior to the merger, IMC had closed an acquisition of Harris Chemical for $1.4 billion with 68% debt, while CCNs debt was merely $42 million. Since then, Mosaic has significantly improved its debt profile, achieving investment-grade status on its debt in 2008, and a strong net cash position of $2.4 billion (as at August 31, 2010). Mosaics management team has indicated that it intends to maintain a minimum net cash position of $1 billion, which we view as a somewhat suboptimal capital structure. Fitch and S&P awarded investment-grade status in June 2008 with Moodys following one month later. Exhibit 6.9 shows the improvement of Mosaics capital structure since 2005.
Exhibit 6.9: Mosaic Has Actively Improved Its Debt Profile Since Inception
8x 50% 40% 30% 20% 10% 0% 2005 2006 2007 2008 2009 2010 2011E 2012E
Net Debt to EBITDA
Mosaic has materially improved its debt profile since 2004.
6x 4x 2x 0x -2x
Net Debt to EBITDA (LHS)
Debt to Capital (RHS)
310
Debt to Total Capital
Forecast
The Mosaic Company
January 2011
Valuation
OVERVIEW
We have initiated coverage on the common shares of Mosaic with a 1-Sector Outperform rating and a one-year target price of $82 per share. When coupled with our forecast NTM dividend of $0.20 per share, we expect investors to earn a one-year pre-tax total return of 7.6%. Our one-year Mosaic target price of $82 is derived from four different valuation methodologies, as follows: (1) a discounted cash flow approach; (2) an enterprise value to forward EBITDA multiple; (3) a price to forward earnings multiple; and (4) a replacement cost new calculation. We weight each of the four approaches equally. Our valuation work is extremely sensitive to various price, volume, and other assumptions used within our financial forecast (see Exhibits 6.10 and 6.11). For full details on our earnings sensitivities, please refer to pages 350 and 351. We summarize our valuation work below.
Exhibit 6.10: Mosaic Key Assumptions
2011E Phosphate Crop Nutrients (M mt) Total (M mt) Realized DAP ($/mt) Realized Blends ($/mt) Potash Volume (M mt) Realized MOP ($/mt FOB Plant) Realized K-Mag ($/mt FOB Plant) 7.9 12.5 $465 $442 2012E 8.1 13.1 $465 $443
Exhibit 6.11: Mosaic Summary Sensitivities

2011E Sensitivity Potash ($/mt) DAP/MAP ($/mt) Ammonia ($/mt) Sulphur ($/lt) Natural Gas ($/mmBtu) P Sales (M mt) K Sales (M mt) C$ (US$) Brazilian Real (US$)
$10 $10 $15 -$20 -$1 0.5 0.5 5 2
7.8 $368 $234
8.8 $424 $274
EPS +16 +6 +3 +9 +7 +0 +0 -14 +2
Our DCF approach yields a one-year price target of $94 per Mosaic share. We apply a WACC of 11.5% and a long-term growth rate of 2.5%. Exhibit 6.12 highlights the build-up of our WACC calculation. Our Mosaic terminal growth rate of 2.5% is in line with most senior fertilizer stocks that we cover. Why: (1) long-term economic, population, and income growth rates in Mosaics markets appear to be robust; (2) Mosaics phosphate operations are sustainable, as it is one of the lowest-cost producers in the world; and (3) the companys brownfield potash expansion projects are inexpensive on a capex/tonne basis.
Exhibit 6.12: Mosaic WACC
Exhibit 6.13: Mosaic Summary DCF

($M) EBITDA Less: Taxes Less: Change in NWC Less: CAPEX Free Cash Flow PV of Free Cash Flow 1 Net Present Value Less: Net Debt Equity Value Equity Value ($/sh) Equity Value, Rounded ($/sh) Last Price, Rounded Implied ROR 41,044 -1,179 42,223 $94.48 $94 $76 23% 2011E 2,891 639 -25 1,500 777 697 2
$94.48 2.00% 2.25% 2.50% 2.75% 3.00%
2012E 3,403 764 -161 1,000 1,801 1,448 3
2013E 3,706 840 -160 750 2,276 1,641 4

13.5% $77 $78 $80 $81 $83
2014E 3,763 854 -91 500 2,500 1,617 5

WACC 11.5% $90 $92 $94 $97 $99
2015E 3,918 891 -174 400 2,801 1,625 6

10.5% $99 $102 $104 $107 $111
Terminal 4,087 931 -182 350 2,988 34,015
12.5% $83 $85 $86 $88 $90
9.5% $110 $114 $117 $121 $125
311
Terminal
January 2011
On an EV/NTM EBITDA basis, Mosaic is currently trading at 11.4x our 2011E EBITDA estimate of $2.9 billion. We forecast Mosaic to ease to the 10.5x NTM EBITDA area, which implies a $83 price value one year out. Exhibit 6.14 summarizes our justification for a 10.5x EV/NTM EBITDA multiple. Specifically, we made the following adjustments to our general fertilizer EV/EBITDA multiples:
We left our general phosphate EV/EBITDA multiple of 9x unchanged to reflect Mosaics economies of scale offset by: (i) declining reserves; and, most importantly (ii) uncertainty surrounding the future of its 6 million tonne South Fort Meade phosphate rock operation in Florida.
We raised our potash multiple by 0.5x to 11.5x to reflect the companys current position as a low-cost producer, its Canpotex membership, as well its plans to bring on 5.1 million tonnes of low-cost brownfield potash capacity (plus an additional 1.3 million Esterhazy tonnes for no cost). Exhibit 6.14: Mosaic EV/NTM EBITDA Build-up
[A]

[B]
Mosaic EV/EBITDA
[C=A+B]
2012E EBITDA
[D, $M]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
Mosaic Price Value Calculation

($M)

Notes
8.0x 9.0x 11.0x 7.0x -
0.0x 0.0x 0.5x 0.0x [1] [2]
8.0x 9.0x 11.5x 7.0x -
0 1,682 1,721 0 0 3,403
0% 49% 51% 0% 0% 100%
0.0x 4.4x 5.8x 0.0x 0.0x 10.3x
2012E EBITDA MOS EV/EBITDA Multiple* Implied EV Cash Debt Equity Value FD Shares O/S (M) Implied Price Value
3,403 10.5x 35,735 2,523 -1,344 36,914 446.9 $82.60
1. Economies of scale offset by declining reserves; South Fort Meade viability in question. 2. Low -cost brow nfield projects, Canpotex member.
Exhibit 6.15 shows Mosaics historical EV/NTM EBITDA trading range, which has averaged 6.4x over the past several years. Mosaic has historically traded in line with its peers. However, we expect a premium to emerge over time, as Mosaic continues to ramp up its brownfield potash capacity. In our view, the current 11.4x NTM EBITDA is not sustainable given the strong EBITDA growth we expect in 2012. We anticipate Mosaic should be trading at 10.5x 2012E EBITDA in one year from now.
Exhibit 6.15: Mosaic EV/NTM EBITDA Chart
14x NTM EV/EBITDA Multiples 12x 10x 8x 6x 4x 2x 0x Dec-06 Jun-07 Dec-07 Jun-08 MOS Dec-08 MOS Average Jun-09 Group Average Dec-09 Jun-10
312
The Mosaic Company
January 2011
On a NTM P/E basis, Mosaic is currently trading at 18.7x our 2011E EPS estimate of $4.09. In our minds, Mosaics appropriate NTM P/E multiple should be closer to the 15x area, which implies a one-year price value of about $74 per share. Therefore, on a P/E basis, the stock is fully valued. Exhibit 6.16 highlights our segmented P/E breakdown. For Mosaic specifically, we made the following adjustments to our general P/E multiples:
We left our phosphate P/E multiple of 13.5x unchanged to reflect Mosaics integrated operations and economies of scale offset by: (i) declining reserves; and, most importantly (ii) uncertainty surrounding the future viability of its 6 million tonne South Fort Meade phosphate rock operation in Florida.
We raised our potash multiple by 0.5x to 16.5x to reflect the companys current position as a low-cost producer, its Canpotex membership, as well its plans to bring on 5.1 million tonnes of low-cost brownfield potash capacity (plus an additional 1.3 million Esterhazy tonnes for no cost).
Exhibit 6.16: Mosaic NTM P/E Build-up
[A]

[B]
Mosaic P/E Ratio

[C=A+B]
2012E EPS
[D, $/sh]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
Mosaic Price Value Calculation

($/sh)

Notes
12.5x 13.5x 16.0x 11.0x -
0.0x 0.0x 0.5x 0.0x [1] [2]
12.5x 13.5x 16.5x 11.0x -
$0.00 $2.44 $2.49 $0.00 $0.00 $4.93
0% 49% 51% 0% 0% 100%
0.0x 6.7x
2012E EPS MOS P/E Multiple* Implied Price Value
4.93 15.0x $73.94
8.3x 0.0x 0.0x 15.0x
1. Economies of scale offset by declining reserves; South Fort Meade viability in question. 2. Low -cost brow nfield projects, Canpotex member.
Exhibit 6.17 shows Mosaics historical NTM P/E trading range, which has averaged 12.4x over the past several years. On a P/E basis, Mosaic has historically traded in line with its peers, as a potash and phosphate valuation premium over nitrogen was likely offset by historical debt concerns, and possibly a stock overhang from Cargills controlling position. We believe that on a NTM P/E basis, 15x forward earnings is the most appropriate measure for Mosaic relative to the group, and for where we are in the fertilizer cycle.
Exhibit 6.17: Mosaic NTM P/E Chart
Jun-07
Dec-07
Jun-08 MOS
Dec-08 MOS Average
Dec-09
Jun-10
Dec-10
313
January 2011
We believe that the replacement cost for Mosaics portfolio is about $91 per share, which is detailed in Exhibit 6.18. Our replacement cost estimates are derived from: (1) current projects under construction; (2) feasibility, pre-feasibility, and scoping studies; (3) inflation-adjusted costs for historical projects; and (4) professional judgment.
Exhibit 6.18: Mosaic Replacement Cost New (RCN)
Production Plant Potash Belle Plaine Colonsay Esterhazy Carlsbad Hersey
Product
Capacity
(000 mt)

($M) ($/sh)
Potash (Solution) Potash (Conventional) Potash (Conventional) Potash (Conventional) K-Mag Potash (Solution)
2,800 1,800 5,300 600 1,100 100 11,700
2,664 3,099 9,126 1,033 1,894 95 $17,912
5.96 6.94 20.42 2.31 4.24 0.21 $40.08
Phosphate Four Corners South Fort Meade Hookers Prairie Wingate Hopewell Fort Green Kingsford Ona Pine Level Bartow New Wales Riverview Faustina Uncle Sam
Phosphate Rock Phosphate Rock Phosphate Rock Phosphate Rock Phosphate Rock Phosphate Rock Phosphate Rock Phosphate Rock Phosphate Rock Phosphoric Acid Processed Phosphate Phosphoric Acid Processed Phosphate Phosphoric Acid Processed Phosphate DAP/MAP Phosphoric Acid
6,500 6,000 2,000 1,400 500 0 0 0 0 1,000 2,100 1,700 4,200 900 1,700 1,700 800 30,500
1,996 1,842 614 430 154 0 0 0 0 1,500 1,155 2,550 2,310 1,350 935 1,885 1,200 $17,921
4.47 4.12 1.37 0.96 0.34 0.00 0.00 0.00 0.00 3.36 2.58 5.71 5.17 3.02 2.09 4.22 2.69 $40.10
Equity Investment 35% Bayovar Stake
Phosphate Rock
$385
$0.86
Gross Replacement Cost New Plus: Working Capital @ August 30, 2010 Less: LT Debt O/S @ Augst 30, 2010 Net Replacement Cost New1
1. Assumes 446.9 million fully diluted shares outstanding.
$36,218 3,376 1,244 $40,837
$81.04 7.55 2.78 $91.38
314
The Mosaic Company
January 2011
A portion of our one-year Mosaic target price is set using 85% RCN, which yields a price value of $78. During the peak of a normal (i.e., not 2008) fertilizer cycle, we expect Mosaic to trade between 85% and 95% RCN. Conversely, in normal market downturns, Mosaic could trade as low as 25% RCN. We chose 85% due to spectacular phosphate margins, and better momentum behind potash pricing in 2011. Mosaic is currently trading at 84% RCN, compared to the group (ex SQM) at 82.9% RCN (see Exhibit 6.19). Generally, we expect Mosaic to trade at an RCN premium to its peer group due to strong position in the phosphate and potash markets.
Exhibit 6.20: Mosaic Valuation Summary

We have set our one-year Mosaic target price at $82, which we derived by equally weighting our four valuation methodologies (see Exhibit 6.20). Given our forecast Mosaic total return of 7.6%, coupled with our average total return of 3.2% for the group (see Exhibit 6.21), we rate Mosaic a 1-Sector Outperform.
MOS Target Price

20% 15.7% 7.6% 3.9% 0.5% 8.8% 10.0%
15% 10% 5% 0% -5% -10% -15%
Top Pick
3-SU
3-SU
-9.2% YAR
2-SP
2-SP
1-SO
1-SO
1-SO
1-SO
-11.5% IPI
SQM
CF
MOS
POT
K+S
AGU
315

Nam e
Ticker
316
C$7.60 27.5% 1-SO 61 C$8.50 10.0% 9.3% 1-SO 1-SO JOD 45.50 HKD 5.57 C$5.96 A$3.96 ILs 1,732 JOD 17.25 56.36 C$7.78 RMB 66.24 $900.00 HKD 4.02 $58.42 RUB 219 NOK 338 $58 NOK 300 1.3% 24.3% 9.6% -9.2% 3-SU 0.5% 2-SP 21.3% 0.5x 83.3 1,771 61.4 1,629 1,269 75.0 191.4 52.2 767.6 7.8 7,021 263.2 2,124 288.8 3,791 25,678 366 6,450 77,459 1,294 10,787 406 50,843 7,043 28,224 15,376 465,815 97,481 3,699 21,383 339 7,519 22,921 1,232 11,658 384 51,720 31,462 16,117 473,760 109,065 1.5% 1.8% 2.2% 6.5% 0.0% 0.7% 0.6% 0.9% 1.2% 0.8% 1.9% 1.7% 44.3% 32.8% 30.9% 68.8% 0.0% 45.0% 25.2% 16.2% 50.0% 0.0% 21.0% 30.4% 15.0% 7.6% 10.2% 6.4% 13.2% 16.5% 2.2% 11.1% 14.0% 9.7% -5.2% 11.3% 14.5% 5.3% 9.4% 19.4% 9.9% 23.0% 11.8% 29.5% 20.9% 5.1% 14.3% 40.8% 22.4% -11.1% 22.3% 23.2% 13.0% 17.5% 0.1x 0.0x 0.0x 0.3x 0.5x 0.0x 0.6x 0.2x 0.2x 1.0x 0.7x 0.9x 0.3x 0.6x 0.4x 0.1x 0.0x 0.0x 0.2x 0.3x 0.0x 0.4x 0.2x 0.2x 0.5x 0.4x 0.5x 0.2x 0.4x 0.2x 0.3x -0.5x -1.0x -1.3x 1.5x 0.7x -1.5x 1.6x -0.1x -0.1x 2.1x 1.3x 0.5x 4.4x 0.6x 0.6x Margins Metrics Operating (%) 8.3% 26.1% 28.1% 30.8% 18.8% 20.5% 22.1% 40.2% 21.7% 12.0% 19.3% 22.6% 22.1% 8.0% 16.9% 49.6% 54.2% -9.2% 30.6% 39.0% 2.1% 23.5% 23.1% 27.2x 2.7% 13.8x 27.4x 16.2x 20.4x 10.6x 17.4x 24.4x 12.3x 32.1x 19.4x 5.8% 2.8% 0.5% 3.6% 5.1% 4.9% 5.5% -13.3% 1.0% 4.1% 2.2% -3.2% 10.1% 2.3% 5.2x 2.2x 1.3x 1.8x 8.7x 2.7x 4.4x 1.4x 13.4x 4.4x 1.9x 9.6x 2.9x 4.6x 4.7x 24.6x 10.5x 24.8x 86.7x 33.9x 53.1x 38.9x 11.2% 10.1% 1.1% -0.9% 2.2% -2.6% 3.5% 2.8x 2.5x 10.3x 3.8x 3.8x 5.9x 4.8x 11.8x 13.6x 11.6x 33.2x 16.5x 22.1x 18.1x 18.3x 10.6x 10.7x 10.7x 15.5x 10.8x 13.1x 7.6x 12.2x 21.9x 13.1x 13.1x 14.9x P/CF (x) FCF Yield (%) P/BV (x) 2009A (x) 2010E (x) 11.0x 10.3x 11.6x 28.9x 19.8x 19.2x 16.8x 16.2x 8.3x 11.5x 8.5x 14.3x 9.4x 11.5x 7.3x 17.8x 10.0x 23.3x 18.7x 7.3x 12.6x 13.9x Y/E Gross (%) 20.6% 32.2% 36.8% 40.5% 25.1% 25.8% 30.1% 57.3% 29.7% 14.8% 40.3% 35.9% 34.4% 23.3% 61.4% 74.4% -2.1% 36.2% 73.7% 40.0% 36.7% 28.6% 48.0% 34.3% 14.4% 24.1% 27.1% 24.9% 12.9% 18.5% 53.7% 62.5% -8.1% 41.4% 48.4% 6.1% 29.2% 11.0% 29.9% 32.6% 36.6% 25.4% 28.3% 27.3% EBITDA (%) Enterprise Value to EBITDA 2011E (x) 7.8x 6.6x 9.5x 14.0x 11.4x 12.6x 10.3x 12.2x 6.4x 8.3x 7.9x 11.4x 7.4x 9.7x 5.9x 14.2x 8.2x 13.7x 18.2x 14.3x 8.5x 10.4x 10.4x 2012E (x) 8.0x 7.7x 8.6x 11.8x 9.7x 11.4x 9.5x 8.8x 5.1x 7.4x 7.3x 10.1x 15.5x 8.5x 5.0x 12.0x 7.4x 11.3x 15.6x 11.7x 8.2x 9.6x 9.6x 2009A (x) 24.7x 17.6x 19.5x 81.1x 32.1x 29.7x 34.1x 28.3x 25.4x 14.0x 15.6x 22.3x 13.9x 31.8x 11.0x 38.1x 0.7x 35.3x 11.3x 20.6x 25.1x Price to Earnings 2010E (x) 19.7x 21.2x 18.8x 67.3x 41.2x 25.1x 32.2x 21.8x 20.3x 15.4x 12.7x 20.6x 10.5x 25.5x 11.5x 33.6x 0.5x 28.7x 40.7x 26.2x 11.2x 20.0x 23.6x 2011E (x) 12.6x 10.6x 15.4x 27.0x 18.7x 16.7x 16.8x 17.7x 14.5x 11.1x 12.1x 15.4x 8.9x 15.9x 9.2x 24.4x 0.4x 18.3x 29.8x 19.9x 12.4x 15.0x 15.6x 12/31 12/31 12/31 12/31 5/31 12/31 12/31 12/31 6/30 9/30 12/31 12/31 12/31 3/31 12/31 12/31 12/31 12/31 12/31 12/31
$91.75 $135.15 $89.27 $37.29 $76.36 $154.83
158.0 71.9 32.8 75.1 446.9 305.3
14,497 9,719 2,928 2,801 34,125 47,269
15,517 11,658 3,347 11,658 33,028 49,538
0.1% 0.3% 2.0% 0.3% 0.3% 0.6%
2.4% 6.3% 28.8% 10.8% 6.5% 10.9%
3.7% 15.0% 17.9% 7.5% 6.5% 8.5% 9.9%
8.4% 23.8% 114.0% 8.1% 9.6% 17.8% 30.3%
0.4x 0.0x 2.2x 0.2x 0.6x 0.7x
0.3x 0.0x 0.7x 0.1x 0.4x 0.3x
0.8x -1.1x 1.5x -0.7x 3.3x 0.7x
Peer Group Average
Nam e
Ticker
Peer Group Average
January 2011
The Mosaic Company
January 2011
Exhibit 6.23: Mosaic Tear Sheet
The Mosaic Company

MOS.N 1-Year Target: 2-Year Target: 1-Year Return: 2-Year Return: NTM Dividend Rating: Risk: $82 $94 7.6% 23.6% $0.20 1-SO High Last Price: FY End: Market Cap: EV: Avg. Volume: FD Shares O/S: Float: $76.36 May 31 $34.1B $33.0B 4.2M 446.9M 35.8%
Valuation: 10.5x 2012E EBITDA, 15x 2012E EPS, DCF @ 11.5%, 85% RCN
Ownership Insider Ownership: Institutional Ownership: Target Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Operational P Crop Nutrients (M mt) Realized DAP ($/mt) Realized Blends ($/mt) Potash* Volume (M mt) Realized MOP ($/mt) EPS Estimates Q1 Q2 Q3 Q4 Total Consensus** 2009 $2.65a $2.15a $0.13a $0.33a $5.27a Multiple 15.0x 10.5x 85% 11.5% 2010 7.4 $328 $400 5.5 $352 2010 $0.23a $0.24a $0.50a $0.89a $1.85a
64.2% 26.7% Value Weight $74 25% $83 25% $78 25% $94 25% 2011E 7.9 $465 $442 7.8 $368 2011E $0.67a $0.91 $1.04 $1.48 $4.09 $3.92 2012E 8.1 $465 $443 8.8 $424 2012E $1.20 $1.30 $0.97 $1.45 $4.93 $4.81 EPS +16 +6 +3 +9 +7 +0 +0 -14 +2 2012E -1.2x 46.2x 0.10x Baa2 2014E 3,763 854 -91 500 2,500
Financial EV/EBITDA P/E P/FCF P/BV Dividend Yield ROE ROA Gross Margin EBITDA Margin EBITDA Growth Income Statement Sales COGS Gross Profit Potash Phosphate Corporate/Other EBITDA Net Income EPS (FD) Balance Sheet Cash & Equivalents PP&E Total Assets Short-Term Debt Long-Term Debt Total Liabilities Shareholders' Equity Cash Flow Statement Operating (post-WC) Investing Financing Cash Replacement Cost New Calculated: $91/sh
* Includes K-Mag. ** Bloomberg.
2009 9.7x 14.5x 43.7x 4.0x 0.3% 28% 19% 27% 33% 5% 2009 10,298 7,531 2,767 1,506 1,230 31 3,403 2,350 $5.27 2009 2,703 4,899 12,676 136 1,257 2,561 8,493 2009 859 -82 -236 348
2010 19.8x 41.2x 37.5x 3.9x 0.3% 9% 7% 41% 25% -51% 2010 6,759 5,066 1,693 1,035 648 11 1,669 827 $1.85 2010 2,523 5,466 12,708 98 1,246 3,986 8,722 2010 1,356 -866 -711 -180
2011E 11.4x 18.7x 43.9x 3.3x 0.3% 17% 13% 31% 32% 73% 2011E 9,039 6,195 2,844 1,459 1,426 -41 2,891 1,826 $4.09 2011E 2,751 6,507 14,443 91 1,242 3,977 10,466 2011E 2,135 -1,807 -100 227
2012E 9.7x 15.5x 19.0x 2.7x 0.3% 18% 13% 28% 34% 18% 2012E 9,917 6,579 3,337 2,140 1,236 -39 3,403 2,203 $4.93 2012E 4,018 7,117 16,644 1,011 322 4,148 12,496 2012E 2,356 -1,000 -89 1,267
2011E Sensitivity Potash ($/mt) DAP/MAP ($/mt) Ammonia ($/mt) Sulphur ($/lt) Natural Gas ($/mmBtu) P Sales (M mt) K Sales (M mt) C$ (US$) Brazilian Real (US$) Credit Metrics Net Debt/EBITDA Interest Coverage Debt/Total Capital Standard & Poor's: Free Cash Flow EBITDA Less: Taxes Less: NWC Less: CAPEX Free Cash Flow 2009 0.2x 68.2x 0.14x BBB2011E 2,891 639 -25 1,500 777 2010 -1.2x 25.2x 0.13x
$10 $10 $15 -$20 -$1 0.5 0.5 5 2 2011E 0.2x 45.2x 0.11x Moody's: 2013E 3,706 840 -160 750 2,276
Peak: Trough:
176% 23%
Target: Current:
85% 84%
2012E 3,403 764 -161 1,000 1,801
317
January 2011
I. Phosphate
WORLDS LARGEST PRODUCER
Mosaic is the worlds largest phosphate producer, possessing a capacity of about 9.7 million tonnes of finished product capacity. This represents roughly 13% of the worlds capacity and about 56% of North Americas capacity (on a 2010 finished product basis). Mosaic has more end-product capacity than the next two largest producers combined. Exhibit 6.24 highlights Mosaics phosphate assets and the associated production over the past three years.
Exhibit 6.24: Phosphate Overview
Annual Capacity
(M mt)
2010
(M mt)
Production 2009
(M mt)
2008
(M mt)
Annual Capacity
(M mt P2O5)
2010
(M mt P2O5)
Production 2009
(M mt P2O5)
2008
(M mt P2O5)
Phosphate Sales (000 mt)
Mosaic has 9.7 million tonnes of finished phosphate fertilizer capacity.
Phosphate Rock Four Corners, FL South Fort Meade, FL Hookers Prairie, FL Wingate, FL Hopewell, FL Bayovar, Peru * Ona, FL** Pine Level, FL** Total Phosphate Products New Wales, FL Bartow, FL Riverview, FL Faustina, LA Total
6.5 6.0 2.0 1.4 0.5 16.4
5.6 4.3 1.8 1.1 0.5 13.3
5.1 5.1 1.6 0.9 0.5 13.2
5.6 6.4 2.3 1.0 0.5 15.8
Phosphoric Acid New Wales, FL Bartow, FL Riverview, FL Uncle Sam, LA Total

4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2008 2009
1.7 1.0 0.9 0.8 4.4
1.5 0.8 0.7 0.6 3.6
1.4 0.7 0.6 0.5 3.2
1.7 0.9 0.9 0.7 4.2
4.2 2.1 1.7 1.7 9.7
3.3 1.8 1.5 1.3 7.9
2.9 1.5 1.2 1.1 6.7
3.6 2.0 1.8 1.5 8.9
2010
2011E
2012E
* Mosaic ow ns a 35% interest in Vale's Bayovar rock mine, w hich w ill continue to ramp up to 3.9M mt by 2014. ** Proposed mines that are currently being permitted.
Crop Nutrients
Crop Blends
Feed
Other
SNAPSHOT OF MOSAICS INTEGRATED PRODUCTION
Mosaic produces phosphate crop nutrients (DAP/MAP/TSP/MicroEssentials), crop blends (that include nitrogen and potash), and feed phosphate. The three key inputs used in the production of finished phosphate fertilizer are phosphate rock, sulphur, and ammonia. Mosaic purchases its sulphur, most of its ammonia requirements, and mines the majority of its phosphate rock. However, we expect Mosaic may purchase more phosphate rock if the South Fort Meade mine permanently closes (remote), which is partly offset by its recent investment in Bayovar.
Exhibit 6.25: Mosaics Phosphate Rock Mines
Annual Capacity
(M mt)
Phosphate Rock
P2O5
(%)
2010
(%)
Utilization 2009 2008

(%) (%)
Average BPL
(%)
Reserves
(M mt)
Mosaic is the second-largest phosphate rock miner in the world.
Four Corners 6.5 South Fort Meade 6.0 Hookers Prairie 2.0 Wingate 1.4 Hopewell 0.5 Ona* Pine Level* Total** 16.4
* Proposed.
86% 72% 90% 79% 100%
78% 85% 80% 64% 100%
86% 107% 115% 71% 100%
65.5 62.7 65.8 63.2 68.8 63.4 64.8 64.0
30.0% 28.7% 30.1% 28.9% 31.5% 29.0% 29.6% 29.3%
57.5 48.3 22.8 35.9 0.2 245.5 148.0 558.2
** Excludes Mosaic's 35% economic interest in Bayovar (3.9M mt)
In fiscal 2010, Mosaics rock production was ~13.3 million tonnes, accounting for ~8% of world production and ~48% of North American production. Mosaics five mines have a combined capacity of 16.4 million tonnes, making it the second-largest phosphate rock miner in the world behind OCP. Exhibit 6.25 highlights capacity, recent production, and the reserves of each of Mosaics phosphate rock mines.
318
The Mosaic Company
January 2011
Office Cherifen des Phosphates (OCP) is the worlds largest phosphate rock producer, with a capacity of 25.7 million tonnes. OCP is a private, state-owned enterprise based in Morocco.
All of Mosaics phosphate rock mines are located in Florida.
Mosaics five mines are all located in central Florida and include Four Corners, South Fort Meade (SFM), Hookers Prairie, Hopewell, and Wingate. Mosaic plans to develop two mines (Ona and Pine Level) to replace mines that will eventually become depleted. Both Ona and Pine Level are currently in the permitting phase. Mosaic has a legal obligation not to mine Pine Level until at least 2014. Due to depleting resources, these two planned mines are expected to position Mosaic at current capacity levels by 2020 (i.e., between 16 and 17 million tonnes). Mosaic owns most of its phosphate ore reserves. The two exceptions are: (1) 1.9 million tonnes of reserves at Wingate (option to lease until 2014); and (2) 65% of the minable acres at SFM, although Mosaic mines the reserves for a royalty. Mosaic owns all above-ground assets at SFM.
Phosphate Facilities
Mosaic operates five phosphate fertilizer plants three in central Florida and two in Louisiana. The companys Uncle Sam facility produces phosphoric acid only, which is shipped to Faustina (produces DAP/MAP and ammonia). The other three plants in Florida produce both phosphoric acid and finished phosphate products. All five plants have several weeks of storage capacity. Refer back to Exhibit 6.24 for production and capacity figures.
Exhibit 6.26: Process Flow of Mosaics Phosphate Business
Natural Gas
Used to manufacture ammonia at Faustina facility Mosaic purchased ~17 million mmBtu of natural gas for its 2010 phosphate requirements
Phosphate Rock
5 Mines, 2 Planned
Four Corners South Fort Meade Hookers Prairie Wingate Hopewell Proposed: Ona Pine Level 6.5 6.0 2.0 1.4 0.5 M mt M mt M mt M mt M mt
Sulphur
Purchased to produce sulphuric acid 1 mt of DAP requires 0.4 tons of sulphur
Sulphuric Acid H2SO4
In addition to phosphate rock, sulphur and ammonia are needed in the production of phosphate. Mosaic sources its sulphur from North American oil and natural gas producers for sulphuric acid production (sulphur is a by-product of the oil and gas industry). Mosaic owns and operates sulphur terminals in Houston and Tampa Bay, as well as two barges for transportation to its phosphate plants. Following the production of phosphoric acid, ammonia is used to produce DAP and MAP. Mosaics ammonia requirements are imported from offshore producers, with the exception of ammonia produced at its Faustina plant in Louisiana. Faustina has a capacity of 0.5 million tonnes, with occasional (and immaterial) surplus ammonia sold to the open market. Natural gas is the primary raw material used to manufacture ammonia, typically accounting for 90% of ammonia cash costs. Exhibit 6.26 provides an overview of the process flow from input to end product and Mosaics assets at each stage.
Phosphate rock is the largest DAP/MAP input, followed by sulphur and ammonia.
Anyhydrous Ammonia
FL requirements: purchased from offshore producers LA requirements: sourced from MOS' Faustina plant (0.5M mt ammonia capacity) 1 mt of DAP requires 0.2 mt of ammonia
Phosphoric Acid P2O5

5 Facilities
Bartow, FL New Wales, FL Riverview, FL Faustina, LA Uncle Sam, LA 1.0 1.7 0.9 0.0 0.8 M mt M mt M mt M mt M mt
DAP
2nd Stage:
MAP + Micronutrients
+ Ammonia and/or P2O5
MOS Product:
Crop Nutrient
Crop Nutrient
MicroEssentials
Feed
Marketed w orldw ide to crop nutrient manufacturers, distributors and retailers
Branded: Biofos & Multifos
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January 2011
Phosphate Products
Mosaics phosphate products consist of crop nutrients, crop blends, and animal feed products. These products are purchased by manufacturers, distributers, dealers, co-ops, and farmers for use in nutrients and animal feed ingredients. Exhibit 6.27 highlights Mosaics four phosphate product lines.
Exhibit 6.27: Mosaics Phosphate Products
Phosphate Product DAP Product Category Crop Nutrient Description Diammomium Phosphate (DAP) is the most widely used phosphate crop nutrient in the world. DAP is produced by combining phosphoric acid with anhydrous ammonia. The 2nd stage combines slurry with additional ammonia to produce DAP. DAP is a solid granular product.
DAP is the most widely used phosphate fertilizer.
MAP
Crop Nutrient
Monoammomium Phosphate (MAP) is the second most widely used phosphate crop nutrient, and is the fastest growing phosphate product in the world. MAP is produced similar to DAP, except that the 2nd production stage involves combining slurry with additional phosphoric acid - requires less ammonia and more sulphur than DAP. MAP is a solid granular product. Premium ammoniated phosphate product created through a patented process. Mosaic sells three MicroEssentials products, which aim to even apply nitrogen, phosphorus, sulfur and zinc based on a soil's needs. Mosaic is one of the world's largest producers/marketers of phosphate-based animal feed products. Farmers are increasingly using enzymes to optimize usage of animal feed ingredients, which caused Mosaic to close one of its two feed production facilties. Mosaic's feed phosphate products are branded under Biofos & Multifos.
MicroEssentials
Crop Blend
Feed Phosphate
Animal Feed
RISING ROCK PRICES GENERALLY BENEFIT MOSAIC
Integrated producers materially benefit from higher rock prices.
In our view, rising rock prices usually benefit rock-integrated producers, such as Mosaic, over nonintegrated producers. A similar concept applies to phosphate producers with sulphur or ammonia operations. Why? As DAP/MAP prices rise, phosphate rock producers undoubtedly follow suit. Back in the summer/fall of 2008 we saw OCPs rock out of Morocco jump an astounding 920% to $450/tonne, from the 2004 to mid-2007 average price of $44/tonne. By the end of 2008, rock prices were back to $90/tonne. Central Florida DAP prices started 2008 at $500/tonne, doubled to just over $1,000/tonne, and closed the year at $320/tonne. Given that phosphate rock costs represent about half of the total feedstock cost requirements of producing DAP, at current market prices of $130/tonne rock (FOB Morocco), $135/tonne sulphur (FOB Vancouver), and $475/tonne ammonia (CFR Tampa), integrated producers that are not exposed to rock pricing avoid margin contraction. Mosaic has a slight advantage over non-integrated producers with respect to ammonia, however with a capacity of 0.5 million tonnes, the impact is minimal.
Exhibit 6.28: Sensitivity of Mosaics DAP Input Costs
Mosaic's Advantage over Non-Integrated
($/mt)
Rise In DAP Input Cost

($/mt)

($/mt)

($/mt)

($/mt)

($/mt)
Rock +$50 +$100 +$150
~ $80 ~ $160 ~ $240
Ammonia +$50 +$100 +$150
~ $5 ~ $9 ~ $14
Sulphur +$50 +$100 +$150
No Relative Advantage
320
The Mosaic Company
January 2011
Mosaic is a first-quartile cash cost phosphate producer. Conversely, non-integrated producers (representing roughly one-third of global phosphate capacity) operate as third- and fourth-quartile producers. These producers form the ceiling of the cost curve and are therefore prone to idling capacity during DAP/MAP pricing volatility. With sulphur and ammonia treated as pass-through costs in the production of DAP, the ability for integrated producers to source rock internally places them near the floor of the DAP cost curve. The main driver of profitability in DAP production is low-cost phosphate rock. Phosphate rock costs typically make up between 40% and 60% of DAP production costs. Specifically, the production of 1 tonne of DAP requires 1.65 tonnes of phosphate rock, 0.42 tonnes of sulphur, and 0.22 tonnes of ammonia. Given the enormous variability in raw material costs over the past several years, we have sensitized the cost of producing 1 tonne of DAP under different rock, sulphur, and ammonia costs (see Exhibit 6.29).
Exhibit 6.29: Integrated Producers Benefit From Higher Phosphate Fertilizer Input Costs
DAP Input Cost Scenario Phos Rock
($/mt)
Sulphur
($/mt)
Ammonia
($/mt)
Input Cost/ 1mt of DAP

($/mt)
Operating Cost
($/mt)
Export DAP
($/mt)
Cash Margin
($/mt) Current m arket feedstock costs im ply a break-even DAP price for nonintegrated producers of ~$434/m t. This led to som e highcost non-integrateds to idle capacity.
Non-Integrated U.S. Producer Current Costs: Peak Rock: Trough Rock: $135 $408 $40 + + + $135 $765 $310 + + + $475 $931 $70 = = = $384 $1,200 $212 $50 $50 $50 $600 $1,080 $390 $166 ($170) $128
Peak Rock Costs (MOS' FQ2/09) Trough Rock Costs (MOS' FQ1/08)
Mosaic (U.S. Integrated Producer) Current Costs: FQ1/11: Peak MOS Costs: Trough MOS Costs: $40 $40 $40 $40 + + + + $135 $152 $496
FQ2/09
+ + + +
~$400 $391 $810

FQ2/09
= = = =
$211 $216 $453 $170
$50 $50 $50 $50
$600 $431 $1,086

FQ2/09
$339 $165 $583 $188
$78
FQ1/08
$326
FQ1/08
$408
FQ1/08
Fully-integrated prodcuers benefit from rising feedstock costs as it brings about higher DAP prices w ith no exposure to phosphate rock prices.
The DAP Formula
1.65 mt
1 mt
+
Phosphate Rock
0.42 m t Sulphur
0.22 m t Am m onia
=
DAP
SUFFICIENT ROCK SUPPLY A KEY MOSAIC CATALYST
We expect Mosaics rock capacity to be about the same as current levels by 2020.
In our minds, securing sufficient rock capacity is a crucial operational requirement for all integrated producers as phosphate rock: (1) is more scarce and difficult to secure than other phosphate fertilizer inputs such as ammonia and sulphur; (2) has shown significant price volatility since 2007; (3) represents a substantial portion of the input cost of DAP/MAP; and (4) is geographically concentrated. Mosaic plans to develop two phosphate rock mines (Ona and Pine Level) to replace depleting resources at its existing mines. Both mines are in the permitting phase, with management under a legal obligation not to mine Pine Level until at least 2014. We believe that the full operation of these two mines (along with a possible third) and Bayovar will result in net neutral rock capacity by 2020, over todays 16.4 million tonnes.
321
January 2011
Exhibit 6.30: Phosphate Rock Capabilities Provide Integrated Producers with a Structural Cost Advantage
$800 $700
High-cost, non-integrated producers idled capacity as DAP prices fell below break-even levels
Forecast
DAP (FOB Central Florida; $/mt)
$600 $500 $400 $300 $200 $100 $0 F2005
Margin for nonintegrated producers
Margin for integrated producers
F2006
F2007
F2008
F2009
F2010
F2011E
F2012E
Ammonia
Sulphur
Rock Pdn Cost (Integrated)
Incremental Rock Cost (Non-Integrated)
Mosaic occasionally purchases rock on the open market (to blend with its own rock). Accordingly, an objective of the company is to secure additional phosphate rock capacity. Mosaic has stated it will mostly consider North and South America to expand its rock operations, but not China, due to cloudy government regulations. Exhibit 6.30 highlights the significance of being a rock-integrated producer. In mid-2010, Mosaic completed a $385 million investment for a 35% economic interest in the 3.9 million tonne Bayovar phosphate open-pit rock mine. The deal is structured as a JV (Vale and Tokyo-based Mitsui are partners) with Vale constructing and operating the mine. Prior to Mosaics investment, Mitsui invested in a 25% stake in the project for $275 million. Vale will retain control of the Bayovar project, holding 51% of voting shares and 40% off-take capacity. Mosaic pays list prices for its Bayovar rock, which is partially offset by a 35% claim to Bayovars net income. In June 2010, the Wall Street Journal reported that Mosaic was six months deep into talks to acquire Mexican fertilizer company Grupo Fertinal SA de CV. The deal was rumoured to be for phosphate rock capacity worth up to $1 billion, an acquisition certainly feasible considering Mosaics $1+ billion of cash on hand. This would mark the companys first major asset in Mexico.
PHOSCHEM
Phosphate Chemicals Export Association (PhosChem) markets and exports phosphate fertilizers internationally, for both Mosaic and PotashCorp. It operates in a similar way as Canpotex does for Saskatchewan-based potash producers.
Bayovar is ramping up to 3.9 million tonnes by 2014.
Exhibit 6.31: MOS/PCS PhosChem Sales
$3.0B $2.5B $2.0B 80% $1.5B 70% $1.0B $0.5B $0.0B F2006 F2007 F2008 F2009 60% 100% Mosaic's PhosChem Share
90%
Mosaic has generally provided a large portion of PhosChems sales. In 2009, it contributed ~87% of PhosChems $2.7 billion net sales, with the remainder from PotashCorp (see Exhibit 6.31). PhosChem is the top U.S. phosphate exporter, accounting for about half of U.S. exports. The remaining export volumes are fairly fragmented between several producers. CF Industries and Agrium are two of the larger names exporting phosphate outside of PhosChem.
50%
MOS PhosChem Sales (LHS)
PCS PhosChem Sales (LHS)
MOS Weighting (RHS)
322
The Mosaic Company
January 2011
PhosChems sales are mostly concentrated in Latin American and Asian markets such as India, Australia, Japan, Brazil, and Colombia. Asia represents 68% of PhosChems 2009 net sales, with India accounting for over half of this volume. We view PhosChems ability to achieve economies of scale and its ability to provide offshore supply contract coordination as positives for Mosaic going forward. Slightly more than two-thirds of Mosaics phosphate volume was sold through PhosChem in fiscal 2010.
HIGH PHOSPHATE PRICING CORRELATION TO U.S. DOMESTIC PRICES
Mosaics phosphate pricing disclosure is grouped into DAP (crop nutrients) and blends (crop blends). Mosaics DAP and blends realized pricing tracks the central Florida posted DAP/MAP price with 90%+ accuracy. For correlations of Mosaics realized selling prices to MAP and DAP prices, please refer to Exhibits 6.32 and Exhibit 6.33, respectively.
Exhibit 6.32: MOS DAP Price Correlation to MAP Prices
$1,200 $1,100 $1,000 $900 MAP/DAP Price ($/mt) $800 $700 $600 $500 $400 $300 $200 $100 $0 2006 2007 2008 MOS Realized DAP Price (FOB Plant) MAP: New Orleans 2009 2010 MAP: Central FL MAP: Western US Delivered 2011 Correlations to MOS' Realized FOB Plant DAP Price: 1. MAP Central FL = 92% (92% to MOS' Blends Price) 2. MAP New Orleans = 87% (88% to MOS' Blends Price) 3. MAP Western U.S. = 96% (93% to MOS' Blends Price)
Exhibit 6.33: MOS DAP Price Correlation to DAP Prices

$1,200 $1,100 $1,000 $900 $800 Correlations to MOS' Realized (FOB Plant) DAP Price: 1. DAP Central FL = 91% (90% to MOS' Blends Price) 2. DAP Mid-Cornbelt = 90% (89% to MOS' Blends Price) 3. DAP Pacific NW = 86% to both prices
DAP Price ($/mt)
$700 $600 $500 $400 $300 $200 $100 $0 2006 2007 2008 2009 2010 2011
MOS Realized DAP Price (FOB Plant)
DAP: Central FL
DAP: Mid-Cornbelt
Source: Green Markets; Scotia Capital.
STRENGTHS & WEAKNESSES
Exhibit 6.34: Mosaics Phosphate Strengths & Weaknesses

Mosaic Phosphate Strengths Largest integrated phosphate producer in the world with international distribution capabilities (ports, sales offices, blending facilities and warehouses). Integrated operations provide Mosaic with a structural cost advantage over non-integrated producers. Three weeks of storage capacity at all five phosphate plants allow for rock mines to temporarily avoid backlogs at plants. Mining near process facilities provides Mosaic with logistical and cost advantages over North American competitors. Cargill's majority ownership provides Mosaic with access to an established distribution network. Mosaic Phosphate Weaknesses Mosaic occasionally needs to purchase phosphate rock, exposing it to rock price volatility. Plants with high fixed costs may not perform profitably at lower operating rates. Mine closures over the next decade (due to depleted resources) will expose Mosaic to restoration and remediation costs.
+
Mosaic is exposed to some rock price volatility.
+ + + +
323
January 2011
SOUTH FORT MEADE IMPLICATIONS
On June 30, 2010, several NGOs filed a lawsuit against the U.S. Army Corps of Engineers (Corps), contesting its issuance of a federal wetlands permit for the extension of Mosaics South Fort Meade (SFM) mine into Hardee County (see Exhibit 6.35). This followed the Corps having issued the federal wetlands permit two weeks prior.
Exhibit 6.35: Mosaics South Fort Meade Mine
On July 1, the court issued a temporary restraining order prohibiting both Mosaic and the Corps from conducting activities on the associated federal wetlands. Three weeks later, the court heard a hearing for a preliminary injunction. On July 30, the court entered the preliminary injunction, preventing Mosaic from mining the extension. Mosaic shares fell by 8%. While an appeals process is underway, Mosaic is now in the midst of partial settlement that has enabled 200 acres of SFM to be mined, which should last about four months. We understand that Mosaic may eventually be able to demonstrate to the courts that there are no practical alternatives. Mosaic estimates the appeals process could be completed in less than one year. Three of SFMs four draglines have exhausted available reserves in Polk County, and have now been idled. Output from the single remaining dragline cannot economically support the operating costs of the mine. We estimate that annual production of SFMbased concentrated phosphate is ~3.2 million tonnes.
Source: Mosaic.
With global phosphate rock capacity at about 200 million tonnes, we estimate that SFM accounts for approximately 3% of the market. The closure of SFM should continue to provide price support to phosphate rock prices, and is therefore positive for all rock-integrated phosphate producers (other than Mosaic). In our view, PotashCorp will benefit more than its publicly traded North American peers (i.e., Agrium and CF Industries), as the company is a fully integrated phosphate fertilizer producer with 9.6 million tonnes of rock capacity, and 8.4 million tonnes of finished product capacity (i.e., liquids, solids, and feed). Mosaic has faced other legal challenges with respect to Florida-based phosphate mine permitting. In late 2008, the Corps withdrew its federal permit for the Altman Tract, which was later reinstated in mid-2009. Mosaics Ona project was ultimately issued a conditional permit after several lengthy appeals. We do not expect SFM to be the last Florida phosphate-based legal challenge that a phosphate producer faces.
324
The Mosaic Company
January 2011
OUTLOOK
On DAP pricing, we are looking for a strong improvement in 2011 over 2010, to a realized price of $465/tonne compared to $328/tonne in 2010. Realized pricing of Mosaics crop blends should show a much less eventful increase to $442/tonne (2011) from $400/tonne last year. We note that mid-2010 was the end of a four-quarter run in which realized blend prices exceeded crop nutrient prices. In 2012, we expect phosphate pricing to be flat from 2011. While we anticipate Maadens DAP to enter the market, along with product from several other (and much smaller) new facilities, the timing of Mosaics fiscal quarters results in price declines beginning in its Q3/12, which coincidentally leads to $465/tonne in 2012. In its fiscal 2013, Mosaic should realize materially lower DAP prices, as the world moves more toward an overcapacity situation, with downward pricing pressure expected. DAP will likely drive post-2012 phosphate price declines, as Maadens 3 million tonne DAP complex continues to ramp up. We expect many other phosphate fertilizer products to decline as well. Ultimately, ammonia and sulphur costs will continue to play a large role in Mosaics phosphate pricing and margins. Natural gas prices, which we expect to remain level over the mid-term (ex seasonality), will have an indirect impact on Mosaics margins (recall that Mosaic buys most of its ammonia as opposed to producing it). We forecast sulphur costs to stabilize in the sub-$100/tonne area.
Exhibit 6.36: SC Forecast Realized Phosphate Prices by Product
1,200 Realized Price ($/mt) 1,000 800 600 400 200 0 2008 2009 2010 DAP ($/mt FOB Plant) 2011 2012 Blends ($/mt FOB Destination) Forecast
We forecast 7.9 million tonnes of phosphate crop nutrients sold in 2011, rising slightly to 8.1 million tonnes in 2012. We expect DAP and MAP (ex nutrient blends) to account for 60% to 65% of phosphate sales volumes (in line with historical), followed by nutrient blends at ~20%, and the remainder comprised of feed and industrial products (see Exhibit 6.37).
Exhibit 6.37: SC Forecast Phosphate Sales Volumes by Product
4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 2011 Forecast
2012
Crop Nutrients
Crop Nutrient Blends
Feed
Other
325
January 2011
We forecast 2011 and 2012 Mosaic Phosphate sales to come in at a flat $6 billion each year. Exhibit 6.38 highlights our forecast split between North American and International phosphate sales.
Exhibit 6.38: SC Forecast Phosphate Net Sales by Region and by Product
3,000 1,200 1,000 800 600 400 200 0 2008 2009 International (LHS) 2010 North America (LHS) 2011 DAP (RHS) 2012 Blends (RHS)
2,500 2,000 1,500 1,000 500 0
We do not anticipate that Mosaics 2011 and 2012 phosphate gross profits will come anywhere near the 2008 record of $2.3 billion. Given the commissioning of new capacity over the coming years, we expect Mosaics 2011 and 2012 phosphate gross profits to come in at $1.4 billion and $1.2 billion, respectively (see Exhibit 6.39).
Exhibit 6.39: SC Forecast Phosphate Gross Profit and Gross Margins

Phosphate Gross Profit ($M) Phosphate Gross Margin (%)
1,200 1,000 800 600 400 200 0 -200 2008 2009 2010 2011 2012 40% 30% 20% 10% 0% -10% -20%
Forecast
Exhibit 6.40: Phosphate Seasonality

37% Phosphate Sales Seasonality 32% 27% 22% 17% 12% Q1 Q2 Crop Nutrients Crop Blends Q3 Feed Other Q4
326
Realized Price ($/mt)
Q1/11 split estim ated
Forecast
327
930 2,168 3,098 245 264 513 469 1,028 840 728 597 1,086 711 499 429 365 409 278 401 287 405 336 380 438 413 1,284 1,920 3,204 2,332 3,374 5,706 910 1,683 2,593 2,157 3,624 5,781 530 1,221 1,751 341 211 552 376 509 885 295 520 814 258 1,070 1,328 363 658 1,021 414 1,154 1,568 1,331 3,401 4,731 328 400 553 1,028 1,581 431 408 421 1,173 1,594 460 438 8,042 3,732 4,310 3,139 951 956 13,088 1,872 779 1,093 731 186 281 3,070 5,642 2,254 3,388 1,971 572 767 8,952 968 366 602 406 125 254 1,753 1,099 482 617 299 131 92 1,621 1,703 627 1,076 535 130 140 2,508 1,844 683 1,161 702 150 194 2,890 2,205 559 1,646 692 161 279 3,337 1,691 869 822 424 149 208 2,472 1,676 7,416 744 2,855 932 4,561 363 2,181 159 619 137 818 2,335 11,034 1,937 854 1,083 699 121 305 3,062 2,200 1,200 1,000 750 200 350 3,500 1,738 893 845 609 216 144 2,707 343 957 1,300 486 462 411 1,145 1,556 486 462 1,729 4,302 6,031 465 442 343 73 331 63 404 185 572 582 531 369 810 496 496 232 292 73 233 44 313 58 319 82 309 131 294 79 391 152 391 140 401 130 401 115 396 134 3,098 2,850 248
8% 13% 31% 34% 10% -8% -3% 17%
Exhibit 6.41: SC Forecast Mosaics Phosphate Segment

2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10 2010 Q1-11 Q2-11E Q3-11E Q4-11E 2011E 2012E 5/31/06 5/31/07 5/31/08 8/31/08 11/30/08 2/28/09 5/31/09 5/31/09 8/31/09 11/30/09 2/28/10 5/31/10 5/31/10 8/31/10 11/30/10 2/28/11 5/31/11 5/31/11 5/31/12
The Mosaic Company
($M)
Sales (000 mt) Crop Nutrients North America International Crop Nutrient Blends Feed Other
2,054 7,929 8,100 883 3,830 3,154 1,171 4,099 4,946 754 2,812 3,100 216 753 950 216 1,015 950 3,240 12,509 13,100 1,591 4,432 6,023 465 443
Sales North America International
Realized Prices ($/mt) DAP ($/mt FOB Plant) Blends ($/mt FOB Destination)
Input Prices ($/mt) Ammonia Sulfur
388 115
3,204 2,772 432
7,477 5,184 2,293
3,328 2,196 1,133 7,410 6,180 1,230
2,023 1,823 199
871 941 -70
1,188 1,220 -32
814 700 115

14%
1,328 1,215 113

9%
1,021 907 114

11%
1,568 1,262 307

20%
4,731 4,083 648

14%
1,581 1,336 245

15%
1,594 1,259 335

21%
1,300 936 364

28%
1,556 1,073 482

31%
MOS Phosphate I/S MOS Phosphate Net Sales Cost of Goods Sold Gross Profit Gross Margin
6,031 4,605 1,426

24%
6,023 4,787 1,236

21%
January 2011
January 2011
II. Potash
SECOND-LARGEST GLOBAL POTASH PLAYER
With operational capacity of 10.4 million tonnes KCl, Mosaic is among the three largest potash producers in the world (see Exhibit 6.42). PotashCorp is currently the global potash capacity leader with 13.3 million tonnes (inclusive of an annual 1.3 million tonne tolling agreement with Mosaics Esterhazy mine), with Mosaic currently at 10.4 million tonnes, and Belaruskali at 10.3 million tonnes.
Exhibit 6.42: Mosaics Potash Capacity
Mining Method Annual Product Capacity
(M mt)
Production
2010
(M mt)
Reserves
2008
(M mt)
Facility
2009
(M mt)
Recoverable Avg. Grade

(M mt) % K2O
At 5.3 million tonnes, or 4.0 million tonnes net to Mosaic, Esterhazy is the worlds largest potash mine.
Belle Plaine, SK Colonsay, SK Esterhazy, SK* Carlsbad, NM Carlsbad, NM Hersey, MI Total
Solution Conventional Conventional Conventional Conventional Solution
MOP MOP MOP MOP K-Mag MOP
2.8 1.8 4.0 0.6 1.1 0.1 10.4
1.5 0.8 1.9 0.4 0.6 0.0 5.2
1.8 1.0 2.2 0.2 0.6 0.1 5.9
2.1 1.4 3.1 0.4 0.8 0.1 7.9
687 233 594 294 40 1,848
18.0% 26.4% 24.5% 7.4% 26.7% 19.6%
* Excludes 1.3M mt of capacity mined under a long-term tolling agreement w ith PCS. For 2010, PCS' production allocation, subject to any force majeure conditions, w as 0.943M mt.
Over 80% of Mosaics potash capacity is located in Saskatchewan, represented by three potash mines that total 8.6 million tonnes. This includes Mosaics Esterhazy mine, which is currently the largest potash mine in the world (5.3 million tonnes, or 4 million tonnes net to Mosaic). Mosaic also owns two potash mines in the United States with a combined capacity of 1.8 million tonnes.
SUPERB LOW-COST POTASH EXPANSION PLANS
Over the next 10 years, Mosaic intends to increase its potash capacity to 16.8 million tonnes, or by 6.4 million tonnes (second to only PotashCorp). Of the incremental 6.4 million tonnes, 1.3 million tonnes will come cost-free from the expiration of Mosaics tolling agreement with PotashCorp at Esterhazy. The remaining 5.1 million tonnes will all come from expansion projects at Mosaics Canadian mines. We do not anticipate any near-term debottlenecking projects at its two U.S. potash mines. Exhibit 6.43 highlights Mosaics expansion projects, both completed and in progress.
Exhibit 6.43: Mosaics Potash Expansion Plans Through 2020
Current Capacity (M mt) Source of Expansion Tolling Agreement Expansions (M mt) (M mt)
Potash Capacity
Est. 2020 Capacity (M mt)
Million Tonnes KCl
18 16 14
Potash capacity will increase shortly by 1.3 million tonnes, cost-free.
Facility
Canada Belle Plaine, SK Colonsay, SK Esterhazy, SK United States Carlsbad, NM Carlsbad, NM Hersey, MI Total
2.8 1.8 4.0
1.3
2.0 1.3 1.8
4.8 3.1 7.1
12 10 8 6 4 2 0 2 0 10 2 0 11 2 0 12 2 0 13 2 0 14 2 0 15 2 0 16 2 0 17 2 0 18 2 0 19 2020
0.6 1.1 0.1 10.4
1.3
0.0 0.0 0.0 5.1
0.6 1.1 0.1 16.8
U.S. Mines
Colonsay
Esterhazy
Belle Plaine
328
The Mosaic Company
January 2011
Mosaic initiated the first phase of its long-term potash expansion plan in 2006, by expanding Esterhazy by 1.5 million tonnes for less than $100/tonne. This compares with Saskatchewan-based greenfield potash projects, which we believe have an average capex of up to $1,400/tonne (ex infrastructure costs at up to $500/tonne). In fiscal 2009, Mosaic started the second phase of its expansion plan with work towards two more phased expansions at Esterhazy, which should add a further 1.8 million tonnes between 2013 and 2016. By the end of 2015, we forecast Mosaics operational potash capacity to reach 14.6 million tonnes.
Exhibit 6.44: Completed and Planned Brownfield Potash Projects
2.0 1.8
Com pleted
In Progress
2011-17 2016-19
Future
$1,400 $1,200
(Million mt KCl)
Lower capex per tonne projects are being constructed first.
1.2 1.0 0.8 0.6 0.4 0.2 0.0
2006
Low er capex/m t projects constructed first
$800
2014 2012 2016
$600 $400 $200 $0
2006
Esterhazy
Esterhazy
Belle Plaine
Colonsay
Esterhazy Future (LHS)
Belle Plaine Capex (RHS)
Colonsay
Completed (LHS)
In Progress (LHS)
Mosaic has no current greenfield expansion plans. Why? Management believes that it will be able to meet its expansion goals through brownfield potash expansion only. Mosaic has stated that when compared to conventional greenfield projects in Saskatchewan, its brownfield projects will be materially cheaper on a capex per tonne basis.
SPECIALTY POTASH EXPOSURE
Mosaic and Intrepid Potash are the only major producers of langbeinite in the world. Both companies mine and process langbeinite at their Carlsbad facilities in New Mexico. Langbeinite, a potassium magnesium sulphate mineral, contains no chloride. This makes the specialty potash ideal for chloride-sensitive crops including fruits, vegetables, and tobacco. Langbeinite contains ~22% K2O (versus ~63% K2O for MOP), 11% Mg, and 22% SO4, and is generally considered harder to mine than conventional potash, due to its composition and more abrasive nature.
Exhibit 6.45: Langbeinite Performance MOS vs. IPI
900 Sales Volume (M mt) 800 700 600 500 400 300 200 100 0 MOS volumes IPI volumes MOS prices IPI prices 2007 735 159 $119 $131 MOS volumes 2008 838 207 $148 $212 IPI volumes MOS prices 2009 544 148 $324 $315 IPI prices $350 $300 $250 $200 $150 $100 $50 $0 Average Selling Price ($/mt)
Mosaic and Intrepid have langbeinite capacities of 1.1 and 0.43 million tonnes, respectively. Mosaics langbeinite-based potash is branded under the name K-Mag, while Intrepid sells its product under the name Trio. Mosaic had KMag sales of $176 million in fiscal 2009 and did not disclose its 2010 sales. Exhibit 6.45 highlights the volumes and average selling price of Mosaics and Intrepids langbeinite products.
Mosaic is one of two major langbeinite producers in the world.
Source: Mosaic; Intrepid Potash; Scotia Capital estimates.
329
Capex ($/mt)
1.6 1.4
$1,000
January 2011
LONG MINE LIVES, BUT CARLSBAD IS A CONCERN
Exhibit 6.46: Mosaics Potash Mine Reserve Life

200
Reserve Life (Years)
Potash reserves could drop to 35 years by 2020.
175 150 125 100 75 50 25 0 Hersey, MI
Current capacity-w eighted average m ine life of 61 years (35 years post 2020 expansions)
We estim ate Carlsbad has 32 years of MOP reserves left
We estimate that Mosaic has an average (capacity-weighted) potash mine life of about 61 years. Our estimated Carlsbad mine life of 32 years (sylvinite) is the lowest of Mosaics mines (see Exhibit 6.46). This is supported by recent drill hole closures at Carlsbad, compared to de-bottlenecking and expansion projects at all of Mosaics other mines (ex Hersey). After considering the 5.1 million tonnes of current expansions by 2020, as well as the expiration of a 1.3 million tonne tolling arrangement with PotashCorp, we estimate Mosaics average mine life could drop to about 35 years.
Belle Plaine, SK
Colonsay, SK
Esterhazy, SK*
Carlsbad, NM
Based on Current Mine Capacities
2020E (Post Potash Expansion Plan)
* Includes 1 .3M mt o f capacity mined under a lo ng-term to lling agreement with P CS. No te: B ased o n average o re mine fro m 2006-2008 (exlcudes 2009).
PRODUCTION PEGGED TO ANTICIPATED DEMAND
Unlike Mosaics North American sales, Mosaics international potash sales are conducted through Canpotex, the worlds largest exporter of potash. Canpotex primarily utilizes two port terminals in Vancouver and Portland, ~5,500 railcars, and chartered vessels to deliver potash from 10 mines. Through international warehouse facilities and port storage capabilities, Canpotex is able to hold up to 350,000 tonnes of potash to ensure speedy delivery. Canpotex is wholly, and equally, owned by PotashCorp, Mosaic, and Agrium. 70% of Canpotex sales are made on a CFR basis, with sales being allocated amongst the three members based on production capacity. In 2008, PotashCorp, Mosaic, and Agrium supplied 54%, 37%, and 9% of Canpotexs sales, respectively, representing about 20% of global consumption that year. As is the case with Canpotexs other two members (POT and AGU), Mosaic has followed a strategy of matching production to meet anticipated market demand, which we believe: (1) minimizes downside price risks; and (2) conserves the long-term value of its potash resources. Exhibit 6.47 highlights Mosaics historical (and forecast) ability to follow this strategy.
Exhibit 6.47: Mosaic Matches Production to Meet Anticipated Demand
MOP Volume (000 mt)
Mosaic matches potash production to meet demand.
3,000 Forecast 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 2011 2012
Sales Volume
Production
330
The Mosaic Company
January 2011
UNCERTAINTY AROUND MOSAICS LARGEST ASSET: ESTERHAZY
Exhibit 6.48: 2010 Production Allocation

Carlsbad 18% Hersey ~0%
Roughly half of Mosaics potash capacity is from Esterhazy.
Esterhazy 41% Colonsay 14%
Mosaics Esterhazy mine site is currently the worlds largest potash mining facility, with an annual capacity of 5.3 million tonnes. Esterhazy has strong ore reserves of 594 million recoverable tonnes KCl at an average K2O grade of 24.5% (versus Mosaics average grade of 19.6%). The mine began operations in 1962 with the commissioning of the K1 mine. Esterhazys K2 mine was commissioned shortly after, in 1967. The mine stretches 20 km by 30 km with mining operations at depths of ~950 metres below ground. Approximately half of Mosaics potash production comes from Esterhazy, a figure that we expect to increase with: (1) the expiration of the tolling agreement with PotashCorp (see below); and (2) a two-phased brownfield expansion plan totalling 1.8 million tonnes (between 2013 and 2016). Exhibit 6.48 shows Mosaics 2010 potash production by mine.
Belle Plaine 27%
Tolling Agreement
In mid-2009, PotashCorp filed a Statement of Claim against Mosaic, whereby PCS asserted that it has the right, under its mining and processing agreement, to receive potash from Mosaic until at least 2012.
Mosaic believes its potash commitments will end by mid-2011.
Mosaic believes that its obligation to deliver potash to PotashCorp will end by mid-2011, based on a delivery of 1.1 million tonnes to PCS in 2009. Mosaic launched a counterclaim against PotashCorp, asserting that PCS had breached the agreement by refusing to take delivery of potash based on an event of force majeure. We expect the Saskatchewan courts to reach a verdict on the amount of potash that Mosaic has the obligation to deliver (if any) shortly. Within our financial forecast, we assume that 1.3 million tonnes of Esterhazy potash capacity reverts back to Mosaic on January 1, 2012 (or one month following the start of Mosaics Q3/12). We estimate that the earnings impact of one year without the incremental Esterhazy capacity is approximately $0.50 per share, which assumes an 80% capacity utilization rate.
Exhibit 6.49: MOS Potash Strengths & Weaknesses

Mosaic Potash Strengths Mosaic's brownfield expansion plan will allow new capacity to be brought online at a relatively low cost, and in less time, than greenfield capacity. Decades of weighted-average reserve life for Mosaic's mines (based on recoverable tonnage). An incremental 1.3 million tonnes of capacity will revert to Mosaic at no cost, upon expiration of the PCS tolling agreement. High barriers to entry; economically mineable deposits are rare, greenfield capital costs are high and lead times are long. Few world producers, little government ownership. Fixed costs per tonne and mining taxes will fall as Mosaic commissions its brownfield capacity. Mosaic Potash Weaknesses Brine inflow at Esterhazy increases remediation costs and risk of mine flooding. Esterhazy is 45% of Mosaic's current potash capacity. High Saskatchewan resource taxes and provincial and federal income taxes relative to global competitors (85% of Mosaic's capacity is in Saskatchewan). Exposed to exchange rate risk as potash costs are mostly denominated in Canadian dollars, while sales are mostly in U.S. dollars. High rail and ocean freight delivery costs for Saskatchewanbased potash; potential for transportation bottlenecks (less likely post Canpotex port expansions).
+ + + + + +
331
January 2011
OUTLOOK
In 2011, we believe that Mosaic will realize about $368/tonne (FOB Plant) for its potash sales, and $234/tonne for K-Mag. The following fiscal year, we expect the company to book slightly above $420/tonne (FOB Plant) for its potash business, and $274/tonne for K-Mag sales. We forecast the 55% to 65% potash premium over K-Mag realized potash prices (non-K2O adjusted) will hold going forward.
Exhibit 6.50: SC Forecast Mosaics Realized Potash and K-Mag Prices
600 250 200 150 100 50 0 2008 2009 2010 2011 2012 Forecast 500 400 300 200 100 0
MOP Premium ($/mt)

MOP (FOB Plant)
K-Mag (FOB Plant)
We expect 7.8 million tonnes of potash sales in fiscal 2011, increasing by 1 million tonnes in 2012, due to a combination of brownfield commissioning and the reversion of Esterhazy. In our view, Mosaics utilization rate should continue to improve as global potash demand recovery continues. We think that debottlenecking projects should account for less than 0.5 million tonnes of 2011 production.
Exhibit 6.51: SC Forecast Potash Production and Sales Volumes
3,000 Forecast 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 2011 2012 Reversion of 1.3M m t of Esterhazy
MOP Volume (000 mt)
Sales Volume
Production
Exhibit 6.52 below shows our quarterly Mosaic Potash sales forecast, split between KCl and K-Mag.
Exhibit 6.52: SC Forecast Potash Sales by Product
1,400 Forecast
Potash Sales ($M)
1,200 1,000 800 600 400 200 0 2008 2009 2010 2011
2012
MOP
K-Mag
332
MOP Premium ($/mt)
Realized Price ($/mt)
The Mosaic Company
January 2011
Exhibit 6.53: SC Forecast Potash Sales by Product and by Region

Nutrient Sales (000 mt MOP)
3,000 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 2011 2012 Forecast 350 300 250 200 150 100 50 0
North America (LHS)

International (LHS)
Non-Ag. (RHS)
K-Mag (RHS)
We forecast that Mosaics potash production costs per tonne will trend lower going forward due to: (1) an improvement of production volumes, resulting in fixed costs spread over greater tonnes; and (2) the commissioning of low-cost debottlenecking or expansion projects. Partially offsetting is a higher forecast production contribution from higher-cost solution mines (see Exhibit 6.54). Mosaic has two solution mines, which by nature have higher operating costs than most conventional underground mines. These two mines (Belle Plaine and Hersey) represent ~25% of Mosaics existing capacity, a percentage we expect to increase slightly by 2020 as a result of capacity expansions. Although disclosure is not provided by on a mine-by-mine basis, and each of the three Canpotex members include different items in their respective COGS per tonne, Mosaic appears to have the highest operating costs per tonne versus its peers, but we do not consider the company to be a high-cost producer. The higher operating costs per tonne is mostly attributable to brine inflow remediation costs, and the degree of solution mining used by Mosaic (25% versus PotashCorps 8% and Agriums 0%).
Exhibit 6.54: SC Forecast Potash COGS and COGS per Tonne
400 Forecast 80% 60% 50% 40% 30% 20% 10% 0% 2008 2009 2010 2011 2012
Potash COGS ($/mt)
300 250 200 150 100 50 0
Potash COGS ($/mt; LHS)
Potash COGS (%; RHS)
Exhibit 6.55: SC Forecast Potash Gross Margins

Potash Gross Profit ($/mt) Potash Gross Margin (%)
400 350 300 250 200 150 100 50 0 2008 2009 2010 2011 2012 Forecast 70% 60% 50% 40% 30% 20% 10% 0%
Potash Gross Margin ($/mt; LHS)
Potash Gross Margin (%; RHS)
333
Potash COGS (%)
350
70%
Other Sales (000 mt MOP)
334
7,900 8,194 6,131 5,196 1,974 2,014 1,377 766 816 1,106 1,332 1,942 1,440 1,897 1,897 2,276 7,510 6,499 3,354 4,151 1,058 8,563 839 546 1,090 261 1,897 209 1,505 2,564 981 5,050 567 2,111 2,739 687 5,537 621 524 921 277 1,722 125 201 317 266 784 98 234 236 177 647 135 109 508 178 795 103 299 524 207 1,030 113 1,002 718 158 1,878 196 701 989 144 1,834 209 677 850 151 1,678 204 7,907 780 1,015 177 1,972 225 720 904 161 1,785 203 780 1,374 213 2,367 270 2,957 4,143 702 7,802 902 140 141 223 145 488 292 531 334 529 325 565 354 540 366 354 301 370 236 356 194 336 187 352 230 331 200 340 221 392 255 399 260 368 234 1,156 1,479 1,750 124 378 2,252 824 61 92 976 2,333 186 299 2,817 845 41 88 973 388 35 59 481 276 49 61 387 245 31 57 333 339 27 48 414 599 38 93 730 546 39 111 696 1,729 135 310 2,174 488 41 93 622 594 50 64 708 619 52 67 738 838 70 91 999 2,539 212 315 3,067 1,156 804 352
30% 28% 38% 52% 59% 43% 57% 53%
Exhibit 6.56: SC Forecast Mosaics Potash Segment

2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10 2010 Q1-11 Q2-11E Q3-11E Q4-11E 2011E 2012E 5/31/07 5/31/08 8/31/08 11/30/08 2/28/09 5/31/09 5/31/09 8/31/09 11/30/09 2/28/10 5/31/10 5/31/10 8/31/10 11/30/10 2/28/11 5/31/11 5/31/11 5/31/12 8,832
($M)
2006 5/31/06
Production (KCL 000 mt)
Sales (KCL 000 mt) Crop Nutrients North America International Non-Agricultural
K-Mag (Included in above)
3,100 4,898 791 8,789 1,002
Realized Price ($/mt) MOP (FOB Plant) K-Mag (FOB Plant)
424 274
Implied Sales MOP K-Mag Adjustments
3,299 276 357 3,932
1,479 1,065 414
2,252 1,399 853
976 473 503 2,817 1,311 1,506
973 398 575
481 274 207
387 166 221
333 209 125

37%
414 234 180

43%
730 378 352

48%
696 318 378

54%
2,174 1,139 1,035

48%
622 365 257

41%
708 390 318

45%
738 367 371

50%
999 485 513

51%
MOS Potash I/S MOS Potash Net Sales Cost of Goods Sold Gross Profit Gross Margin
3,067 1,608 1,459

48%
3,932 1,792 2,140

54%
January 2011
The Mosaic Company
January 2011
Global Footprint Across the Value Chain

OFFSHORE OPERATIONS
In 2010, India and Brazil each represented 15% to 20% of Mosaics offshore sales.
Mosaics offshore presence consists of sales offices, port terminals, crop nutrient blending/bagging facilities, warehouses, and three SSP plants, predominantly in Latin America and Asia. In fiscal 2010, India and Brazil each represented 15% to 20% of Mosaics offshore sales, while Asia and the remainder of Latin America made up most of the rest (see Exhibit 6.57). Prior to Q2/10, Mosaics offshore segment mostly consisted of phosphate, potash, and nitrogen fertilizer sales, as well as animal feed ingredients. International sales are made on the wholesale, cooperative, retailer, and farmer level. Mosaics offshore business (i.e., outside of North America) has historically made up about 60% of its total sales. Specifically, offshore sales as a percent of total sales were 60%, 63%, and 58% in fiscal 2008, 2009, and 2010, respectively. From Q2/10 onward, Mosaic began including its offshore business segment into Mosaic Phosphate. In our view, Mosaics offshore business will continue to play a strong role in penetrating markets not reached directly through PhosChem and Canpotex. Management has also targeted the continued growth of its direct sales business, as it attempts to mitigate the volatility experienced through resale and distribution of other suppliers product.
Exhibit 6.57: Mosaics 2010 Geographic Sales Breakdown
Canada 5% USA 35% Mexico 2% Canpotex: 9%

( e xc lude d f ro m re gio na l %)
ROW 4% India 16%
Asia
( e x: India )
6%
Brazil 16% S.A.

( e x: B ra zil)
5%
Australia 2%
Latin America
Mosaic currently owns seven warehouse blending plants, two phosphate production facilities, as well as several port offices within Latin America. Mosaic is present in Brazil and Argentina, and to a lesser extent in Chile, Mexico, and Peru (see Exhibit 6.58). Brazil. The bulk of Mosaics South American presence is in Brazil. In 2010, Brazil accounted for approximately 25% of offshore sales. Mosaic owns and operates several blending/SSP plants in Brazil, which are complemented by Mosaics access, through lease agreements, to regional warehouses and distribution channels.
335
January 2011
Mosaic sold its 20.1% stake in Fosfertil to Vale in early 2010.
Prior to early 2010, Mosaic controlled 20.1% of Fosfertil S.A., one of the largest phosphate-based crop nutrient manufacturers in the world. Although the asset boasted an impressive phosphate rock and processing facility, as well as abundant access to natural gas, Mosaic agreed to sell its Fosfertil position, alongside its Brazil-based Cubato operations to Vale, for slightly more than $1 billion. Argentina. Mosaic has a significant position in Argentina, a country with one of the fastest-growing phosphate consumption rates in the world. The company currently owns a port and terminal facility, as well as the countrys only GSSP production facility. In 2009, the Quebracho GSSP facility produced 165,000 product tonnes. Peru. In mid-2010, Mosaic purchased a 35% interest in the Bayovar phosphate project in Sechura, Peru. Mosaics $385 million investment provides it with the right to 35% of all rock mined. The 3.9 million tonne rock mine was constructed by Vale and recently commissioned (full ramp-up by 2014).
Exhibit 6.58: Mosaics Offshore Operations
Asia
16
China
13
9 19
Following Mosaics late 2009 sale of its Thailand business, the companys Asian exposure remains strong in China and India. China. Mosaics Chinese operations are comprised of strategic partnerships as well as wholly owned projects to produce DAP and NPK compounds. Mosaic owns 35% of one China-based DAP and NPK blend facility. This plant has an estimated annual capacity of 600,000. Mosaic also owns two additional blending plants with an annual capacity of 200,000 tonnes. India. In fiscal 2010, Mosaic distributed approximately 500,000 product tonnes of phosphate nutrient through the importing of product into distribution and its deep water port facility. Thailand. In late 2009 Mosaic sold its Thailand distribution business to ICP Fertilizer Co. The annual distribution capacity of the assets was 240,000 tonnes. The sale was aimed at better aligning Mosaics global distribution network with its North American production assets.
1 2
5 3 4 10 21 4 17
14
22 22
India
11 7 6 12 18,20
Following the sale of its Thailand business, Mosaics Asian assets are mostly in China and India.
Australia
15
1 2 3 4 5 6 7 8 9
Warehouse & Blender Sorriso Alto Araguaia Rio Verde Uberaba Candeias Concepcion Bay San Antonio Qinhhuangdao Yantai
10 11 12 13 14 15 16
Major Offices Sao Paulo Santiago Buenos Aires Beijing Gurgaon Hawthorn Mexico City
Phosphate Production 17 Cubatao 18 Quebracho 19 Yangzhong City
Port Operation 20 Quebracho 21 Paranagua 22 Rozy
336
The Mosaic Company
January 2011
Specialty Products with International Exposure

K-MAG Exhibit 6.59: K-Mag
K-Mag is ideal for crops with high potassium needs, but low chloride tolerance.
K-Mag (langbeinite) is a Mosaic-branded three-in-one fertilizer containing potassium (K), magnesium (Mg) and sulphur (S). K-Mag is most valuable to crops with high potassium requirements, but with a low chloride tolerance. These include crops such as fruits, vegetables, and tobacco. These cash crops have economics that warrant: (1) new applications each growing season; and (2) K-Mag as a non-comprehensive source of potash. Instead, K-Mag is typically applied at rate to supply most, if not all, of the required magnesium and sulphur, with additional potash being required. K-Mag blends well with most other fertilizers.
Given that K-Mag is 100% water soluble, nearly all of the product applied in a growing season is dissolved in the same season. We view this as a positive for Mosaic. Other key reasons that a typical farmer would apply K-Mag include:
Exhibit 6.60: K-Mag Has a Relatively Low Salt Content
120 100 Relative Salt Index 80 60 40 20 0
at e Su lfa te SO P K C at e A P P ag N O K -M itr itr M D A P l
1. Virtually chloride-free. K-Mags maximum chloride content is less than 2.5%, resulting in a lower chance of fertilizer burn on chloride-sensitive crops. 2. Minimal leaching. Given its high solubility, K-Mag has the potential to take effect right after application, given sufficient soil moisture (which is not a characteristic of granular products). 3. K-Mag provides a good balance of K,
Unlike K-Mag, SOP does not contain magnesium and as a result has a higher KCl (highest salt content) weighting
um
So di um
on i
on i
um
Mg, and S, in a proportion that is suitable for many crops.

4. K-Mag is a neutral salt. This means that regardless of the application rate, K-Mag does not change a soils pH.
A m
About half of Mosaics K-Mag product is sold in the United States, with the highest growth potential in Latin America and Asia. K-Mag is sold to both dealers and growers, worldwide. The K-Mag product has existed for about 70 years, with mining and processing taking place at Mosaics Carlsbad facility in New Mexico. New Mexico contains the largest and purest economically viable deposits of langbeinite ore in the world. Langbeinite is found in natural ore beds ~300 metres underground.
The highest growth potential of K-Mag is in Latin America and Asia.
Mosaics three K-Mag products include premium, granular, and standard. The suitability of each of the three products depends on the crop, soil condition, and specific needs of the dealer or grower. Generally, premium K-Mag is preferred over granulated for short-cycle crops (such as corn and potatoes), given its higher solubility. Through process improvements, Mosaic has expanded its premium grade granulation plant from an initial capacity of ~0.2 million tonnes to its current capacity of ~0.4 million tonnes. Plans are to increase capacity by a further 0.2 million tonnes. K-Mag is fairly similar to potassium sulphate (SOP), with the key difference being that SOP lacks Mg. The result is that SOP contains higher portions of KCl and S, and therefore a higher salt content. The chemical composition of K-Mag is: (1) 21-22% K2O, or 18.2% K; (2) 10.5-11% Mg, or 18% MgO; and (3) 21-22% S, or 67% SO4.
337
A m
January 2011
MICROESSENTIALS
Mosaics three premium MicroEssentials products allow for an even application of nitrogen, phosphorus, sulphur, and zinc. Regardless of the application method, traditional blended fertilizers can separate, resulting in an uneven distribution of nutrients. Through a patented process, Mosaics granule MicroEssentials products allow for a balanced distribution of essential nutrients, provided an appropriate application method is used. MicroEssentials can be regionally customized based on soil needs. For example, in Chile, a MicroEssentials product developed for volcanic soils is currently being tested. In Brazil, another product has been developed to meet the unique nutrient needs of soybeans grown in tropical climates. Accordingly, we believe that MicroEssentials is superior to traditional blended fertilizers, providing a more efficient, uniform distribution of nutrients in a ratio that is best suited to plant health and productivity.
Exhibit 6.61: MicroEssentials vs. Traditional Fertilizer
Source: Mosaic.
MicroEssentials competitive advantage lies in its technology. The key difference between MicroEssentials and other blended, coated, or SCR fertilizers is the manufacturing process. Traditional fertilizers blend nitrogen, phosphorus, sulphur, and zinc, whereas Mosaic uses a process to produce a granule with the appropriate distribution of nutrients. Specifically, sulphur and zinc are layered around phosphorus-based fertilizer particles. This uniformity allows for even distribution across the field and amongst crops particularly important with sulphur and zinc, nutrients that are relatively immobile in soil.
Mosaic sells three MicroEssentials products that contain nitrogen, phosphorus, and two forms of sulphur. All three products provide an increased phosphorous uptake of up to 30%. Products include:
MicroEssentials contains nitrogen, phosphorus, and two forms of sulphur.

MicroEssentials S10: Designed for crops such as wheat, corn, sugar beets, soybeans, and alfalfa. MicroEssentials S15: Designed for canola, wheat, corn, sugar beets, soybeans, and alfalfa.
MicroEssentials SZ: In addition to nitrogen, phosphorus, and two forms of sulphur, MicroEssentials SZ contains two forms of zinc. On top of an increased phosphorus uptake of up to 30%, this product: (1) boosts a crops zinc uptake by up to 45%; and (2) provides roots with up to 12 times more zinc granules than a typical zinc blend. Application is suitable for essentially all crops, but best suited for corn, soybeans, wheat, rice, and barley. Exhibit 6.62: N and S Requirements Are Mildly Correlated
# N # P2O5 240 100 325 65 370 96 120 45 120 60 180 65 410 95 # K20 240 140 400 85 170 155 400
Not all crops require sulphur and uptake varies vastly among crops. Crops with high nitrogen requirements also tend to have high sulphur needs due to their joint role in facilitating plant growth. The key advantages of sulphur include improved: (1) nitrogen use efficiency; (2) protein production as an ingredient of amino acids; (3) seed oil in oil seed crops; and (4) chlorophyll formation.
Crop Corn (180 bu/a) Soybeans (60 bu/a) Bermudagrass (8 t/a) Wheat (55 bu/a) Rice (7,500 lb/a) Cotton (1,500 lb/a) Alfalfa (8 t/a)
#S 28 25 44 13 12 40 40
# Mg 41 26 26 15 15 32 40
Crops w ith high nitrogen needs generally also have high sulphur needs
338
The Mosaic Company
January 2011
Exhibit 6.63: Key Advantages of Mosaics MicroEssentials Products

Advantages of MicroEssentials Improved phosphorus uptake Balances soil pH Key nutrient interaction between phosphorus and zinc helps plants take up more of the nutrients applied, and P uptake increases between 10% and 30%. The pH of the MicroEssentials granule balances the soil pH around the granule to enhance P availability. MicroEssentials delivers two forms of sulphur: 50% sulphate, which is immediately available to developing roots; and 50% elemental sulphur, which becomes available later in a growing season. Plants begin growth relatively faster, as MicroEssentials delivers N in the in the ammonium form. As zinc is incorporated into every MicroEssentials SZ granule, it is uniformly distributed and readily available to each plant - roots come in contact with up to 12 times more contact points than when applied in a typical blend.
Season-long sulfur availability
Nitrogen kick-starts young plants
Zinc is 10% to 45% more available

Marginal zinc deficiency often leads to greatly reduced yields (<40%) without obvious visible symptoms. Without soil testing, these latent deficiencies can easily remain undetected. For yield losses greater than 40% (i.e., a major economic impact on the farmer), zinc-deficient soils can be identified, or diagnosed, by soil testing, or the analysis of the crop plants (usually leaves). Soil conditions that are highly prone to zinc deficiencies include solids with: (1) low contents of organic matter; (2) a neutral or low pH; (3) relatively high salt concentrations; (4) high calcium carbonate content; (5) a high phosphate status; (6) prolonged flooding; and/or (7) high magnesium and/or bicarbonate concentrations. Within the United States, zinc deficiencies appear to be the greatest in the Corn Belt. In particular, more than 75% of soils tested in Ohio, Indiana, and Illinois have very low to medium zinc contents.
Exhibit 6.64: Zinc Deficiencies Appear Greatest in the U.S. Corn Belt
U.S. zinc deficiencies are greatest in the Corn Belt.
Source: Mosaic.
339
January 2011
Strong MOS/POT Correlation

For the past several years, Mosaics and PotashCorps stock prices have tracked each other with a 97% correlation. In Exhibit 6.65, we have provided a brief snapshot of Mosaic and PotashCorp, including financial, segment, and stock price data.
Exhibit 6.65: Comparison of Mosaic and PotashCorp
Mosaic MOS-N General Market Capitalization Dividend 52 Week High/Low Float (%) Short Interest Ratio Business Segments Phosphate $34.1 billion 5 quarterly dividend [regular] $37.68 Low, $76.36 High 35.8% 1.07x Potash Corp POT-T, POT-N $47.3 billion 10 quarterly dividend [regular] $84.60 Low, $154.83 High 99.8% 1.67x
#1 P2O5 producer in the world 4.4M mt of P2 O5 capacity (8% global market share) Integrated producer with assets primarily in the U.S. Capacity: 16.4M mt of rock; 9.7M mt of phosphate products (DAP/MAP/Other); 4.4M mt of acid 1 of 2 PhosChem members
#3 P2O5 producer in the world 2.8M mt of P2 O5 capacity (5% global market share) Integrated producer with assets in the U.S. Capacity: 9.6M mt of rock; 1.7M mt of DAP/MAP; 5.6M mt of liquids; 3.8M mt of feed and acid 1 of 2 PhosChem members POT Phosphate comprises ~10% of gross margin
Outlook/Impact
Both MOS and POT will continue to benefit the international distibution capabilities of PhosChem. We estimate that MOS will remain the world's largest phosphate fertilizer producer for the foreseeable future. On the phosphate rock side, POT currently has the upperhand - this may not persist in the mid-term based on MOS investments. #2 KCl producer in the world by capacity 10.4M mt of capacity; mines predominately in SK Capacity planned to reach 16.8M mt by 2020 1 of 3 Canpotex members #1 KCl producer in the world by capacity 13.3M mt of capacity; mines predominately in SK Capacity planned to reach 17.1M mt by 2015 1 of 3 Canpotex members Comprises 60% - 70% of POT's gross margin
Potash
Outlook/Impact
We expect both MOS and POT to increase their potash market in the short and mid term. Both companies have announced material brownfield expansion plans, which should lock the #1 and #2 ranks for POT and MOS, respectively. A closed merger between Uralkali/Silvinit could place the combined company ahead of Mosaic, depending on brownfield timing. MOS sold its Canadian nitrogen business to Yara in 2008 at 8x trailing EBITDA In F2007, MOS Nitrogen accounted for only 2% of overall sales & less than 1% of earnings 3.5M mt of ammonia capacity, ranking #3 in the world. Nitrogen is ~20% of gross margin. 1.7M mt of urea capacity, and 3.9M mt of other nitrogen capacity Low cost: Production facilities in Trinidad with a natural gas cost advantage
Nitrogen
Outlook/Impact Gross Profit Split
We do not anticpate MOS will re-enter the Nitrogen business.
F2009
F2015E
2009
2015E
Phosphate
Potash
Other
Phosphate
Potash
Other
Phosphate
Potash
Nitrogen
Phosphate
Potash
Nitrogen
Debt Profile Total Debt ($M) Net Debt ($M) Moody's Rating S&P's Rating Ownership Structure Insider Institutional 97% Stock Price Correlation
$250
1,333 (1,030) Baa2 BBB-
3,715 3,355 Baa1 A-
64.2% 26.7%
3.5% 81.3%
60%
R Squared: 0.97 POT

NYSE Stock Price $150
Company Gross Margin
$200
50% 40% 30% 20% 10% 0%

Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10
POT
MOS
$100
$50
MOS
$0 Dec-07
2006
2007
2008
2009
2010
Source: Mosaic; PotashCorp; Bloomberg; Scotia Capital.
340
The Mosaic Company
January 2011

We believe Mosaic carries a high risk profile, which is consistent among all senior fertilizer producers in our coverage universe. Below, we have highlighted Mosaics key investment risks.
BRINE INFLOW AT ESTERHAZY
Mosaic has managed brine inflow at Esterhazy since 1985. Despite this long-standing track record, flooding of conventional underground mines is an unpredictable and material risk. A good example is PotashCorps Patience Lake mine, which flooded in 1988 following two periods of mine closure due to brine inflow. The injection of calcium chloride to subdue the brine (a traditional mining practice) became less effective in the later years due to a change in the mineralogy. In 1989, Patience Lake was converted into a solution mine and annual production capacity declined to 0.3 million tonnes. This level was well below its conventional capacity of 1.15 million tonnes. Other examples of potash mine floods include the Potacan mine in New Brunswick in 1997 (0.8 million tonnes), and two Uralkali mines in 1986, and 2006 (totalling 3.1 million tonnes).
Exhibit 6.66: Esterhazy Inflow Remediation Costs
$160 $140 Remediation Cost ($M) $70 $60 $50 (LHS) $40 (RHS) $30 $20 $10 $0 2006 2007 2008 2009 2010 Remediation Cost ($/mt)
Mosaic has managed Esterhazy brine inflow since 1985.
$120 $100 $80 $60 $40 $20 $0
Esterhazy is the worlds largest potash mine, representing 45% of Mosaics potash capacity. Mosaic currently has storage capacity to handle current brine inflow levels for several months without adversely affecting production, and Mosaic continues to drill additional wells. Esterhazy brine inflow peaked at between ~20,000 and 25,000 gallons per minute (gpm) in January 2007. At that time, Mosaics share price fell 8% on the news and within the subsequent months an incremental $30 to $40 million was spent to control the inflow. Exhibit 6.66 highlights Mosaics historical remediation costs to manage brine inflow. Brine inflow levels are now ~5,000 gpm.
NEW GREENFIELD SUPPLY
Potash
Soaring potash prices between 2006 and 2008 led to a surge of interest among both existing producers and new entrants looking to join the perceived party of abnormally high perceived long-term returns. These new entrants ranged from pre-IPO junior resource companies to global mining giants such as BHP Billiton. Within Canada, numerous exploration licenses have been issued over the past several years. Saskatchewan alone has issued roughly 200 potash exploration permits that cover ~11 million acres. About 90% of these were applied for, and granted, post 2006. The IFA has indicated that current producers have planned 20 expansion projects, eight of which are greenfield. If new supply, including existing producer-announced brownfield expansions, were to come online faster than warranted, potash prices could be depressed for a prolonged period. This would negatively impact Mosaics margins, profitability, and ultimately its share price. For further details on the future of greenfield potash supply, please refer to our January 2010 report titled Finding Value in Growth.
341
January 2011
Phosphate
Although demand growth of finished phosphate fertilizer (i.e., MAP/DAP/TSP) should be strong over the mid-term, new supply could overshadow. Close to 40 new processed phosphate facilities are expected to be commissioned during the next five years, with approximately three-quarters of this supply coming online as DAP. China alone represents about half of this growth, with nine other countries accounting for the remaining ~20 projects. Should the majority of new P2O5 capacity planned in China, Morocco, and Saudi Arabia reach production, P2O5 capacity could see single-digit percentage oversupply, assuming IFA forecast demand growth rates hold. This would imply an oversupply of 2 million tonnes over the next 12 months, growing to 3+ million tonnes by 2014. This should weigh on any continued phosphate fertilizer price rally.
PHOSPHATE ROCK PRICING
Exhibit 6.67: Morocco Rock Prices per Tonne

$450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Dec-04
Average North Africa (OCP) Phosphate Rock ($/mt)
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
North America is likely the only phosphate rock-producing region in the world that should see rock capacities shrink in the mid-term. With annual phosphate demand anticipated to grow at between 2% to 2.5% through 2020, a majority of the new rock required to meet this demand is expected to come from Asia and North Africa. New projects there should represent ~17 million tonnes, or 45% of the new rock supply. If these expansions are commissioned as planned, an oversupply of rock would hurt integrated producers like Mosaic.
Falling rock prices weaken margins of rock-integrated phosphate producers such as Mosaic, as input cost advantages are diminished relative to non-integrated producers. A $50/tonne increase in phosphate rock prices will typically increase an integrated producers cash margin by $80/tonne, and vice versa. We estimate that the impact on Mosaics bottom line is approximately $0.07. Please refer back to Exhibits 6.28, 6.29, and 6.30 for a more detailed look at phosphate rock price impacts on Mosaics margins.
CHINESE EXPORT TARIFFS
China consumes about 30% of global phosphate fertilizers.
China is presently the worlds largest phosphate fertilizer market, with its consumption accounting for ~30% of global production. Despite a large domestic capacity, Chinese producers have largely been limited in their export options due to high export taxes aimed at: (1) keeping fertilizer prices low in China; and (2) restricting the export of energy-intensive products. The Chinese government recently became more restrictive with respect to its phosphate export tax. Specifically, the government reduced its off-season window by one and a half months to four months. Despite the above, any loosening of Chinese fertilizer export tax rates, or the length of the offseason window, would likely have a material impact global DAP/MAP prices, and therefore on Mosaics earnings. A steady 7% tax, or elimination of the tax altogether, would introduce a substantial amount of new players into the phosphate export market, as the Chinese phosphate industry is highly fragmented.
342
The Mosaic Company
January 2011
COMMODITY PRICE EXPOSURE
Volatility in fertilizer input prices and grain prices, which drive fertilizer prices, will impact the profitability of fertilizer producers. Unlike many global commodities, fertilizers are typically not sold forward beyond one year, and cannot be price-hedged in a futures market. Exhibit 6.68 highlights the historical volatility of phosphate input prices.
Exhibit 6.68: Historical Pricing of the Three Key Inputs for the Production of Processed Phosphate
11x 10x Indexed at 1x (May 14, 2004) 9x 8x 7x 6x 5x 4x 3x 2x 1x 0x Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10
Nat. Gas
Dec-10
N. Africa Phosphate Rock
Ammonia: US Gulf (NOLA Barge)
Ammonia: Tampa (C&F)
Sulphur (Van.)
Mosaics stock price is weakly correlated to natural gas.
The price of natural gas impacts Mosaics potash operating costs, and to a lesser extent, its phosphate operating costs. Mosaic has minimal direct (but high indirect) natural gas exposure as most of Mosaics ammonia required for phosphate fertilizer production is purchased. The companys small Faustina facility is the extent of Mosaic Phosphates direct exposure to natural gas price changes. Additionally, ~25% of Mosaics potash production (Belle Plaine and Hersey) is generated from solution mines, which is a natural gas-intensive mining method. With the exception of mid-2007/08, Mosaics stock price has been weakly correlated (less than 50%) to natural gas. We would not look too deep into the moderate 2007/08 correlation of 70%, as fertilizers followed the general market bull run. Mosaics stock price has historically had a strong correlation to corn and soybean price changes, but less so to wheat. With the exception of the last couple of years, in which some of Mosaics trade has been around fertilizer M&A noise/hype/rumours, the stock has traditionally tracked corn and soybean prices with a 70%+ correlation (see Exhibits 6.69 and 6.70).
Exhibit 6.69: MOS Correlation to Grains and Energy
100%
Correlation to MOS Stock Price
Exhibit 6.70: MOS Correlation to Fertilizers

100% Correlation to MOS Stock Price 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 Year Ammonia 3 Year 5 Year DAP Inception Potash
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 Year Corn 3 Year Soybeans 5 Year Wheat Inception Natural Gas Low due to M&A noise
343
January 2011
Mosaics profitability is highly dependent on fertilizer demand, which is generally affected by the outlook for crop prices, crop nutrient prices, farmer economics, government policies and subsidies, the availability of farmer and customer credit, dealer/distributor inventories, and competitor actions, such as decisions to build or close production facilities or vary production operating rates.
FOREIGN EXCHANGE EXPOSURE
Mosaic earns the majority of its revenue in U.S. dollars, while most of its potash operating costs are denominated in Canadian dollars. Accordingly, a strengthening C$ is negative for Mosaics EPS. We estimate that a $0.01 appreciation in the C$ will reduce our 2011E Mosaics earnings by ~$0.03 per share. Exhibit 6.71 shows our 2011 MOS EPS sensitivity to changes in FX rates. Exhibit 6.72 highlights the historical FX rate over the past five years.
Exhibit 6.71: Mosaic 2011 EPS Sensitivity to FX Changes
2011 U.S. Dollar per Canadian Dollar
Exhibit 6.72: C$-US$ FX History

-1 SD +1 SD Avg
LABOUR CONTRACTS
Over half of Mosaics employees are unionized.
Of Mosaics 7,500 global employees, approximately 56% are unionized. Of its 4,500 hourly employees, 93% are covered under 10 separate collective bargaining agreements. Chemical Workers Union and United Steelworkers (USW), out of Florida and Saskatchewan, are the largest unions to Mosaic. In August 2009, Mosaics Colonsay (potash) workers ratified an agreement through to 2012. Mosaics Brazil operations (~64% of Mosaics international workforce) are exposed to eight unions with collective bargaining agreements negotiated annually. Mosaics Carlsbad location, which employs 315 workers, poses a possible threat to a labour disagreement, as their contracts are set to expire in May 2012.
344
2011 Potash Price ($/mt)
We estimate a $0.01 rise in the C$ will reduce our 2011E EPS by ~$0.03.
$338 $348 $358 $368 $378 $388 $398
$1.15 3.20 3.36 3.52 3.68 3.84 4.00 4.16
$1.10 3.34 3.50 3.66 3.82 3.98 4.14 4.30
$1.05 3.47 3.63 3.79 3.95 4.11 4.27 4.43
$1.00 3.61 3.77 3.93 4.09 4.25 4.41 4.57
$0.95 3.74 3.90 4.06 4.22 4.38 4.54 4.70
$0.90 3.88 4.04 4.20 4.36 4.52 4.68 4.84
$0.85 4.01 4.17 4.33 4.49 4.65 4.81 4.97
The Mosaic Company
January 2011
Financial Forecast
On the top line, we are looking for overall 2011 and 2012 gross sales of $9 billion and $9.9 billion, or slightly below peak sales in Mosaics fiscal 2009 of $10.3 billion. Throughout our forecast period, we expect potash sales to represent an increasing proportion of Mosaics net sales.
Exhibit 6.73: SC Forecast Net Sales by Division
5,000 Forecast 4,000 Net Sales ($M) 3,000 2,000 1,000 0 2006 2007 2008 2009 Potash 2010 Phosphate 2011 2012
Gross margins should see a slightly better recovery than sales, with potash improvement expected to pick up substantially next year. Specifically, we forecast that potash will contribute up to 65% of Mosaics 2012 gross profit, up from our expectation of about half in 2011.
Exhibit 6.74: SC Forecast Gross Profit by Division
Gross Profit ($M)
1,200 900 600 300 0 -300 2006 2007 2008 2009 Potash 2010 Phosphate 2011 2012
We forecast 2011 and 2012 EBITDA of $2.9 billion and $3.4 billion, respectively, with associated EBITDA margins of 32% and 34%, respectively. Our EPS estimates for Mosaic are $4.09 (2011) and $4.93 (2012), versus a record $5.27 in 2009.
2,000 Forecast 60% 50%
1,000 500 0 -500 2006 2007 2008 2009 2010 2011 2012
30% 20% 10% 0% -10%
EBITDA (LHS)
EBITDA Margin (RHS)
345
EBITDA Margin (%
EBITDA ($M)
We expect EBITDA margins in the low 30% area.
1,500
40%
January 2011

1,400 1,200 30% 25% 20% 15% 10% 5% 0% -5% -10% 2006 2007 2008 2009 2010 2011 2012
Net Income ($M)
1,000 800 600 400 200 0 -200 -400
Net Income (LHS)
We estimate that Mosaic will generate $2.1 billion and $2.4 billion in cash flow from operations in 2011 and 2012, respectively (post working capital adjustments). We forecast 2011 capital expenditures at between $1.4 billion and $1.6 billion, in line with Mosaics guidance. Exhibit 6.77 highlights that, post 2010, Mosaics return on assets and return on equity should return to more normalized levels of ~15%.
35% 30% 25% Return (%) 20% 15% 10% 5% 0% -5% 2005 2006 2007 2008 ROA 2009 ROE 2010 2011 2012 Forecast
We do not expect Mosaic will deviate from its quarterly $0.05 per share dividend throughout our forecast period. Exhibit 6.78 shows that our estimates are in line with the Street in 2011and 2012. While we do know the specifics behinds consensus forecasts, we estimate that the primary difference is that we are looking for falling phosphate fertilizer prices in 2012.
Exhibit 6.78: Our 2011 and 2012 Mosaic Estimates vs. Consensus
2011 Scotia Capital Est. Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/sh) 9,039 2,891 1,826 4.09 Low 8,145 1,975 1,456 3.26 Street Avg. 9,170 2,808 1,744 3.92 High 10,138 3,273 2,351 5.27 Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/sh) Scotia Capital Est. 9,917 3,403 2,203 4.93 2012 Low 8,125 2,725 1,838 3.66 Street Avg. 9,790 3,523 2,171 4.81 High 11,827 4,580 2,981 6.58
Source: Bloomberg; Reuters; Scotia Capital estimates.
Exhibits 6.79 through 6.81 highlight our quarterly forecast financial statements for Mosaic through fiscal 2012.
346
Net Income Margin (%)
Forecast
35%
347
3,098 1,156 1,052 5,306 2,850 804 1,014 4,668 248 352 37 637 241 7 101 288 1 153 8 -160 5 -165 48 -4 -121
381 3 0 384 382 0 382 440 446 447 6 3 2 434 443 444 441 444 444 444 444 2 446 0 0 0 0 3 2 0 0 437 442 444 444 444 0 0 444 444 1 446 444 0 0 445 444 0 444
Exhibit 6.79: SC Forecast Mosaic Income Statement

2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10 2010 Q1-11 Q2-11E Q3-11E Q4-11E 2011E 2012E 5/31/06 5/31/07 5/31/08 8/30/08 11/30/08 2/28/09 5/31/09 5/31/09 8/30/09 11/30/09 2/28/10 5/31/10 5/31/10 8/31/10 11/30/10 2/28/11 5/31/11 5/31/11 5/31/12 3,204 1,479 1,091 5,774 2,772 1,065 1,010 4,848 432 414 80 926 310 2 9 -37 642 150 -13 506 123 382 41 -4 420 124 -9 2,083 60 -4 1,185 29 -2 960 6 1 59 6 -2 146 100 -6 2,350
444 0 0 445 444 2 446
($M)
The Mosaic Company
Phosphate Potash Corporate/Other Total Net Sales 5,184 1,399 70 6,652 2,293 853 14 3,161 324 12 58 21 2,747 91 -26 2,682 715 1,968 3 -2 101
445 0 0 445 445 2 446
7,477 2,252 84 9,813 2,196 473 5 2,674 1,133 503 13 1,649 90 10 -87 0 1,636 11 -2 1,627 498 1,129 8 -4 1,384 451 933 8 0 83 31 52 16 2 -188 -330 142 43 -4 2,906 649 2,256 15 0 133 33 100 12 -6 171 50 121 -12 -1 108
445 0 0 445 445 2 447
3,328 976 18 4,323 1,823 398 11 2,233 199 575 -1 774 77 15 -32 -673 1,388 10 -1 357 125 232 -9 -1 223
445 0 0 445 445 2 447
2,023 973 11 3,007 941 274 20 1,235 -70 207 4 140 71 25 -47 1 91 83 -5 298 -3 -170 321 44 132 -676 2,945 81 7 -13 0 147 83 24 23 0 178 82 5 22 0 367 114 26 1 0 547 13 6 528 139 390 7 0 396
445 0 0 445 445 2 447
871 481 23 1,376 1,220 166 4 1,389 -32 221 15 204 1,230 1,506 31 2,767 115 125 -17 222 113 180 14 307 114 352 11 477 307 378 3 688 648 1,035 11 1,693 360 62 32 0 1,238 50 -1 1,190 347 842 -11 -4 827
445 0 0 445 445 2 447
1,188 7,410 387 2,817 19 71 1,594 10,298 6,180 1,311 40 7,531 245 257 3 505 88 6 0 0 410 7 -1 405 110 295 4 -1 298
445 0 0 446 446 1 447
814 333 -71 1,457 700 209 -54 1,235 1,215 234 -47 1,403 907 378 -29 1,255 1,262 318 -27 1,553 4,083 1,139 -156 5,066 1,336 365 -18 1,684 1,259 390 0 1,649 335 318 -15 638 89 7 0 0 542 16 0 526 137 389 18 -2 406
446 0 0 446 446 1 447
1,328 414 -33 1,710 936 367 0 1,304 364 371 -15 720 91 6 0 0 623 16 0 607 158 449 15 -1 463
446 0 0 446 446 1 447
1,021 730 -19 1,732
1,568 696 -24 2,240
4,731 2,174 -146 6,759
1,581 622 -15 2,188
1,594 708 -15 2,287
1,300 738 -15 2,024
1,556 999 -15 2,540 1,073 485 0 1,559 482 513 -15 981 93 8 0 0 881 16 0 865 225 640 22 -2 660
446 0 0 446 446 1 447
6,031 3,067 -59 9,039 4,605 1,608 -18 6,195 1,426 1,459 -41 2,844 361 27 0 0 2,456 54 -1 2,403 629 1,774 59 -6 1,826
445 0 0 446 446 1 447
6,023 3,932 -39 9,917 4,787 1,792 0 6,579 1,236 2,140 -39 3,337 370 30 0 0 2,938 63 0 2,874 747 2,127 83 -7 2,203
446 0 0 446 446 1 447
Phosphate Potash Corporate/Other Cost of Goods Sold
Phosphate Potash Corporate/Other Gross Profit
Selling, General & Administrative Other (Income) Expenses FX Loss (Gain) Other Loss (Gain) Earnings Before Interest & Taxes (EBIT)
Interest Expense Other Income Earnings Before Taxes (EBT) Income Taxes Earnings From Consolidated Companies
Controlling Interest Non-Controlling Interest Net Income
Basic Shares - Opening Plus: Equity Issued Less: Share Buyback Basic Shares - Closing Average Shares O/S - Basic (M) Average Dilution (M) Average Shares O/S - Diluted (M) -0.32 -0.32 361 1,022 3,246 0.97 0.95 4.70 4.67 2.67 2.65 1,781 2.16 2.15 1,509
0.13 0.13 188
0.33 0.33 -75
5.29 5.27 3,403
0.23 0.23 240
0.24 0.24 309
0.50 0.50 460
0.89 0.89 660
1.86 1.85 1,669
0.67 0.67 519
0.91 0.91 655
1.04 1.04 717
1.48 1.48 1,000
4.10 4.09 2,891
4.94 4.93 3,403
EBITDA
January 2011
348
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10 2010 173 421 508 557 761 787 140 191 1,583 1,956 1,961 1,039 1,351 459 4,810 2,190 1,586 1,945 456 6,177 2,812 918 1,614 627 5,971 2,529 633 1,435 623 5,220 2,703 598 1,126 881 5,308 2,703 598 1,126 881 5,308 2,599 486 1,047 871 5,002 2,648 580 969 815 5,011 2,292 595 940 965 4,791 2,523 615 1,002 835 4,975 2,523 615 1,002 835 4,975 2,363 572 1,045 775 4,755 2,397 628 997 850 4,872 2,518 556 788 875 4,738 2,751 698 942 886 5,277 0 0 153 139 69 404 906 1,029 0 36 0 23 1,129 1,630 2,388 1,818 675 634 1,001 898 5,192 4,980 1,375 516 1,011 5,089 1,311 492 899 5,342 1,273 630 942 4,575 1,268 620 882 3,998 1,257 457 848 4,183 1,257 457 848 2,561 1,253 456 865 3,889 1,250 471 881 4,470 0 133 43 1,940 35 35 2,186 0 109 69 2,418 33 11 2,640 0 111 30 1,551 29 10 1,730 0 90 30 1,059 39 11 1,229 0 93 43 1,415 65 6 1,622 0 93 43 1,415 65 6 1,622 0 107 30 1,108 66 4 1,315 0 140 16 1,637 72 3 1,868 0 96 17 1,043 54 17 1,227 1,246 476 864 3,813 0 83 15 1,169 33 3 1,304 1,246 502 934 3,986 0 83 15 1,169 33 3 1,304 1,246 502 934 3,986 0 76 13 1,240 34 16 1,379 1,244 481 909 4,013 0 76 15 1,269 34 16 1,410 1,242 481 910 4,043 0 76 13 1,003 34 16 1,142 1,244 481 912 3,779 0 76 15 1,199 34 16 1,341 1,242 481 914 3,977 2,249 2,322 983 1,403 299 459 3,531 4,184 2,455 3,485 791 6,731 2,469 4,647 552 7,668 2,477 5,585 -209 7,853 2,481 5,622 -328 7,775 2,488 5,746 259 8,493 2,488 5,746 259 8,493 2,505 5,825 260 8,590 2,511 5,331 384 8,226 2,523 5,532 411 8,465 2,528 5,905 289 8,722 2,528 5,905 289 8,722 2,541 6,181 337 9,059 2,541 6,546 337 9,424
Exhibit 6.80: SC Forecast Mosaic Balance Sheet
($M)
Q1-11 Q2-11E Q3-11E Q4-11E 2011E 2012E
Current Assets Cash and Cash Equivalents A/R (including from Cargill) Inventory Other Current Assets
2,751 698 942 886 5,277
4,018 752 1,071 1,028 6,868
PP&E Investments Goodwill Other Assets Total Assets
4,417 4,449 4,648 4,559 4,332 4,380 4,899 4,899 5,008 5,158 5,253 5,466 5,466 5,658 5,937 6,232 6,507 6,507 7,117 319 385 354 356 281 301 358 358 376 390 54 55 55 443 443 443 443 443 443 2,347 2,284 1,875 1,808 1,682 1,660 1,734 1,734 1,733 1,757 1,765 1,763 1,763 1,759 1,759 1,759 1,759 1,759 1,759 58 90 133 109 163 213 377 377 360 381 414 449 449 458 458 458 458 458 458 8,723 9,164 11,820 13,010 12,428 11,773 12,676 12,676 12,479 12,697 12,278 12,708 12,708 13,072 13,468 13,629 14,443 14,443 16,644
Current Liabilities Revolver ST Debt Current Portion of LTD AP and Accrued Liabilities Deferred Income Tax Other
0 76 15 1,199 34 16 1,341 1,242 481 914 3,977
0 76 935 1,363 34 16 2,425 322 481 921 4,148
LT Debt Deferred Income Tax Other Non-Current Liabilities Total Liabilities
Share Capital Retained Earnings Comprehensive Income Total Shareholders' Equity
2,541 2,541 2,541 2,541 6,972 7,588 7,588 9,618 337 337 337 337 9,850 10,466 10,466 12,496
Total Liabilities and SE
8,723 9,164 11,820 13,010 12,428 11,773 12,676 12,676 12,479 12,697 12,278 12,708 12,708 13,072 13,467 13,629 14,443 14,443 16,644
January 2011
349
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10 2010 Q1-11 Q2-11E Q3-11E Q4-11E -121 324 4 -39 -22 0 270 417 -137 280 329 4 47 -29 0 -44 727 -19 707 358 9 141 10 -15 -25 2,561 -14 2,547 88 4 15 -28 0 132 1,396 -835 562 89 2 149 -29 -673 355 853 -466 387 90 -1 -47 -6 0 68 163 -175 -12 93 2 -256 -6 0 96 75 231 306 361 6 -139 -68 -673 269 2,105 -1,245 859 92 0 12 -3 0 -17 184 -14 171 139 0 23 12 0 -16 266 -93 174 102 0 1 9 0 -11 323 153 477 112 0 15 -5 0 -7 516 21 535 445 0 51 13 0 -52 1,289 67 1,356 105 -4 -30 0 16 21 406 150 556 96 2 0 -18 0 0 485 -54 431 420 2,083 1,185 960 59 146 2,350 101 108 223 401 832 299 406 463 80 1 0 -15 0 0 529 -10 519 660 100 2 0 -22 0 0 740 -110 630 -390 0 0 39 -351 -292 -1 0 -11 -304 -372 33 -8 6 -342 -187 0 0 -1 -188 -223 746 0 -31 491 -197 0 0 4 -193 -174 0 -17 -1 -192 -781 746 -17 -29 -82 -236 0 0 0 -236 -191 0 0 36 -155 -209 13 0 -9 -205 -275 -13 0 17 -271 -911 0 0 44 -866 -295 0 -385 -2 -682 -375 0 0 0 -375 -375 0 0 0 -375 -375 0 0 0 -375 -521 515 -10 0 29 13 -13 -72 245 173 247 173 420 1,540 421 1,961 229 1,961 2,190 622 2,190 2,812 -283 2,812 2,529 17 45 -68 -173 -31 78 174 2,529 2,703 -194 348 1,961 2,309 -13 -104 2,703 2,600 -13 -66 -9 0 -86 -173 -8 -799 -12 0 110 -710 -23 -34 -24 0 4 -77 2 -67 -23 0 5 -83 -22 -4 -23 0 0 -48 8 -4 -24 0 2 -18 -35 -109 -93 0 11 -236 15 -17 -22 0 -3 -25 33 -18 -23 0 3 -8 35 46 2,600 2,645 -43 -4 -601 0 9 -639 11 -356 2,645 2,292 -14 -6 -23 0 4 -38 8 234 2,292 2,526 -10 -44 -670 0 12 -711 41 -180 2,703 2,523 -7 -4 -22 2 -1 -33 -2 -160 2,523 2,363 0 0 -22 0 0 -22 0 34 2,363 2,397 0 0 -22 0 0 -22 0 122 2,397 2,518 0 0 -22 0 0 -22 0 233 2,518 2,751
Exhibit 6.81: SC Forecast Mosaic Cash Flow Statement

2011E 2012E
($M)
The Mosaic Company
Operating Activities Net Income (Loss) Add/(deduct) non-cash items: Depreciation and Amortization Non-controlling interests Deferred Income Tax Controlling Interest Loss (gain) on sale of investments Other CFO (pre-WC Adj.) Net change in non-cash WC CFO (post-WC Adj.)
1,826 381 1 -30 -55 16 21 2,160 -25 2,135
2,203 390 7 0 -83 0 0 2,517 -161 2,356
Investing Activities Additions to property, plant and equipment Proceeds on Sale/Disposal of assets Purchase of LT Investments Other assets CFI
-1,420 0 -385 -2 -1,807
-1,000 0 0 0 -1,000
Financing Activities Proceeds from ST Debt Proceeds from LT Debt Dividends Issuance of common shares Other CFF
-7 -4 -89 2 -1 -100 -2 227 2,523 2,750
0 0 -89 0 0 -89 0 1,267 2,750 4,017
Effect of Exchange rate on Cash
Net change in cash and cash equivalents Cash and cash equivalents - beginning Cash and cash equivalents - ending
January 2011
January 2011
Exhibit 6.82: Mosaic 2011E EPS Sensitivity to Phosphate Sales Volume Changes
2011 Phosphate Sales Volume (M mt, product) $338 $348 $358 $368 $378 $388 $398 11.0 3.37 3.53 3.69 3.85 4.01 4.17 4.33 11.5 3.45 3.61 3.77 3.93 4.09 4.25 4.41 12.0 3.53 3.69 3.85 4.01 4.17 4.33 4.49 12.5 3.61 3.77 3.93 4.09 4.25 4.41 4.57 13.0 3.69 3.85 4.01 4.17 4.33 4.49 4.65 13.5 3.77 3.93 4.09 4.25 4.41 4.57 4.73 14.0 3.85 4.01 4.17 4.33 4.49 4.65 4.81
Exhibit 6.83: Mosaic 2011E EPS Sensitivity to Potash Volume Changes
2011 Potash Sales Volume (M mt KCl) $338 $348 $358 $368 $378 $388 $398 6.3 3.10 3.26 3.42 3.58 3.74 3.90 4.06 6.8 3.27 3.43 3.59 3.75 3.91 4.07 4.23 7.3 3.44 3.60 3.76 3.92 4.08 4.24 4.40 7.8 3.61 3.77 3.93 4.09 4.25 4.41 4.57 8.3 3.78 3.94 4.10 4.26 4.42 4.58 4.74 8.8 3.95 4.11 4.27 4.43 4.59 4.75 4.91 9.3 4.12 4.28 4.44 4.60 4.76 4.92 5.08
Exhibit 6.84: Mosaic 2011E EPS Sensitivity to Realized DAP/MAP Price Changes
2011 DAP/MAP Realized Price ($/mt) $338 $348 $358 $368 $378 $388 $398 $435 3.43 3.59 3.75 3.91 4.07 4.23 4.39 $445 3.49 3.65 3.81 3.97 4.13 4.29 4.45 $455 3.55 3.71 3.87 4.03 4.19 4.35 4.51 $465 3.61 3.77 3.93 4.09 4.25 4.41 4.57 $475 3.67 3.83 3.99 4.15 4.31 4.47 4.63 $485 3.73 3.89 4.05 4.21 4.37 4.53 4.69 $495 3.79 3.95 4.11 4.27 4.43 4.59 4.75
Exhibit 6.85: Mosaic 2011E EPS Sensitivity to Realized Ammonia Price Changes
2011 Ammonia Realized Cost ($/mt) $338 $348 $358 $368 $378 $388 $398 $351 3.53 3.69 3.85 4.01 4.17 4.33 4.49 $366 3.56 3.72 3.88 4.04 4.20 4.36 4.52 $381 3.58 3.74 3.90 4.06 4.22 4.38 4.54 $396 3.61 3.77 3.93 4.09 4.25 4.41 4.57 $411 3.63 3.79 3.95 4.11 4.27 4.43 4.59 $426 3.66 3.82 3.98 4.14 4.30 4.46 4.62 $441 3.68 3.84 4.00 4.16 4.32 4.48 4.64
350
The Mosaic Company
January 2011
Exhibit 6.86: Mosaic 2011E EPS Sensitivity to Realized Sulphur Cost Changes
2011 Sulphur Realized Cost ($/mt) $338 $348 $358 $368 $378 $388 $398 $194 3.34 3.50 3.66 3.82 3.98 4.14 4.30 $174 3.43 3.59 3.75 3.91 4.07 4.23 4.39 $154 3.52 3.68 3.84 4.00 4.16 4.32 4.48 $134 3.61 3.77 3.93 4.09 4.25 4.41 4.57 $114 3.70 3.86 4.02 4.18 4.34 4.50 4.66 $94 3.79 3.95 4.11 4.27 4.43 4.59 4.75 $74 3.88 4.04 4.20 4.36 4.52 4.68 4.84
Exhibit 6.87: Mosaic 2011E EPS Sensitivity to Natural Gas Cost Changes
2011 Natural Gas Cost ($/mmbtu) $338 $348 $358 $368 $378 $388 $398 +$3 3.39 3.55 3.71 3.87 4.03 4.19 4.35 +$2 3.46 3.62 3.78 3.94 4.10 4.26 4.42 +$1 3.53 3.69 3.85 4.01 4.17 4.33 4.49 Base 3.61 3.77 3.93 4.09 4.25 4.41 4.57 -$1 3.68 3.84 4.00 4.16 4.32 4.48 4.64 -$2 3.75 3.91 4.07 4.23 4.39 4.55 4.71 -$3 3.82 3.98 4.14 4.30 4.46 4.62 4.78
Exhibit 6.88: Mosaic 2011E EPS Sensitivity to R$/US$ Changes
2011 Brazilian Real per U.S. Dollar $338 $348 $358 $368 $378 $388 $398 $0.52 3.56 3.72 3.88 4.04 4.20 4.36 4.52 $0.54 3.57 3.73 3.89 4.05 4.21 4.37 4.53 $0.56 3.59 3.75 3.91 4.07 4.23 4.39 4.55 $0.58 3.61 3.77 3.93 4.09 4.25 4.41 4.57 $0.60 3.62 3.78 3.94 4.10 4.26 4.42 4.58 $0.62 3.64 3.80 3.96 4.12 4.28 4.44 4.60 $0.64 3.66 3.82 3.98 4.14 4.30 4.46 4.62
351
January 2011

Mosaics management team and board of directors are well represented by former Cargill and IMC Global employees with expertise in the agricultural and fertilizer business. According to Reuters, Mosaics management and directors control about 0.1% of the companys (undiluted) shares, while Cargills majority stake in Mosaic resides at 64.1% (see Exhibit 6.89).
Shares Controlled Directly or Indirectly
Name
Position
Background Mr. Prokopanko has been CEO since 2007 and previously served as Executive Vice President and COO. Prior to joining Mosaic in July 2006, he held the position of Corporate Vice President at Cargill. During his 28 year career at Cargill, Mr. Prokopanko held the position of Vice President of the North American crop inputs business and gained exposure to the retail agriculture business. He currently serves on the Board of Mosaic, Canpotex, The Fertilizer Institute and the International Plant Nutrition Institute.
James T. Prokopanko
President and CEO
83,995
Norman B. Beug
Senior VP, Potash Operations
96,654
Since beginning his career in the potash industry in 1977, Mr. Beug has served as the Vice President and General Manager of IMC Global's potash business and General Manager of IMC's Belle Plaine potash facility. Past experience also includes the position as President of The Saskatchewan Mining Association and Chairman of the Canadian Fertilizer Institute (CFI). Mr. Beug is currently a director of CFI and the Saskatchewan Potash Producers Association.
Lawrence W. Stranghoener
Executive VP and CFO
92,465
Mr. Stranghoener joined Mosaic in 2004 after six years of CFO experience, comprised of three years at a financial services firm and three years at Honeywell Inc. Mr. Stranghoener served 17 years at Honeywell Inc. in a variety of positions.
James "Joc" O'Rourke
Executive VP, Operations
n.a.
Prior to joining Mosaic in 2009, Mr. O'Rourke served as President of Australia Pacific for Barrick Gold. Mr. O'Rourke has more than 25 years of experience in both mining and processing operations. Prior to assuming his current role in 2007, Mr. Davis served as Mosaic's Vice President of Mining since the company's 2004 inception. From 1999 to 2004 Mr. Davis held numerous positions at Cargill, including VP Operations, for the fertilizer division and has worked in the crop nutrient industry for over 30 years. Mr. Mack has served as Mosaic's General Counsel since inception in 2004 and oversees land development and permitting. He has had significant experience in mergers, acquisitions, joint ventures and equity transactions, and assisted in the start up of Cargill Ventures. Mr. Mack has also served in various legal positions at Cargill. Mr. McLellan served as Mosaic's VP, North American Sales, as well as Country Manager for Mosaic Fertilizantes in Brazil. He has held various positions at Cargill and has gained experience in grain, retail and wholesale fertilizer distribution, as well as fertilizer import and production. Mr. Lumpkins joined Cargill in 1968 and held various positions including CFO from 1989 to 2005. Prior to retirement in 2006, he served as Vice Chairman of Cargill from 1995 and as a member of the Cargill Corporate Leadership Team since its inception in 1999. Mr. Bastiaens joined Cargill in 1967 and held various positions in Cargill's processing and technology operations. He served as a director at Cargill from 1995, and as Vice Chairman from 1998. He is also on the Board of Donaldson Company, Inc. Mr. Mathis previously served as a director of IMC Global Inc. from 1995 to 2004. He has served as Chairman, and is a former CEO, of Kemper Insurance Companies. Mr. Mathis is also on the Board of Thomas Group, Inc.
Bo Davis
VP, Phosphate Operations
n.a.
Richard L. Mack
Executive VP, General Counsel and Corporate Secretary
37,923
Richard N. McLellan
Senior VP, Commercial
9,670
Robert L. Lumpkins
Chairman
30,606
Guillaume Bastiaens
Director
16,071
David B. Mathis
Director
36,270
Other
134,216
Total Weighted Average Diluted Shares Outstanding % Insider Ownership % Cargill Ownership
537,870 445,654,000 0.1% 64.1%
Source: Reuters; Company Reports; Scotia Capital.
352
Potash Corporation of Saskatchewan, Inc.
January 2011

(POT-N, POT-T)
Dec 31, 2010: Rating: Risk: IBES EPS 2010E IBES EPS 2011E 1-Yr Target: 1-Yr ROR: 2-Yr Target: 2-Yr ROR: Div. (Curr.): Yield Valuation: 11.5x 2012E EBITDA, 17x 2012E EPS, DCF @ 9.9%, 95% RCN Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather Qtly EPS (FD) (Next Release: 27-Jan-11) Y/E DECEMBER-31 Mar Jun 2009A $1.02A $0.62A 2010E $1.47A $1.55A 2011E $2.22 $2.28 2012E $2.46 $2.55 Qtly CFPS (FD) 2009A 2010E 2011E 2012E Mar $0.60A $1.93A $2.54 $2.79 Jun $1.00A $2.11A $2.59 $2.86 Sep $0.82A $1.32A $2.22 $2.46 Sep $1.18A $1.31A $2.54 $2.78 Dec $0.80A $1.83 $2.53 $2.87 Dec $1.65A $2.16 $2.87 $3.23 Year $3.25 $6.17 $9.26 $10.34 Year $4.44 $7.51 $10.53 $11.65 $154.83 1-Sector Outperform High $5.94 $8.70 $168.00 8.8% $190.00 23.2% $0.40 0.3% Capitalization Shares O/S (M) Total Value ($M) Float O/S (M) Float Value ($M) S&P Weight 305.3 47,269.0 304.8 47,196.9 3.01%
P/E 33.4x 25.1x 16.7x 15.0x P/CF 24.4x 20.6x 14.7x 13.3x
Inflection Point Achieved

Inflection point achieved. In our view, Potash Corporation of Saskatchewan, Inc. (PotashCorp or PCS) is well positioned to benefit from rising potash demand and prices through our 2012 forecast period. Potash-levered stocks should have the most torque heading into the 2011 spring planting season. Potash currently on allocation. We expect to see up to $125/short ton of North American potash price increases fully realized by the end of Q1/11 (the first $50/ton has been realized). Demand recovery is in full swing, with spot shortages appearing across North America. China should settle near $400/tonne (CFR) based on Southeast Asian prices now at ~$430/tonne (CFR). Continued market dominance. PCS is midway through a $7 billion program to increase its 2015 operational potash capability to 17.l million tonnes, which will keep it as the worlds number one producer. BHP gone, but not forgotten. Shortly after BHP withdrew its hostile offer to acquire PotashCorp, the mining giant acquired yet another Saskatchewan potash permit. BHP has now filed an Environmental Impact Statement for Jansen, and recently awarded a $400 million contract to construct two shafts there. Target valuation. In one year from now, we expect PotashCorp to trade at 11.5x 2012E EBITDA of $4.35 billion, 17x 2012E EPS of $10.34, and at about 95% of its $156/share replacement cost. We use these three metrics, as well as a DCF at a 9.9% WACC, to set our one-year target price of $168 per share.
Current valuation. PotashCorp is currently trading at 12.6x NTM EBITDA, 16.7x NTM EPS, and at 99% of its replacement cost. Our one-year target price of $168 per share implies a total rate of return of 8.8%.
Getting to the next level. To achieve our target valuation, we are looking for: (1) 9.4 million tonnes of 2011 potash sales, at an average netback price of $392/tonne; (2) continued fundamental fertilizer support from above-average global crop prices coupled with low grain inventories; and (3) strong earnings from PotashCorps four strategic potash-related publicly traded investments. We have transferred coverage on the common shares of Potash Corporation of Saskatchewan, Inc. (PotashCorp or PCS), and rate the shares a 1-Sector Outperform.
353
January 2011

Potash Corporation of Saskatchewan, Inc. (PotashCorp or PCS) offers optimal exposure to the continued global demand recovery for potash, and to a lesser extent, other fertilizers. In our minds, this is precisely what BHP was thinking when it launched its hostile, all-cash bid of $130 per share for PotashCorp. Agricultural fundamentals continue to strengthen, with crop commodity futures prices supporting near-record farmer profitability heading into 2011. Phosphate and nitrogen fertilizer prices were up 100% and 50% in 2010, respectively, while potash prices lagged until Q4/10. With global potash demand expected to end 2010 at ~50 million tonnes (70% over 2009), and 2011 consumption forecasts hovering in the 55 million tonne area (ex dealer restocking of up to 5 million tonnes), we think potash-levered stocks have the most torque heading into 2011. We believe that PotashCorps potash business has several advantages over its competitors, as well as all greenfield developers, including: (1) PCS is able to bring on its potash capacity in less time; (2) brownfield capital costs per tonne are materially lower than greenfield costs; (3) PCS is already a lowcost producer of potash; (4) transportation infrastructure (i.e., rail, ports, distribution terminals) are already in place; and (5) its 54% economic membership in Canpotex enables it to somewhat control global potash pricing. Beyond its potash business, PCS is well diversified across all NPK nutrients. The company boasts 2.4 million tonnes (P2O5) of phosphate capacity, and 3.5 million tonnes of ammonia capacity. As an integrated phosphate fertilizer producer, PotashCorp is able to capture materially stronger phosphate margins over its non-integrated competitors, including most Chinese and Indian phosphate producers. On the nitrogen side, its Trinidad assets provide the company with lower-cost natural gas contracts as well as a close proximity to its nitrogen customer base.
For fiscal 2011, we estimate net sales, EBITDA, and fully diluted EPS of $7.3 billion, $3.9 billion, and $9.26, respectively, and slightly ahead of consensus earnings estimates. In fiscal 2012, we are looking for net sales of $7.7 billion, EBITDA of $4.4 billion, and EPS of $10.34. Our forecast 2012 EPS growth rate of 11.7% is mostly due to higher potash prices and sales volumes. In fact, we are looking for a slight retreat in both nitrogen and phosphate gross profits in 2012.
TRANSFERRING COVERAGE
We rate POT a 1-Sector Outperform. Our one-year target price is $168 per share.
We have transferred coverage on the common shares of Potash Corporation of Saskatchewan, Inc., and rate POT a 1-Sector Outperform. Our one-year target price is $168 per share, which yields a total return of 8.8%. We value PotashCorp based on an equally weighted 11.5x 2012E EBITDA, 17x 2012E EPS, a DCF at a 9.9% WACC, and 95% of its replacement cost. PCS is currently trading at 12.6x NTM EBITDA, 16.7x NTM EPS, and at 99% of its replacement cost. Our risk ranking for PotashCorp is High. We believe this risk ranking is justified due to: (1) the cyclical nature of the fertilizer industry, and potash price elasticity in particular; (2) volatile crop price changes, to which changes in POTs share price is strongly correlated; (3) new greenfield potash and phosphate supply risk that could erode long-term margins; (4) commodity price exposure, which for most fertilizers, is difficult to hedge beyond one year; and (5) conventional potash mines being susceptible to water inflow that could increase operating costs, and possibly suspend operations.
354
January 2011

Headquartered in Saskatoon, Potash Corporation of Saskatchewan, Inc. is the worlds largest producer by nameplate capacity of the three primary crop nutrients combined: nitrogen (N); phosphate (P); and potash (K).
PCS is the worlds largest potash company by nameplate capacity.
Specifically, PCS is the largest potash company (~20% market share of nameplate capacity), the thirdlargest phosphate company (5% market share of nameplate capacity), and the third-largest nitrogen producer (2% market share of nameplate capacity). The company owns and operates five potash mines in Saskatchewan and one in New Brunswick. Its nitrogen business involves the production of ammonia, urea, nitrogen solutions, and other products, which are produced from facilities in both the United States and Trinidad. PotashCorps phosphate operations include the manufacture and sale of solid and liquid phosphate fertilizers, as well as animal feed supplements and industrial acids. PCS also holds material investments in Arab Potash Company, Sociedad Quimica y Minera de Chile (SQM), Israel Chemicals Ltd., and Sinofert Holdings Limited. PCS began operations in 1975, as a Crown corporation for the Government of Saskatchewan. In 1989, following the privatization of PotashCorp, the company successfully went public on both the TSX and the NYSE. Led by President and CEO William J. Doyle, PotashCorps management team consists of seasoned industry experts and business professionals with extensive knowledge of domestic and offshore chemical and fertilizer markets. Mr. Doyle has led PCS for 12 years, and is also the Chairman of Canpotex the offshore marketing and distribution company for Saskatchewan-based potash producers. Together, insiders and related parties control (directly and/or indirectly) about 3.5% of PotashCorp. PotashCorps 296 million common shares (305.3 million shares fully diluted) trade under the ticker POT on both the Toronto Stock Exchange and the New York Stock Exchange. Exhibit 7.1 shows the stocks historical trading range and volume. As at December 31, PotashCorps market capitalization was $47.3 billion. PCS currently pays a quarterly dividend of $0.10 per share, which equates to a dividend yield of about 0.3%. PotashCorp reports in U.S. dollars, using a December 31 year-end, and its financial statements are prepared in accordance with Canadian GAAP.
Exhibit 7.1: Potash Corporation of Saskatchewan Stock Price Performance
$160 $150 $140 $130 Price $120 $110 $100 $90 $80 $70 Mar-09 Jun-09 POT (V olume)
PCS went public in 1989, after having been a Crown corporation since 1975.
Insiders and related parties control 3.5% of POT shares (FD).
35,000 30,000 25,000 20,000 15,000 10,000 5,000 Sep-09 POT (Price) Dec-09 Mar-10 S&P 500 (rebased) Jun-10 Sep-10 0 Dec-10
355
Daily Volume (000s)
Ticker: Last P rice: M arket Cap: 52 Wk H igh: 52 Wk Lo w: FD Shares O/S:
P OT $ 154.83 $ 47.3B $ 155.04 $ 83.85 305.3M
50,000 45,000 40,000
January 2011
Corporate Profile
PotashCorp is the worlds largest producer of the three primary crop nutrients combined: nitrogen (N); phosphate (P); and potash (K). Specifically, PotashCorp owns 18% to 20% of global potash nameplate capacity (#1), 5% of global phosphate nameplate capacity (#3), and 2% of global nitrogen nameplate capacity (#3). Exhibit 7.2 highlights where PCS capacity ranks among its global NPK peers.
Exhibit 7.2: NPK Capacity Rankings
2010 Global Capacity Share
(M mt KCl) (%)
1
PotashCorp ranks third in both the global phosphate and nitrogen businesses (by nameplate capacity).
POTASH
PHOSPHATE
AMMONIA
2010 Capacity
(M mt)
Global Share
(%)
PotashCorp Mosaic 1,2 Belaruskali K+S Silvinit3 Israel Chemicals Uralkali3 Arab Potash Qinghai Salt Lake Potash Agrium SQM Intrepid2 Vale
13.3 9.3 9.0 ~7.5 5.1 5.7 5.5 2.5 ~2.2 2.1 1.5 0.8 0.7
18% 13% 13% 10% 7% 8% 8% 3% 3% 3% 2% 1% 1%
Yara International CF Industries 5 PotashCorp Agrium Koch6 JSC Acron
8.2 7.0 3.5 3.4 ~2.3 1.7
4% 4% 2% 2% 1% 1%
PCS POTASH
PotashCorp is first and foremost a producer, marketer, and seller of potash, with its PCS Potash division typically contributing between 60% and 70% of the companys overall gross margin. With a nameplate capacity of 13.3 million tonnes KCl, most of which is located in Saskatchewan, PCS is the worlds largest potash company.
PCS is among the lowest-cost producers of potash in the world.
PotashCorp consistently follows a strategy of matching production to meet anticipated demand, which we believe conserves the long-term value of its potash resources. PCS is among the lowest-cost producers of potash in the world, and is currently increasing its operational capability through brownfield expansion and debottlenecking projects, which we estimate will reach 17.1 million tonnes KCl by 2015.
PCS PHOSPHATE
PotashCorp is an integrated producer of phosphate fertilizers, as well as industrial phosphate and feed products. Integrated producers such as PCS have a material cost advantage over their non-integrated peers, due to their ability to own and process their own phosphate rock resources. Specifically, PotashCorp owns 9.6 million tonnes of high-quality phosphate rock capacity, 1.7 million tonnes of DAP/MAP capacity, 5.6 million tonnes of phosphate liquids capacity, and 3.8 million tonnes of feed and acid production. All of the companys phosphate assets are located in the U.S. With processing capacity of 2.4 million tonnes P2O5, PotashCorp is ranked third in phosphate global capacity (behind Mosaic and Moroccos OCP). About 40% of PCS Phosphates sales volumes are to industrial and feed customers, which we believe provides the company with enhanced flexibility to maximize its segment gross margins and minimize volatility. In 2009, PCS Phosphate contributed 10.1% of the companys overall gross margin.
356
January 2011
PCS NITROGEN
PotashCorps 3.5 million tonnes of ammonia capacity ranks third among global nitrogen producers behind Yara, CF Industries, and slightly ahead of Agrium. The company focuses its nitrogen business mostly toward industrial consumers of ammonia and urea, as they typically provide PCS with consistent and stable margins. Urea capacity is 1.5 million tonnes, while other products such as nitric acid, ammonium nitrate, and nitrogen solutions add a further 4 million tonnes to PCS Nitrogens capacity.
PCS Nitrogens Trinidad advantage will begin deteriorating in 2011.
Perhaps the largest advantage to PCS Nitrogen is its production facility in Trinidad, which holds lower-cost natural gas contracts that are primarily indexed to ammonia prices. However, between 2011 and 2014, these lower-cost gas contracts in Trinidad will be reduced to 55% of capacity from 100%. We note that PCS is currently negotiating with its gas suppliers for what we believe should result in similar contracts. There are three other facilities that produce nitrogen products, all of which are located in the U.S., providing PotashCorp with the benefit of relatively close proximity to its customer base. In 2009, PCS Nitrogen contributed 18.7% to PotashCorps overall gross margin.
POTASHCORP HISTORY
PCS strategic investments are worth about $34/POT share.
Exhibit 7.3: A Brief History of PotashCorp

1989 1990 1993 1995 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 IPO on the TSX and NYSE. PCS had been a Crown Corporation owned by the Government of Saskatchewan. Acquired Saskterra and its 40% interest in the Allan potash mine from Husky Oil Ltd. for $47M. Purchased the potash assets of Potash Company of America - a mine and mill in SK, and a mine, mill and port in NB - from Rio Algom for $111.8M. Acquired White Springs Agricultural Chemicals from Occidental for $291.5M, and purchased Texasgulf Inc. for $832.6M, whose primary asset was a vertically integrated phosphate complex in Aurora, NC. Created PCS Nitrogen by acquiring Arcadian for $563.6M. The assets included a nitrogen complex in Trinidad and four U.S. facilities. Purchased 9% of ICL from the Government of Israel for $93M. Acquired all of the shares of Potash Company of Canada for $11.4M. Acquired Minera Yolanda SCM, a specialty potash producer in Chile, $37M. Purchased 18% of SQM for $131M. Purchased 2% of SQM for $23M. Acquired 26% of APC for $178M. Invested $40.6M to increase SQM interest to 25%. Two-for-one stock split. Purchased 10% of Sinofert Holdings for $97.4M. Increased ICL ownership interest to 10%, and APC ownership to 28%. Acquired an additional 7% of SQM for $231.5M, raising interest to 32%. Increased ownership in Sinofert to 20%. Announced potash debottlenecking projects at Rocanville, New Brunswick, Cory, Patience Lake. Three-for-one stock split. Increased ICL ownership to 11%, and Sinofert ownership to 22%. Announced Allan debottlenecking, and expanded scope at Rocanville and Cory. Completed Patience Lake debottlenecking and the construction of a $260M sulfuric acid plant in Aurora. Increased ICL ownership interest to 14% through a $422M purchase of 3%. BHP launches, and fails, a hostile takeover of POT @ $130/share.
PotashCorp was established in 1975 by the Government of Saskatchewan as a Crown corporation that initially focused on potash production only. Throughout the late 1970s and 1980s, PCS successfully expanded its potash portfolio through several acquisitions. In 1989, PCS went public, following the governments privatization of PCS. In the mid-1990s, PCS expanded its business into nitrogen and phosphate through a few acquisitions (Exhibit 7.3). Over the past 12 years, PCS has been strategically investing in offshore potash producers and distributors, such that we estimate its investment portfolio to be worth about $34/POT share (gross). In Exhibit 7.4, we map PotashCorps operations and investments across the globe.
357
358
1-6 7 8-17 20 21
1 Corporate HQ
Exhibit 7.4: Map of PotashCorps Operating and Investing Activities
22
18
2 3 4 5 6 7 19 20 21 22 15 16 17 18
Potash Allan Cory Lanigan Patience Lake Rocanville Sussex
Nitrogen Augusta Geismar Lima Point Lisas
19
8 9 10 11 12 13 14
Phosphate Aurora White Springs Cincinnati Geismar Joplin Weeping Water Marseilles
Investments SQM (32%) Israel Chemicals (14%) Arab Potash Company (28%) Sinofert Holdings (22%)
January 2011
January 2011
What We (and BHP) Like About PotashCorp

HIGH BARRIERS TO ENTRY
K barriers to entry are higher than corresponding N and P barriers to entry.
We estimate that the current cost to develop a 2 million tonne conventional potash mine in Saskatchewan is about $2.8 billion (as does AMEC PotashCorps engineering firm). This excludes infrastructure investment outside of the plant gate, such as rail and port facilities. On top of that, some governments require the purchase of potassium ore bodies, such as in Russia. Theoretically, this could raise the total investment cost into the $3.8 billion to $5 billion range. In our view, financing a world-class, greenfield potash mine is perhaps one of the steepest challenges that many junior potash exploration and development companies face irrespective of the quantity and quality of the resource available to them. We do not believe that a junior potash development company would be successful in tapping the equity markets for $2.3+ billion, assuming 40%/60% debt to equity split. Accordingly, the only logical financiers/backers of greenfield potash developments are likely: (1) state-owned companies that are looking to secure a long-term supply of potash, as well as a return on their investment; (2) well-capitalized mining giants; or (3) European producers, such as K+S and Yara.
High capital costs and long lead times create high barriers to entry for the potash industry.
In addition to the high cost of market entry, the time it takes to build a fully operational potash mine is between five and seven years (Exhibit 7.5).
Exhibit 7.5: Conventional Potash Mine Development Timeline
Task Exploration Establishing Infrastructure Constructing Surface Operation Constructing Underground Operation Duration 22 months 12 months 73 months 63 months Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Comparatively, a 1 million tonne phosphate facility will generally cost about $1.5 billion and takes between three and four years until full production is reached; while a similar-sized ammonia/urea complex could take about one year less to complete although the cost is approximately the same.
POTASH FIRST STRATEGY
More than twothirds of PCS gross margins come from its potash business.
PotashCorp is first and foremost a producer, marketer, and seller of potash. Specifically, the companys potash business contributes more than two-thirds of its gross margin (Exhibit 7.6).
Exhibit 7.6: SC Forecast PotashCorp Gross Margin by Business Segment
2,000 Forecast
Gross Margin ($M)
1,750 1,500 1,250 1,000 750 500 250 0 2006 2007 2008 Potash 2009 Nitrogen 2010 Phosphate
2011
2012
359
January 2011
Why potash first: (1) limited government involvement means that investment decisions are driven by economics and not by politics; (2) economically viable potassium deposits are rare; (3) greenfield development is costly, and can take up to seven years to construct, resulting in high barriers to entry; and (4) potash has no known substitutes.
STRATEGIC INVESTMENTS
Exhibit 7.7: PCS Investments

6,000 5,000
Unrealized gains on POTs strategic investments are worth about $27/POT share.
$34/POT Share
4,000
$ Millions
Over a decade ago, PotashCorp began increasing its potash exposure through several offshore investments. Investments currently include Sociedad Quimica y Minera de Chile (32%), Israel Chemicals Ltd. (14%), Arab Potash Company (28%), and Sinofert Holdings Limited (22%).
$2,313
3,000 2,000 1,000 0
$4,414
$1,290 $491 SQM $207 APC Acquisition Cost
$246 $575 Sinofert Unrealized Gain
$706 Israel Chemicals
Source: PotashCorp; Bloomberg; Scotia Capital.
We believe that material investments in Chiles largest potash producer, the two lowest-cost (to port) producers in the world, and Chinas largest fertilizer distributor give PCS unique insight into key offshore markets, as well as an increased ability to indirectly participate in those key markets.
PCS strategic public investments are worth a total market value of $34/POT share (Exhibit 7.7).
WHY PCS PHOSPHATE BUSINESS IS ROCK SOLID
1. As an integrated phosphate producer, PCS has a material cost advantage over its U.S. non-integrated peers, as well as Chinese integrated producers; 2. PotashCorps phosphate rock reserves are sufficient for another 90 years at its Aurora mine; 3. Unlike Mosaic and OCP, which direct their phosphate production almost entirely to fertilizers, about
40% of PotashCorps sales volumes are to industrial and feed customers. We believe this diversification enables PCS Phosphate to maximize its gross margins and minimize volatility;
4. About 60% of PCS Phosphates sales are in North America, where the company typically benefits from higher margins due to its close proximity to customers; and 5. PotashCorp and Mosaic are the sole members of PhosChem, a phosphate fertilizer export marketing association in the U.S. (i.e., similar to Canpotex for Saskatchewan potash), which gives the companies economies of scale, and offshore supply contract coordination that we think provides the companies with a boost in phosphate fertilizer margins. Exhibit 7.8 highlights PhosChems regional sales volumes over the past three years.
Exhibit 7.8: PhosChem Sales Volumes by Region
80% 60% 40% 20% 0% India
39% 57% 61% 2007 36% 21% 19% 5% 8% 0% 1% 11% 9% 12% 11% 10% 2008 2009
Latin America
China
Other (Asia)
Other (ex Asia)
360
January 2011
Valuation
OVERVIEW
We have transferred coverage on the common shares of PotashCorp with a 1-Sector Outperform rating and a one-year target price of $168 per share. Inclusive of our forecast NTM dividend of 40, this represents a one-year total return of 8.8%. Our PotashCorp target price of $168 is derived entirely from our fundamental valuation and does not attribute a takeover premium, which we believe is supported by Investment Canada's view that potash is a strategic Canadian resource. On fundamentals, we value PotashCorp using four different valuation methodologies, as follows: (1) a discounted cash flow approach; (2) an enterprise value to forward EBITDA multiple; (3) a price to forward earnings multiple; and (4) a replacement cost new calculation. We weight each of the four approaches equally. Our valuation work is extremely sensitive to various price, volume, and other assumptions used within our financial forecast (Exhibits 7.9 and 7.10). For full details on our earnings sensitivities, please refer to pages 399 and 400. We summarize our valuation work below.
Exhibit 7.9: PCS Key Assumptions
2011E Potash MOP Sales (M mt) Realized Price ($/mt) Phosphate Solid DAP/MAP Sales (M mt) Realized Price ($/mt) Nitrogen Ammonia Sales (M mt) Realized Price ($/mt) Urea Sales (M mt) Realized Price ($/mt) 9.4 $392 1.7 $452 1.8 $401 1.4 $345 2012E 9.8 $440 1.7 $409 1.8 $376 1.4 $315
Exhibit 7.10: PCS Summary Sensitivities

2011E Sensitivity Potash ($/mt) DAP/MAP ($/mt) Urea ($/mt) Ammonia ($/mt) Sulphur ($/lt) Natural Gas ($/mmBtu) N Sales (M mt) P Sales (M mt) K Sales (M mt) C$ (US$)
$20 $40 $20 $20 -$20 $1 0.5 0.3 0.5 3
EPS +33 +12 +6 +1 +12 +4 +14 +6 +25 +6
Our DCF approach yields a one-year price value of $194 per POT share. We apply a WACC of 9.9% and a long-term growth rate of 2.5%. Exhibit 7.11 highlights the buildup of our WACC calculation. Our terminal growth rate of 2.5% is in line with PotashCorps peer group. The company has superb upside associated with its low-cost brownfield potash expansion projects.
Exhibit 7.11: PCS WACC
Risk Free Rate Beta Country Risk Premium Cost of Equity Pre-Tax Cost of Debt Tax Rate After-Tax Cost of Debt 2.8% 1.11x 8.5% 12.3% 3.5% 23.0% 2.7% 75% 25% 9.9% 2.5%
Exhibit 7.12: PCS Summary DCF

($M) EBITDA Less: Taxes Less: Change in NWC Less: CAPEX Free Cash Flow PV of Free Cash Flow 1 Net Present Value Less: Net Debt Equity Value Equity Value ($/sh) Equity Value, Rounded ($/sh) Last Price, Rounded Implied ROR 62,727 3,350 59,376 $194.49 $194 $155 26% 2011E 3,928 1,048 -138 2,060 958 872 2
$194.49 2.00% 2.25% 2.50% 2.75% 3.00%
2012E 4,351 1,158 -99 1,317 1,976 1,636 3
2013E 5,086 1,351 -100 646 3,190 2,404 4

11.9% $148 $151 $155 $159 $164
2014E 5,359 1,423 -75 406 3,605 2,473 5

WACC 9.9% $182 $188 $194 $200 $207
2015E 5,550 1,474 -62 356 3,783 2,362 6

8.9% $207 $214 $222 $231 $240
Terminal 5,550 1,476 -40 300 3,815 52,979
Our DCF approach yields a one-year out $194 price value.
WACC Terminal Growth Rate
361
Terminal
L/T Equity Weight L/T Debt Weight
10.9% $163 $168 $172 $178 $183
7.9% $239 $249 $260 $272 $286
January 2011
On a NTM EV/EBITDA basis, PCS is currently trading at 12.6x our 2011E EBITDA estimate of $3.9 billion. This is slightly ahead of our one-year out 11.5x EV/NTM EBITDA expectation, which implies a price value of $155/share, based on 2012E EBITDA of $4.4 billion. For PotashCorp, we made one adjustment to our general EV/NTM EBITDA multiples. We increased our potash multiple by 2x, to 13x, to reflect: (1) PotashCorps crown jewel potash assets; (2) its 20% global potash capacity market share; (3) its 54% economic membership in Canpotex; and (4) its ability to bring on a significant amount of brownfield potash capacity at an average cost that is less expensive than most of its peers.
Exhibit 7.13: PCS EV/NTM EBITDA Buildup
[A]

[B]
PotashCorp EV/EBITDA
[C=A+B]
2012E EBITDA
[D, $M]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
PotashCorp Price Value Calculation

($M)
Nitrogen
8.0x 9.0x 11.0x 7.0x -
0.0x 0.0x 2.0x 0.0x [1]
8.0x 9.0x 13.0x 7.0x -
839 490 3,022 0 0 4,351
19% 11% 69% 0% 0% 100%
1.5x 1.0x 9.0x 0.0x 0.0x 11.6x
Our EV/EBITDA approach yields a one-year out share price value of $155.
Phosphate Potash Retail Other

Notes
2012E EBITDA POT EV/EBITDA Multiple* Implied EV Cash Debt Equity Value FD Shares O/S (M) Implied Price Value
4,351 11.5x 50,038 1,250 -4,115 47,173 305.3 $154.51
1. Largest producer in the w orld; low -cost brow nfield projects; sw ing producer; Canpotex member.
Exhibit 7.14 shows PotashCorps historical EV/NTM EBITDA trading range, which has averaged 9.2x over the past several years. PotashCorp has historically traded at a premium to its peers. In our minds, and only considering fundamentals, PotashCorp is fairly valued at 11.5x NTM EBITDA, which implies a one-year out share price value of $155. Using an EBITDA multiple valuation approach only, we think PotashCorps stock price is fairly valued.
Exhibit 7.14: PCS EV/NTM EBITDA Chart
20x NTM EV/EBITDA Multiples 15x 10x 5x 0x Dec-06
Jun-07
Dec-07
Jun-08 POT
Dec-08 POT Average
Dec-09
Jun-10
362
January 2011
On a NTM P/E basis, PotashCorp is currently trading at 16.7x our 2011E EPS estimate of $9.26. We believe this is close to an appropriate PotashCorp NTM P/E multiple (we use 17x), which implies a one-year out price value of $176 per share. A sustained multiple despite what we believe will be 11.7% earnings growth from 2011 to 2012 provides implied price value upside of about $21/share. Exhibit 7.15 highlights our segmented P/E breakdown. We made one adjustment to our general fertilizer P/E multiples. We increased our potash P/E multiple by 3x, to 19x, to reflect: (1) PotashCorps crown jewel potash assets; (2) its 20% global potash capacity market share; (3) its 54% economic membership in Canpotex; and (4) its ability to bring on a significant amount of brownfield potash capacity at an average cost that is less than that of any of its peers.
Exhibit 7.15: PCS NTM P/E Buildup
[A]

[B]
PotashCorp P/E Ratio

[C=A+B]
2012E EPS
[D, $/sh]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
PotashCorp Price Value Calculation

($/sh)
Our P/E approach yields a one-year out share price value of $176.

Notes
12.5x 13.5x 16.0x 11.0x -
0.0x 0.0x 3.0x 0.0x [1]
12.5x 13.5x 19.0x 11.0x -
$1.99 $1.16 $7.18 $0.00 $0.00 $10.34
19% 11% 69% 0% 0% 100%
2.4x 1.5x
2012E EPS POT P/E Mulitple* Implied Price Value
10.34 17.0x $175.78
13.2x 0.0x 0.0x 17.1x
1. Largest producer in the w orld; low -cost brow nfield projects; sw ing producer; Canpotex member.
Exhibit 7.16 shows PotashCorps historical NTM P/E trading range, which has averaged 15.1x since the end of 2005. In our view, and on a NTM P/E basis only, PotashCorps share price appears to be fairly valued today, but with healthy upside one-year out from now due to our expectation for 11.7% earnings growth.
Exhibit 7.16: PCS NTM P/E Chart
35x NTM P/E Multiples 30x 25x 20x 15x 10x 5x 0x Dec-06 Jun-07 Dec-07 Jun-08 POT Dec-08 POT Average Jun-09 Group Average Dec-09 Jun-10 Dec-10 Average NTM P/E = 15.1x
363
January 2011
Exhibit 7.17: PotashCorp Replacement Cost New (RCN)

Production Plant Potash Lanigan - Conventional Rocanville - Conventional Allan - Conventional Cory - Conventional Patience Lake - Solution Esterhazy - Conventional New Brunswick - Conventional Product Capacity
(000 mt)

($M) ($/sh)
Potash Potash Potash Potash Potash Potash Potash Potash
3,830 3,040 1,890 1,360 1,030 0 800 7,100 19,050
6,595 5,235 3,254 2,342 980 0 1,378 5,501 $25,284
21.61 17.15 10.66 7.67 3.21 0.00 4.51 18.02 $82.84
95% of PotashCorps replacement cost yields a one-year out share price value of $149.
Brownfield Expansions @ 45% commitment
Phosphate Aurora
White Springs
Geismar Marseilles Weeping Water Joplin
Phosphate Rock Phosphoric Acid DAP/MAP Phosphate Liquids Feed Phosphate Phosphate Rock Phosphoric Acid DAP/MAP Phosphate Liquids Feed Phosphate Phosphoric Acid Phosphate Liquids Feed Phosphate Feed Phosphate Feed Phosphate
6,000 1,200 1,250 2,520 160 3,600 970 710 1,140 100 200 340 280 210 160 18,840
1,842 1,800 1,386 1,386 88 1,105 1,455 787 627 55 300 187 154 116 88 $11,377
6.04 5.90 4.54 4.54 0.29 3.62 4.77 2.58 2.05 0.18 0.98 0.61 0.50 0.38 0.29 $37.27
Nitrogen Augusta
Geismar
Lima
Trinidad
Ammonia Urea Solutions Nitric Acid & AN Ammonia Solutions Nitric Acid & AN Ammonia Urea Nitric Acid & AN Ammonia Urea
710 470 580 1,080 0 1,030 840 590 350 100 2,180 710 8,640 Market Cap
($M)
563 242 232 432 0 412 336 468 180 40 1,729 366 $5,001 Value
($M)
1.84 0.79 0.76 1.42 0.00 1.35 1.10 1.53 0.59 0.13 5.66 1.20 $16.38 Value
($/sh)
Equity Investments1 SQM Sinofert Holdings Ltd. Arab Potash Corp Israel Chemicals
Ownership
(%)
32% 22% 28% 14%
13,660 4,184 4,205 18,262
4,371 921 1,177 2,557 $9,026
14.32 3.02 3.86 8.38 $29.57
1. As at December 31, 2010. 2. Assumes 305.2 million shares outstanding.
$50,688 -225 2,722 $47,741
$166.06 -0.74 8.92 $156.41
364
January 2011
We believe that the RCN for PotashCorp is about $156 per share, which is detailed above in Exhibit 7.17. Our estimates are derived from: (1) current projects under construction; (2) feasibility, pre-feasibility, and scoping studies; (3) inflation-adjusted costs for historical projects; and (4) professional judgment. We think that, absent any takeover premium, PotashCorp should be trading closer to 95% RCN, which yields a price value of $149. Nearing the peak of a normal (not 2008) fertilizer cycle, we expect PotashCorp to trade between 95% and 100% RCN. Conversely, in normal market downturns, it could trade as low as 45% RCN. In our minds, an RCN premium should be placed on PotashCorps potash assets in general, due to it being a first-quartile cash cost producer, as well as its significant ~20% global potash market share. PotashCorp is currently trading at 99% RCN compared with the group (ex SQM) at 82.9% RCN (Exhibit 7.18).
SETTING OUR TARGET PRICE & RATING Exhibit 7.19: PotashCorp Valuation Summary
We have set our one-year PCS target price at $168 per share, which we derived by equally weighting our four valuation methodologies (Exhibit 7.19). Given our forecast PotashCorp total return of 8.8%, coupled with our universe total return of 3.2% (Exhibit 7.20), we rate the company 1-Sector Outperform.
POT Target Price


20% 15.7% 7.6% 3.9% 0.5% 8.8% 10.0%
15% 10% 5% 0% -5% -10% -15%
Top Pick
3-SU
3-SU
-9.2% YAR
2-SP
2-SP
1-SO
1-SO
1-SO
1-SO
-11.5% IPI
SQM
CF
MOS
POT
K+S
AGU
365

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C$7.60 27.5% 1-SO 61 C$8.50 10.0% 9.3% 1-SO 1-SO JOD 45.50 HKD 5.57 C$5.96 A$3.96 ILs 1,732 JOD 17.25 56.36 C$7.78 RMB 66.24 $900.00 HKD 4.02 $58.42 RUB 219 NOK 338 $58 NOK 300 1.3% 24.3% 9.6% -9.2% 3-SU 0.5% 2-SP 21.3% 0.5x 83.3 1,771 61.4 1,629 1,269 75.0 191.4 52.2 767.6 7.8 7,021 263.2 2,124 288.8 3,791 25,678 366 6,450 77,459 1,294 10,787 406 50,843 7,043 28,224 15,376 465,815 97,481 3,699 21,383 339 7,519 22,921 1,232 11,658 384 51,720 31,462 16,117 473,760 109,065 1.5% 1.8% 2.2% 6.5% 0.0% 0.7% 0.6% 0.9% 1.2% 0.8% 1.9% 1.7% 44.3% 32.8% 30.9% 68.8% 0.0% 45.0% 25.2% 16.2% 50.0% 0.0% 21.0% 30.4% 15.0% 7.6% 10.2% 6.4% 13.2% 16.5% 2.2% 11.1% 14.0% 9.7% -5.2% 11.3% 14.5% 5.3% 9.4% 19.4% 9.9% 23.0% 11.8% 29.5% 20.9% 5.1% 14.3% 40.8% 22.4% -11.1% 22.3% 23.2% 13.0% 17.5% 0.1x 0.0x 0.0x 0.3x 0.5x 0.0x 0.6x 0.2x 0.2x 1.0x 0.7x 0.9x 0.3x 0.6x 0.4x 0.1x 0.0x 0.0x 0.2x 0.3x 0.0x 0.4x 0.2x 0.2x 0.5x 0.4x 0.5x 0.2x 0.4x 0.2x 0.3x -0.5x -1.0x -1.3x 1.5x 0.7x -1.5x 1.6x -0.1x -0.1x 2.1x 1.3x 0.5x 4.4x 0.6x 0.6x Margins Y/E Gross (%) 20.6% 32.2% 36.8% 40.5% 25.1% 25.8% 30.1% 57.3% 29.7% 14.8% 40.3% 35.9% 34.4% 23.3% 61.4% 74.4% -2.1% 36.2% 73.7% 40.0% 36.7% 28.6% 23.1% 27.2x 48.0% 34.3% 14.4% 24.1% 27.1% 24.9% 12.9% 18.5% 53.7% 62.5% -8.1% 41.4% 48.4% 6.1% 29.2% 40.2% 21.7% 12.0% 19.3% 22.6% 22.1% 8.0% 16.9% 49.6% 54.2% -9.2% 30.6% 39.0% 2.1% 23.5% 13.8x 27.4x 16.2x 20.4x 10.6x 17.4x 24.4x 12.3x 32.1x 19.4x 5.8% 2.8% 0.5% 3.6% 5.1% 4.9% 5.5% -13.3% 1.0% 4.1% 2.2% -3.2% 10.1% 2.3% 2.7% 5.2x 2.2x 1.3x 1.8x 8.7x 2.7x 4.4x 1.4x 13.4x 4.4x 1.9x 9.6x 2.9x 4.6x 4.7x 11.0% 29.9% 32.6% 36.6% 25.4% 28.3% 27.3% 8.3% 26.1% 28.1% 30.8% 18.8% 20.5% 22.1% 24.6x 10.5x 24.8x 86.7x 33.9x 53.1x 38.9x 11.2% 10.1% 1.1% -0.9% 2.2% -2.6% 3.5% 2.8x 2.5x 10.3x 3.8x 3.8x 5.9x 4.8x 11.8x 13.6x 11.6x 33.2x 16.5x 22.1x 18.1x 18.3x 10.6x 10.7x 10.7x 15.5x 10.8x 13.1x 7.6x 12.2x 21.9x 13.1x 13.1x 14.9x EBITDA (%) Operating (%) P/CF (x) FCF Yield (%) P/BV (x) 2009A (x) Metrics Enterprise Value to EBITDA 2010E (x) 11.0x 10.3x 11.6x 28.9x 19.8x 19.2x 16.8x 16.2x 8.3x 11.5x 8.5x 14.3x 9.4x 11.5x 7.3x 17.8x 10.0x 23.3x 18.7x 7.3x 12.6x 13.9x 2011E (x) 7.8x 6.6x 9.5x 14.0x 11.4x 12.6x 10.3x 12.2x 6.4x 8.3x 7.9x 11.4x 7.4x 9.7x 5.9x 14.2x 8.2x 13.7x 18.2x 14.3x 8.5x 10.4x 10.4x 2012E (x) 8.0x 7.7x 8.6x 11.8x 9.7x 11.4x 9.5x 8.8x 5.1x 7.4x 7.3x 10.1x 15.5x 8.5x 5.0x 12.0x 7.4x 11.3x 15.6x 11.7x 8.2x 9.6x 9.6x 2009A (x) 24.7x 17.6x 19.5x 81.1x 32.1x 29.7x 34.1x 28.3x 25.4x 14.0x 15.6x 22.3x 13.9x 31.8x 11.0x 38.1x 0.7x 35.3x 11.3x 20.6x 25.1x Price to Earnings 2010E (x) 19.7x 21.2x 18.8x 67.3x 41.2x 25.1x 32.2x 21.8x 20.3x 15.4x 12.7x 20.6x 10.5x 25.5x 11.5x 33.6x 0.5x 28.7x 40.7x 26.2x 11.2x 20.0x 23.6x 2011E (x) 12.6x 10.6x 15.4x 27.0x 18.7x 16.7x 16.8x 17.7x 14.5x 11.1x 12.1x 15.4x 8.9x 15.9x 9.2x 24.4x 0.4x 18.3x 29.8x 19.9x 12.4x 15.0x 15.6x 12/31 12/31 12/31 12/31 5/31 12/31 12/31 12/31 6/30 9/30 12/31 12/31 12/31 3/31 12/31 12/31 12/31 12/31 12/31 12/31
$91.75 $135.15 $89.27 $37.29 $76.36 $154.83
158.0 71.9 32.8 75.1 446.9 305.3
14,497 9,719 2,928 2,801 34,125 47,269
15,517 11,658 3,347 11,658 33,028 49,538
0.1% 0.3% 2.0% 0.3% 0.3% 0.6%
2.4% 6.3% 28.8% 10.8% 6.5% 10.9%
3.7% 15.0% 17.9% 7.5% 6.5% 8.5% 9.9%
8.4% 23.8% 114.0% 8.1% 9.6% 17.8% 30.3%
0.4x 0.0x 2.2x 0.2x 0.6x 0.7x
0.3x 0.0x 0.7x 0.1x 0.4x 0.3x
0.8x -1.1x 1.5x -0.7x 3.3x 0.7x
Peer Group Average
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Peer Group Average
January 2011
January 2011
Exhibit 7.22: PotashCorp Tear Sheet
Potash Corporation of Saskatchewan

POT.T; POT.N 1-Year Target: $168 Last Price: $154.83 2-Year Target: $190 FY End: Dec. 31 1-Year Return: 8.8% Market Cap: $47.3B 2-Year Return: 23.2% EV: $49.5B NTM Dividend $0.40 Avg. Volume: 5.7M Rating: 1-SO FD Shares O/S: 305.3M Risk: High Float: 99.8% Valuation: 11.5x 2012E EBITDA, 17x 2012E EPS, DCF @ 9.9%, 95% RCN Financial EV/EBITDA P/E P/FCF P/BV Dividend Yield ROE ROA Gross Margin EBITDA Margin EBITDA Growth Income Statement Sales COGS Gross Profit Potash Phosphate Nitrogen EBITDA Net Income EPS (FD) Balance Sheet Cash & Equivalents PP&E Total Assets Short-Term Debt Long-Term Debt Total Liabilities Shareholders' Equity Cash Flow Statement Operating (post-WC) Investing Financing Cash Credit Metrics Net Debt/EBITDA Interest Coverage Debt/Total Capital Standard & Poor's:
* Bloomberg.
Ownership Insider Ownership: Institutional Ownership: Target Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Free Cash Flow EBITDA Less: Taxes Less: NWC Less: CAPEX Free Cash Flow EPS Estimates Q1 Q2 Q3 Q4 Total Consensus* 2011E Sensitivity Potash ($/mt) DAP/MAP ($/mt) Urea ($/mt) Ammonia ($/mt) Sulphur ($/lt) Natural Gas ($/mmBtu) N Sales (M mt) P Sales (M mt) K Sales (M mt) C$ (US$) Operational Potash Sales (M mt) Realized Price ($/mt) Solid Phosphate Sales (M mt) Realized Price ($/mt) Ammonia Sales (M mt) Realized Price ($/mt) Urea Sales (M mt) Realized Price ($/mt) Replacement Cost New Calculated: $156/sh Peak: Trough: 2010E 8.5 $320 1.4 $450 1.8 $368 1.3 $323 2011E 3,928 1,048 -138 2,060 958 2009 $1.02a $0.62a $0.82a $0.80a $3.25a
3.5% 81.3% Multiple Value Weight 17.0x $175.78 25% 11.5x $154.51 25% 95% $148.59 25% 9.9% $194.49 25% 2012E 4,351 1,158 -99 1,317 1,976 2010E $1.47a $1.55a $1.32a $1.83 $6.17 $5.91 2013E 5,086 1,351 -100 646 3,190 2014E 5,359 1,423 -75 406 3,605
2009 32.9x 47.6x n.m. 7.3x 0.3% 15% 8% 26% 41% -70% 2009 3,977 2,632 1,026 730 65 231 1,504 988 $3.25 2009 385 6,413 12,922 0 3,319 6,422 6,501 2009 924 -1,669 854 109 2009 2.2x 7.2x 0.34x A-
2010E 19.2x 25.1x n.m. 5.8x 0.3% 23% 12% 41% 43% 71% 2010E 6,561 3,391 2,677 1,859 301 516 2,579 1,881 $6.17 2010E 1,250 7,774 15,570 0 4,115 7,456 8,114 2010E 2,416 -2,140 589 865 2010E 1.2x 20.2x 0.34x
2011E 12.6x 16.7x 49.3x 4.4x 0.3% 26% 16% 53% 54% 52% 2011E 7,754 3,159 4,108 2,990 438 680 3,928 2,826 $9.26 2011E 1,548 9,445 17,574 0 4,115 6,753 10,821 2011E 3,077 -2,060 -719 298 2011E 1.2x 18.2x 0.28x Moody's:
2012E 11.4x 15.0x 23.9x 3.4x 0.3% 23% 15% 56% 57% 11% 2012E 8,154 3,084 4,568 3,612 413 543 4,351 3,157 $10.34 2012E 3,571 10,361 20,592 0 3,865 6,734 13,859 2012E 3,458 -1,317 -119 2,022 2012E 0.2x 22.2x 0.22x Baa1
2011E 2012E $2.22 $2.46 $2.28 $2.55 $2.22 $2.46 $2.53 $2.87 $9.26 $10.34 $8.61 $9.47
$20 $40 $20 $20 -$20 $1 0.5 0.3 0.5 3 2011E 9.4 $392 1.7 $452 1.8 $401 1.4 $345
EPS +33 +12 +6 +1 +12 +4 +14 +6 +25 +6 2012E 9.8 $440 1.7 $409 1.8 $376 1.4 $315
153% 49%
Target: Current:
95% 99%
367
January 2011
I. PCS Potash
WORLDS LARGEST POTASH PRODUCER
With a 2010 operational capability of 11.2 million tonnes KCl (nameplate capacity of 13.3 million tonnes KCl), PotashCorp is the worlds largest potash company.
Lawsuits have been filed by both PCS and Mosaic to clarify the end date of the Esterhazy agreement.
The majority of PCS Potashs capacity is located in Saskatchewan, where production is achieved from five 100%-owned mines. Additionally, PCS operates a somewhat small 0.8 million tonne potash mine in New Brunswick, and has a mining and processing agreement with Mosaic at its 5.3 million tonne Esterhazy mine, also located in Saskatchewan. Exhibit 7.23 summarizes PotashCorps potash production facilities. Unlike its North American sales, PCS offshore business is conducted through Canpotex an export marketing agency equally owned by PotashCorp (54% economics), Agrium (9%), and Mosaic (37%). Canpotex utilizes two West Coast terminals, ~5,500 railcars, and charters vessels for offshore delivery. Seventy percent of Canpotex sales are typically made on a CFR basis, whereby Canpotex takes on ocean freight risk to deliver potash for a premium.
Exhibit 7.23: PCS Potash Overview
Facility Nameplate Operational Capacity Capability
(M mt) (M mt)
Production 2009 2008 2007

(M mt) (M mt) (M mt)
1,200
Quarterly Sales by Geographic Location
Lanigan, SK Rocanville, SK Allan, SK Cory, SK Patience Lake, SK New Brunswick, NB PCS Owned Esterhazy, SK1 Total
3.8 3.0 1.9 1.4 1.0 0.8 12.0 1.3 13.3
3.6 2.8 1.8 0.8 0.5 0.8 10.3 0.9 11.2
0.7 0.9 0.7 0.4 0.1 0.3 3.1 0.3 3.4
2.1 2.8 1.1 0.4 0.3 0.8 7.5 1.1 8.6
1.9 2.6 1.7 0.8 0.3 0.8 8.1 1.0 9.2
1,000 MOP Sales ($M) 800 600 400 200 0 2006 2007 2008 2009 North America Offshore
1. PotashCorp's mineral rights are mined by Mosaic's Esterhazy plant under a long-term mining and processing agreement. For 2010, PCS' production allocation, subject to any force majeure conditions, w as 0.943 million tonnes.
PCS MATCHES PRODUCTION TO MEET DEMAND
PotashCorp has followed a strategy of matching production to meet anticipated market demand, which we believe: (1) minimizes downside risks; and (2) conserves the long-term value of its potash resources. Exhibit 7.24 highlights PCS success in following its strategy.
Exhibit 7.24: PCS Matches Production to Meet Demand
10,000
PCS has kept to its strategy of matching production to meet anticipated demand.
(000 mt KCl)
8,000 6,000 4,000 2,000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Production 2008 2009
North America Sales

Offshore Sales
368
January 2011
AMONG THE LOWEST-COST PRODUCERS IN THE WORLD
In our view, PCS is a first- to second-quartile cash-cost producer of potash, at least, at mine site. We believe that PotashCorp can produce potash for between $10/tonne and $15/tonne cheaper than Middle East producers (i.e., Israel Chemicals and Arab Potash). On an FOB port basis, however, all Saskatchewan-based potash producers are disadvantaged, due to a 1,500+ kilometre distance to West Coast ports.
Exhibit 7.25: Potash Production Cost Profile
Royalties & Other Taxes 14% Depreciation & Amortization 13% Energy 13% Other 17% Supplies 22%
About 70% of PotashCorps operating costs are variable, when operating at near capacity.
Labour 21%
This is why Middle Eastern producers produce potash for, on average, between $5/tonne and $10/tonne less than Canpotex members. When operating at near capacity, ~70% of PCS potash operating costs are variable, which gives the company the flexibility to reduce production and costs in the event of a decline of demand. Exhibit 7.25 highlights PCS production cost composition, while Exhibit 7.26 shows historical COGS/tonne over the past four years, as well our forecast through 2012.
Exhibit 7.26: SC Forecast PCS Potash COGS and COGS per Tonne
250 60% Forecast 200 150 100 50 0 2006 2007 2008 2009 2010 2011 2012 Potash COGS ($/mt; LHS) Potash COGS (%; RHS)
Potash COGS ($/mt)
40% 30% 20% 10% 0%
LOW-COST BROWNFIELD EXPANSIONS IN PROGRESS
PotashCorp should have 17.1 million tonnes of operational capability by 2015.
Over the past several years, PotashCorp has completed 3 million tonnes KCl of construction projects, for a total cost of $860 million, or slightly less than $300/tonne. This compares with Saskatchewan-based conventional greenfield potash projects, which have an average capex of ~$2,000+/tonne (i.e., $1,400/tonne to $1,500/tonne construction + $500/tonne infrastructure + $0/tonne to $500/tonne for ore body). Going forward, PCS plans to continuing working toward its 10.1 million tonne expansion plan, some of which will be accomplished through various debottlenecking projects. Construction completion of the remaining four projects is underway, with all expected online by 2013, and full ramp-up by 2015. Exhibit 7.27 highlights PotashCorps expansion projects, both completed and in progress. By 2015, we expect PotashCorp to boast operational capability of about 17.1 million tonnes KCl.
369
Potash COGS (%)
50%
January 2011
Exhibit 7.27: PCS Potash Completed and Planned Brownfield and/or Debottlenecking Potash Projects
3.0 Com pleted 2.5 In Progress $1,600 $1,400 $1,200 $1,000 $800 $600 $400 0.5 0.0 Rocanville Allan Lanigan Patience Lake Cory I New Brunsw ick Allan Cory II Rocanville $200 $0
(Million mt KCl)
2.0 1.5 1.0
Low er capex/m t projects constructed first
GREENFIELD-READYIF REQUIRED
While we dont anticipate that PotashCorp will develop a Saskatchewan-based greenfield potash mine over the next decade, the company has a property at Bredenbury (i.e., about 30 kilometres north of Esterhazy), where geological exploration is advanced, and shaft pilot holes have been drilled.
POTASH RESERVE LIFE SUFFICIENT FOR 80+ YEARS
Exhibit 7.28: PCS Potash Mine Reserve Life
Reserve Life (Years)
PCS has sufficient potash resources for at least the next 80 years.
120 100 80 60 40 20
107 88 87
81 65
PCS potash mines have ample resources to continue producing (at 2015 expansion production rates) for at least the next 80 years. Lanigan, Allan, and New Brunswick each have between 80 and 90 years of resources, while Lanigan and Rocanville have about 100+ and 65 years of potash production available, respectively (Exhibit 7.28).
n.a. Patience Lake
0
Cory Lanigan Allan New Rocanville Esterhazy Brunsw ick
A reduction in a mines reserve life can be attributed to: (1) expansion or debottlenecking projects; and/or (2) a conventional mine flood, which could lead to a solution mine being created instead (i.e., Patience Lake).
THE FUTURE OF ESTERHAZY
In mid-2009, PotashCorp filed a Statement of Claim against Mosaic, whereby PCS has asserted that it has the right under its mining and processing agreement to receive potash from Mosaic until at least 2012. Mosaic asserts that a delivery rate of 1.24 million tonnes will terminate in 2011. Additionally, Mosaic commenced a counterclaim against PotashCorp, asserting that PCS breached the agreement due to its refusal to take delivery of potash based on an event of force majeure. We expect the Saskatchewan courts to declare the amount of potash that PCS has the right to receive under its agreement shortly, and view this announcement as a moderate catalyst to both PotashCorps and Mosaics share prices.
370
Capex (C$ per mt)
January 2011
Exhibit 7.29: PCS Potash Strengths & Weaknesses

PCS Potash Strengths PCS can raise capacity at a significant discount to, and in less time than, comparable greenfield capacity. Per-tonne fixed costs and mining taxes decrease as sales volume increases. Existing operations have significant reserves, resources, and mine lives, and are located in geopolitically stable environments. Offshore potash investments add global reach and profitability. High barriers to entry; economically mineable deposits are rare, capital costs are high, and lead times are long. Few world producers, little government ownership. No known substitutes for potash. PCS Potash Weaknesses High rail and ocean freight delivery costs for Saskatchewan potash; potential for transportation bottlenecks. Water inflow at its New Brunswick mine (and at Esterhazy) increases costs and risks loss of production. Production costs exposed to Canadian Dollar volatility. High Saskatchewan resource taxes and federal and provincial income taxes relative to global competitors.
+ + + + + + +
NORTH AMERICA MARKET SHARE EXPANSION?
In our minds, PotashCorp could increase its North American potash market share over the coming three years, and possibly, at the expense of both Agrium and Mosaic. With the majority of potash consumption growth occurring in overseas markets, coupled with PotashCorps ability to bring brownfield capacity online sooner than Agrium and Mosaic, we think both Agrium and Mosaic may choose to direct some of their North American production to Canpotex. Why? If a Canpotex member turns down a proportion of its allocation for the year, we understand that the member may lose its ability to supply that amount of potash for the following three years. We expect that a diversion (to Canpotex) of some of Agriums and Mosaics North American destined potash sales could enable PCS to gradually begin gaining North American potash market share between 2011 and 2013.
OUTLOOK
We are bullish on the outlook for PCS Potash, and believe that the company will be able to realize higher sales volumes over last year, as well as materially improved pricing. Beyond 2012, we are mildly concerned that a continued ramp-up of brownfield potash capacity could depress the above-average margins that PCS Potash has enjoyed over the past several years. We expect PotashCorp to produce about 8.5 million tonnes in 2010, rising by 10.6% to 9.4 million tonnes in 2011. In 2012, we forecast production to increase to 9.8 million tonnes, as we assume that Esterhazy reverts back to Mosaic midway through the year. Looking back, peak production occurred in 2007 at 9.2 million tonnes, followed by 8.7 million tonnes in 2008, and then a sharp drop to 3.4 million tonnes in 2009. As the worlds primary potash swing producer, PotashCorp reduced its utilization more than most of its peers.
371
January 2011
Exhibit 7.30: SC Forecast Quarterly Potash Production

3,500
MOP Production (000 mt)
3,000 2,500 2,000 1,500 1,000 500 0 2006 2007 2008 2009 2010
Forecast
2011
2012
On pricing, we forecast PotashCorp will realize $392/tonne in 2011, rising 12.2% to $440/tonne in 2012. For North American sales, we are looking for $404/tonne and $447/tonne in 2011 and 2012, respectively. For its offshore potash business (i.e., Canpotex), we estimate PCS Potash will realize $386/tonne and $436/tonne in 2011 and 2012. Exhibit 7.31 highlights our realized potash price forecast through 2012, as well as the spread between the two prices, which we forecast will approach zero over time (i.e., in line with the CEOs Q3/11 comments).
Exhibit 7.31: SC Forecast Realized Potash Prices by Region
800 Forecast 250 200 150 100 50 0 -50 2006 2007 2008 2009 2010 Offshore 2011 NA Premium 2012
Realized Potash Price ($/mt)
600 500 400 300 200 100 0
North America
On volumes through 2012, we expect to see 1.3 million to 1.8 million tonnes of offshore sales per quarter, and 0.7 million to 1.1 million tonnes of quarterly North American sales (Exhibit 7.32). In summary, we forecast 9.4 million tonnes of potash sold in 2011, rising to 9.8 million tonnes in 2012 (i.e., before the reversion of Esterhazy to Mosaic).
Exhibit 7.32: SC Forecast PCS Potash Sales Volume by Region
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2006 2007 2008 2009 North America 2010 Offshore
MOP Sales (000 mt MOP)
Forecast
2011
2012
372
NA Premium ($/mt)
700
January 2011
Exhibit 7.33: SC Forecast PCS Potash Sales by Region

1,400 1,200
Forecast
MOP Sales ($M)
1,000 800 600 400 200 0 2006 2007 2008 2009 North America 2010 Offshore 2011 2012
Exhibit 7.34: SC Forecast PCS Potash COGS and COGS per Tonne
250 60% Forecast 200 150 100 50 0 2006 2007 2008 2009 2010 2011 2012 Potash COGS ($/mt; LHS) Potash COGS (%; RHS)
Potash COGS ($/mt)
40% 30% 20% 10% 0%
Exhibit 7.35: SC Forecast PCS Potash Gross Profit and Gross Margins
Potash Gross Profit ($/mt)
Forecast 500 400 300 200 100 0 2006 2007 2008 2009 2010 2011 2012 Potash Gross Profit ($/mt; LHS) Potash Gross Margin (%; RHS) 90% 80% 70% 60% 50% 40%
Exhibit 7.36: SC Forecast PCS Potash Seasonality by Region

Potash Sales Seasonality (%)
31% 29% 27% 25% 23% 21% 19% 17% 15% Q1 Q2 North America Q3 Offshore Q4
373
Potash Gross Margin (%)
600
100%
Potash COGS (%)
50%
374
7,018 2,785 4,411 7,196 471 576 12 1,058 169 131 145 189 153 167 442 452 449 642 493 535 464 369 404 577 367 474 417 379 389 395 288 336 355 285 321 370 282 309 354 277 306 387 317 341 365 292 320 657 910 14 1,580 1,308 2,527 24 3,859 85 168 6 259 507 699 16 1,222 1,212 1,510 15 2,738 115 71 2 189 111 284 3 397 195 176 6 377 450 342 5 796 213 375 2 590 252 328 2 582 298 465 7 770 356 535 8 899 392 370 378 420 502 9 932 400 385 392 3,471 5,929 9,400 2,960 5,585 8,545 133 341 474 1,093 1,895 2,988 3,321 5,179 8,500 200 194 394 266 748 1,014 494 612 1,106 1,266 1,198 2,464 575 1,329 1,904 710 1,187 1,897 770 1,465 2,235 910 1,445 2,355 1,050 1,305 2,355 770 1,396 2,166 315 545 7 866 409 390 397 9,160 8,697 1,040 3,405 8,162 626 626 1,113 1,955 2,232 1,263 2,712 2,355 2,355 1,884 2,826 770 1,773 2,543 322 700 7 1,029 418 395 402 9,418 3,500 5,918 9,418 1,413 2,282 32 3,726 404 386 392 12 1,047 169 1,228 131 39 1,058 497 561 14 1,567 217 1,797 178 39 1,580 668 912 23 3,836 209 4,068 167 42 3,859 803 3,056 6 253 10 269 7 4 259 92 167 16 1,206 94 1,316 59 35 1,222 492 730 2 186 22 211 11 12 189 82 106 3 395 26 423 17 9 397 146 251 6 371 35 413 24 11 377 171 206 5 347 96 892 67 29 796 280 516 2 588 51 641 36 16 590 193 397 2 580 55 637 40 15 582 219 364 7 763 55 825 45 10 770 187 583 15 2,277 257 2,995 188 70 2,738 879 1,859 8 891 57 956 47 10 899 184 714 9 922 57 989 47 10 932 184 748 7 859 53 920 43 10 866 183 683 7 1,022 61 1,090 51 10 1,029 185 845 32 3,695 228 3,955 188 40 3,726 736 2,990
Exhibit 7.37: SC Forecast PCS Potash

2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 3/31/10 6/30/10 09/31/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 9,800 3,600 6,200 9,800 1,609 2,704 36 4,349 447 436 440
($M)
Production (KCL 000 mt)
Sales (KCL 000 mt) North America Offshore
Sales ($M) North America Offshore Misc
Realized Price ($/mt) North America Offshore
PCS Potash I/S ($M) Other Misc. and Purchased Product Manufactured Product Adjustments PCS Potash Gross Sales Less: Freight Transportation PCS Potash Net Sales Cost of Goods Sold Gross Margin
36 4,313 236 4,585 196 40 4,349 737 3,612
January 2011
January 2011
II. PCS Phosphate

THIRD-LARGEST PRODUCER
PCS is the thirdlargest producer of phosphate fertilizers.
PotashCorp is the worlds third-largest producer of phosphate fertilizer, possessing capacity of about 2.4 million tonnes P2O5. Mosaic and the Moroccan governments Office Cherifen des Phosphates (OCP) rank ahead of PCS. Exhibit 7.38 highlights PotashCorps phosphate assets and the associated production over the past three years.
Exhibit 7.38: PCS Phosphate Overview
Annual Capacity
(M mt)
2009
(M mt)
Production 2008
(M mt)
2007
(M mt)
Annual Capacity
(M mt P2O5)
2009
(M mt P2O5)
Production 2008
(M mt P2O5)
2007
(M mt P2O5)
Phosphate Rock Aurora, NC White Springs, FL Total Phosphate Solids Aurora, NC White Springs, FL Total Phosphate Liquids Aurora, NC White Springs, FL Geismar, LA Total Phosphate Feed Marseilles, IL White Springs, FL Weeping Water, NE Joplin, MO Aurora, NC Fosfatos do Brazil Total
6.0 3.6 9.6
4.2 2.5 6.7
4.0 3.0 7.1
4.1 3.2 7.3
Phosphoric Acid Aurora, NC White Springs, FL Geismar, LA Total Purified Acid Aurora, NC Total
1.2 1.0 0.2 2.4
0.9 0.4 0.1 1.5
1.1 0.7 0.1 1.9
1.1 0.9 0.2 2.2
1.2 0.5 1.7
0.8 0.2 1.0
0.8 0.2 1.0
0.9 0.3 1.2
0.3 0.3
0.2 0.2
0.3 0.3
0.3 0.3
2.5 3.0 0.5 5.6
1.7 0.5 0.2 2.1
1.9 0.7 0.2 2.6
1.9 0.8 0.3 2.7
1,200 1,000 800 600 400 200 0 2006 2007 Liquids Solids 2008 Industrial Feed 2009
0.3 0.3 0.2 0.2 0.2 1.1
0.1 0.1 0.1 0.1 0.3
0.1 0.2 0.1 0.1 0.1 0.0 0.6
0.1 0.2 0.1 0.1 0.1 0.1 0.6
With 9.6 million tonnes of high-quality phosphate rock capacity, PotashCorp is an integrated producer of phosphate fertilizers, such as DAP and MAP, giving the company a strong cost advantage over many of its global competitors (Exhibit 7.39). PCSs phosphate rock reserves are sufficient for another 90 years at its Aurora mine (permitted for 30 years), and 15 more years at White Springs (Exhibit 7.40).
Exhibit 7.39: PCS Phosphate Is Rock-Integrated
500
Exhibit 7.40: Sufficient Rock Reserves at Aurora

100
As an integrated phosphate manufacturer, PCS has a material cost advantage over its nonintegrated peers.
400 ($/mt) 300 200 100 0
PotashCorp's phosphate advantage
80 60 40 20 15 0 Aurora White Springs 90
U.S. Integrated Rock
U.S. NonIntegrated Ammonia
China Integrated Sulphur
India NonIntegrated Other
Unlike Mosaic and OCP, which direct their phosphate production almost entirely to fertilizers, about 40% of PotashCorps sales volumes are to industrial and feed customers. We believe PCS diversification split provides the company with the flexibility to maximize segment gross margins and minimize volatility.
375
Years
January 2011
About 60% of PotashCorps phosphate sales are made within North America, where the company typically benefits from higher prices due to its close proximity to customers. North American competitors include Mosaic, CF Industries, Mississippi Phosphates, Simplot, Agrifos, and Agrium. For offshore sales, PCS and Mosaic jointly run PhosChem, a U.S. marketing association for the export of phosphate fertilizers, and which is similar in nature to Canpotex. Moroccos OCP is PhosChems primary competitor for offshore phosphate fertilizer sales. OCP controls over 40% of the global phosphate rock export market.
STRENGTHS & WEAKNESSES Exhibit 7.41: PCS Phosphate Strengths & Weaknesses
PCS Phosphate Strengths High quality, low-cost phosphate rock in significant quantity provides PCS with a cost advantage over non-integrated producers. Permit to mine for more than 35 years at Aurora, NC. Ability to direct rock with low levels of impurities to diversified product lines to optimize margins and reduce volatility. Mining near process facilities provides PCS with a cost advantage over North American competitors. Strong position in North American purified acid, feed phosphate, and liquid fertilizer markets. PCS Phosphate Weaknesses Transporting ammonia to solid fertilizer plants is becoming more difficult and costly. Higher sulphur and ammonia costs can negatively impact margins. Plants with high fixed costs may not perform profitably at lower operating rates. High barriers to exit due to significant environmental restoration and remediation costs.
+ + + + +
THE MARKET THROUGH 2012
Phosphate Rock We think phosphate rock prices will be balanced to tight over the mid-term.
Other than the Bayovar project in Peru, which is scheduled to become fully operational in 2011, there are very few new phosphate rock export projects scheduled to come online over the next several years. Accordingly, we think phosphate rock prices will be balanced to tight over the mid-term. We note that high rock prices have a major impact on non-integrated DAP producers, as 1.7 tonnes of rock is required to produce 1 tonne of DAP.
Phosphate Fertilizers
In our view, the outlook for PotashCorps phosphate business is positive through 2011, at which point we expect capacity expansions from China, Brazil, Morocco, Tunisia, and Jordan to begin having an impact on the P2O5 supply/demand balance. Saudi Arabias 3 million tonne DAP complex should be 100% ramped up by 2012, as the railway linking its rock mine with its DAP facility on the Arabian Gulf should also be complete by then. We believe that both India and China will continue to have a major impact on PCS Phosphate sales volumes, as will an eventual economic recovery in the United States. India typically accounts for 40% of world DAP/MAP imports, and we anticipate domestic solid phosphate fertilizer production to continue declining as Indian companies are generally high-cost non-integrated producers (Exhibit 7.42). Accordingly, we are looking for P2O5 export growth in India, which presents a strengthened opportunity for PhosChem. Early evidence of this trend was Indias March 2010 signing of a 6 million tonne DAP order with PhosChem.
376
January 2011
Exhibit 7.42: Historical India DAP/MAP Production and Imports
10 DAP/MAP (M mt)
Increased Indian DAP/MAP exports is a big positive for PhosChem.
8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006

Imports
2007
2008
2009
Domestic Production
In our view, Chinas export volumes will be heavily dependent on the export tax it sets on an annual basis. In 2007, China exported almost 4 million tonnes of DAP/MAP, or three times more than in each of the previous four years. The following year, the Chinese government implemented a 100% export tax on top of the existing 35% tax, which reduced DAP/MAP exports by more than 50% (Exhibit 7.43). The 2011 DAP/MAP export tax is 7% during off-season months and 110% during peak-season months (i.e., December to May, and October to December).
Exhibit 7.43: China DAP/MAP Exports Depend on the Annual Export Tax
4.0 Chinese DAP/MAP Exports (M mt)
China remains an annual wild card as to what its DAP/MAP exports will be.
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Exhibit 7.44: Industrial Phosphate Volumes to GDP

200 R2 = 0.55 175 150 125 100 12,800 12,900 13,000 13,100 13,200 13,300 13,400 13,500 Real U.S. GDP
Phosphate Industrial Sales Volume (000 mt)
Industrial phosphate sales volumes in the U.S. are mildly correlated with GDP growth in the United States. Specifically, we found an R-squared value of 0.55, which is based on limited quarterly data since the start of 2006 (Exhibit 7.44). Exhibit 7.49 provides a detailed outlook through 2012 for PCS Phosphate.
Source: Bloomberg; PotashCorp; Scotia Capital.
377
January 2011
OUTLOOK
On phosphate pricing, we are looking for a decline in realized pricing through 2012. Specifically, we forecast $452/tonne for solid fertilizers in 2011, such as DAP/MAP, dropping to $409/tonne in 2012. Why? While we expect phosphate demand growth to remain robust, new supply should begin to outweigh. We think liquid phosphate fertilizer prices will remain relatively flat in 2011 at $377/tonne, while feed should decline by about 5%, to $427/tonne. Finally, realized industrial phosphate prices should decline the least, as the U.S. economy continues to recover. For 2011, we are looking for a weightedaverage industrial phosphate realized price of $579/tonne, almost flat with our $577/tonne 2010 forecast.
Exhibit 7.45: SC Forecast PCS Phosphate Realized Prices by Product Line
Realized Phosphate Prices ($/mt)
1,400 1,200 1,000 800 600 400 200 0 2006 2007 2008 Industrial 2009 Liquids 2010 Solids 2011 Feed 2012 Forecast
In 2011, we expect PCS Phosphates DAP/MAP (i.e., solid) volumes to come in at 1.67 million tonnes, or a healthy bump from 2010. We believe that this volume level is achievable, although we note that it has not been realized since 2006 and 2007.
Exhibit 7.46: SC Forecast PCS Phosphate Sales Volumes by Product Line
1,200 1,000 800 600 400 200 0 2006 2007 2008 Liquids 2009 Solids 2010 Industrial Feed 2011 2012 Forecast
For other phosphate products, we are looking for flat liquids volumes at about 1 million tonnes in 2011, feed sales at 0.49 million tonnes, and industrial sales of 0.66 million tonnes.
378
January 2011
Our PCS Phosphate quarterly net sales forecast is shown in Exhibit 7.47. Given our volume and price forecasts above, we expect 2011 and 2012 PCS Phosphate net sales of about $1.75 billion and $1.65 billion, respectively. This translates into an annual gross margin of about 25%.
Exhibit 7.47: SC Forecast PCS Phosphate Net Sales by Product Line
PCS Phosphate Sales ($M)
1,200 1,000 800 600 400 200 0 2006 2007 2008 Liquids 2009 Solids 2010 Industrial Feed 2011 2012 Forecast
Exhibit 7.48: SC Forecast PCS Phosphate Gross Profit and Gross Margins
Phosphate Gross Profit ($/mt)
600 500 400 300 200 100 0 2006 2007 2008 2009 2010 2011 2012 60%
Forecast
40% 30% 20% 10% 0%
Phosphate Gross Profit ($/mt; LHS)
Phosphate Gross Margin (%; RHS)
In 2008, PCS Phosphate realized a gross profit of $1.1 billion, which subsequently dropped to a mere $65 million in 2009. Based on current and expected phosphate margins, we think $410 million to $440 million annual gross profit for 2011 and 2012 is not unrealistic.
379
Phosphate Gross Margin (%)
50%
380
2,021 2,086 1,930 236 1,505 1,967 377 479 413 494 491 521 551 500 452 527 551 2,029 910 1,634 777 647 3,968 225 392 239 240 29 1,124 247 240 307 370 276 29 239 240 392 225 132 1,255 43 89 1,124 998 125 42 273 277 608 292 146 1,637 33 112 1,491 1,059 433 45 493 471 997 735 141 2,881 39 101 2,740 1,626 1,115 4 69 95 93 44 27 330 8 18 303 295 9 -22 260 387 354 235 121 1,335 38 83 1,214 1,149 65 4 72 96 80 44 28 325 13 16 296 276 21 -34 61 96 90 68 38 318 14 24 280 275 5 4 59 100 92 79 28 362 3 25 334 304 30 6 71 82 125 81 35 401 10 26 366 300 66 7 68 82 98 82 27 364 8 19 337 275 62 288 374 336 379 347 823 932 754 667 811 459 343 601 816 503 297 300 490 702 405 246 294 519 718 404 267 268 423 638 356 302 301 436 663 386 328 428 426 539 418 373 456 465 591 468 378 438 468 584 452 7 80 92 191 123 44 536 14 31 492 392 100 398 473 448 595 475 7 53 99 213 119 39 531 11 28 492 418 74 371 450 452 577 455 27 272 355 628 405 146 1,832 43 104 1,686 1,384 301 283 608 273 277 51 1,491 735 997 493 471 45 2,740 44 93 69 95 4 303 235 354 260 387 17 1,253 405 628 272 355 27 1,686 44 80 72 96 4 296 68 90 61 96 5 319 79 92 59 100 4 334 81 125 71 82 6 366 82 98 68 82 7 337 123 191 80 92 7 492 119 213 53 99 7 492 94 181 53 96 6 430 377 452 427 579 458 6 53 96 181 94 36 466 10 25 430 323 108 75 166 55 92 6 394 377 452 427 579 461 6 55 92 166 75 32 426 9 23 394 295 98 982 1,623 813 731 4,149 893 1,069 654 706 3,322 96 270 114 116 596 791 1,182 531 551 3,055 1,091 1,395 602 614 3,701 177 273 139 134 723 255 334 143 150 882 263 305 135 151 854 248 293 167 152 860 219 215 146 139 719 324 437 170 157 1,088 300 450 119 166 1,034 250 400 124 166 939 200 367 128 159 854 250 450 124 173 996 94 203 53 100 7 457 377 452 427 579 459 7 53 100 203 94 38 495 11 27 457 343 114 300 450 119 166 1,034 113 203 51 96 7 470 377 452 427 579 454 7 51 96 203 113 39 509 11 28 470 352 117 1,000 1,666 494 664 3,824 377 753 211 384 26 1,751 377 452 427 579 458 26 211 384 753 377 145 1,896 42 103 1,751 1,313 438
Exhibit 7.49: SC Forecast PCS Phosphate
($M)
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 3/31/10 6/30/10 09/31/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 2,123
Production (P2O5 000 mt)
Sales (000 mt) Liquid Solid Feed Industrial
1,126 1,705 494 664 3,989 376 697 190 363 24 1,650 334 409 384 546 414 24 190 363 697 376 152 1,802 44 108 1,650 1,238 413
Sales ($M) Liquid Solid Feed Industrial Misc.
Realized Price ($/mt) Liquid Solid Feed Industrial
PCS Phosphate I/S ($M) Other Feed Industrial Fertilizer - Solids Fertilizer - Liquids Adjustments PCS Phosphate Gross Sales Less: Transportation Freight PCS Phosphate Net Sales Cost of Goods Sold Gross Margin
January 2011
January 2011
III. PCS Nitrogen

THIRD-LARGEST NITROGEN PRODUCER
PotashCorps 3.5 million tonnes of ammonia capacity ranks third (among publicly traded companies) in global nitrogen production capacity, behind Yara and CF Industries. Additionally, PCS boasts 1.5 million tonnes of urea capacity, as well as additional capacity for nitrogen solutions, nitric acid, and ammonium nitrates production (Exhibit 7.50).
Exhibit 7.50: PCS Nitrogen Overview
Annual Capacity
(M mt)
2009
(M mt)
Production 2008
(M mt)
2007
(M mt)
Annual Capacity
(M mt)
2009
(M mt)
Production 2008
(M mt)
2007
(M mt)
PCS Nitrogen has a cost advantage over its peers due to its proximity to customers.
Ammonia Trinidad Augusta, GA Lima, OH Geismar, LA Total Urea Trinidad Augusta, GA Lima, OH Geismar, LA Total Nitrogen Solutions Trinidad Augusta, GA Lima, OH Geismar, LA Total
2.2 0.7 0.6 3.5
1.9 0.7 0.6 3.1
1.8 0.7 0.5 3.0
2.1 0.6 0.5 3.2
Nitric Acid & Ammonium Nitrate Trinidad Augusta, GA 1.2 Lima, OH 0.1 Geismar, LA 0.8 Total 2.1
900 800 Nitrogen Sales ($M) 700 600 500 400 300 200 100 0 2006 2007 Ammonia Urea 2008
1.0 0.1 0.4 1.5
1.2 0.1 0.6 1.9
1.1 0.1 0.7 1.9
0.7 0.5 0.4 1.5
0.7 0.4 0.4 1.4
0.6 0.4 0.3 1.3
0.7 0.3 0.3 1.3
0.6 0.2 1.0 1.8
0.3 0.1 0.3 0.7
0.3 0.1 0.5 0.9
0.2 0.1 0.5 0.8
2009 Other
NA, AN, Solutions
Unlike the potash industry (and to a much lesser extent, the phosphate industry), the nitrogen market is highly fragmented and regionalized. Accordingly, PotashCorps nitrogen nameplate capacity only accounts for about 2% of the world market, giving the company little to no ability to meaningfully influence global nitrogen fertilizer prices and margins.
PCS FOCUSES ITS NITROGEN MOSTLY ON U.S. INDUSTRIAL CUSTOMERS
Industrial consumers of ammonia and urea provide PotashCorp with more consistent and stable margins (Exhibit 7.51), unlike fertilizer consumers.
Exhibit 7.51: Nitrogen Industrial Margins Are Slightly More Stable Than Nitrogen Fertilizers
$700 $600 $500 N Fertilizers (SD: $97/mt) N Industrials/Feed (SD: $89/mt)
Industrial nitrogen margins have proven to be slightly more stable than fertilizer nitrogen margins.
$/mt
$400 $300 $200 $100 $0 2006 2007 2008 2009
381
January 2011
In 2009, industrial customers bought 40% of the urea and 75%+ of the ammonia that was produced for sale in the U.S. Accordingly, PCS nitrogen production at its Augusta, Geismar, and Lima facilities are primarily earmarked for industrial customers. Over the past several years, 60% of PotashCorps nitrogen sales went to industrial customers, although we note that a slight declining trend has been evident over the past couple of years.
TRINIDAD ADVANTAGE WANING
PCS Nitrogens lower-cost gas contracts in Trinidad will begin, falling away in 2011.
Because 75% to 90% of the cash cost of ammonia production is based on natural gas (coal in China), access to secure supply of lower-cost natural gas is a key success factor for PCS to ensure margin stability in its nitrogen business. 60% of PCS ammonia is produced in Trinidad, where it holds lower-cost natural gas contracts that are indexed to ammonia prices. In our view, this strategy allows the company to somewhat preserve margins if ammonia prices decline. In addition to lower-cost gas, market proximity is the second success factor in the nitrogen business. Why? Pressurized railcars and refrigerated ocean vessels are costly. Accordingly, only 10% to 12% of ammonia trades across borders, compared with 80% of potash, and 40% of DAP. Trinidad is less than one weeks sailing time to the U.S., giving PCS an excellent proximity to the worlds largest nitrogen importer. While PotashCorps Trinidad assets allow the company to compete in the U.S., we note that the percentage of Trinidad gas covered by lower-cost contracts will begin declining in 2011. By 2016, only 50% of PCS Trinidad facilities will benefit from gas contracts that are indexed to ammonia prices (Exhibit 7.52).
Exhibit 7.52: Reduction in Low-Cost Trinidad Gas Contracts
Tinidad Gas Covered by LowCost Contracts
100% 80% 60% 40% 20% 0%
100% 90% 80%
The m ost noticeable changes to the reduction of PCS' low er-cost Trinidad gas contracts w ill be over the next three years
65% 55% 55% 50% 50% 50%
2010
2011
2012
2013
2014
2015
2016
2017
2018
STRENGTHS & WEAKNESSES Exhibit 7.53: PCS Nitrogen Strengths & Weaknesses
PCS Nitrogen Strengths Long-term, lower-cost natural gas contracts in Trinidad. 60% of ammonia production in Trinidad, close to the U.S., which is the world's largest ammonia importer. Location of U.S. manufactured ammonia relatively insulated from U.S. Gulf imports. More than 75% of ammonia sales from U.S. facilities are made to less cyclical industrial customers. PCS Nitrogen Weaknesses 40% of ammonia production is in the U.S., which is affected by the variability of natural gas price volatility. Contractual commitments to U.S. industrial customers may force PCS to temporarily operate unprofitably amid rising natural gas prices. Lower-cost natural gas contracts in Trinidad will begin falling away over time.
+ + +
382
January 2011
OUTLOOK
In our view, the reduction of PotashCorps lower-cost gas contracts in Trinidad could slowly tighten the companys nitrogen segment margins, unless the contracts are renewed. It is true that the increase of unconventional natural gas production in the U.S. is making U.S. nitrogen production more cost competitive (Exhibit 7.54). However, this gain could be partially offset by: (1) synergies realized from CF Industries acquisition of Terra Industries; and (2) a proven appetite for increased U.S. nitrogen asset exposure by both Yara and Agrium. On a net basis, we think declining Trinidad value trumps, for now.
Exhibit 7.54: U.S. Shale NatGas Production Increasing
Trillion Cubic Feet/Year
12 10 8 6 4 2 0 1990 1995 2000 2005 Onshore conventional 2010
Forecast
2015 Offshore
2020 Alaska
Onshore unconventional
Source: EIA; Scotia Capital.
On nitrogen pricing, we are looking for no material improvement in 2011 or in 2012. Specifically, we forecast PCS Nitrogens realized 2011 prices to come in at $401/tonne, $345/tonne, and $207/tonne, for ammonia, urea, and solution/NA/AN, respectively. On a volume-weighted basis, we estimate 2011 and 2012 overall realized prices of $308/tonne and $285/tonne, slightly above 2010 although down ~30% from a 2008 peak of $438/tonne. We are slightly more constructive on urea pricing than we are on straight ammonia (Exhibit 7.55). In 2011, we expect PCS Nitrogens ammonia volumes to come in at 1.82 million tonnes, a slight bump from our forecast of 1.75 million tonnes in 2010. In 2007, ammonia sales volume peaked at 2.1 million tonnes, but has been range-bound between 1.7 million and 1.8 million tonnes since then. Were modelling a slight rise to urea volumes in 2011 to 1.43 million tonnes, or almost identical to levels reached in 2009. Through 2012, we forecast 2.1 million to 2.2 million tonnes of annual solutions/NA/AN sales volumes per year in line with 2007 and 2008 average levels (Exhibit 7.56).
Exhibit 7.55: SC Forecast PCS Nitrogen Realized Prices by Product
Realized N Prices ($/mt)
900 800 700 600 500 400 300 200 100 0 2006 2007 2008 Ammonia 2009 Urea 2010 NA, AN, Solutions 2011 2012 Forecast
383
January 2011
Exhibit 7.56: SC Forecast PCS Nitrogen Sales Volumes by Product

Nitrogen Sales Volumes (000 mt)
1,800 1,600 1,400 1,200 1,000 800 600 400 200 2006 2007 2008
Ammonia
Forecast
2009
Urea
2010
NA, AN, Solutions
2011
2012
Our PCS Nitrogen quarterly net sales forecast is shown below in Exhibit 7.57. Given our volume and price forecasts above, we expect 2011 and 2012 PCS Nitrogen net sales of between $1.6 billion and $1.7 billion per year. This translates into an average annual gross margin of about 33%. In 2008, PCS Nitrogen realized a gross profit of $737 million, which subsequently dropped to $231 million in 2009. Based on current nitrogen pricing, we think a $480 million to $630 million gross profit for 2011 and 2012 is not unrealistic.
Exhibit 7.57: SC Forecast PCS Nitrogen Sales by Product
900 800 700 600 500 400 300 200 100 0 2006 2007 2008 Ammonia 2009 Urea 2010 NA, AN, Solutions Other Forecast
Nitrogen Sales ($M)
2011
2012
Exhibit 7.58: SC Forecast PCS Nitrogen Gross Profit and Gross Margins
350 300 250 200 150 100 50 0 2006 2007 2008 2009 2010 2011 2012 Forecast 40% 30% 20% 10% 0% 50%
Nitrogen Gross Profit ($/mt)
Nitrogen Gross Profit ($/mt; LHS)
Nitrogen Gross Margin (%; RHS)
384
Nitrogen Gross Margin (%)
385
2,579 1,695 1,199 1,781 4,675 500 318 305 72 1,195 295 265 171 240 312 352 193 274 557 534 280 438 190 308 189 227 244 291 159 227 275 282 166 239 228 274 137 204 300 297 152 242 343 351 180 277 384 310 190 287 354 303 182 272 391 325 300 336 368 323 211 293 665 469 438 121 1,693 999 633 578 180 2,390 91 122 73 10 296 425 417 284 56 1,183 644 429 446 125 1,644 124 93 69 9 295 104 101 76 12 293 106 101 66 26 300 147 121 99 30 396 177 101 101 34 413 163 91 96 32 382 157 116 150 30 453 187 123 104 29 442 401 345 207 313 193 123 117 30 464 401 345 207 309 2,133 1,333 2,267 5,733 1,795 1,186 2,061 5,042 479 395 386 1,260 1,740 1,433 1,793 4,966 1,752 1,327 2,108 5,187 450 330 417 1,197 457 367 553 1,377 354 341 437 1,132 430 344 548 1,322 461 324 532 1,317 459 302 528 1,289 402 357 500 1,259 465 357 500 1,323 481 357 566 1,404 2,987 2,780 668 2,571 2,705 632 658 613 738 713 601 653 705 738 743 470 357 609 1,437 189 123 126 31 469 401 345 207 305 653 402 357 500 1,259 161 123 104 27 415 401 345 207 308 500 318 305 72 89 1,284 52 37 1,195 880 316 664 469 438 122 107 1,800 52 56 1,693 1,157 536 999 633 578 180 107 2,498 51 57 2,390 1,653 737 91 122 73 10 28 323 15 13 296 242 54 425 417 284 95 104 1,326 55 49 1,222 991 231 124 93 69 9 26 321 14 13 295 251 44 104 101 76 51 26 357 13 13 332 242 90 106 101 66 26 24 324 13 11 300 257 43 147 121 99 30 24 420 12 12 396 264 133 177 101 101 34 21 433 11 10 413 288 125 163 91 96 32 20 402 9 10 382 282 100 157 116 150 30 26 479 14 13 453 295 158 644 429 446 125 91 1,735 46 45 1,644 1,128 516 187 123 104 29 28 470 15 13 442 274 169 193 123 117 30 29 493 15 14 464 287 177 189 123 126 31 30 499 16 14 469 290 178 161 123 104 27 26 442 14 13 415 258 157
Exhibit 7.59: SC Forecast PCS Nitrogen

2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 3/31/10 6/30/10 09/31/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 2,839 1,818 1,429 2,176 5,423 729 493 450 117 1,790 401 345 207 308 2,839 1,818 1,429 2,176 5,423 683 450 411 108 1,653 376 315 189 285
($M)
Production (N 000 mt)
Sales (000 mt) Ammonia Urea Solutions/NA/AN
Sales ($M) Ammonia Urea Solutions/NA/AN Misc.
Realized Price ($/mt) Ammonia Urea Solutions/NA/AN
PCS Nitrogen I/S ($M) Ammonia Urea Nitrogen solutions/Nitric acid/Ammonium nitrate Other Adjustments PCS Nitrogen Gross Sales Less: Transportation Freight Net Nitrogen Sales Cost of Goods Sold Gross Margin
729 493 450 117 114 1,904 60 54 1,790 1,110 680
683 450 411 108 114 1,767 60 54 1,653 1,110 543
January 2011
January 2011
Strategic Investments Worth $34/POT Share

Exhibit 7.60: PCS Investments
6,000 5,000
PotashCorp is invested in four potash-related public companies around the world, which we believe gives the company a strategic advantage to enhance and diversify its bottom line. At December 31, 2010, the market value of PCS investments in these companies was $10.2 billion, which equates to about $34 per share (Exhibit 7.60). We estimate the total acquisition cost of these dividend-paying investments to be slightly less than $2 billion.
$34/POT Share
4,000
$ Millions
3,000 2,000 1,000 0
$4,414 $2,313 $1,290 $491 SQM $207 APC Acquisition Cost
$246 $575 Sinofert Unrealized Gain
$706 Israel Chemicals
Source: PotashCorp; Bloomberg; Scotia Capital estimates.
ISRAEL CHEMICALS LTD.
Israel Chemicals Ltd. (ICL) has approximately 5.7 million tonnes of MOP capacity, and plans to increase this amount by 0.5 million tonnes by the end of 2011. 3.7 million tonnes of capacity is located in Israel, with the remaining 2 million tonnes split evenly between the U.K. (i.e., Cleveland Potash) and Spain (Iberpotash). PotashCorp began acquiring ICL shares in 1998, and currently owns 13.9% of the company, with no board seats. In addition to its potash assets, ICL is also a large producer of bromine and magnesium, and owns rights to mine phosphate rock in the Negev Desert. In our view, ICLs potash production is among the least expensive (FOB port) in the world.
Exhibit 7.61: Israel Chemicals Ltd. Stock Price Performance (ILs)
ILs 7,000 ILs 6,500 ILs 6,000 ILs 5,500 Price ILs 5,000 ILs 4,500 ILs 4,000 ILs 3,500 ILs 3,000 Mar-09 Jun-09 Sep-09 ICL (Price) Dec-09 Mar-10 Jun-10 Sep-10
Ticker: IC L Last P rice: ILs 6,083 M arket Cap: $ 21.8B 52 Wk High: ILs 6,270 52 Wk Lo w: ILs 3,941 FD Shares O/S: 1,269M
40,000 35,000 Daily Volume (000s) 30,000 25,000 20,000 15,000 10,000 5,000 0 Dec-10
Israel Chemicals is the lowest-cost potash producer (FOB port) on the planet.
ICL (V olume)
Tel A viv 25 (rebased)
SOCIEDAD QUIMICA Y MINERA DE CHILE
Sociedad Quimica y Minera de Chile (SQM) is the worlds leading producer of specialty plant nutrition products (50% global market share), lithium (24% global market share), and iodine (25% global market share). SQM, also the largest potash producer in South America, boasts a current annual potash capacity of 1.5 million tonnes, with plans to raise this to 2 million tonnes by the end of 2012. In our view, SQMs natural resources are the foundation of its competitive advantage, across almost all product lines.
386
January 2011
PotashCorp currently has a 32% stake in SQM, which includes the right to designate three of SQMs eight directors. For further details on Sociedad Quimica y Minera, please refer to our SQM initiation report (page 403 of this report).
Exhibit 7.62: Sociedad Quimica y Minera de Chile Stock Price Performance
$55 $50
Ticker: Last P rice: M arket C ap: 52 Wk H igh: 52 Wk Lo w: FD Shares O/S: SQM $ 58.42 $ 15.4B $ 59.77 $ 30.98 263.2M
4,000 3,500 Daily Volume (000s) 3,000 2,500 2,000 1,500 1,000
SQM is the largest potash producer in Latin America, for now.
$45 Price $40 $35 $30 $25 Mar-09
500 Jun-09 SQM (V olume) Sep-09 SQM (Price) Dec-09 Mar-10 S&P 500 (rebased) Jun-10 Sep-10 0 Dec-10
ARAB POTASH COMPANY
Arab Potash Company (APC) is a low-cost potash producer in Jordan, with approximately 2.5 million tonnes of annual potash capacity, after having opened its 0.5 million tonne brownfield expansion project in late October 2010. Similar to ICL, APC has logistical advantages in delivering product to India, China, and Southeast Asia. PotashCorp is APCs largest shareholder at 28%, holds three of 13 board seats, and appoints the top four management positions. Exhibit 7.63 shows APCs recent share price performance.
Exhibit 7.63: Arab Potash Company Stock Price Performance
300 250 200 150 100 50 0 Dec-10 Daily Volume (000s)
JOD 75
Price
Arab Potash has logistical advantages to India and China.
JOD 65 JOD 55 JOD 45 JOD 35
Ticker: Last P rice: M arket Cap: 52 Wk High: 52 Wk Lo w: FD Shares O/S:
A P OT JOD 44 $ 5.12B JOD 45 JOD 30 83.3M
JOD 25 Mar-09
Jun-09
Sep-09 A POT (Price)
Dec-09
Mar-10
Jun-10
Sep-10
A POT (V olume)
MSCI World (rebased)
387
January 2011
SINOFERT HOLDINGS LIMITED
Sinofert is the largest fertilizer importer and distributor in China, with the majority of its earnings coming from importing and selling potash. Sinofert owns about 18% of Qinghai Salt Lake Potash Company, Chinas largest potash producer, and distributes about 50% of its 2.2 million tonnes of annual MOP production. PotashCorp owns 22% of Sinofert, and appoints two of seven board seats. Sinoferts controlling shareholder is SinoChem, which owns 53.5% of the company. The remaining shares are publicly owned. Exhibit 7.64 shows Sinoferts recent share price performance.
Exhibit 7.64: Sinofert Holdings Limited Stock Price Performance
HK$8.00
Ticker: Last P rice: M arket Cap: 52 Wk H igh: 52 Wk Lo w: FD Shares O/S: 297 H K$ 4.02 HK$ 28.2B H K$ 5.72 H K$ 2.98 7,021M
140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Dec-10 Daily Volume (000s)
Price
Sinofert is the largest fertilizer importer and distributor in China.
HK$7.50 HK$7.00 HK$6.50 HK$6.00 HK$5.50 HK$5.00 HK$4.50 HK$4.00 HK$3.50
HK$3.00 Mar-09
Jun-09
Sep-09 Sinof ert (Price)
Dec-09
Mar-10
Jun-10
Sep-10
Sinof ert (V olume)

Hang Seng Index (rebased)
388
January 2011
Special Dividend or Share Buyback?

Following PotashCorps November 16 announcement that it would repurchase up to 14.57 million common shares (~4.9%) through the end of 2010 (now complete), we do not expect the company to pay investors a special dividend for at least the next 12 months. First, $600 million of bonds mature in May 2011, and the company is in the process of determining the best use of its funds over the next couple of years. Second, PCS has a lofty $7 billion capex program through 2015 to increase its operational potash capability to 17.1 million tonnes. While we recognize that PotashCorps dividend increases have not maintained a stable yield, we note that its yield is in line with those of its peers (Exhibit 7.65).
Exhibit 7.65: PotashCorps Historical Dividend and Dividend Yield
Annual Dividend ($/sh)
2001
2002
2003
2004
2005
2006
2007
2008
2009
Annual Dividend (LHS)

Dividend Yield (RHS)
In addition to the recently completed share repurchase program, PotashCorp has announced three other share buybacks since 2000, as follows: (1) 2.7 million share buyback in late 1999; (2) a 5% open market buyback in January 2005; and (3) a 31.5 million share open market buyback in January 2008.
Exhibit 7.66: Special Dividend in 2012 or 2013?
$2,500 $2,000 $1,500 $1,000 $500 $0 2010 2011 2012 2013 2014 2015+
Special dividend or share repurchase?
We think the earliest PotashCorp could reward shareholders with a special dividend or another share repurchase is in 2012. Why: (1) there is no material amount of debt due then. In 2011, $600 million of bonds are due, while in 2013, about $250 million is due; (2) we anticipate that global demand recovery for potash will be complete by then; and (3) PotashCorps current capex program should be winding down, increasing the amount of distributable free cash flow that could be made available to shareholders.
389
Debt Repayment ($M)
Dividend Yield (%)
PCS dividend yield has declined in line with its peers.
$0.45 $0.40 $0.35 $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.00 2000
2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 2010
January 2011

We believe that PotashCorp carries a high-risk profile. Key risk factors are outlined below.
POTASH DEMAND RECOVERY
More than two-thirds of PotashCorps annual gross margin is generated from its potash segment. Additionally, the company will have invested more than $7 billion between 2005 and 2015 in expansion and debottlenecking projects. If post-2010 potash demand recovery does not show the strength that many industry observers expect it to, including ourselves, we see three negative financial implications to PCS, as follows: (1) lower-thanexpected potash pricing and/or sales volumes will lead to reduced POT earnings; (2) the IRR on the companys $7 billion potash investment will be lower than anticipated; and (3) the opportunity cost of outlaying significant capital before it was required will increase. When PCS potash facilities are operating near capacity, about 70% of its cost per tonne is variable. Accordingly, muted potash demand recovery will lead to lost production, and higher per-tonne operating costs. On volume, we estimate that a 100,000 tonne KCl decline in potash sales will reduce 2011E EPS by 5. On pricing, we estimate that a $25/tonne drop in the price of potash, sustained for one year, will reduce our 2011 EPS estimate by approximately 41.
Exhibit 7.67: PotashCorp 2011E EPS Sensitivity to Potash Volume Changes
Soaring potash prices between 2006 and 2008 led to a surge of interest among new entrants looking to join the party. These new entrants range from pre-IPO junior resource companies to global mining giants such as BHP Billiton. In Saskatchewan alone, there are approximately 200 potash exploration permits that cover about 11 million acres, 90% of which were applied for and granted post-2006. A large amount of potash exploration and development activity is current occurring in Latin America. Following recent discoveries in the northern and eastern part of the country, Brazil may now hold the worlds third-largest potash reserves, at about 1 billion tonnes K2O. Prior to the discoveries, Brazil had an estimated 285 million tonnes K2O, compared with Canadas 11 billion tonnes K2O.
390
2011 Potash Netback ($/mt)
POT shares are more sensitive to potash pricing and volume changes than anything else.
2011 Potash Volume (M mt KCl) $332 $352 $372 $392 $412 $432 $452 7.9 7.52 7.85 8.18 8.51 8.84 9.17 9.50 8.4 7.77 8.10 8.43 8.76 9.09 9.42 9.75 8.9 8.02 8.35 8.68 9.01 9.34 9.67 10.00 9.4 8.27 8.60 8.93 9.26 9.59 9.92 10.25 9.9 8.52 8.85 9.18 9.51 9.84 10.17 10.50 10.4 8.77 9.10 9.43 9.76 10.09 10.42 10.75 10.9 9.02 9.35 9.68 10.01 10.34 10.67 11.00
January 2011
If new supply, including existing producer-announced brownfield expansions, was to come online faster than warranted, potash prices could be depressed for a prolonged period. This would have a negative impact on PotashCorps margins, profitability, and ultimately, its share price. For further details on the future of greenfield potash supply, please refer to our January 2010 report titled Finding Value in Growth.
TRANSPORTATION AND DISTRIBUTION INFRASTRUCTURE
PotashCorp transports and distributes its products via railcars, barges, ocean freightliners, and warehouse and port storage facilities. Problems such as railcar shortages, slow turn times, strikes, derailments, and adverse weather conditions could lead to: (1) a loss of, or a change in, the expected timing of sales; (2) increased distribution costs; and (3) customer dissatisfaction. About two-thirds of PCS potash is shipped offshore, up from about 55% 10 years ago (Exhibit 7.68).
Exhibit 7.68: Offshore Sales Now Represent Two-Thirds of PCS Potash Sales
Offshore potash sales represent about two-thirds of PCS Potashs business.
75% 70% 65% 60% 55% 50% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Offshore potash sales are increasing, as a percentage of overall potash sales for PCS Forecast
In our minds, ocean freight rate changes are also a significant risk for PotashCorp. We estimate that Canpotex assumes freight cost risk on two-thirds of its sales. Freight rates are highly volatile, as can be seen by changes in the Baltic Dry Index in Exhibit 7.69.
Exhibit 7.69: Baltic Dry Index
14,000 12,000 Baltic Dry Index 10,000 8,000 6,000 4,000 2,000 0 2001 -1 SD 2002 2003 2004 2005 2006 2007 2008 2009 2010 +1 SD Avg. +2 SD
Baltic Dry Index

Oil (rebased)
391
January 2011
COMMODITY PRICE EXPOSURE
In our minds, commodity price exposure is one of the largest investment risks to POT shareholders. Unlike many global commodities, fertilizers are typically not forward sold beyond one year out, and cannot be price-hedged in a futures market as no such market exists (yet). On the cost side, changes in the price of natural gas have a material impact on PotashCorps earnings. Specifically, a $1/mmBtu increase in NYMEX natural gas would increase our nitrogen-based 2011E EPS by 6, but would reduce our potash-based 2011E EPS by 2. PCS uses natural gas futures, swaps, and option agreements to manage its natural gas cost. As at September 30, 2010, the company had a natural gas hedging derivative net liability of $239.4 million. As shown in Exhibit 7.70, we believe that the successful run of PotashCorps natural gas hedging strategy ended in Q2/08. For full details of commodity price sensitivities to PotashCorp, please refer to pages 399 to 400.
Exhibit 7.70: PotashCorps Natural Gas Hedging Success Ended in Q2/08
$12 $11 $10 $9 ($/mmBtu) $8 $7 $6 $5 $4 $3 $2 Q1-06 Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 POT Natgas Cost NYMEX Natgas Price
Prior to Q2/08, PCS' natural gas cost averaged about 60% of m arket rates Since Q2/08, PCS' average natural gas cost has been in line w ith m arket rates.
PCS natural gas hedging success appears to have ended in Q2/08.
CYCLICALITY
Because government involvement in the nitrogen industry is fairly steep at between 50% and 60%, a risk exists that new supply will be added without regard to demand, resulting in high price volatility. PotashCorp attempts to mitigate this risk by maximizing its low-cost Trinidad production, as well as using natural gas price hedging strategies. During periods when gas costs rise, but nitrogen product prices do not follow, PCS tends to reduce its operating rates. Similar to the nitrogen industry, the phosphate industry is also about 50% government controlled, leading to production maximization at the expense of profitability. Increased supply such as Maadens 3 million tonne DAP facility, which is now ramping up could outpace growth of world consumption over the next few years. PCS tries to mitigate this risk by: (1) maintaining its cost advantage as an integrated producer; and (2) diversifying its phosphate business into less cyclical industrial and feed products.
CONVENTIONAL POTASH MINING
Potassium-based ore is water soluble, and accordingly, the risk of a mine flood is much more severe than for most other types of mining operations. There are several examples of potash mine floods or water inflow challenges, such as Mosaics Esterhazy, PotashCorps Patience Lake and New Brunswick facilities, as well as Uralkalis Mine #1.
392
January 2011
PotashCorp spends approximately $30 million per year managing water inflow at its New Brunswick potash mine. We note that, similar to other companies involved in mining, PotashCorp is unable to acquire insurance for its underground assets. The refurbishment of the New Brunswick potash mine, as well as the expansion, are expected to stop water inflow there.
FOREIGN EXCHANGE
PotashCorp earns the majority of its revenue in U.S. dollars, while a majority of its operating expenses are denominated in Canadian dollars. Accordingly, a strengthening Canadian dollar is negative for POTs EPS. We estimate that a 1 appreciation in the Canadian dollar will reduce our 2011 POT earnings forecast by 2 per share. Exhibit 7.72 highlights the historical FX rate over the past five years.
Exhibit 7.71: PotashCorp 2011E EPS Sensitivity to FX Rate Changes
2011 U.S. Dollar per Canadian Dollar

FX rate variability does not have a major impact on PCS earnings.
$332 $352 $372 $392 $412 $432 $452
$0.86 8.09 8.42 8.75 9.08 9.41 9.74 10.07
$0.89 8.15 8.48 8.81 9.14 9.47 9.80 10.13
$0.92 8.21 8.54 8.87 9.20 9.53 9.86 10.19
$0.95 8.27 8.60 8.93 9.26 9.59 9.92 10.25
$0.98 8.33 8.66 8.99 9.32 9.65 9.98 10.31
$1.01 8.39 8.72 9.05 9.38 9.71 10.04 10.37
$1.04 8.45 8.78 9.11 9.44 9.77 10.10 10.43
Exhibit 7.72: CAD-USD FX History

-1 SD +1 SD Avg
393
January 2011
Financial Forecast
On the top line, we are looking for overall 2011 and 2012 gross sales of $7.75 billion and $8.15 billion, respectively, or about the midpoint of 2007 and 2008 sales levels. On a net basis (ex freight and transportation), we forecast $7.27 billion and $7.65 billion, for 2011 and 2012, respectively.
Exhibit 7.73: SC Forecast Net Sales by Segment
Net Sales ($M)
2,500 2,000 1,500 1,000 500 0 2006 2007 2008 2009 Potash Nitrogen 2010 Phosphate 2011 2012
Gross margins should rebound similar to sales, but will be dominated by the potash business, as usual. We estimate that potash will contribute about two-thirds of PCS gross margins in both 2011 and 2012. We forecast 2011 EBITDA and EBITDA margins to fall in the $3.93 billion and 54% areas, rising to $4.35 billion and 57% in 2012, respectively. Our EPS estimates for PotashCorp are $9.26 (2011E) and $10.34 (2012E), versus a record $11.01 in 2008. We note that we have not included the impact of PotashCorps share repurchase program, and will do so following the release of its Q4/10 earnings. We estimate that PCS will generate $3.1 billion and $3.5 billion in cash flow from operations in 2011 and 2012 (after working capital adjustments).
Exhibit 7.74: SC Forecast Gross Margins by Segment
2,000 Forecast
Gross Margin ($M)
1,750 1,500 1,250 1,000 750 500 250 0 2006 2007 2008 Potash 2009 Nitrogen 2010 Phosphate
We are looking for 2011E and 2012E EBITDA margins near the 50% area.
2011
2012
Exhibit 7.77 highlights that, post-2010, PotashCorps return on assets and return on equity should return to more normalized levels in the 15% to 20% range. Additionally, debt metrics should decline substantially in 2011 with the planned repayment of $600 million of notes. Exhibit 7.78, on page 395, compares our estimates against consensus estimates.
394
January 2011
Exhibit 7.75: SC Forecast EBITDA and EBITDA Margin

6,000 5,000 Forecast 70% 60% 50% 40% 30% 20% 10% 0% -10% 1998 2000 2002 2004 EBITDA (LHS) 2006 2008 2010 2012
4,000 3,000 2,000 1,000 0 -1,000
EBITDA Margin (RHS)
Exhibit 7.76: SC Forecast Income and Income Margin

4,000 Forecast 50% 40% 30% 20% 1,000 0 -1,000 1998 2000 2002 2004 Net Income (LHS) 2006 2008 2010 2012 10% 0% -10%
3,000 2,000

100% 80% 60% 40% 20% 0% -20% -40% 1998 2000 2002 2004 ROA 2006 ROE 2008 2010 2012 Forecast
Exhibit 7.78: Our 2011 and 2012 PCS Estimates vs. Consensus
2011 Scotia Capital Est. Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/sh) 7,267 3,928 2,826 9.26 Low 6,911 3,510 2,134 7.00 Street Avg. 7,425 4,076 2,612 8.60 High 8,579 4,487 2,908 9.78 Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/sh) Scotia Capital Est. 7,652 4,351 3,157 10.34 2012 Low 7,200 3,735 2,294 7.45 Street Avg. 7,828 4,402 2,844 9.49 High 8,340 5,103 3,189 10.96
395
Return (%)
Income Margin (%)
Net Income ($M)
EBITDA Margin (%)
EBITDA ($M)
396
3,767 256 134 3,377 346 124 4,764 325 132 8,989 38 27 858 39 38 779 54 36 1,009 61 27 1,011 191 128 3,658 105 50 1,559 65 35 1,339 81 38 1,456 85 35 1,714 336 158 6,067 86 35 1,771 84 35 1,789 85 37 1,792 5,234 9,447 923 856 1,099 1,099 3,977 1,714 1,438 1,575 1,835 6,561 1,892 1,908 1,913 2,041 91 35 1,914 7,754 346 142 7,267 497 998 880 2,375 1,002 561 125 316 158 242 0 67 -4 0 782 86 -94 790 158 632
314 0 0 314 312 7 319 324 317 303 304 9 10 8 9 316 307 295 295 316 295 295 296 296 296 8 304 0 0 296 296 8 304 296 296 8 304 0 0 0 0 0 316 295 295 295 296 296 0 296 0
Exhibit 7.79: SC Forecast PotashCorp Income Statement

2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 3/31/10 6/30/10 09/31/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 8,154 358 144 7,652
($M)
Sales
Less Freight Transportation Total Net Sales
Cost of Good Sold Potash Phosphate Nitrogen Total COGS 668 1,059 1,157 2,883 1,881 912 433 536 213 291 0 135 70 0 1,463 69 -126 1,520 416 1,104 63 -334 4,572 1,077 3,495 23 -35 195 -113 308 27 -188 259 72 187 31 -41 327 79 249 40 -79 290 46 244 121 -344 1,071 84 988 31 -28 632 182 449
296 0 0 296 296 9 305
803 1,626 1,653 4,082 4,907 3,056 1,115 737 188 328 0 543 -126 0 4,302 23 -147 646 174 472
296 0 0 296 296 8 304
92 295 242 628 230 167 9 54 43 74 0 33 -30 0 183 17 -66 523 120 403
296 0 0 297 297 8 305
82 276 251 609 171 106 21 44 53 70 0 -18 38 0 97 47 -64 753 196 558
297 0 0 297 297 8 305
146 275 242 663 346 251 5 90 36 83 0 2 -9 0 317 280 206 30 43 51 85 0 12 -34 0 251 1,026 730 65 231 184 312 0 29 -35 0 849 715 516 66 133 50 102 0 23 9 0 634 584 397 62 125 45 100 0 17 0 0 522 563 364 100 100 75 97 0 16 -2 0 474 815 583 74 158 43 103 0 35 0 0 737 2,677 1,859 301 516 213 401 0 91 7 0 2,366 117 -276 2,525 673 1,881
296 0 0 297 296 8 305
171 304 257 732
492 1,149 991 2,632
280 300 264 843
193 275 288 755
219 392 282 893
187 418 295 899
879 1,384 1,128 3,391
184 323 274 781 991 714 108 169 40 96 0 43 0 0 908 59 -68 917 239 679
297 0 0 297 297 8 305
184 295 287 767 1,023 748 98 177 61 93 0 45 0 0 916 59 -84 942 245 697
297 0 0 297 297 8 305
183 343 290 816 976 683 114 178 36 97 0 41 0 0 899 47 -64 915 238 677
297 0 0 297 297 8 305
185 352 258 795 1,119 845 117 157 43 104 0 51 0 0 1,025 47 -66 1,044 271 772
297 0 0 297 297 8 305
736 1,313 1,110 3,159 4,108 2,990 438 680 181 389 0 179 0 0 3,748 211 -282 3,818 993 2,826
297 0 0 297 297 8 305
737 1,238 1,110 3,084 4,568 3,612 413 543 185 401 0 217 0 0 4,166 188 -288 4,266 1,109 3,157
297 0 0 297 297 8 305
Gross Profit Potash Phosphate Nitrogen Less: Selling, General & Administrative Amortization and Depreciation Provision for plant shutdowns Provincial Mining and other taxes FX Loss (Gain) Other Earnings Before Interest & Taxes (EBIT)
Less: Interest Expense Other Income Earnings Before Taxes (EBT) Less: Income Taxes Net Income
Basic shares - opening Plus: Equity issued Less: Share buyback Basic shares - closing Average Shares O/S - Basic (M) Average Dilution (M) Average Shares O/S - Diluted (M) 2.03 1.98 1,118
33% 39% 55%
EPS (Basic) EPS (Diluted) 3.50 3.40 1,880 4,963 292

32%
11.37 11.01
1.04 1.02
0.63 0.62 356

42%
0.84 0.82 442

40%
0.82 0.80 414

38%
3.34 3.25 1,504

41%
1.52 1.47 750

44%
1.59 1.55 736

51%
1.36 1.32 694

44%
1.88 1.83 814

44%
6.35 6.17 2,579

43%
2.29 2.22 948

50%
2.35 2.28 978

51%
2.28 2.22 935

49%
2.60 2.53 1,068

52%
9.51 9.26 3,928

54%
10.63 10.34 4,351

57%
EBITDA
January 2011
397
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 326 720 442 596 501 428 41 68 1,310 1,811 3,526 3,887 4,812 5,138 5,493 5,891 6,413 6,413 1,149 3,582 2,751 2,889 3,173 3,323 3,760 3,760 135 339 322 266 281 362 380 380 97 97 97 97 97 97 97 97 6,217 9,717 10,249 10,496 11,265 12,004 12,922 12,922 6,729 4,333 383 97 13,604 7,140 3,481 379 97 13,064 7,580 4,460 421 97 14,532 7,774 4,195 421 97 15,570 7,774 4,195 421 97 15,570 8,193 4,195 421 97 16,102 8,615 4,195 421 97 16,155 277 1,190 715 86 2,267 255 1,053 659 140 2,106 371 999 658 192 2,221 391 1,139 640 161 2,331 385 1,138 624 125 2,272 385 1,138 624 125 2,272 299 1,053 577 134 2,063 367 787 662 151 1,967 360 975 508 132 1,975 1,250 907 781 145 3,083 1,250 907 781 145 3,083 1,427 936 678 156 3,196 1,057 944 666 161 2,827 1,290 946 709 162 3,106 9,034 4,195 421 97 16,852 1,548 1,009 690 169 3,416 9,445 4,195 421 97 17,574 0 0 545 912 158 90 400 0 1,104 1,002 1,357 1,339 632 988 220 245 110 121 14 3 3,437 3,698 1,740 794 253 133 124 5,660 2,825 702 258 132 142 5,587 3,082 770 266 134 103 5,766 3,499 881 275 135 108 6,150 3,319 999 281 135 127 6,422 3,319 999 281 135 127 6,422 3,320 989 287 216 166 6,652 2,721 1,009 290 270 170 6,495 2,722 968 295 268 229 6,682 0 1,184 1,324 108 2,616 0 907 539 82 1,528 0 591 736 85 1,411 0 704 490 59 1,252 0 779 729 52 1,560 0 779 729 52 1,560 0 824 764 87 1,674 0 959 996 79 2,035 0 1,115 993 92 2,200 0 890 600 92 1,582 4,115 968 295 268 229 7,456 0 890 600 92 1,582 4,115 968 295 268 229 7,456 0 772 600 92 1,464 4,115 968 295 268 229 7,339 0 758 0 92 850 4,115 968 295 268 229 6,725 0 807 0 92 899 4,115 968 295 268 229 6,774 0 787 0 92 879 4,115 968 295 268 229 6,753 1,432 62 1,286 2,780 1,461 2,278 2,280 6,019 1,403 784 2,402 4,589 1,405 823 2,681 4,909 1,415 1,245 2,839 5,499 1,426 1,370 3,058 5,854 1,430 1,798 3,272 6,501 1,430 1,798 3,272 6,501 1,444 1,878 3,631 6,952 13,604 1,449 1,047 4,073 6,569 13,064 1,482 1,923 4,446 7,851 14,532 1,482 1,659 4,974 8,114 15,570 1,482 1,659 4,974 8,114 15,570 1,482 1,659 5,623 8,763 16,102 1,482 1,659 6,290 9,430 16,155 1,482 1,659 6,938 10,078 16,852 1,482 1,659 7,681 10,821 17,574 6,217 9,717 10,249 10,496 11,265 12,004 12,922 12,922
Exhibit 7.80: SC Forecast PotashCorp Balance Sheet

2012E
($M) Assets Current Assets Cash and Cash Equivalents A/R Inventory Prepaid Expenses and Other
1,548 1,009 690 169 3,416 9,445 4,195 421 97 17,574
3,571 1,077 673 198 5,519 10,361 4,195 421 97 20,592
PP&E Long Term Investments Other Assets + Intangibles Goodwill Total Assets
Current Liabilities Revolver A/P and Accrued Liabilities CP - LTD + STD CP - Derivatives
0 787 0 92 879 4,115 968 295 268 229 6,753
0 767 250 92 1,109 3,865 968 295 268 229 6,734
Long-Term Debt Future Income Tax Liability Accrued pension and other post-retirement benefits Accrued environmental costs and AROs Other non-current liabilities Total Liabilities
Shareholders' Equity Share Capital Translation/Comprehensive Income/Contributed Surplus Retained Earnings/(Deficit) Total Shareholders' Equity
1,482 1,659 7,681 10,821 17,574
1,482 1,659 10,719 13,859 20,592
Note: Our Q4/10 ending cash estimate of $1.25 billion assumes the receipt of $1 billion from two notes issued in Q4/10, but does not include the use of the proceeds to repurchase shares.
January 2011
398
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 632 1,104 242 291 -9 8 1 52 50 119 25 -50 941 1,525 -244 164 697 1,689 328 -27 -106 82 9 3,781 -768 3,013 74 1 -14 -117 -70 183 -84 99 70 1 12 41 -7 305 -368 -64 83 7 1 141 -121 360 -39 321 85 -1 0 137 39 504 65 568 312 8 -1 203 -159 1,351 -427 924 101 0 2 37 -2 588 201 789 100 3 0 24 43 642 265 907 96 0 0 -11 -89 400 104 504 103 0 0 0 0 660 -443 217 400 4 2 50 -47 2,290 126 2,416 96 0 0 0 0 775 -53 722 93 0 0 0 0 790 -15 775 3,495 308 187 249 244 988 449 472 403 558 1,881 679 697 677 97 0 0 0 0 774 3 777 772 104 0 0 0 0 876 -73 803 -509 -353 22 -1 -840 -607 -1,198 -31 -446 5 43 -125 -47 -758 -1,647 -366 0 0 -11 -377 -400 0 16 133 -251 -425 0 0 -26 -450 -574 -1,764 -3 -3 4 19 -18 78 -591 -1,669 -453 -422 0 -15 -891 -437 0 0 -10 -446 -505 0 0 -2 -507 -297 -1,691 0 -422 0 1 0 -28 -297 -2,140 -515 0 0 0 -515 -515 0 0 0 -515 -515 0 0 0 -515 483 -94 -61 47 375 232 94 326 326 720 720 277 277 255 255 371 371 391 394 -443 -22 116 20 -6 391 385 109 277 385 -402 47 -68 1,556 -94 -546 27 -2,866 -537 -1,809 70 215 -30 2 257 256 196 -29 7 431 417 -246 -29 8 149 -195 238 -29 3 17 547 403 -117 20 854 250 -215 -30 10 16 -87 385 299 -250 -118 -30 5 -393 68 299 367 0 0 -30 25 -4 -7 367 360 1,000 0 -30 0 970 890 360 1,250 1,000 -332 -119 40 589 865 385 1,250 0 0 -30 0 -30 177 1,250 1,427 -600 0 -30 0 -630 -370 1,427 1,057 0 0 -30 0 -30 232 1,057 1,290 0 0 -30 0 -30 259 1,290 1,548
Exhibit 7.81: SC Forecast PotashCorp Cash Flow Statement

Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E
($M)
Operating Activities Net Income (Loss) Add/(deduct) non-cash items: Depreciation and Amortization (Gain) Loss on Sale of PP&E/LT Inv. Foreign exchange on future income tax Provision for future income tax Other CFO (pre-WC Adj.) Net change in non-cash WC CFO (post-WC Adj.)
2,826 389 0 0 0 0 3,215 -138 3,077
3,157 401 0 0 0 0 3,557 -99 3,458
Investing Activities Additions to property, plant and equipment Purchase of long-term investments Proceeds on Sale/Disposal of PP&E/LT Inv. Other assets and intangible assets CFI
-515 -2,060 -1,317 0 0 0 0 0 0 0 0 0 -515 -2,060 -1,317
Financing Activities Proceeds from (repayment of) long-term debt obligations (Repayment of) proceeds from short-term debt obligations Dividends Net issuance (buyback) of common shares
-600 0 -119 0 -719 298 1,250 1,548
0 0 -119 0 -119 2,022 1,548 3,571
Net change in cash and cash equivalents
Cash and cash equivalents - beginning of period Cash and cash equivalents - end of period
Note: Our Q4/10 ending cash estimate of $1.25 billion assumes the receipt of $1 billion from two notes issued in Q4/10, but does not include the use of the proceeds to repurchase shares.
January 2011
January 2011
Exhibit 7.82: PotashCorp 2011E EPS Sensitivity to Potash Volume Changes
2011 Potash Volume (M mt KCl) $332 $352 $372 $392 $412 $432 $452 7.9 7.52 7.85 8.18 8.51 8.84 9.17 9.50 8.4 7.77 8.10 8.43 8.76 9.09 9.42 9.75 8.9 8.02 8.35 8.68 9.01 9.34 9.67 10.00 9.4 8.27 8.60 8.93 9.26 9.59 9.92 10.25 9.9 8.52 8.85 9.18 9.51 9.84 10.17 10.50 10.4 8.77 9.10 9.43 9.76 10.09 10.42 10.75 10.9 9.02 9.35 9.68 10.01 10.34 10.67 11.00
Exhibit 7.83: PotashCorp 2011E EPS Sensitivity to Natural Gas Price Changes
2011 Average NYMEX Natural Gas ($/mmBtu) $332 $352 $372 $392 $412 $432 $452 -$3 8.15 8.48 8.81 9.14 9.47 9.80 10.13 -$2 8.19 8.52 8.85 9.18 9.51 9.84 10.17 -$1 8.23 8.56 8.89 9.22 9.55 9.88 10.21 Base 8.27 8.60 8.93 9.26 9.59 9.92 10.25 +$1 8.31 8.64 8.97 9.30 9.63 9.96 10.29 +$2 8.35 8.68 9.01 9.34 9.67 10.00 10.33 +$3 8.39 8.72 9.05 9.38 9.71 10.04 10.37
Exhibit 7.84: PotashCorp 2011E EPS Sensitivity to Nitrogen Sales Volume Changes
2011 Nitrogen Sales Volume (M mt, product) $332 $352 $372 $392 $412 $432 $452 3.9 7.86 8.19 8.52 8.85 9.18 9.51 9.84 4.4 7.99 8.32 8.65 8.98 9.31 9.64 9.97 4.9 8.13 8.46 8.79 9.12 9.45 9.78 10.11 5.4 8.27 8.60 8.93 9.26 9.59 9.92 10.25 5.9 8.40 8.73 9.06 9.39 9.72 10.05 10.38 6.4 8.54 8.87 9.20 9.53 9.86 10.19 10.52 6.9 8.67 9.00 9.33 9.66 9.99 10.32 10.65
Exhibit 7.85: PotashCorp 2011E EPS Sensitivity to Realized Ammonia Price Changes
2011 Ammonia Realized Price ($/mt) $332 $352 $372 $392 $412 $432 $452 $341 8.24 8.57 8.90 9.23 9.56 9.89 10.22 $361 8.25 8.58 8.91 9.24 9.57 9.90 10.23 $381 8.26 8.59 8.92 9.25 9.58 9.91 10.24 $401 8.27 8.60 8.93 9.26 9.59 9.92 10.25 $421 8.28 8.61 8.94 9.27 9.60 9.93 10.26 $441 8.29 8.62 8.95 9.28 9.61 9.94 10.27 $461 8.30 8.63 8.96 9.29 9.62 9.95 10.28
399
January 2011
Exhibit 7.86: PotashCorp 2011E EPS Sensitivity to Realized Urea Price Changes
2011 Urea Realized Price ($/mt) $332 $352 $372 $392 $412 $432 $452 $285 8.09 8.42 8.75 9.08 9.41 9.74 10.07 $305 8.15 8.48 8.81 9.14 9.47 9.80 10.13 $325 8.21 8.54 8.87 9.20 9.53 9.86 10.19 $345 8.27 8.60 8.93 9.26 9.59 9.92 10.25 $365 8.33 8.66 8.99 9.32 9.65 9.98 10.31 $385 8.39 8.72 9.05 9.38 9.71 10.04 10.37 $405 8.45 8.78 9.11 9.44 9.77 10.10 10.43
Exhibit 7.87: PotashCorp 2011E EPS Sensitivity to Phosphate Sales Volume Changes
2011 Phosphate Sales Volume (M mt, product) $332 $352 $372 $392 $412 $432 $452 2.9 8.10 8.43 8.76 9.09 9.42 9.75 10.08 3.2 8.16 8.49 8.82 9.15 9.48 9.81 10.14 3.5 8.21 8.54 8.87 9.20 9.53 9.86 10.19 3.8 8.27 8.60 8.93 9.26 9.59 9.92 10.25 4.1 8.32 8.65 8.98 9.31 9.64 9.97 10.30 4.4 8.38 8.71 9.04 9.37 9.70 10.03 10.36 4.7 8.43 8.76 9.09 9.42 9.75 10.08 10.41
Exhibit 7.88: PotashCorp 2011E EPS Sensitivity to Realized DAP/MAP Price Changes
2011 DAP/MAP Realized Price ($/mt) $332 $352 $372 $392 $412 $432 $452 $332 7.91 8.24 8.57 8.90 9.23 9.56 9.89 $372 8.03 8.36 8.69 9.02 9.35 9.68 10.01 $412 8.15 8.48 8.81 9.14 9.47 9.80 10.13 $452 8.27 8.60 8.93 9.26 9.59 9.92 10.25 $492 8.39 8.72 9.05 9.38 9.71 10.04 10.37 $532 8.51 8.84 9.17 9.50 9.83 10.16 10.49 $572 8.63 8.96 9.29 9.62 9.95 10.28 10.61
Exhibit 7.89: PotashCorp 2011E EPS Sensitivity to Realized Sulphur Cost Changes
2011 Sulphur Realized Cost ($/mt) $332 $352 $372 $392 $412 $432 $452 +$60 7.91 8.24 8.57 8.90 9.23 9.56 9.89 +$40 8.03 8.36 8.69 9.02 9.35 9.68 10.01 +$20 8.15 8.48 8.81 9.14 9.47 9.80 10.13 Base 8.27 8.60 8.93 9.26 9.59 9.92 10.25 -$20 8.39 8.72 9.05 9.38 9.71 10.04 10.37 -$40 8.51 8.84 9.17 9.50 9.83 10.16 10.49 -$60 8.63 8.96 9.29 9.62 9.95 10.28 10.61
400
January 2011

In our view, PotashCorps management team and board of directors have a wealth of experience in both domestic and international chemical and fertilizer markets. The companys management and directors directly and indirectly control approximately 3.5% of PotashCorps shares on a diluted basis (Exhibit 7.90).
Name
Position
Background Mr. Doyle has been CEO since 1999 and has served on the Board of Directors since PCS became a publicly traded company in 1989. He is also Chairman of Canpotex and serves on the boards of The Fertilizer Institute and International Plant Nutrition Institute. In 1989, Mr. Brownlee coordinated the privatization of PotashCorp from a Crown Corporation to a publicly traded company. He has been PotashCorp's CFO since 1999 and was appointed Executive Vice President in 2006. Mr. Brownlee serves on the board of SQM, which is 32% owned by PCS. Mr. Hoffman joined PotashCorp's Board in 2008. He has 22+ years of experience in fertilizer sales, having previously serving as senior executive of IMC Global (i.e., Mosaic). Mr. Hoffman is a past Chairman of both Canpotex and Porsche. Mr. Delany was appointed COO in mid-2010, after serving 10 years as President of PCS Sales. In addition to his work with PotashCorp, he is also a Director of Arab Potash Company. Mr. Howe joined the Board in 1991, and was appointed Chairman in 2003. Mr. Hoffman owns a technology investment company and is also a Director of Viterra and Advanced Data Systems Ltd. Mr. Schoenhals joined the PCS Board in 1992, having previously served as the company's Chairman between 1987 and 1989. He is also a past president of Enform, a petroleum industry safety and training service. Ms. Paliza joined the Board in 2003. She currently serves as President of Inter-Quimica, S.A., a chemical distributor and importer, and heads Monte Rio Power Corp. and Indescorp, S.A. Mr. Burley joined PotashCorp's board in 2009. He has 21+ years of investment banking experience and previously served as Managing Director and Vice Chairman with Energy of Merrill Lynch Canada. Ms. Mogford joined the Board in 2001. She previously served as Ontario Deputy Minister of Natural Resources and Finance and currently serves on the Board of MDS, Inc. Ms. Laberge joined the PCS Board in 2003. She is the former CEO of a software solutions provider and currently serves on the boards of Royal Bank of Canada and Russel Metals.
William J. Doyle
President, CEO, Director
3,508,212
Wayne Richard Brownlee
CFO
1,072,909
C. Steven Hoffman
Director
5,426
David Delany
COO
255,304
Dallas J. Howe
Chairman
146,041
Paul J. Schoenhals
Director
23,370
Elena Viyella De Paliza
Director
32,857
Christopher M. Burley
Director
10,968
Mary Mogford
Director
56,845
Alice D. Laberge
Director
22,990
Other
5,699,604
10,834,526 305,300,000 3.5%
Source: SEDI; Bloomberg; company reports; Scotia Capital.
401
January 2011
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402
Sociedad Quimica y Minera de Chile
January 2011

(SQM-N)
Dec 31, 2010: Rating: Risk: IBES EPS 2010E IBES EPS 2011E 1-Yr Target: 1-Yr ROR: 2-Yr Target: 2-Yr ROR: Div. (Curr.): Yield Valuation: 17.5x 2012E EBITDA, 26x 2012E EPS, DCF @ 12.1% Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather Qtly EPS (FD) (Next Release: Feb-11) Y/E DECEMBER-31 Mar Jun 2009A $0.33A $0.32A 2010E $0.29A $0.40A 2011E $0.48 $0.46 2012E $0.58 $0.55 Qtly CFPS (FD) 2009A 2010E 2011E 2012E Mar $0.56A $0.60A $0.80 $0.92 Jun $0.84A $0.71A $0.78 $0.89 Sep $0.31A $0.36A $0.49 $0.58 Sep $0.57A $0.73A $0.81 $0.92 Dec $0.29A $0.38 $0.53 $0.64 Dec $0.59A $0.70 $0.86 $0.98 Year $1.24 $1.43 $1.96 $2.34 Year $2.57 $2.74 $3.25 $3.71 $58.42 2-Sector Perform High $1.43 $1.94 $58.00 0.5% $65.00 13.7% $0.72 1.2% Capitalization Shares O/S (M) Total Value ($M) Float O/S (M) Float Value ($M) S&P Weight 263.2 15,375.9 72.8 4,251.5 0.06%
P/E 30.2x 40.7x 29.8x 24.9x P/CF 14.6x 21.3x 18.0x 15.7x
A Rising Potash Star with Lithium Upside

Fertilizers first. Sociedad Quimica y Minera de Chile (SQM) is the worlds largest potassium nitrate (NOP) producer (50% market share), a specialty potash used for high-value, chloride-sensitive crops. SQM also boasts 1.5 million tonnes of potash capacity, growing to 2 million tonnes by the end of 2012. Global leader. SQM is also the worlds leading producer of iodine (25% market share), as well as the largest producer of lithium (24% market share). Investor interest in lithium is soaring as lithium-ion batteries will power most hybrid, plug-in, and electric vehicles of tomorrow.
Unmatchable resource base. SQMs success stems from its rights to exploit northern Chiles highquality natural resources (i.e., caliche ore and salar brines). Caliche ore deposits are the only known source of natural nitrates and iodine in the world, while the Atacama Deserts salar brines offer SQM the ability to be among the worlds lowest-cost potash and lithium producers.
Target valuation. In one year from now, we expect SQM to trade at 17.5x 2012E EBITDA of $1.03 billion and 26x 2012E EPS of $2.34. In addition to relative valuation, we also apply a DCF approach at a 12.1% WACC to set our one-year target price of $58. We do not apply a replacement cost new calculation to SQM. Current valuation. SQM is currently trading at 18.2x NTM EBITDA and at 29.8x NTM EPS. Our $58 one-year target price implies a total rate of return of 0.5%.
Getting to the next level. We are focused on: (1) the realization of higher MOP, SOP, and SPN volumes, prices, and margins; (2) potash capacity expansion by 0.5 million tonnes; (3) the renewal of a potash supply agreement with PotashCorp that expires in 2012; and (4) increased adoption of lithiumbased energy and nitrate-based thermal energy storage applications.
We have initiated coverage on the ADRs of Sociedad Quimica y Minera de Chile (SQM) and rate the company 2-Sector Perform.
403
January 2011

Sociedad Quimica y Minera de Chile (SQM) offers investors exposure to low-cost, world-class chemical and fertilizer assets based in Chile. SQMs business is one-of-a-kind, with leading global market share positions in almost all of its business lines. The success of SQM is based on its rights to substantial and high-quality nitrate, iodine, potassium, and lithium reserves in northern Chile.
We believe SQM is a first-quartile, cash cost producer of potash.
SQM holds a dominant leadership position in almost all of its business lines. Specifically, the company boasts a 50%+ global market share of nitrates (#1), used in both its specialty fertilizer and industrial chemicals businesses; a 25% global market share of iodine and derivative production (#1); and a 24% share of the soaring global lithium market (#1). Additionally, the company recently expanded its potash (MOP) capacity to 1.5 million tonnes. Evidence of SQMs leadership strength is reflected in the companys ability to increase prices of iodine (up 13%) and industrial chemicals (up 3%) in 2009, while the rest of the world was reducing commodity prices due to the global economic recession. We believe SQM is a first-quartile cash cost potash producer, with a similar cash cost production profile to Israel Chemicals Dead Sea Works. Both companies use solar evaporation to process potash. In our view, SQM has multiple advantages over most of its peers, including: (1) a natural resource base that is nearly impossible to match; (2) global leadership positions in most of its businesses; (3) stronger margins than many of its peer producers due to its low-cost profile; (4) a solid distribution network that spans 100+ countries; (5) transportation and storage facilities that are within very close proximity to its production sites; (6) a sound financial position to continue its organic growth program, as well as allowing for acquisitions; and (7) a 32% equity ownership position held by PotashCorp, which enables the company to partner with the worlds largest fertilizer producer.
For fiscal 2011, we estimate sales, EBITDA, and fully diluted EPS of $2.1 billion, $883 million, and $1.96, respectively, generally in line with consensus estimates. In 2012, we are looking for sales of $2.4 billion, EBITDA of $1.03 billion, and EPS of $2.34. Our forecast 2012 EPS growth rate of 19.3% is due to an even mix of both volume and pricing improvements in fertilizers. We forecast SQM will declare a dividend of $0.98 per ADR in 2011 and $1.17 per ADR in 2012, each payable the following Q2.
INITIATING COVERAGE
We have initiated coverage on SQM with a 2-SP rating, and a $58 per ADR one-year target price.
We have initiated coverage on the ADRs of Sociedad Quimica y Minera de Chile with a 2-Sector Perform rating. Our one-year target price is $58 per ADR, which, when included with our forecast NTM dividend of $0.72 per ADR, represents a one-year rate of return of 0.5%. We value SQM using equally weighted 17.5x 2012E EBITDA, 26x 2012E EPS, and a DCF at a 12.1% WACC. SQM is currently trading in line with our target price. Accordingly, we do not expect material movement in the stock, unless we see a stronger-than-expected outlook for lithium, potash, and/or NOP. Our risk ranking for SQM is High. We believe this risk ranking is justified due to: (1) the highly cyclical nature of the fertilizer industry; (2) rising energy shortages in Argentina that could disrupt SQMs power and natural gas supplies at its operations in northern Chile; (3) potential changes to mining rights and environmental laws that could reduce the value of SQMs assets or increase its liabilities; and (4) the (very remote) possibility that the Chilean government re-nationalizes SQM.
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January 2011

Headquartered in Santiago, Chile, Sociedad Quimica y Minera de Chile (SQM) is a Chilean producer of chemicals and fertilizers. Specifically, SQM operates five business lines, as follows: (1) Specialty Plant Nutrition, which mostly focuses on chloride-free fertilizers; (2) Iodine & Derivatives; (3) Lithium & Derivatives; (4) Industrial Chemicals; and (5) Potassium Chloride & Potassium Sulphate. While SQMs history can be traced back to 1924, todays company was formed through a 1968 merger of three Chilean companies, as well as the Government of Chile. Following the 1971 nationalization of SQM and subsequent 1983 privatization of the company, SQM issued its first shares on international markets in 1993 through an ADR program. A second ADR share offering followed in 1995. Led by CEO Patricio Contesse, SQMs management team consists of seasoned industry experts and business professionals with extensive knowledge of both chemical and fertilizer markets. With the exception of SQMs General Counsel, almost all members of the companys senior management team are engineers (mostly industrial). Mr. Contesse has been at SQMs helm since 1990, but also served as CEO for two one-year stints (1981 and 1988). Insiders and related parties control (directly and/or indirectly) at least 64% of SQM. SQMs 263.2 million shares are split into Series A (142.8 million) and Series B (120.4 million) shares. Both share classes are equal with respect to voting rights and dividend distributions. The key difference between the two classes of shares is that Series A shareholders elect seven board members, while Series B shareholders elect only one board member. PotashCorp and SQMs Chairman, Julio Ponce, each own approximately 32% of the company, but Mr. Ponce has legal control of SQM.
SQMs dividend policy is to pay out 50% of net income.
PotashCorp and Mr. Ponce each own ~32% of SQM, but Mr. Ponce has legal control of SQM.
SQMs current dividend policy is to pay out 50% of its annual net income. According to Chilean law, a company must distribute mandatory cash dividends of at least 30% of its net income, unless otherwise decided by a unanimous shareholder vote. At the option of the company, the portion of the dividends that exceeds the mandatory cash amount may be paid in cash, shares of the company, or shares of publicly traded corporations owned by the company. Dividends paid by Chilean companies to foreign investors are subject to a 35% withholding tax, which can be reduced based on the receipt of certain tax credits. SQM reports in U.S. dollars, using a December 31 year-end. As at January 1, 2010, the company had adopted International Financial Reporting Standards (IFRS).
Exhibit 8.1: Sociedad Quimica y Minera de Chile Stock Price Performance
$55 $50 $45 Price $40 $35 $30 $25 Mar-09 4,000 3,500 Daily Volume (000s) 3,000 2,500 2,000 1,500 1,000 500 Jun-09 SQM (Volume)
Ticker: Last P rice: M arket Cap: 52 Wk H igh: 52 Wk Lo w: FD Shares O/S:
SQM $ 58.42 $ 15.4B $ 59.77 $ 30.98 263.2M
Sep-09 SQM (Price)
Dec-09
Jun-10
Sep-10
0 Dec-10
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January 2011
Corporate Profile
The success of SQMs businesses depends on the companys ability to exploit the rich natural resources located in the Tarapaca and Antofagasta regions; specifically, caliche ore, and the brines of Salar de Atacama.
Northern Chile holds the only known source of caliche ore.
Northern Chiles Atacama Desert hosts the worlds only known natural source of caliche ore, which consists mostly of nitrates and iodine. The Salar de Atacama hosts the worlds second largest salt flat, where ~27% of the planets lithium and world-scale potassium resources are found, as well as considerable sulphate and boron concentrations (Exhibit 8.2). In our view, the synergies between these two natural resources make SQMs business model nearly impossible to replicate.
Exhibit 8.2: SQM's One-of-a-Kind Natural Resources
Nitrates Iodine
Potassium Lithium Sulphate Boron
Source: SQM.
OPERATIONS & FACILITIES
Specialty Plant Nutrition SQM holds a 50% global market share of the NOP market.
About one-third of SQMs business stems from its Specialty Plant Nutrition segment, which focuses on the production of chloride-free potash fertilizers, such as potassium nitrate (NOP), and various NPK blends. SQMs current NOP capacity is 950,000 tonnes, which includes 260,000 tonnes of technical-grade NOP. This follows the mid-2010 commissioning of a 300,000 tonne NOP capacity expansion project. SQM holds a 50% share of the global agricultural NOP market.
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January 2011
Potassium Chloride (MOP)
Over the near term, we believe SQMs fastest-growing segment will be its commodity potash business, as new capacity comes online that is supported by a rebound in global fertilizer demand. SQMs current capacity is 1.5 million tonnes, following two capacity expansion programs over the past several years. Additionally, the company has budgeted to expand its MOP capacity to about 2 million tonnes by the end of 2012. Due to its ability to use solar evaporation, we believe SQM is a first-quartile cash-cost potash producer, similar to Israel Chemicals Dead Sea Works. Exhibit 8.3 shows how much more significant SQMs potash business should become to the company during our forecast period.
Exhibit 8.3: SC Forecast SQM Revenue Contribution by Business Segment
Segment Contribution (%) 100% 80% 60% 40% 20% 0% 2000 2002 SPN
Source: SQM; Scotia Capital estimates.
We believe SQMs fastest-growing business segment through 2012 will be commodity potash.
Forecast 2004 Iodine Lithium 2006 Industrial Chemicals 2008 Potash 2010 Other 2012
Lithium & Derivatives
Over the long term, we think SQMs position as the top lithium producer on the planet could ultimately serve shareholders best. Why? Electric, hybrid, and plug-in vehicles, such as GMs new Chevy Volt, use lithium-ion batteries, whose adoption rates could soar with rising oil prices and supportive government policies (Exhibit 8.4).
Exhibit 8.4: Emerging Markets for Lithium
With 40,000 tonnes of lithium carbonate capacity and a global market share of 24%, SQM is one of the lowest-cost producers of lithium worldwide.
Iodine & Derivatives
Almost all electric vehicles use lithium-ion batteries.
Source: General Motors.
SQM is the worlds largest producer of iodine and derivatives, with 11,000 tonnes of capacity and a 25% global market share. Iodine is used in a wide range of medical, pharmaceutical, agricultural, and industrial applications, including x-ray contrast media, disinfectants, and polarizing films for x-ray contrast media. We think iodine growth through 2014 will be moderate at about 3.5% per annum.
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January 2011
Exhibit 8.5: Emerging Markets for Nitrates
Industrial Chemicals
Industrial Chemicals plays a small but growing role for SQM, as margins are strong, usually in the 30% to 40% range. While some boric acid is produced, the majority of the business is focused on industrial- and technical-grade nitrates, used in the production of explosives, glass, and metal treatments. However, we believe the biggest opportunity for the segment is the increase in concentrated solar power, which relies on sodium nitrate as a medium for heat storage during night hours (Exhibit 8.5).
Source: Vada Energy.
Other Commodity Fertilizers
SQM also has an Other division, most of which imports commodity fertilizers (i.e., ammonia, urea, DAP, etc.), that are resold through its primary subsidiary, Soquimich Comercial (61% held by SQM, 39% publicly traded). Why? Eighty-five percent of Chiles agricultural fertilizers are imported. The majority of the remaining 15% is supplied by SQM.
FINANCIAL SNAPSHOT
SQMs sales have ranged between $1 billion and $1.8 billion over the past five years, with a consolidated gross margin range of 25% to 45%. Exhibit 8.6 shows the companys gross profit contribution by business segment over the past several years.
Exhibit 8.6: SQMs Gross Profit Contribution by Business Segment
$M $450 $400
386
SQMs total gross margin ranges between 25% and 45% annually.
$350 $300 $250 $200 $150 $100 $50 $0 07 08

SPN
Source: SQM; Scotia Capital.
230
96
81
92
111 77
94 57
105
110 16 41 48
09
07
08
09
07
08
09
07
08
09
07
08
09
Iodine & Derivates
Lithium & Derivatives
Industrial Chem icals
Potash
While SPN has historically contributed about one-third of SQMs gross profit, we think more robust MOP sales will play an increasingly greater role to its bottom line. SQM is well capitalized, with $0.6 billion of cash and a good mixture of bank debt and bonds, all backed by solid leverage ratios. SQM is currently rated Baa1/Stable by Moodys and BBB/Stable by Standard & Poors.
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January 2011
DISTRIBUTION
JV agreements with Yara and others help boost SQMs distribution network.
SQM operates in 100+ counties with 20 sales offices across the globe. The majority of its exports are delivered to its own and affiliate storage facilities, which enables the company to meet client purchase orders quickly. Similar to Agrium, SQM provides direct service and support to its end-users. Further strengthening the companys distribution network are key marketing agreements with Yara International and several other companies.
TRANSPORTATION & STORAGE
SQM owns and operates railway lines, as well as its own port and storage facilities. The Tocopilla Port Terminal is the main facility SQM uses for the storage and shipment of product. Tocopilla Port is located about 190 kilometres north of Antofagasta and 372 kilometres west of Salar de Atacama.
Exhibit 8.7: SQM Train Above Tocopilla Port Exhibit 8.8: SQM Train on the Nitrate Road
Source: Markus Worldwide.
Source: Markus Worldwide.
Storage facilities consist of a 55,000 tonne silo system and a 230,000 tonne open storage area. In 2008, SQM invested $1 million into a new bagging system that increased its packaging capacity by 200% to 300,000 tonnes.
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January 2011
A BRIEF HISTORY OF SQM
Exhibit 8.9: A Brief History of SQM

The Guggenheim family acquires the Coya Norte land in the El Toco sector of northern Chile, in order to build a facility for caliche operations. Maria Elena is constructed and begins operations in 1926 using the Guggenheim method, w hich is still used in today's production process. Construction of Pedro de Validivia caliche facility begins. The facility has greater a capacity than Maria Elena, and starts operations in 1931. A crystallizing plant is built in Coya Sur in order to use the nitrate precipitation in the solar evaporation ponds. SQM is created through the merger of: (1) Corporacion de Ventas de Salitre y Yodo; (2) Compania Salitrera Anglo Lautaro; (3) Compania Victoria; and (4) the Government of Chile. CORFO (Chilean Economic Development Agency) takes 100% control of the ow nership of SQM. SQM's five-year privatization process starts and private pension funds acquire ow nership stakes. The heap leaching process is applied in the extraction of nitrates and iodine. The potassium nitrate facility at Coya Sur begins production. The technical-grade potassium nitrate facility begins operations. SQM issues its first offering of shares on international markets through an ADR program. SQM issues a second share offering, again through an ADR program. Production of potassium chloride (MOP) begins in Salar de Atacama. SQM begins producing lithium carbonate using lithium brines. Construction of a new potassium nitrate facility is completed. SQM increases its potassium chloride capacity. A commercial distribution agreement is signed w ith Yara International, allow ing SQM to achieve cost synergies in its Specialty Plant Nutrition business. SQM purchases a Kemira Emirates Fertilizer Company (KEFCO) plant. The lithium hydroxide facility in the Salar del Carmen begins operations. SQM acquires the iodine business of DSM in Chile. Production starts at a new prilling and granulating facility at Coya Sur. Work begins on the expansion of the lithium carbonate plant. SQM signs a JV w ith Migao to develop a 40,000 mt/y NOP plant. Lithium carbonate capacity expands by 10,000 mt to 40,000 mt. Work continues on NOP and MOP expansion projects. SQM signs JV agreements w ith Coromandel (India), Qingdao Star (China) and Roullier (France).
1924 1930 1951 1968 1971 1983 1985 1986 1993 1995 1997 2000 2001 2005 2006 2007 2008 2009
410
411
12,13 19 11 21 10 15,16 7,8 24
Corporate HQ 1 Santiago Lithium & Derivatives 5 Salar de Atacama 20 Salar del Carmen 21 Houston 12 13 14 15 16
Exhibit 8.10: Map of SQMs Operating Activities
14 22,23
9 18
SPN (cont'd) Netherlands Belgium Turkey United Arab Emirates Dubai
1-5 17,20
Industrial Chemicals 3 Pedro de Valdivia 4 Coya Sur 5 Salar de Atacama 2 3 4 17 1 18 19 Iodine & Derivatives Maria Elena Pedro de Valdivia Coya Sur Nueva Victoria Santiago Atlanta France JVs 22 Migao 23 Qingdao Star 24 Coromandel
2 3 4 5 1 6 7 8 9 10 11
SPN Maria Elena Pedro de Valdivia Coya Sur Salar de Atacama Santiago Pisco Manzanillo Guadalajara California Mississippi Delaware
January 2011
January 2011
What We Like About SQM

NATURAL RESOURCES ARE IMPOSSIBLE TO MATCH
SQMs operations mostly depend on the companys ability to exploit the rich natural resources located in Chiles northern regions; specifically, caliche ore and the brines of Salar de Atacama. Accordingly, less than 25% of SQMs COGS is based on external raw materials and energy. Northern Chiles Atacama Desert hosts the worlds only known natural source of caliche ore, which consists mostly of nitrates and iodine. SQMs rights to the caliche ore cover over 75% of Chiles current economic mineral deposits. If SQM were to keep producing nitrates and iodine at full capacity, the companys proven and probable reserves would provide about 40 years of supply. The Salar de Atacama hosts the worlds second-largest salt flat, where 27% of the planets lithium and world-scale potassium resources are found, as well as considerable sulphate and boron concentrations. We estimate that SQM has approximately 50 years of lithium (proven and probable) reserves remaining.
GLOBAL LEADER IN MOST BUSINESSES Exhibit 8.11: SQM Is the Global Leader in Most of Its Businesses
Lithium Nitrates Agricultural NOP Iodine
SQM has 40+ years of nitrate and iodine supply, and 50+ years of lithium supply.
SQM 24% Other 47% Other 76% SQM 53% Other 50% SQM 50% Other 75%
SQM 25%
BEST EXPOSURE TO LITHIUM INDUSTRY
SQMs is the worlds leading lithium producer with a global market share of 24% overall (and 31% for lithium chemicals). While there are numerous applications for lithium products, investors continue to focus on the superb outlook of lithium-based battery applications for electric and hybrid vehicles. Lithium-ion batteries are desirable because they are lightweight, have a slow loss of charge when they are not in use, and have over double the energy density of nickel-based batteries. At recent auto shows, lithium-ion battery-powered cars continue to lead discussions/hype of the next-generation models of electric cars. Examples include GMs Chevy Volt, BMWs 750i luxury sedan (Japan only) and its MINI Es, a new line of plug-in hybrid Toyota Priuses, the Ford Escape, Jeep Renegade, Chryslers EcoVoyager, the Tesla Roadster, etc. Additionally, the quality of its lithium resources in the Salar de Atacama is unmatched anywhere else in the world. Why? SQM is currently extracting lithium from brines boasting 2,700 ppm, compared to Chinas Zhabuye brines at ~1,000 ppm, which have the second-highest concentration of lithium that we are aware of (Exhibit 8.12).
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January 2011
Exhibit 8.12: The Quality of SQMs Lithium Resources Is Unmatched Anywhere Else on the Planet
Lithium Concentration (ppm)
The quality of SQMs lithium reserves is unmatched anywhere else on the planet.
3,000 2,500 2,000 1,500 1,000 500 0 Atacama Zhabuye Hombre Muerto Olaroz DXC Uyuni Rincon Clayton Valley Taijinaier Great Salt Lake Dead Sea 2,700 ppm = Avg. concentration of current brines extracted
2,200 ppm = Avg. concentration of deposits currently operated 1,500 ppm = Avg. concentration of Salar de Atacam a
JV WITH MIGAO IS THE BEST ENTRANCE STRATEGY INTO CHINA
SQM and Migao (1-Sector Outperform, C$8.50 per share one-year target) formed a JV in mid-2008 to construct a 40,000 tonne potassium nitrate facility to be located in Sichuan Province, China. As a by-product, about 22,400 tonnes/year of ammonium chloride will also be produced. Commissioning of the $20 million plant is underway (on time and on budget). SQMs net production would be 20,000 tonnes/year of NOP, and 11,200 tonnes/year of ammonium chloride. We expect SQM to contribute ~$10 million to the JV. In our view, SQMs strategy to form a JV with Migao is likely the best way for the company to deepen its penetration into one of the worlds largest fertilizer markets. Why? Without trustworthy people on the ground that understand Chinas unique culture, as well as significant government contacts to help expedite permitting approvals, we think it is extremely challenging for a foreign company to set up shop on its own. Additionally, we believe it is not impossible that an acquisition of a local Chinese manufacturer would lead to employees leaving with company trade secrets.
STRONG MARGINS SHOULD BE MAINTAINED THROUGH AT LEAST 2012 Exhibit 8.13: SC Forecast Gross Margin by Business Unit
100% Forecast 80% 60% 40% 20% 0% 2006 2007 2008 2009 2010 2011 2012
Gross Margins (%)
SPN
Iodine
Lithium
MOP/SOP
POTASH EXPANSION PROVIDES SIGNIFICANT UPSIDE
SQM uses solar evaporation for potash production, similar to IPI and ICL.
As one of the lowest-cost potash producers on the planet, we think SQMs recent potash capacity expansion investments will provide shareholders with strong rates of return. SQMs current MOP capacity is 1.5 million tonnes, and the company has budgeted to expand this to about 2 million tonnes by the end of 2012, and possibly to 2.2 million tonnes by 2014. Potash expansion environmental approvals were received in mid-December 2010.
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January 2011
Valuation
CHILEAN PENSION FUND REFORM
In our view, the Chilean pension system has been undergoing gradual liberalization over the past two decades. It wasnt until 1992 that Chilean pension funds were first allowed to invest abroad. The first foreign investment limit was set at 3% in 1993, and has risen steadily since then. Accordingly, a large portion of Chilean pension assets under management (AUM) has historically been trapped in the domestic Chilean equity market, which has resulted in premium valuations for many Chilean equities like SQM. On November 4, the Central Bank of Chile announced an increase to the foreign investment limits for Chilean pension funds. While the specific weightings of each of the five funds in the system vary, the average existing foreign investment limit of 60% of AUM will increase gradually to 80% by September 2011. Several industry observers point out that this move may not put pressure on Chilean equities over the next year, as foreign investment (as at September 2010) had only reached 45.6% out of the 60% limit. The difference of 14.4% equates to $19.9 billion of investable capital. While its true that it takes time for pension funds to switch in and out of equities, and Chilean pension funds are often below the foreign investment limit to allow for quarterly portfolio value fluctuations, we generally agree that there will likely not be a substantial impact to Chilean equity valuations over the next year. Fund C, with about $59.5 billion of AUM (out of a total $138.3 billion in the system), is the most relevant to watch for with respect to Chilean equities. Currently, the fund has 38.3% of its AUM invested in foreign equities out of a total limit of 60% (and rising to 75% over the next year).
A TAKEOVER VALUATION PREMIUM IS UNWARRANTED
SQM Chairman Julio Ponce owns (directly and through partnership agreements) 32% of SQMs outstanding shares, or the maximum allowable under the companys corporate by-laws. Additionally, PotashCorp also owns 32% of SQM. SQMs Board of Directors is composed of eight members. Four board members are ultimately elected by Mr. Ponce through a partnership agreement between Pampa Calichera S.A. (his holding company) and Kowa, a Japanese investment company. Three board members are elected by PotashCorp, with the eighth and final board member elected by Series B shareholders (i.e., ADR holders). In the event that the board reaches a tie in voting, the vote is recast, with the Series B elected board member removed from the vote. Accordingly, in a split board decision, Mr. Ponces four elected board members would trump PotashCorps three elected board members. We do not believe Mr. Ponce is currently interested in selling his SQM stake. If/when an acquirer wants to take control of SQM, the by-laws must first be changed to allow for an investor to own more than 32% of SQMs outstanding shares. In order for this to occur, 75% of shareholders must vote in favour of the by-law change. As PotashCorp and Mr. Ponce each own more than 25% of the companys share, both parties have blocking positions for an SQM acquisition. We do not view any SQM takeover scenario as likely.
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January 2011
VALUATION OVERVIEW
We have initiated coverage on the ADRs of SQM with a 2-Sector Perform rating and a one-year target price of $58 per ADR. When coupled with our forecast NTM dividend payment of 72 per ADR, we expect investors to earn a one-year pre-tax total return of 0.5%. Our one-year SQM target price of $58 per ADR is derived from three different valuation methodologies, as follows: (1) a discounted cash flow approach; (2) an enterprise value to forward EBITDA multiple; and (3) a price to forward earnings multiple. We weight each of the three approaches equally. Our valuation work is extremely sensitive to various price, volume, and other assumptions used within our financial forecast (Exhibits 8.14 and 8.15). For full details on our earnings sensitivities, please refer to pages 462-463. We summarize our valuation work below.
Exhibit 8.14: SQM Key Assumptions
2011E Specialty Plant Nutrition Volume (000 mt) Price ($/mt) MOP/SOP Volume (000 mt) Price ($/mt) Lithium Volume (000 mt) Price ($/mt) Iodine Volume (000 mt) Price ($/mt) 820 834 2012E 885 826
Exhibit 8.15: SQM Summary Sensitivities

2011E Sensitivity Potash ($/mt) Potash Margin (%) SPN Margin (%) Iodine Margin (%) Lithium Margin (%) Industrial Chemicals Margin (%) SPN Sales (M mt) K Sales (M mt) Chilean Peso (US$)
$25 3% 3% 3% 3% 3% 100 100 $30
1,700 471
1,850 517
33 5,263
36 5,500
9,000 28,000
9,500 28,000
EPS +3 +4 +6 +3 +2 +2 +6 +8 +3
Our DCF approach yields a one-year price value of $48 per ADR. We apply a WACC of 12.1% and a long-term growth rate of 3%. Exhibit 8.16 highlights the build-up of our WACC calculation. Our SQM terminal growth rate of 3% is 0.5 percentage points above most fertilizer stocks that we cover. In our minds, SQMs dominant 24% share of the lithium market, coupled with what we expect to be surging demand for lithium over the next decade, justifies a 50 bp terminal growth rate premium over its peers. Additionally, SQM boasts pricing control over the global NOP and iodine markets.
Exhibit 8.16: SQM WACC
Exhibit 8.17: SQM Summary DCF

($M) EBITDA Less: Taxes Less: Change in NWC Less: CAPEX Free Cash Flow PV of Free Cash Flow 1 Net Present Value Less: Net Debt Equity Value Equity Value ($/ADR) Equity Value, Rounded ($/ADR) Last Price, Rounded Implied ROR 12,793 166 12,627 $47.98 $48 $58 -18% 2011E 883 130 -269 370 653 583 2 2012E 1,031 154 -212 310 780 620 3 2013E 1,157 176 -79 294 766 544 4 2014E 1,181 181 -93 100 994 629 5
WACC 12.1% $46 $47 $48 $49 $50
2015E 1,164 181 -9 100 892 504 6
Terminal 1,149 181 -8 100 876 9,913
$47.98 2.50% 2.75% 3.00% 3.25% 3.50%
14.1% $39 $40 $41 $41 $42
13.1% $42 $43 $44 $45 $46
11.1% $50 $52 $53 $54 $56
10.1% $56 $57 $59 $61 $63
415
Terminal
January 2011
On an EV/NTM EBITDA basis, SQM is currently trading at 18.2x our 2011E EBITDA of $883 million. In our minds, SQM should trade in the 17.5x NTM EBITDA area, which implies a $66 price value in one year from now. Exhibit 8.18 summarizes our justification for a 17.5x EV/NTM EBITDA multiple. Specifically, we made the following adjustments to our general fertilizer EV/EBITDA multiples:

We raised our potash EV/NTM EBITDA multiple to 18x to reflect captive Chilean pension fund money.
We apply an EV/NTM EBITDA multiple of 17x to SQMs non-fertilizer businesses, to reflect: (i) superb growth expected in lithium; (ii) the worlds largest lithium, iodine, and potassium nitrate producer (with market shares ranging 25% to 30%); and of course, (iii) captive Chilean pension fund money.
Exhibit 8.18: SQM EV/NTM EBITDA Buildup
[A]

[B]
SQM EV/EBITDA
[C=A+B]
2012E EBITDA
[D, $M]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
SQM Price Value Calculation

($M)
Nitrogen Phosphate Potash Retail Lithium/ Iodine/Other

Notes
8.0x 9.0x 11.0x 7.0x -
0.0x 0.0x 7.0x 0.0x [1,2] [1]
8.0x 9.0x 18.0x 7.0x 17.0x
0 0 591 0 440 1,031
0% 0% 57% 0% 43% 100%
0.0x 0.0x 10.3x 0.0x 7.3x 17.6x
2012E EBITDA SQM EV/EBITDA Multiple* Implied EV Cash Debt Equity Value
1,031 17.5x 18,046 713 -1,292 17,467
FD Shares O/S (M) Implied Price Value

263.2 $66.36
1. Premium for high Chilean pension fund domestic equity investment requirements. 2. Strong grow th expected in lithium; largest lithium and iodine producer in the w orld (25% to 30% market share each).
We believe it is nearly impossible to accurately gauge the replacement cost new (RCN) for SQM. Why? SQMs resources (i.e., caliche ore and salar brines), assets, and processes are so individualized that we do not think they can be directly replaced anywhere else on the planet. Additionally, most of SQMs business segments rely on multiple resource processes, such that the assets cannot be valued (nor sold) as stand-alone entities. Accordingly, we have removed a replacement cost new calculation from our SQM valuation methodologies.
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January 2011
On a NTM P/E basis, SQM is currently trading at 29.8x our 2011 EPS estimate of $1.96. In our minds, SQMs appropriate NTM P/E multiple should be closer to 26x at this point of the fertilizer cycle. Accordingly, on a NTM P/E basis only, we believe that SQM should reflect a price value of about $61 per share in one year from now. Exhibit 8.20 highlights our segmented NTM P/E breakdown. For SQM specifically, we made the following adjustments to our general NTM P/E multiples:
We increased our potash NTM P/E multiple to 26x, to reflect captive Chilean pension fund money.
We apply a forward P/E multiple of 26.5x, to reflect: (i) strong growth expected in lithium; (ii) the worlds largest lithium, iodine, and potassium nitrate producer (with market shares ranging between 25% and 30%); and, most importantly, (iii) captive Chilean pension fund money. Exhibit 8.20: SQM NTM P/E Buildup
[A]

[B]
SQM P/E Ratio

[C=A+B]
2012E EPS
[D, $/sh]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
SQM Price Value Calculation

($/sh)
Nitrogen Phosphate Potash Retail Lithium/ Iodine/Othe

Notes
12.5x 13.5x 16.0x 11.0x -
0.0x 0.0x 10.0x 0.0x [1,2] [1]
12.5x 13.5x 26.0x 11.0x 26.5x
$0.00 $0.00 $1.34 $0.00 $1.00 $2.34
0% 0% 57% 0% 43% 100%
0.0x 0.0x
2012E EPS SQM P/E Multiple* Implied Price Value
2.34 26.0x $60.93
14.9x 0.0x 11.3x 26.2x
1. Premium for high Chilean pension fund domestic equity investment requirements. 2. Strong grow th expected in lithium; largest lithium and iodine producer in the w orld (25% to 30% market share each).
Exhibit 8.21 shows SQMs NTM P/E trading range, which has averaged 20x over the past several years. On a NTM P/E basis, SQM has historically traded well above its peers due to continuous inflow of captive Chilean pension fund money. We believe SQM will continue to trade at a premium to its peers until there is further pension fund reform in Chile.
Exhibit 8.21: SQM NTM P/E Chart
35x NTM P/E Multiples 30x 25x 20x 15x 10x 5x 0x Dec-07 Jun-08 Dec-08 SQM Jun-09 SQM Average Dec-09 Group Average Jun-10 Dec-10 Average NTM P/E = 20x
417
January 2011
TARGET PRICE & RATING
Exhibit 8.22: SQM Valuation Summary

Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Metric 26.0x 17.5x 12.1% Value $60.93 $66.36 $47.98 Weight 33% 33% 33% Contribution $20.11 $21.90 $15.83 $57.84 $58.00
We have set our one-year SQM target price at $58 per ADR, which we derived by equally weighting our three valuation methodologies (Exhibit 8.22). Given our forecast SQM total return of 0.5%, coupled with our average total return of 3.2% for the group (Exhibit 8.23), we rate SQM 2-Sector Perform.
SQM Target Price

20% 15.7% 7.6% 3.9% 0.5% 8.8% 10.0%
15% 10% 5% 0% -5% -10% -15%
Top Pick
3-SU
3-SU
-9.2% YAR
2-SP
2-SP
1-SO
1-SO
1-SO
1-SO
-11.5% IPI
SQM
CF
MOS
POT
K+S
AGU
418

Nam e
Ticker
419
C$7.60 27.5% 1-SO 61 C$8.50 10.0% 9.3% 1-SO 1-SO JOD 45.50 HKD 5.57 C$5.96 A$3.96 ILs 1,732 JOD 17.25 56.36 C$7.78 RMB 66.24 $900.00 HKD 4.02 $58.42 RUB 219 NOK 338 $58 NOK 300 1.3% 24.3% -9.2% 3-SU 0.5% 2-SP 9.6% 21.3% 0.5x 83.3 1,771 61.4 1,629 1,269 75.0 191.4 52.2 767.6 7.8 7,021 263.2 2,124 288.8 3,791 25,678 366 6,450 77,459 1,294 10,787 406 50,843 7,043 28,224 15,376 465,815 97,481 3,699 21,383 339 7,519 22,921 1,232 11,658 384 51,720 31,462 16,117 473,760 109,065 1.5% 1.8% 2.2% 6.5% 0.0% 0.7% 0.6% 0.9% 1.2% 0.8% 1.9% 1.7% 44.3% 32.8% 30.9% 68.8% 0.0% 45.0% 25.2% 16.2% 50.0% 0.0% 21.0% 30.4% 15.0% 7.6% 10.2% 6.4% 13.2% 16.5% 2.2% 11.1% 14.0% 9.7% -5.2% 11.3% 14.5% 5.3% 9.4% 19.4% 9.9% 23.0% 11.8% 29.5% 20.9% 5.1% 14.3% 40.8% 22.4% -11.1% 22.3% 23.2% 13.0% 17.5% 0.1x 0.0x 0.0x 0.3x 0.5x 0.0x 0.6x 0.2x 0.2x 1.0x 0.7x 0.9x 0.3x 0.6x 0.4x 0.1x 0.0x 0.0x 0.2x 0.3x 0.0x 0.4x 0.2x 0.2x 0.5x 0.4x 0.5x 0.2x 0.4x 0.2x 0.3x -0.5x -1.0x -1.3x 1.5x 0.7x -1.5x 1.6x -0.1x -0.1x 2.1x 1.3x 0.5x 4.4x 0.6x 0.6x Margins Y/E Gross (%) 20.6% 32.2% 36.8% 40.5% 25.1% 25.8% 30.1% 57.3% 29.7% 14.8% 40.3% 35.9% 34.4% 23.3% 61.4% 74.4% -2.1% 36.2% 73.7% 40.0% 36.7% 28.6% 23.1% 27.2x 48.0% 34.3% 14.4% 24.1% 27.1% 24.9% 12.9% 18.5% 53.7% 62.5% -8.1% 41.4% 48.4% 6.1% 29.2% 40.2% 21.7% 12.0% 19.3% 22.6% 22.1% 8.0% 16.9% 49.6% 54.2% -9.2% 30.6% 39.0% 2.1% 23.5% 13.8x 27.4x 16.2x 20.4x 10.6x 17.4x 24.4x 12.3x 32.1x 19.4x 5.8% 2.8% 0.5% 3.6% 5.1% 4.9% 5.5% -13.3% 1.0% 4.1% 2.2% -3.2% 10.1% 2.3% 2.7% 5.2x 2.2x 1.3x 1.8x 8.7x 2.7x 4.4x 1.4x 13.4x 4.4x 1.9x 9.6x 2.9x 4.6x 4.7x 11.0% 29.9% 32.6% 36.6% 25.4% 28.3% 27.3% 8.3% 26.1% 28.1% 30.8% 18.8% 20.5% 22.1% 24.6x 10.5x 24.8x 86.7x 33.9x 53.1x 38.9x 11.2% 10.1% 1.1% -0.9% 2.2% -2.6% 3.5% 2.8x 2.5x 10.3x 3.8x 3.8x 5.9x 4.8x 11.8x 13.6x 11.6x 33.2x 16.5x 22.1x 18.1x 18.3x 10.6x 10.7x 10.7x 15.5x 10.8x 13.1x 7.6x 12.2x 21.9x 13.1x 13.1x 14.9x EBITDA (%) Operating (%) P/CF (x) FCF Yield (%) P/BV (x) 2009A (x) Metrics Enterprise Value to EBITDA 2010E (x) 11.0x 10.3x 11.6x 28.9x 19.8x 19.2x 16.8x 16.2x 8.3x 11.5x 8.5x 14.3x 9.4x 11.5x 7.3x 17.8x 10.0x 23.3x 18.7x 7.3x 12.6x 13.9x 2011E (x) 7.8x 6.6x 9.5x 14.0x 11.4x 12.6x 10.3x 12.2x 6.4x 8.3x 7.9x 11.4x 7.4x 9.7x 5.9x 14.2x 8.2x 13.7x 18.2x 14.3x 8.5x 10.4x 10.4x 2012E (x) 8.0x 7.7x 8.6x 11.8x 9.7x 11.4x 9.5x 8.8x 5.1x 7.4x 7.3x 10.1x 15.5x 8.5x 5.0x 12.0x 7.4x 11.3x 15.6x 11.7x 8.2x 9.6x 9.6x 2009A (x) 24.7x 17.6x 19.5x 81.1x 32.1x 29.7x 34.1x 28.3x 25.4x 14.0x 15.6x 22.3x 13.9x 31.8x 11.0x 38.1x 0.7x 35.3x 11.3x 20.6x 25.1x Price to Earnings 2010E (x) 19.7x 21.2x 18.8x 67.3x 41.2x 25.1x 32.2x 21.8x 20.3x 15.4x 12.7x 20.6x 10.5x 25.5x 11.5x 33.6x 0.5x 28.7x 40.7x 26.2x 11.2x 20.0x 23.6x 2011E (x) 12.6x 10.6x 15.4x 27.0x 18.7x 16.7x 16.8x 17.7x 14.5x 11.1x 12.1x 15.4x 8.9x 15.9x 9.2x 24.4x 0.4x 18.3x 29.8x 19.9x 12.4x 15.0x 15.6x 12/31 12/31 12/31 12/31 5/31 12/31 12/31 12/31 6/30 9/30 12/31 12/31 12/31 3/31 12/31 12/31 12/31 12/31 12/31 12/31
$91.75 $135.15 $89.27 $37.29 $76.36 $154.83
158.0 71.9 32.8 75.1 446.9 305.3
14,497 9,719 2,928 2,801 34,125 47,269
15,517 11,658 3,347 11,658 33,028 49,538
0.1% 0.3% 2.0% 0.3% 0.3% 0.6%
2.4% 6.3% 28.8% 10.8% 6.5% 10.9%
3.7% 15.0% 17.9% 7.5% 6.5% 8.5% 9.9%
8.4% 23.8% 114.0% 8.1% 9.6% 17.8% 30.3%
0.4x 0.0x 2.2x 0.2x 0.6x 0.7x
0.3x 0.0x 0.7x 0.1x 0.4x 0.3x
0.8x -1.1x 1.5x -0.7x 3.3x 0.7x
Peer Group Average
Nam e
Ticker
Peer Group Average
January 2011
January 2011
Exhibit 8.25: SQM Tear Sheet

SQM.N (ADR) 1-Year Target: 2-Year Target: 1-Year Return: 2-Year Return: NTM Dividend Rating: Risk: $58 $65 0.5% 13.7% $0.72 2-SP High Last Price: FY End: Market Cap: EV: Avg. Volume: FD ADRs O/S: Float: $58.42 Dec. 31 $15.4B $16.1B 0.6M 263.2M 27.7%
Valuation: 17.5x 2012E EBITDA, 26x 2012E EPS, DCF @ 12.1%
Ownership Insider Ownership: Institutional Ownership: Target Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Segmented GM SPN Iodine & Derivatives Lithium & Derivatives MOP (& SOP 2010+) Industrial Chemicals EPS Estimates Q1 Q2 Q3 Q4 Total Consensus* 2009 35% 40% 48% 38% 41% 2009 $0.33a $0.32a $0.31a $0.29a $1.24a Multiple 26.0x 17.5x 12.1% 2010E 30% 43% 43% 34% 46% 2010E $0.29a $0.40a $0.36a $0.38 $1.43 $1.38
~64.0% 33.7% Value Weight $60.93 33% $66.36 33% $47.98 33% 2011E 33% 45% 42% 42% 45% 2011E $0.48 $0.46 $0.49 $0.53 $1.96 $1.91 2012E 33% 44% 42% 44% 43% 2012E $0.58 $0.55 $0.58 $0.64 $2.34 $2.38 EPS +3 +4 +6 +3 +2 +2 +6 +8 +3 2012E 0.2x 0.26x Baa1 2014E 1,181 181 -93 100 994
Financial EV/EBITDA P/E P/FCF P/BV Dividend Yield ROE ROA Gross Margin EBITDA Margin EBITDA Growth Income Statement Sales COGS Gross Profit Potash Iodine & Derivatives Lithium & Derivatives Industrial Chemicals EBITDA Net Income EPS (FD) Balance Sheet Cash & Equivalents PP&E Total Assets Short-Term Debt Long-Term Debt Total Liabilities Shareholders' Equity Cash Flow Statement Operating (post-WC) Investing Financing Cash
* Bloomberg.
2009 27.2x 47.0x 33.9x 10.2x 1.2% 22% 10% 36% 41% -20% 2009 1,437 764 521 339 76 57 48 594 327 $1.24 2009 545 1,324 3,203 251 1,035 1,145 1,513 2009 377 -373 202 232
2010E 23.3x 40.7x 32.2x 8.5x 1.2% 21% 11% 35% 39% 17% 2010E 1,761 991 612 402 102 65 43 693 377 $1.43 2010E 713 1,370 3,553 261 1,031 1,743 1,811 2010E 575 -247 -143 182
2011E 18.2x 29.8x 20.1x 6.8x 1.2% 23% 13% 38% 43% 27% 2011E 2,060 1,073 785 540 113 73 59 883 515 $1.96 2011E 604 1,539 3,931 312 843 1,654 2,277 2011E 587 -370 -325 -109
2012E 15.6x 24.9x 19.7x 5.5x 1.2% 22% 14% 39% 43% 17% 2012E 2,401 1,249 931 665 118 84 64 1,031 617 $2.34 2012E 613 1,629 4,280 216 749 1,504 2,776 2012E 765 -310 -446 9
2011E Sensitivity Potash ($/mt) Potash Margin (%) SPN Margin (%) Iodine Margin (%) Lithium Margin (%) Industrial Chemicals Margin (%) SPN Sales (M mt) K Sales (M mt) Chilean Peso (US$) Credit Metrics Net Debt/EBITDA Debt/Total Capital Standard & Poor's: Free Cash Flow EBITDA Less: Taxes Less: NWC Less: CAPEX Free Cash Flow 2009 1.2x 0.46x BBB 2011E 883 130 -269 370 653 2010E 1.2x 0.42x
$25 3% 3% 3% 3% 3% 100 100 $30 2011E 1.2x 0.34x Moody's: 2013E 1,157 176 -79 294 766
2012E 1,031 154 -212 310 780
420
January 2011
One-Of-A-Kind Natural Resource Base

Exhibit 8.26: SQMs Production Region
SQMs products are mostly derived from mineral deposits found in northern Chile, specifically in the Tarapaca and Antofagasta regions, where the company mines and processes caliche ore and brine deposits (Exhibit 8.26). Caliche ore in northern Chile contains the largest known nitrate and iodine deposits on the planet, and is the worlds only commercially exploited source of natural nitrates. The brine deposits of the Salar de Atacama, a saltencrusted depression within the Atacama Desert in northern Chile, contain high concentrations of potassium and lithium, as well as significant concentrations of both sulphate and boron. SQM is highly experienced in mining caliche ore in northern Chile, having done so successfully since 1968. Additionally, SQM has been exploiting salar brines since the mid-1990s.
SQM has been mining caliche ore since 1968.
Source: SQM.
CALICHE ORE
What Is It?
Caliche ore is a mineral that contains high nitrate and iodine concentrations (6% to 9% and 300 ppm to 600 ppm, respectively). The ore is found in 1-4 metre thick layers, about 0-2 metres under the deserts surface. Caliche ore is the principal source of natural iodine and nitrate in the world. Due to its shallowness, the extraction of caliche ore is both easy and cost-effective. Explosives are used to give SQM access to the ore, where the minerals are then processed into final products (Exhibit 8.27).
Exhibit 8.27: SQMs Caliche Ore Process
Extraction of caliche ore is highly costeffective, as it is located 0-2 metres below ground.
Source: SQM.
421
January 2011
Concessions
SQM holds caliche ore exploitation rights representing almost 0.6 million hectares, with another 1.7 million hectares applied for. Additionally, the company possesses exploration rights to mineral resources for 0.02 million hectares, with another 0.25 million hectares applied for. To put this in perspective, SQMs existing rights to caliche ore cover over 75% of Chiles current economic mineral deposits. In 2008 and 2009, SQM made payments of $9.3 million and $7.7 million to the Chilean government for its exploration and exploitation concessions, respectively. Exhibit 8.28 tables SQMs caliche ore concessions.
Exhibit 8.28: SQMs Caliche Concessions
SQMs exploration rights cover 75%+ of all of Chiles mineral deposits.
Caliche Concessions Pedro de Valdivia Maria Elena Pampa Blanca Nueva Victoria Other caliche areas
Exploitation Number Hectares 584 615 464 342 7,777 9,782 148,802 182,804 137,112 89,157 1,720,000 2,277,875
Exploration Number Hectares 1 25 1 18 733 778 300 4,900 200 11,300 253,300 270,000
Reserves
If SQM were to keep producing iodine and sodium nitrates at full capacity, the companys proven and probable reserves would provide about 40 years of supply. Perhaps even more impressive is that SQMs proven and probable reserves are the result of exploration of only 16% of its total caliche-related mining properties of the company. Exhibit 8.29 highlights SQMs proven and probable caliche ore reserves, along with the associated iodine and nitrate grades.
Exhibit 8.29: SQMs Caliche Reserves and Grades
Caliche Ore
Proven
(M mt)
Reserves Probable
(M mt)
Proven Grades Nitrate Iodine

(%) (ppm)
Pedro de Valdivia Maria Elena Pampa Blanca Nueva Victoria

166.6 137.9 71.7 305.0
85.2 97.8 447.8 102.4
7.1% 7.3% 5.6% 5.9%
368 412 544 458
Exploration Program
SQM maintains an ongoing program of exploration and resource evaluation on the land surrounding its four mines, and at other sites. Each year, SQM usually conducts a reconnaissance program on 30,000 to 40,000 hectares, general exploration on up to 5,000 hectares, and in-depth sampling of up to 3,000 hectares.
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January 2011
Pedro de Valdivia
The Pedro de Valdivia mine is located 170 kilometres northeast of Antofagasta, and has been in operation for over 78 years. Between 10 million and 12 million tonnes of ore is mined per year. About 25% of SQMs iodine is produced at Pedro de Valdivia, and approximately half of its crystallized nitrates are produced there as well. As can be seen in Exhibits 8.30 and 8.31, the mines production, and more importantly, its grades, had been declining until 2008, at which point both rebounded.
Exhibit 8.30: Pedro de Valdivias Iodine Metrics
2.7 410 400 2.5 2.3 2.1 1.9 1.7 1.5 2001 2002 2003 2004 2005 2006 2007 2008 2009
Exhibit 8.31: Pedro de Valdivias Nitrate Metrics

500 8.00%
Nitrate Production (000 mt)
Iodine Production (000 mt)
Iodine Grade (ppm)
390 380 370 360 350 340 330 320 310
475 450
7.75%
7.50% 425 7.25% 400 375 350 2001 2002 2003 2004 2005 2006 2007 2008 2009 7.00%
6.75%
Production (LHS)
Grade (RHS)
Production (LHS)
Grade (RHS)
Maria Elena
The Maria Elena mine is located 220 kilometres northeast of Antofagasta, and has operated for about 83 years, although the average age of the mining facilities is less than eight years. Between 10% and 15% of SQMs iodine production normally comes from Maria Elena, although production was suspended in early 2010 due to a drop in iodine and nitrate demand. As can be seen in Exhibits 8.32 and 8.33, the mines nitrate production, and more importantly, its grades, have also been declining steadily since 2004.
Exhibit 8.32: Maria Elenas Iodine Metrics Exhibit 8.33: Maria Elenas Nitrate Metrics
600
525 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% 2001 2002 2003 2004 2005 2006 2007 2008 2009
Nitrate Production (000 mt)
1.0 0.8 0.6 0.4 0.2 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009
400 300 200 100 0
450 425 400 375 350 325
Production (LHS)
Grade (RHS)
Production (LHS)
Grade (RHS)
Exhibit 8.34: Pampa Blancas Iodine Metrics

1.6 650 1.5
Pampa Blanca
1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 2001 2002 2003 2004 2005 2006 2007 2008 2009 400 450 500 550
Production (LHS)
Grade (RHS)
423
Iodine Grade (ppm)
1.4
600
Northeast of Antofagasta is SQMs Pampa Blanca mine, with an average age of 10.9 years. Mostly iodine, and to a lesser extent, nitrate salts are produced. Pampa Blancas iodine grade soared last year to 645 ppm, although production is 15%-20% less than during 2004 to 2006 (Exhibit 8.34). Similar to Maria Elena, Pampa Blanca production was suspended in early 2010.
Nitrate Grade (%)
1.2
Iodine Grade (ppm)
Nitrate grades have declined steadily over the past five years at Maria Elena.
1.6 1.4
500
500 475
Nitrate Grade (%)
January 2011
Exhibit 8.35: Nueva Victoras Iodine Metrics

5.6 600 580
Nueva Victoria
5.1 4.6 4.1 3.6 3.1 2.6 2.1 1.6 1.1 0.6
540 520 500 480 460 440
n.a.
2001
n.a.
2002 2003 2004 2005 2006 2007 2008 2009
420 400
Production (LHS)
Grade (RHS)
SALAR DE ATACAMA BRINES
What Is It?
The Salar de Atacama is the largest salt flat in Chile, and the second largest (280,000 ha) in the world, behind neighbouring Bolivias Salar de Uyuni. The Salar de Atacama, located about 250 kilometres east of Antofagasta, is a source of salar brines, formed through natural leaching from the Andes Mountains.
Exhibit 8.36: Salar de Atacama
Iodine Grade (ppm)
560
SQM currently conducts caliche ore operations in Nueva Victoria, which is located about 180 kilometres north of Maria Elena. Since 2007, Nueva Victoria operations include the mining properties Soronal, Mapocho, and Iris. Ore from Nueva Victoria is transported by truck to heap leaching pads where it is used to produce iodine. The mines power source comes from the highly unstable Northern Power Grid (SING).
The brines of the Salar de Atacama contain one of the largest known and highest quality lithium and potassium concentrations, in addition to considerable sulphate and boron concentrations. Brines are pumped from depths between 1.5 metres and 60 metres below the surface. From this, lithium carbonate, potassium-based fertilizers, boric acid, and magnesium chloride are produced. Advantages to SQM include: (1) low processing costs due to its reduced magnesium content; (2) higher evaporation rates than all other salt plains in the world; and (3) the ability for SQM to operate all year long due to favourable weather conditions.
The Salar de Atacama contains the largest known lithium and potassium concentrations.
Source: Wikimedia Commons.
Exhibit 8.37: SQMs Salar de Atacama Process
Source: SQM.
424
January 2011
Concessions SQMs Salar de Atacama exploration lease expires in 2030.
SQM holds exploitation rights to the mineral resources of Salar de Atacama, covering approximately 0.2 million hectares of land and a further 0.05 million hectares applied for. Additionally, the company possesses exploration rights to mineral resources for 0.95 million hectares, with another 0.05 million hectares applied for. Exhibit 8.38 tables SQMs salar concessions.
Exhibit 8.38: SQMs Brine Concessions
Brine Concessions Salar de Atacama Other salars and other areas

Exploitation Number Hectares 447 585 1,032 277,075 116,933 394,008
Exploration Number Hectares 2,502 210 2,712 996,900 53,500 1,050,400
Part of SQMs exclusive exploitation rights include a significant area of land owned by the Chilean Economic Development Agency (Corfo). Under the terms of the agreement, Corfo may not unilaterally amend the agreement, and SQMs rights to exploit the natural resources cannot be transferred. However, SQM is required to make lease-royalty payments to Corfo based on the value of production from the Salar de Atacama. The lease-royalty agreement expires 2030.
Reserves
SQMs reserves from the Salar de Atacama are vast, especially considering that only 5% of its total concessions have been explored to maximum depths. Exhibit 8.39 tables SQMs reserves of potassium, lithium, sulphate, and boron.
Exhibit 8.39: SQMs Salar de Atacama Reserves
Reserves Probable
(M mt)
Salar de Atacama
Proven
(M mt)
Recovery Rates Low High

(%) (%)
Potassium Sulphate Lithium Boron

50.4 37.2 2.7 1.1
11.3 2.2 2.7 0.2
47% 27% 28% 28%
77% 45% 37% 32%
Operations
Exhibit 8.40: Salar de Atacama Operations
1,200 $20
Exhibit 8.41: Salar de Atacama Operations

40
Potash Production (000 mt)
1,000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 2008 2009
$14 $12 $10 $8 $6 $4 $2 $0
Lease-Royalty ($M)
$16
Other Production (000 mt)
$18
35 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009
MOP (LHS)
SOP (LHS)
Royalty (RHS)
Lithium
Boric Acid
425
January 2011
I. Potash
LOW-COST SOLAR-BASED POTASH PRODUCER
SQMs current MOP production capacity is 1.5 million tonnes, following two expansion projects over the past several years, as well as the recent conversion of its SOP plant to a flexible MOP/SOP plant that is now producing only MOP. Additionally, SQM purchases ~0.1 million tonnes of MOP annually from its lithium-producing neighbour Chemetall. Historically, SQMs potash business has not contributed a material amount to its top line (3% to 5%), although following a 20% contribution to sales in 2009, we expect potash to become materially more meaningful to SQM going forward (20% to 30%). SQMs production of potassium chloride involves pumping the Salar de Atacamas brines (at depths between 1.5 metres and 60 metres) to solar evaporation ponds. It typically takes between eight and nine months for evaporation to yield 30 centimetres of potash. Following harvesting, a portion of the potash is then prepared for grinding, flotation, and filtering (Exhibit 8.44). The remainder is transferred 300 kilometres by truck to SQMs Coya Sur facility, where it is processed into potassium nitrate (NOP).
Exhibit 8.42: SQMs Potash Solar Evaporation Ponds Exhibit 8.43: SQMs Potash Solar Evaporation Ponds
Proven and probable potash reserves total 61.7 million tonnes.
Exhibit 8.44: SQMs MOP and SOP Production Processes
Source: SQM.
SQM currently has proven and probable potassium reserves of 50.4 million tonnes and 11.3 million tonnes, respectively, with recovery rates between 47% and 77%. Sulphate (for SOP) proven and probable reserves are slightly lower at 37.2 million tonnes and 2.2 million tonnes, respectively, with recovery rates of 27% to 45%.
FLEXIBLE MOP/SOP PLANT OFFERS SIGNIFICANT BENEFITS
SQM recently completed a $20 million conversion of its 250,000 tonne to 300,000 tonne potassium sulphate (SOP) plant into a flexible MOP/SOP facility.
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January 2011
If SQM were to use its SOP plant to solely produce MOP, which it is now doing, an additional capacity of 460,000 tonnes would be available. We view the flexibility of the plant as an excellent way for SQM to further optimize its potash-based margin profile.
FOCUSED ON ASIA, BUT WELL DIVERSIFIED
In 2009, SQM sold its potash to 44 countries, with about two-thirds of sales outside Latin American markets. Exhibit 8.45 shows a regional breakdown of SQMs potash sales, which should result in increased foreign sales over time. SQM currently has a three-year agreement to supply between 150,000 tonnes and 250,000 tonnes of MOP to 32%-owner PotashCorp.
Exhibit 8.45: SQMs Regional MOP & SOP Sales (2009)
Potash capacity expansion should lead to greater exports outside Latin America.
Europe 12% USA 1% Mexico 7% Latin America 5% Brazil 15% Africa 5% Middle East 1% Asia 42%
Chile 8%
SQMs global market share of the potash (MOP) market has historically been small, averaging about 0.5%. With recent and expected capacity additions, we believe SQM will be able to increase its market share to between 2% and 2.5% over the next several years.
SQMS POTASH CASH COST POSITION
We estimate that SQM can produce potash at a cash cost of between $90/tonne and $100/tonne. At first glance, this may not seem impressive given that PotashCorp can produce its potash for slightly less than this amount (FOB mine). However, we believe it is more important to compare potash cash costs at port, and not at the mine site. Transportation to port is where SQM becomes a first-quartile cash cost potash producer. Specifically, we estimate SQM can deliver potash to ports in Tocopilla or Antofagasta for between $5/tonne and $10/tonne, or at a $30/tonne to $35/tonne advantage to members of Canpotex.
427
January 2011
MOP CAPACITY OF 2 MILLION TONNES BY THE END OF 2012
SQM has the ability to expand its potash production capacity to 2 million tonnes. Based on our discussions with management, we do not believe the company will receive the environmental permitting for MOP capacity growth beyond 2.2 million tonnes. We think SQM could eventually reach 2.2 million tonnes by 2014. Specifically, the potash capacity expansion program is a $500 million, multi-project investment to grow capacity from the initial 860,000 tonnes. Accordingly, at $375/tonne of capex, we view the expansion as one of the least expensive on the planet. We estimate 1.7 million tonnes of MOP capacity in 2011, 1.8+ million tonnes in 2012, and 2 million tonnes in 2013 all figures exclude potash purchases from Chemetall. It is important to note that while SQM will usually produce at full capacity, it will not likely sell MOP near full capacity, as a material amount of potash is transferred to Coya Sur for potassium nitrate production. We estimate that about 0.3 million tonnes of MOP is currently sent to Coya Sur annually for the production of 0.4 million tonnes of NOP. Throughout our forecast period, we expect SQM to ship between 0.3 million tonnes and 0.4 million tonnes of MOP to Coya Sur annually.
DEMAND DRIVERS & FORECAST
We forecast global potash demand recovery will continue into 2011, reaching approximately 56 million tonnes, at which point, we expect an annual growth rate through 2014 of 4%. SQM is more conservative than we are, estimating 2011 global potash consumption at less than 55 million tonnes, followed by a long-term growth rate of 3%. Long-term potash demand drivers are ultimately dependent upon: (1) population growth; (2) income growth; and (3) the increased adoption of food-based biofuels. Some highlights from our January 2010 publication, Finding Value in Growth, include:
By 2050, the global population could increase by 40%+ over today, or an incremental 2.7 billion mouths to feed on an annual basis;
Global meat consumption per capita is increasing. Specifically, the average person consumes 60% more meat than they did 50 years ago. Why is this important? 1 kg of poultry requires 2 kg of grain; 1 kg of pork requires 4 kg of grain; and 1 kg of beef requires 7 kg of grain; and

Arable land per capita is shrinking quickly. The world currently has about 0.5 acres of arable land per person, down from 1.33 acres in 1950.
OUTLOOK
By 2013, SQM should be producing 2 million tonnes of MOP per year.
Between 2002 and 2008, potash (MOP) prices soared to nearly $1,000/tonne from less than $150/tonne. SOP prices followed a similar trend, albeit at a consistent premium to MOP. We estimate SQMs 2009 average realized MOP price dropped to $512/tonne in line with industry norms. Beginning in 2010, SQM reorganized its business segments to combine SOP (out of SPN) with MOP. Specifically, we are looking for average MOP/SOP blended realized prices in 2011 and 2012 to come in at $471/tonne and $517/tonne, respectively.
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January 2011
Exhibit 8.46: SC Forecast MOP & SOP Sales and Realized Blended Pricing
MOP/SOP Price ($/mt)
MOP/SOP Margin (%)
$300 $1,000 Forecast $800 $600 $400 $200 $0 2006 2007 2008 2009 2010 2011 2012
MOP/SOP Revenue ($M)
$250 $200 $150 $100 $50 $0
Revenue (LHS)
Price (RHS)
SQM sold 556,000 tonnes of MOP in 2009, a significant step up from 185,600 tonnes sold the previous year. For 2010, we estimate that SQM is tracking to sell about 1.2 million tonnes. We are looking for 1.7 million tonnes and 1.85 million tonnes of combined MOP/SOP sales in 2011 and 2012, respectively. We forecast 2011 and 2012 MOP/SOP revenue of $800 million and $956 million. We note that the reorganization of SQMs business segments, coupled with no previous distinct SOP operational data, results in our potash segment revenue forecast not being comparable to previous years.
Exhibit 8.47: SC Forecast MOP & SOP Volumes and Gross Margins
600,000 100% 80% 60% 40% 20% 0% 2006 2007 2008 2009 2010 2011 2012
MOP/SOP Volume (mt)
Forecast
500,000 400,000 300,000 200,000 100,000 0
Volume (LHS)
Gross Margin (RHS)
SQMs realized MOP gross margins have historically been high, ranging between 45% and 75% for the five years prior to 2009. In 2009, however, SQMs potash gross margin dropped to 38% in line with many of its global potashproducing peers. As we continue to see evidence that potash prices have moved away from their cyclical lows, we think a recovery in MOP/SOP pricing will yield 2011 and 2012 gross margins in the 42% to 44% range. SQMs primary potash-based strategies going forward include: (1) continue to supply close to 100% of the Chilean domestic market; (2) use expanded capacity to increase potash presence in foreign markets; and (3) increase MOP/SOP/NOP cross-selling opportunities to targeted customers.
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January 2011
II. Specialty Plant Nutrition

THE FOUNDATION OF SQM
SPN sales have historically accounted for onethird of its total revenue.
SQM is the worlds largest producer of potassium nitrate (NOP) and other specialty plant nutrients, with a 50% share of the global NOP market. SQMs Specialty Plant Nutrition (SPN) division produces NOP, sodium nitrate, sodium potassium nitrate, and various NPK blends. In our view, the primary advantage of these products is that they are chloride-free. Why is this important? Many crops such as tobacco, fruits and vegetables, and cereals are sensitive to chloride, and their yield potential and/or quality is materially reduced when fertilizers Exhibit 8.48: Advantages of Specialty Fertilizers containing chloride are applied to the - fully w ater soluble, allow ing their use in hydroponics, fertigation, foliar soil. Other advantages of SQMs applications, and other advanced agricultural techniques; - absorbed more rapidly by plants as they do not require nitrification, unlike ammonia- specialty plant nutrition products are based fertilizers; listed in Exhibit 8.48.
are free of chloride content, reducing the risk of scorching roots and other problems; do not release hydrogen after application, thereby avoiding increased soil acidity; posses trace elements that promote disease resistance in plants; are more attractive to customers that prefer products of natural origin; and are more efficient than commodity fertilizers because they deliver more nutrients per unit of product applied.
As a result of SPN products offering customers higher yields and betterquality crops than conventional commodity fertilizers, SQM is able to charge a relatively higher price for its products.
SPN sales typically account for about one-third of the companys total revenue, although gross margins are somewhat lower than some of its other businesses. Additionally, there is minimal seasonality of SPN sales, as customers are located in both the northern and southern hemispheres.
A GROWTH MARKET
SQM targets its SPN products to customers that produce high-value crops such as fruits, vegetables, and crops grown using modern agricultural technologies. Over the past two decades, the market for specialty fertilizers has grown at a materially faster rate than for commodity fertilizers. Why: (1) higher land costs have forced farmers to improve their yields; (2) the accelerating consumption of fruits and vegetables per capita; (3) the scarcity of water; and (4) the increasing demand for higher-quality crops.
The market for specialty fertilizers is growing faster than for commodity fertilizers.
PRODUCTION
The majority of the raw materials required to produce SPN products come from caliche ore found in northern Chile.
Sodium Nitrate
Sodium nitrate for both agricultural and industrial applications is produced at the Maria Elena (currently idled) and Pedro de Valdivia facilities using the Guggenheim method1. The combined capacity for these two facilities is 770,000 tonnes of crystallized sodium nitrate (i.e., not finished product). The crystals are then processed further at Coya Sur and Maria Elena to produce prilled sodium nitrate.
This closed-circuit method involves adding a heated leaching solution to the crushed caliche, in order to selectively dissolve the contents. After cooling, the sodium nitrate crystallizes. The iodine is then stripped out and the remaining solution is centrifuged. The weak solution is then pumped to solar evaporation ponds at SQM's Coya Sur facilities, near Maria Elena, for concentration.
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January 2011
The majority of sodium nitrate produced by SQM is used as a feedstock for its production of potassium nitrate and sodium potassium nitrate.
Potassium Nitrate
Once the sodium nitrate solution is concentrated at SQMs solar evaporation ponds, the solution is combined with potassium chloride (MOP) to produce potassium nitrate (NOP), while the remaining sodium chloride is discarded. The crystallized NOP is either processed further to produce prilled NOP, or used as a feedstock for the production of sodium potassium nitrate. SQMs current NOP capacity at Coya Sur is 950,000 tonnes, which includes 260,000 tonnes of technicalgrade NOP. This follows a 300,000 tonne NOP capacity expansion project commissioned in mid-2010. Exhibit 8.49 shows SQMs production process for its crystallized and prilled potassium nitrate products.
Exhibit 8.49: SQMs NOP Production Process
NOP capacity is currently close to ~1 million tonnes.
Source: SQM.
Sodium Potassium Nitrate
Sodium potassium nitrate is simply a mixture of about two parts sodium nitrate per one part potassium nitrate.
Specialty Blends
Specialty NPK blends are produced using SQMs own specialty plant nutrients at blending plants operated by the company, its affiliates, or related companies, in Chile, the United States, Mexico, the UAE, Belgium, the Netherlands, South Africa, Turkey, and Egypt.
HUGE QUALITY RESERVES
SQM has four mines with proven and probable reserves of caliche ore totalling 1.4 billion tonnes, with nitrate grades ranging between 5.6% and 7.3%, and recovery rates of between 80% and 90%. For further details please refer to Exhibit 8.29 on page 422. We note that the proven and probable reserves above represent only 16% of the total caliche-related mining property of SQM (Exhibit 8.50). The company maintains an ongoing program of exploration and resource evaluation at its sites.
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January 2011
Exhibit 8.50: Only 16% of SQMs Caliche Ore Concessions Have Been Explored
Source: SQM.
432
January 2011
SPN LEADERSHIP BUILT BY ACQUISITIONS & JVS
Outside of Chile, SQM sells its specialty plant nutrition products mostly through its own network of representative offices and through distribution affiliates. Perhaps SQMs most important distribution agreement is with Yara, whereby each company sells the other companys products in regions where its presence and commercial infrastructure is greater. Other SPN-related JVs/acquisitions include: (1) a JV among SQM, Yara, and Israel Chemicals for NPK blending facilities in Belgium and the Netherlands; (2) a JV between SQM and Yara for an 80,000 tonne NPK plant in Egypt; (3) the 2005 acquisition of Kemira Emirates Fertilizers, which has a 30,000 tonne urea phosphate plant in Dubai; and (4) a JV with Migao to construct a 40,000 tonne NOP plant in China.
CUSTOMER CONCENTRATION
In 2009, SQM sold its SPN products (0.8 million tonnes, including Yaras products) to about 90 countries, 93% of which was exported outside of Chile. Exhibit 8.51 shows a regional breakdown of SQMs iodine sales, including our forecast. No single customer accounted for more than 7% of sales, and the top 10 customers accounted for 38% of sales.
Exhibit 8.51: SC Forecast Regional SPN Sales
SPN - Regional Sales (%)
90%+ of SPN products are exported outside of Chile.
40% 30% 20% 10% 0% 2000 2002 Central & South America 2004 Chile 2006 2008 North America 2010 Europe
Forecast
2012 Other
COMPETITION
Despite being the worlds largest potassium nitrates producer, SQMs SPN products compete indirectly with substitute products such as calcium nitrate, ammonium nitrate, and calcium ammonium nitrate. We believe SQMs largest competitor in the nitrate market is Haifa Chemicals, with about a 30% market share (ex the intra-China NOP market). Other competitors include: (1) SCM Virginia a Chilean iodine producer with NOP capacity; (2) ACF another Chilean iodine producer; (3) Kemapco a subsidiary of Arab Potash; and (4) Chinas Migao and Wentong.
Exhibit 8.52: Agricultural NOP Market Share
Other Kemapco 6% 6%
Exhibit 8.53: Global Nitrates Market Share

Other Kemapco 12% 5%
SQM 50% Haifa 38%
SQM 53% Haifa 30%
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January 2011
OUTLOOK
Between 1998 and 2008, SQMs average SPN price climbed to $917/tonne from $267/tonne, dropping slightly to $882/tonne in 2009. Without operational data disclosure, we are unable to break down SQMs realized product prices and costs any further. We expect specialty nutrient prices to generally track commodity-based fertilizers, with a higher weight toward potash. Specifically, we are looking for 2011 and 2012 realized SPN blended prices of $752/tonne and $826/tonne, respectively.
Exhibit 8.54: SC Forecast SPN Sales and Realized Prices
$400 Forecast SOP rem oved from SPN $1,600 $1,200 $1,000 $800 $600 $400 $200 $0 2006 2007 2008 2009 2010 2011 2012
SPN Revenue ($M)
$300 $250 $200 $150 $100 $50 $0
Revenue (LHS)
Price (RHS)
We dont expect SPN revenue to hit the $1 billion level that was nearly reached in 2008.
Since 2002, SQMs SPN sales volumes have ranged between 1 million tonnes and 1.3 million tonnes, with a drop to 0.8 million tonnes in 2009 (as a result of the fertilizer market crash). Of these amounts, SOP accounted for between 150,000 and 200,000 tonnes, and has now been realigned into the potash business. Accordingly, we have forecast 2011 and 2012 sales volumes at 820,000 tonnes and 885,000 tonnes, respectively, or slightly below the midpoint of the past decades sales volumes. Until new capacity is brought online, we think it is unlikely that SQM will be able to materially increase its sales volumes. We are looking for 2011 and 2012 SPN revenue of $617 million and $731 million, representing a fairly robust annual growth rate of 18.9%. SQMs peak SPN revenue was in 2008, when sales reached nearly $1 billion. Since then, SQM has removed its SOP operations from the SPN segment, which we estimate accounted for around $200 million of 2008s peak revenue. While SQMs SPN gross margins have been decent, they certainly are not the crown jewel of gross margins. Between 2002 and 2009, SQMs gross margins ranged between 17% and 35%, with a one-time jump to 49% in Q4/08. Going forward, we forecast the Specialty Plant Nutrition business will return gross margins in the 30% to 33% area. SPN-based strategies going forward include: (1) increase sales of higher-margin soluble NOP/NPK; and (2) further develop its global distribution system through strategic alliances with other producers.
Exhibit 8.55: SC Forecast SPN Volumes and Gross Margins
350,000 SOP rem oved from SPN Forecast 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2012 Gross Margin (RHS)
250,000 200,000 150,000 100,000 50,000 0 2006 2007 NOP + Sodium NOP 2008 Specialty 2009 Sodium Nitrate 2010 Other 2011 SOP
434
SPN Margin (%)
We forecast SPN gross margins in the 30% to 33% range.
SPN Volumes (mt)
300,000
SPN Price ($/mt)
$350
$1,400
January 2011
III. Iodine and Derivatives

WORLDS LARGEST IODINE PRODUCER
SQM is the worlds leading producer of iodine and iodine derivatives, with an estimated global market share of 25%. In 2009, SQMs revenue from iodine and iodine derivatives amounted to about 13% of the companys consolidated top line, or slightly less than $200 million. SQM has a total iodine production capacity of about 11,000 tonnes, and through its Ajay-SQM Group (ASG) JV, it also produces iodine derivatives (~10% of SQMs iodine sales) in the United States, Chile, and France. ASG is the worlds largest inorganic and organic iodine derivatives producer.
SQM boasts a 25% global market share of iodine.
Iodine and its derivatives are used in a wide range of medical, pharmaceutical, agricultural, and industrial applications, including x-ray contrast media, polarizing films for liquid crystal displays (LCDs), antiseptics, biocides, and disinfectants.
DIVERSIFIED PRODUCTION SOURCES
Iodine is produced by extracting it from the solutions resulting from the leaching of caliche ore at the Pedro de Valdivia, Maria Elena (idled), Nueva Victoria, and Pampa Blanca (idled) facilities. Part of the iodate solution is reduced to iodide using sulphur dioxide, which is produced by burning sulphur. Solid iodine is then refined through a smelting and (patented) prilling process. The final product is then packed into 20-50 kilogram drums or 350-700 kilogram maxibags and transported by truck to Antofagasta or Iquique for export. Exhibit 8.56 highlights the iodine production process.
Exhibit 8.56: SQMs Iodine Production Process
Source: SQM.
In 2009, SQM sold its iodine (7,200 tonnes) to about 300 customers in more than 70 countries. Exhibit 8.57 shows a regional breakdown of SQMs iodine sales, including our forecast. No single customer accounted for more than 6% of sales, and the top 10 customers accounted for 43% of sales.
Exhibit 8.57: SC Forecast Iodine & Derivatives Regional Sales
Iodine - Regional Sales (%) 50% 40% 30% 20% 10% 0% 2000 2002 Europe
Forecast
2004 North America
2006
2008 Central & South America
2010 Other
2012
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January 2011
THE IODINE MARKET
The Players
Exhibit 8.58: Global Iodine Production and Resources
Country 2008
(mt)
2009
(mt)
Reserves Reserve Base

(mt) (mt)
Iodine demand is split almost evenly between human health and industrial applications.
Chile produces iodine from iodate minerals as either co- or by-products of Source: U.S. Geological Survey; Scotia Capital. nitrate production. Accordingly, most iodine plants in Chile are located adjacent to nitrate plants. In addition to SQM, other Chilean producers include Compania de Salitre y Yodo de Chile (Cosayach), ACF Minera S.A., SCM Virginia, and Canadas Atacama Minerals Corp. A large portion of Chilean iodine is produced as a by-product of nitrates. Japanese and U.S. producers extract iodine from underground brines as a by-product of natural gas extraction. Azerbaijan, Russia, Turkmenistan, Indonesia, and Uzbekistan also produce iodine from subterranean brines. Eight Japanese iodine producers account for one-fifth of global sales, with the largest Japanese iodine producer, Ise Chemicals Ltd., accounting for more than 65% of Japans iodine production. Several Japanese producers also recycle iodine derivatives from iodine waste streams. Iodine recycling currently represents about 15% of global iodine supply.
Iodine Demand Growth
Azerbaijan Chile China Indonesia Japan Russia Turkmenistan United States Uzbekistan
300 15,500 570 75 9,500 300 270 n.a. 2 26,517
300 16,000 580 75 9,300 300 300 n.a. 2 26,857
170,000 9,000,000 4,000 100,000 4,900,000 120,000 170,000 250,000 n.a. 14,714,000
340,000 18,000,000 120,000 200,000 7,000,000 240,000 350,000 550,000 n.a. 26,800,000
The majority of the worlds iodine is produced in Chile, Japan, and the United States. Global annual sales are about 30,000 tonnes, with SQM normally providing over one-quarter of the volume. Chilean companies account for 60% of production, followed by Japan at 20% and the United States at 5%. Exhibit 8.58 highlights iodine mine production and reserves according to the U.S. Geological Survey2.
The market for iodine is split between human health (55%) and industrial (45%) applications. Between 2000 and 2008, the annual growth rate for iodine and derivative products was 6%, with 2008 consumption slightly above 29,000 tonnes. The surge in demand during the past decade came from increased output of optical polarizing film for LCD screens, heat stabilizers, and catalysts. Asias high rates of economic growth, coupled with the majority of LCD screen production located there, has resulted in a demand shift away from Europe and North America towards China, India, and other Asian countries. We estimate that Asia currently accounts for 45% of total iodine consumption. Roskill estimates that demand for iodine is forecast to rise by 3.5% by 2014, with the majority of demand growth driven by LCD screens, x-ray contrast media for radiology, and biocides for human health. Three months before Roskills forecast, SQM halted operations at two iodine mines due to a slump in world demand. At the time, SQM stated that its available iodine inventory would allow it to respond to a faster-than-anticipated recovery of the iodine market, should it occur.
We should also mention that the largest source of iodine is actually sea water, which contains 0.05 ppm, or about 31 million tonnes. Seaweed of the family Laminaria can extract and accumulate up to 0.45% iodine on a dry basis, but is not economically viable compared to current forms of iodine production.
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January 2011
Iodine Substitutes
While there are iodine substitutes available for certain applications, such as antiseptics and disinfectants, there are no cost-effective iodine substitutes currently available for the main nutritional, pharmaceutical, animal feed, and chemical uses, which together account for the majority of iodine sales.
OUTLOOK
Between 2003 and today, iodine prices have more than doubled to $28,000/tonne from $13,000/tonne, although we note that SQMs realized prices are at a discount to posted prices as a result of large SQM customers still receiving pricing in the $25,000/tonne to $26,000/tonne area. We anticipate iodine demand and prices will continue to rise through at least 2012, although at a more modest growth rate. Specifically, we are looking for averaged realized (not posted) prices in 2011 and 2012 to come in at about $28,000/tonne. On volume, we do not think SQM will reach its record sales level of about 10,500 tonnes as it did in 2008, which then dropped to 7,200 tonnes in 2009. However, we do expect volumes of 9,000 tonnes and 9,500 tonnes in 2011 and 2012 slightly above volumes realized between 2005 and 2007. We are looking for 2011 and 2012 iodine revenue of $252 million and $266 million, representing an annual growth rate of about 5.6%. With the exception of 2009, gross iodine and derivative sales have consistently delivered between $215 million and $250 million since 2006. SQMs iodine gross margins have been stable at between 37% and 40% over the past several years, but have recently been in the 44% area. We are modelling a 45% gross margin in 2011 that falls to 44% the following year.
Exhibit 8.59: SC Forecast Iodine & Derivative Sales and Pricing
$100
Iodine Revenue ($M)
Forecast
$29,000 $27,000 $25,000 $23,000 $21,000 $19,000 $17,000 $15,000
$80 $60 $40 $20 2006 2007 2008 2009 2010 2011 2012
Revenue (LHS)
Price (RHS)
Exhibit 8.60: SC Forecast Iodine & Derivatives Volumes and Gross Margins
3,000 Forecast 50% 45% 40% 35% 30% 25% 20% 2006 2007 2008 2009 2010 2011 2012
Iodine Volume (mt)
2,500 2,000 1,500 1,000 500 0
We forecast iodine gross margins in the 44% area.
Volume (LHS)
Gross Margin (RHS)
437
Iodine Margin (%)
Iodine Price ($/mt)
January 2011
IV. Lithium & Derivatives

WORLDS LARGEST LITHIUM PRODUCER
SQM is the worlds leading producer of lithium carbonate and one of the worlds largest producers of lithium hydroxide. In 2009, SQMs lithium sales accounted for approximately 31% of the global chemical lithium market, and about 8% of the companys total sales ($117.8 million). SQM produces both lithium carbonate (40,000 tonnes capacity) and lithium hydroxide (6,000 tonnes capacity) at its Salar del Carmen facilities near Antofagasta, from solutions with high concentrations of lithium coming from the potassium production at its Salar de Atacama operation. Because lithium carbonate is used as a feedstock for lithium hydroxide production, actual lithium capacity is 40,000 tonnes, not 46,000 tonnes. SQM currently has permitting approvals to increase its lithium carbonate capacity to 48,000 tonnes, or by 20%, and will do so as the market requires it. Additionally, we believe that increased demand for lithium hydroxide will result in an eventual capacity expansion to that product as well, likely to 8,000 tonnes or 10,000 tonnes. SQM is one of the lowest-cost producers of lithium worldwide. Exhibit 8.61 shows the production process of SQMs lithium operations.
Exhibit 8.61: SQMs Lithium Production Process
SQM is one of the lowest-cost producers of lithium worldwide.
Source: SQM.
SQMs Salar de Atacama proven and probable lithium (brine) reserves are each currently 2.7 million tonnes, with recovery rates ranging between 28% and 37%. In our view, SQM has enough lithium to supply the entire worlds lithium needs for about 50 years, assuming no material step-up in global demand.
COMPETITION AND CASH COSTS
SQMs main competitors in lithium carbonate and lithium hydroxide production are Chemetall GmbH (16% market share) and FMC Corporation (15% market share). Historically, SQM sets its lithium price and the rest of the world follows suit. Chinese producers currently account for slightly above one-quarter of global lithium capacity. China continues to invest heavily in developing significant lithium production capacity, a potential negative to SQMs market share and pricing power.
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January 2011
SQM sells 50% of its lithium for use in batteries, while only 25% to 30% of total lithium is used in batteries today. High-grade lithium (>99.5%) sold for automotive battery use earns SQM a higher gross margin than lithium sold for other purposes. All else equal, SQM is earning higher lithium-based margins than its peers. However, all else is not equal. Why? We estimate that SQMs cash cost to produce 1 tonne of lithium carbonate is about $1,500. This compares to Chemetall, which is likely in the low $2,000s, and FMC at about $2,500 (our estimate). Chinas lithium cash cost per tonne is over $4,000, or more than twice what we estimate it costs SQM to produce lithium. We do not believe that Bolivias vast, and Chinas modest, lithium resources will become a threat in the near future for the following reasons:
Bolivian lithium deposits are poor. The lithium grades are lower, and the magnesium and boron (i.e., impurities) grades are higher. In Bolivia, there are problems with indigenous peoples claims to the land and/or the resources of the Salar de Uyuni. In China, we have been hearing about new lithium capacity coming online for years, but projects continue to get delayed.
Ultimately, we think that Bolivia will eventually begin producing lithium carbonate. However, we are fairly confident that Bolivia-based lithium production will never be able to compete against SQMs cash cost leadership position.
In 2009, SQM sold its lithium products (21,300 tonnes) to about 270 customers in more than 50 countries. Exhibit 8.62 shows a breakdown of SQMs iodine sales, including our forecast. No single customer accounted for more than 13% of sales, and the top 10 customers accounted for 52% of sales.
THE LITHIUM MARKET ENVIRONMENT Exhibit 8.62: SC Forecast Lithium & Derivatives Regional Sales
Lithium - Regional Sales (%) 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2002 Europe
Forecast
2004 North America
2006
2008 Asia & Oceania
2010 Other
2012
Please refer to The Lithium Hype, a discussion of the lithium market, beginning on page 441.
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January 2011
OUTLOOK
Lithium prices have tripled over the past 15 years.
Between 1998 and 2008, lithium carbonate prices approximately tripled to $6,000/tonne from $2,000/tonne. In 2009, we estimate SQMs average realized lithium price dropped to about $5,500/tonne. We anticipate that global lithium demand will grow in the 8% to 10% area (post-recovery), but that price increases will slow substantially as new capacity is brought online. Conservatively, we are looking for averaged realized prices in 2011 and 2012 to come in at ~$5,250/tonne and $5,500/tonne, respectively. On volume, we do think SQM will surpass its (2004) record sales level of 30,600 tonnes in 2011. We currently forecast lithium and derivative sales volumes of 33,000 tonnes and 36,000 tonnes in 2011 and 2012, respectively. We believe 2010 lithium sales will fall in the 30,000 tonne area.
Exhibit 8.63: SC Forecast Lithium & Derivatives Sales and Realized Pricing
Lithium Revenue ($M)
$50 $40 $30 $20 $10 $0 2006 2007 2008 2009 2010
$7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0
2011
2012
Revenue (LHS)
Price (RHS)
We are looking for 2011 and 2012 lithium revenue of $174 million and $198 million, representing a strong expected annual growth rate of 13.8%. SQMs peak lithium revenue was in 2007, when sales reached $180 million. SQMs realized lithium gross margins have historically been superb. By all accounts, our forecast gross margins may appear conservative at first, but we believe global lithium production capacity expansion may reduce SQMs lithium gross margins to great from superb. Since 2006, gross margins have mostly ranged between 55% and 60%. Following SQMs decision to cut lithium pricing by 20% in late 2009, margins have come down to the 47% to 50% range. We are conservatively looking for gross margins to yield 42% to 44% over the next two years, although there is significant room for upside. SQMs lithium-based strategies going forward include: (1) maintain its position as the largest lithium carbonate producer and distributor; (2) pursue downstream lithium derivative opportunities; and (3) continue reducing production costs through process improvements and more efficient use of labour.
Exhibit 8.64: SC Forecast Lithium & Derivatives Volumes and Gross Margins
10,000 8,000 6,000 4,000 2,000 0 2006 2007 2008 2009 2010 2011 2012 Forecast 80% 70% 60% 50% 40% 30% 20%
Lithium Volume (mt)
Lithium Price ($/mt)
When SQM cut its lithium prices by 20% in Q4/09, Chemetall and FMC later followed, but only by half as much.
$60 Forecast
$8,000
We forecast lithium gross margins in the 42% to 44% area.
Volume (LHS)
Gross Margin (RHS)
440
Lithium Margin (%)
January 2011
The Lithium Hype

LITHIUM 101
Lithium is a low-density, alkaline metal that is the preferred raw material for manufacturing cathode material for disposable and rechargeable batteries. Why? Lithium batteries have a high energy density, permitting them to store more energy per weight and volume than other materials. Lithium also has a strong resistance to high temperatures, allowing it to be used in applications that involve heat transfer, such as ceramic glass. Exhibit 8.65 shows the principal uses of lithium.
Lithium Hydroxide (LiOH)
Lithium hydroxide is used in carbon dioxide scrubbers for purification of gases and air. It is used as a heat transfer medium, as a storage-battery electrolyte, and as a catalyst for polymerization. It is also used in ceramics, and manufacturing other lithium compounds such as lithium stearate for lubricating grease.
Exhibit 8.65: Principal Uses of Lithium
Lithium Carbonate (Li2CO3)
Other 23%
Batteries 26%
Chemicals 2% Pharmaceuticals 3% Casting 3% Aluminum 4% Polymers 5% Air Conditioning 6% Glass 7% Glazes 8% Grease 13%
Lithium carbonate is an important industrial chemical as it forms low-melting fluxes with silica and other materials. Glasses derived from lithium carbonate are useful in ovenware, and it is a common ingredient in both low-fire and high-fire ceramic glaze. Lithium carbonate can also be used as a carbon dioxide sensor, as well as to treat mania (i.e., the up phase of bipolar disorder). Perhaps the most important use of lithium carbonate is for the manufacturing of most lithium-ion battery cathodes, which are made of lithium cobalt oxide.
PRODUCTION
Exhibit 8.66: Distribution of Global Lithium Reserves
Other 4%
Chile has been the worlds leading lithium producer since 1997.
China 5% Australia 6% Argentina 8%
Lithium has historically been mined from two sources continental brines and hard rock ore. Chile has been the worlds leading producer of lithium carbonate since 1997. Production in Chile occurs in the Salar de Atacama in the Andes Mountains, while Argentina also produces lithium in the Andes, from the Salar del Hombre Muerto. In China, lithium carbonate is produced from brines in the Zhabuye Salt Lake in western Tibet, and the Dongtai and Xitai Salt Lakes in Qinghai Province. In the United States, lithium brine operations are mostly in Nevada.
Chile 77%
Source: Meridian International Research; Scotia Capital.
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January 2011
CONSUMPTION
Lithium is sold as brines, compounds, metal, or mineral concentrates, depending on the end-use. For many years, most lithium compounds and minerals were used in the production of ceramics, glass, and primary aluminum. However, growth in lithium battery use and decreased use of lithium in aluminum products has resulted in battery applications gaining significant market share over the past five years. Increased global lithium consumption is mostly due to growth from foreign battery manufacturers as well as the developing economies of China and India.
FOCUS ON BATTERIES
Most lithium batteries are manufactured in Asia. Battery experts have been working to develop lithium batteries for decades because lithiums natural properties make it one of the most attractive battery materials of all the elements. In 2009, lithium battery production represented 70% of the total rechargeable battery market worldwide.
Exhibit 8.67: Inside a Lithium Battery Exhibit 8.68: Energizers Lithium Batteries
70% of all rechargeable batteries use lithium.
Source: Florida State University.
Source: Energizer; Scotia Capital.
Worldwide, rechargeable lithium batteries power the majority of cellular phones, laptop computers, and increasingly are being used to power heavy-duty power tools. Additionally, automakers continue to work on lithium batteries for hybrid electric vehicles (HEVs), plug-in hybrid electric vehicles (PHEVs), and pure electric vehicles (EVs).
DEMAND TRENDS & OUTLOOK
Since 2000, global lithium consumption growth has averaged between 7% and 8%, with a sharp drop to 2.5% in 2008 due to the worldwide economic recession. Excluding battery use, demand has averaged approximately 5% per year over the past decade. In 2009, global demand for lithium was estimated to have fallen by about 25% over 2008, reaching ~68,500 tonnes of lithium carbonate equivalent (LCE). In order to speed up demand recovery for lithium, SQM announced a 20% price reduction for both lithium carbonate and lithium hydroxide in Q3/09. As a result, SQM reported a healthy increase in sales volume, providing evidence that the lithium market had bottomed out.
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January 2011
Independent of the global financial crisis, auto manufacturers continue to move forward with programs to develop and manufacture hybrid and electric vehicles. In 2009, companies such as Hyundai, Nissan, Mitsubishi, Mercedes Benz, GM, Toyota, and Volkswagen launched vehicles that use lithium batteries to store energy. As part of the American Recovery and Reinvestment Act of 2009, the U.S. DOE funded $2.4 billion in grants to accelerate the development of U.S. manufacturing capacity for batteries and electric drive vehicles, with about $1 billion pegged specifically for the development of lithium-ion battery technologies.
Electric vehicles consume up to 30 kg of lithium.
A typical hybrid vehicle requires 8 kg to 9 kg of lithium carbonate, a plug-in uses about 12 kg, and a full electric vehicle can easily use 30 kg. Compare this to cell phone batteries, which consume about 4 grams of lithium carbonate per battery, and laptops, which require 10-12 grams. Demand for certain lithium applications have begun to rebound at a faster rate than SQM had initially anticipated (i.e., lubricating greases and construction-based lithium products), which we believe is likely a result of the companys 20% posted price decrease in September 2009. Additionally, production of rechargeable batteries has also rebounded well throughout 2010, with inventories beginning to return to pre-financial crisis levels. Exhibit 8.69 shows our global forecast for lithium demand through 2015.
Exhibit 8.69: Battery Demand for Lithium Should Soar Over the Coming Five Years
Lithium Demand (mt)
250,000 Forecast 200,000 150,000 100,000 50,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Other Demand (LHS) Battery Demand (LHS) Battery Market Share (RHS)
60% 50% 40% 30% 20% 10% 0%
Source: Meridian International Research; Scotia Capital estimates.
LITHIUM SUBSTITUTES
According to the USGS, substitutes for lithium are possible (but not preferred) in batteries, ceramics, and greases, as well as in glass. Examples are calcium and aluminum soaps as substitutes for stearates in greases; calcium, magnesium, mercury, and zinc as anode material in primary batteries; and sodic and potassic fluzes in ceramics and glass manufacturing. Substitutes for aluminum-lithium alloys as structural materials are composite materials consisting of boron, glass, or polymer fibres in engineering resins.
WHAT WE KNOW ABOUT CHINA AND LITHIUM
China has about the same lithium capacity as SQM.
We believe China ranks third in salt lake brine lithium reserves and fourth in terms of lithium ore resources. Chinas brine lithium resources are mostly found in Qinghai and Tibet. In the Qaidam Basin of Qinghai, the Taijinar Salt Lake lithium resource is ~0.9 million tonnes, or up to 3.3 million tonnes if adding the reserves of the Chaerhan, Dachaidan, and Yipling lakes. In Tibet, the Zhabuye and Damxung salt lakes host about 1.7 million tonnes of pure lithium. Chinas ore lithium resources are located in the province of Sichuan, Xingjiang, and Jiangxi, and account for an additional 0.7 million tonnes. Between 2006 and 2008, China lithium carbonate production grew to approximately 20,000 tonnes from 15,000 tonnes. Research In China forecasts that Chinas lithium carbonate production capacity will increase to about 45,000 tonnes shortly, from 33,000 tonnes in 2008.
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Battery Market Share
January 2011
Chinas Tibet Mineral Development Company is mainly engaged in the exploitation of lithium ore, as well as other products including chromite, gold, copper, and boron (i.e., a lithium substitute). In 2009, 28% of Tibet Minerals revenue was derived from lithium-based products. Other China-based lithium producers to watch for include: (1) CITIC Guoan Information Industry; (2) Sichuan TianQi Lithium Industries; (3) Qinghai Salt Lake Group; (4) Qinghai Lithium Industry; (5) Xinjiang Lithium Salt Plant; (6) Sichuan Ni&Co Guorun New Materials; (7) Sichuan Jixiang Lithium Technology Corporation; and (8) ABA Guangsheng Lithium.
A BRIEF HISTORY OF LITHIUM CARBONATE PRICING
1990-1996: Lithium carbonate was produced from minerals and from brines by Chemetalls SCL and Silver Peak operations. The market price was hovering around the $3,000/tonne area. 1997: SQM entered the lithium game by dropping 9,000 tonnes of lithium carbonate in the market with a price less than $1,800/tonne, which was around 40% lower than the established price at the time. 1998-2004: The market price for lithium carbonate ranged between $1,500/tonne and $1,700/tonne. SQM expanded its annual lithium carbonate production capacity to 18,000 tonnes from 9,000 tonnes and then to 28,000 tonnes. 2005-2006: The lithium carbonate price started to increase to between $2,000/tonne and $3,000/tonne because of market shortage caused by: (1) a strong increase in demand fuelled by a surge in lithium-ion battery applications; (2) production problems in the Salar de Atacama; and (3) the start-up of SQMs lithium hydroxide plant that consumed pure lithium that otherwise would have gone toward lithium carbonate production. 2007-2008: Lithium carbonate pricing soars to between $5,500/tonne and $6,000/tonne. 2009: The financial crisis hits lithium demand hard. In September 2009, SQM reduces the price of lithium carbonate by 20%.
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January 2011
Exhibit 8.70: Lithium Chilean Exports and Global Pricing
Source: Ehren-Gonzalez Limitada.
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January 2011
V. Industrial Chemicals
A SMALL BUT GROWING BUSINESS
In addition to producing sodium nitrate and potassium nitrate for agricultural applications, SQM also produces several grades of each product for industrial applications. In our view, the main advantage of SQMs industrial nitrate business is its operational flexibility, as production is identical to agriculturalgrade nitrates, with one additional step of purification. SQM also sells boric acid and industrial potash, which is used as a clay inhibitor in drilling fluids for oil wells and exploratory drilling (similar to IPI).
Nitrates are now being used as a medium for heat storage in solar projects.
The Industrial Chemicals division is somewhat small, with revenue contributing between 7% and 9% to overall sales throughout the past several years. Last year, SQM earned $115.4 million on sales of 149,200 tonnes of nitrates (i.e., slightly low) and 3,400 tonnes of boric acid (50% below normal). Industrial sodium and potassium nitrate are used in a wide range of applications, including the production of glass, ceramics, explosives, charcoal briquettes, and various metal treatments. Additionally, nitrates are now being used as a medium for heat storage in concentrated solar power projects. Boric acid is mainly used in glass, ceramics, fibreglass, enamels, and the production of LCD screens. SQM has the capacity to produce about 10,000 tonnes per year of boric acid, although actual production has ranged between 7,000 tonnes and 8,000 tonnes over the past several years. Exhibit 8.71 highlights SQMs boric acid production process. Proven and probable boron reserves at Salar de Atacama total 1.3 million tonnes, with recovery rates ranging between 28% and 32%.
Exhibit 8.71: SQMs Boric Acid Production Process
Source: SQM.
In 2009, SQM sold its industrial chemicals in more than 50 countries. Exhibit 8.72 shows a regional breakdown of SQMs industrial chemicals sales, including our forecast. No single customer accounted for more than 14% of sales, and the top 10 customers accounted for 40% of sales.
Exhibit 8.72: SC Forecast Industrial Chemicals Regional Sales
Ind. Chem. - Regional Sales (%) 60% 50% 40% 30% 20% 10% 0% 2000 2002 Europe 2004 North America 2006 2008 2010 Other 2012 Central & South America
Forecast
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January 2011
OUTLOOK
Between 2002 and 2006, SQMs average Industrial Chemicals price (almost entirely technical-grade NOP) fluctuated between $350/tonne and $390/tonne, before peaking at $839/tonne in Q3/08. Perhaps slightly aggressive, we expect SQMs weighted average Industrial Chemicals price to come in at $800/tonne and $850/tonne in 2011 and 2012, respectively.
Exhibit 8.73: SC Forecast Industrial Chemicals Sales and Realized Pricing
$50 $1,200 $1,000 $800 $600 $400 $200 2006 2007 2008 2009 2010 2011 2012
Chem. Revenue ($M)
$40 $30 $20 $10 $0
Revenue (LHS)
Price (RHS)
Since 2002, SQMs sales volumes of industrial and technical grades of NOP have been in a steady range of between 150,000 tonnes and 200,000 tonnes. We do not anticipate this trend will change over the mid-term, although we do expect high-grade NOP sales volumes to be closer to the lower end of the range through 2012. Specifically, we are looking for sales of 160,000 tonnes and 170,000 tonnes in 2011 and 2012. We anticipate boric acid sales volumes will not return to the 6,000 tonne to 8,000 tonne range during our two-year forecast period, but will come in between 5,000 tonnes and 5,500 tonnes annually. We forecast 2011 and 2012 Industrial Chemicals revenue of $132 million and $149 million, representing a growth rate of 12.9%. SQMs peak Industrial Chemicals revenue was $123 million in 2008, as technical and industrial grades of potassium nitrate peaked alongside agricultural grade NOP. While SQMs Industrial Chemicals gross margins are high, they have (expectedly) come off slightly over the past couple of years. On average, SQM realizes about 31% for this segment, although volatility is not uncommon with a quarterly gross margin range between 17% and 58% since 2006. We forecast the Industrial Chemicals business will return gross margins in the 43% to 44% area in line with 2010. Industrial Chemical-based strategies going forward include: (1) maintaining industrial nitrate leadership position; and (2) better target boric acid to niche markets.
Exhibit 8.74: SC Forecast Industrial Chemicals Volumes and Gross Margins
60,000 70% 50% 40% 30% 20% 10% 0% 2006 2007 2008 2009 2010 2011 2012
50,000 40,000 30,000 20,000 10,000 0
Nitrates (LHS)
Boric Acid (LHS)
Gross Margin (RHS)
447
Chem. Margin (%)
We forecast Industrial Chemicals gross margins in the 43% to 44% area.
Chem. Volume (mt)
Forecast
60%
Chem. Price ($/mt)
Forecast
January 2011
Key Investment Risks (ex Chile)

COMMODITY PRICE/CYCLE EXPOSURE
In our minds, commodity price exposure is one of the largest investment risks to SQM shareholders. Unlike many global commodities, potash, iodine, lithium, and most of SQMs other primary products are typically not forward sold beyond one year out, and cannot be price hedged in a futures market. The prices of SQMs products typically vary depending on: (1) the relationship between global supply and demand; and (2) the production of major producers, as well as their respective business strategies.
SQMs market share leadership gives it partial control in pricesetting.
The lithium carbonate market provides a perfect example of the price volatility witnessed over the past several years. Specifically, SQMs entrance into the lithium carbonate market resulted in a 35%+ drop in prices to less than $2,000/ton from over $3,000/ton. At the end of 2008, lithium carbonate was priced at $6,000/ton. In mid-2009, SQM announced a 20% decrease to its lithium carbonate prices. Partially offsetting commodity price and/or cycle exposure is SQMs substantial global market shares in three of its five business lines, affording the company some flexibility in price- and margin-setting.
FX RATE FLUCTUATIONS
The U.S. dollar is the primary currency in which SQM transacts most of its businesses, and is also the companys functional currency for financial reporting purposes. Yet, a significant portion of the companys operating costs are in Chilean pesos. Accordingly, a strengthening Chilean peso relative to the U.S. dollar is negative for SQMs earnings. However, if the value of the Chilean peso falls relative to the U.S. dollar, the value of the ADRs and any distributions to be received from the depositary will decrease. Exhibit 8.75 highlights the historical FX rate over the past five years.
Exhibit 8.75: CLP-USD FX History
U.S. Dollar (Chilean Pesos) 700 650 600 550 500 450 400 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
+1 SD Avg -1 SD
EMERGING MARKETS
A substantial portion of SQMs sales are in emerging markets, and are therefore exposed to risks related to the economic conditions and trends of those countries. Future government policy changes, including the imposition of taxes and/or repatriation of capital, could impact SQMs profitability, and ultimately its ADR price.
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January 2011
About 75% of SQMs emerging market sales are in Central and South America, with the majority of the remaining sales in Asia (ex Japan).
INTEREST RATES
SQM maintains both short- and long-term debt priced at LIBOR, plus a spread. We note that SQM does not have derivative instruments to hedge against material changes in LIBOR, and accordingly, the company is subject to rate fluctuations. We estimate that SQM has approximately 20% of its financial debt priced at LIBOR (Exhibit 8.76).
Exhibit 8.76: 12-Month US$ LIBOR
12 Month US$ LIBOR (%) 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Jan-07 Jul-07
Avg +1 SD
-1 SD
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
AMERICAN DEPOSITARY RECEIPTS
The price of SQMs ADRs and the U.S. dollar value of any dividends will be affected by fluctuations in the FX rate between the U.S. dollar and the Chilean peso. Why? Chilean trading in the shares underlying its ADRs is conducted in Chilean pesos. On distributions, the ADR will convert peso-based dividends to U.S. dollars at the prevailing exchange rate. Accordingly, if the value of the peso drops (relative to the U.S. dollar), the value of the ADRs and any distributions received from the ADR will decline. The volatility and low liquidity of the Chilean markets could increase the price volatility of SQMs ADRs and may impair the ability of a shareholder to sell ADRs into the Chilean market at the amount/price the shareholder wishes. Chilean law requires companies to offer their shareholders pre-emptive rights whenever issuing equity. Pre-emptive rights permit holders to maintain their existing ownership percentage in a company by subscribing to additional shares. ADR holders do not have the equivalent rights, and accordingly, an SQM ADR holders equity interest could be diluted following a share issuance.
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January 2011
Chile-Specific Investment Risks

ARGENTINA AND ENERGY SUPPLY
The continuity of SQMs natural gas supply is dependent on the Argentine governments energy supply policies. SQMs natural gas supply is subject to a 10-year agreement with Argentine authorities. However, due to rising energy shortages in Argentina, the authorities sometimes restrict natural gas exports to Chile in order to increase the supply to its domestic markets. SQM suffered partial natural gas shortages during 2004, 2005, and 2006; and during 2007 through 2009, the company received practically no natural gas. We note, however, that most of SQMs industrial equipment can also operate on fuel oil and/or diesel (but the cost is significantly higher). In 2009, electricity purchases accounted for 6.5% of the companys overall cost of sales.
Energy supply shortages to northern Chile from Argentina are not uncommon.
Exhibit 8.77: SQMs Existing Energy-Related Contracts
Agreement Type
Natural gas Fuel (including distribution) Pow er (general) Pow er (50Hz/60Hz) Pow er (Nueva Victoria)
Company
Distrinor S.A. Copec S.A. Norgener S.A. Electroandina S.A. Norgener S.A.
Expiration
May 2011 April 2012 March 2017 January/March 2013 December 2013
Gas shortages in northern Chile severely stress the regions power supply. Additionally, as natural gas supply to northern Chile declines, coupled with increasing global oil prices, SQM is faced with potential revisions to its long-term electricity supply contracts. Exhibit 8.77 highlights SQMs current energy-related contracts in effect.
NATIONALIZATION
In our view, it is not impossible that one day SQM is renationalized by the government of Chile, especially if margins appear to be excessive. SQM has a history of government involvement since its creation. Specifically, in 1968, the government was the fourth partner in a merger among Corporacion de Ventas de Salitre y Yodo, Compania Salitrera Anglo Lautaro, and Compania Victoria. Chile has a track record of nationalizing natural resources industries. Beginning in 1966, the government of Chile created the Copper Corporation of Chile (Codelco). Codelcos primary objective was to increase state control over the copper industry through the authorization of direct participation in existing and new operations. By 1969, Chile owned a 51% stake in all major copper mines, with an option to purchase the remaining 49% over the following 13 years. Two years later, a law was passed to outright nationalize the entire industry. With respect to compensation, the expropriation was originally based on the book value of the mines. However, the administration at the time introduced the idea of excessive profits, which considered that multinationals had earned profits well above what was considered normal business practice. Accordingly, these excessive profits were deducted from the book value of the mines, resulting in no payment to the U.S. multinationals that owned them. In 2005, the Chilean Congress approved its Royalty Law (i.e., No. 20,206), which establishes a royalty tax to be applied to mining activities in Chile. After the February 2010 earthquake in Chile, the government proposed increasing both the Royalty Law and corporate tax rates to partially fund the recovery effort. With these changes now approved, we estimate that SQM will pay between $4 million and $6 million per year more in taxes going forward.
Chile has a track record of nationalizing natural resource industries.
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January 2011
ENVIRONMENTAL LAWS
SQMs operations in Chile are subject to a variety of national and local regulations relating to environmental protection. Under Chiles environmental laws, SQM is required to conduct environmental impact studies on all existing and future projects that may affect the environment. Changes in environmental laws and regulations could expose SQM to higher costs, liabilities, and claims. In 2010, Chile created the Ministry of Environment, the Environmental Assessment Service, and the Superintendent of the Environment, as well as various amendments to environmental laws. To date, these changes have had no impact on SQM.
MINING RIGHTS
SQM conducts its mining operations under exploitation and exploration concessions granted to it by the government of Chile. Exploitation concessions essentially grant a perpetual right to conduct mining operations provided the company pays annual concession fees. The exception to this is the companys Salar de Atacama rights, which have been leased until 2030. Exploration concessions permit SQM to explore for mineral resources on designated land for a specific period of time. Changes to these concessions and/or grants, as well as the companys water and port use rights, could negatively impact SQMs profitability, outlook, and ultimately its ADR price.
A Word on Water Rights
Water rights have been secured to grow MOP capacity to 2.2 million tonnes, either through SQMowned wells or through bulk water purchases. For incremental growth beyond that, SQM will need to bring water in from the sea, about 80 kilometres away. We estimate that the iodine cash cost per tonne will increase by $2,000 to $3,000, reaching between $16,000/tonne and $18,000/tonne. Accordingly, while SQMs incremental water requirements extend well beyond our forecast period, we do not view this as a material weakness or threat to the company.
LABOUR STRIKES
Of SQMs 4,000+ employees, 70% (up from 61% last year) are represented by 28 labour unions. Accordingly, the company is exposed to labour strikes, which, if continued for a sustained period of time, increase costs and possibly production disruption could occur.
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January 2011
JV Partnerships Accelerating Globally

YARA INTERNATIONAL ASA (NORWAY)
In 2001, SQM signed a transformational commercial distribution agreement with Yara, allowing the company to achieve significant cost synergies in its Specialty Plant Nutrition business. The formal agreement between the two companies was built on the 1999 success of SQM allowing Yara to market its NOP in Europe, while Yara allowed SQM to market its calcium nitrate in Latin America. The relationship strengthened further in 2004, when Yara acquired a 20.8% stake in SQM, matching PotashCorps ownership interest at the time. By 2005, Yara had increased its ownership of SQM to 24.9%. In April 2008, Yara divested its SQM holdings to redeploy funds to more profitable opportunities in India, Australia, and the United States. The distribution agreement between SQM and Yara is maintained.
Exhibit 8.78: SQM Migao Plant Schematic MIGAO (CHINA)
We think SQMs JV agreement with Migao is the best way for it to enter China.
SQM and Migao formed a JV in mid-2008 to construct a 40,000 tonne potassium nitrate facility to be located in Sichuan Province, China. As a by-product, about 22,400 tonnes/year of ammonium chloride will also be produced. Commissioning of the $20 million plant is underway. SQMs net production will be 20,000 tonnes/year of potassium nitrate, and 11,200 tonnes/year of ammonium chloride. We expect SQM to contribute ~$10 million to the JV. Exhibit 8.78 shows a schematic of the SQM Migao JV.
Source: Migao.
We provide research coverage on the common shares of Migao Corporation, and currently rate the stock 1-Sector Outperform, with a one-year target price of C$8.50 per share. For further details on our views on Migao, please refer to our January 2010 initiation piece, Finding Value in Growth.
QINGDAO STAR (CHINA)
SQM Star is a JV between SQM and Qingdao Star to produce, distribute, and commercialize soluble NPK specialty plant nutrients in China. On March 31, 2010, a plant was commissioned (on time) in Jimo, Shandong Province (about 40 kilometres north of Qingdao). The total investment for the 15,000 tonne NPK facility was $2 million, split 50/50 between SQM and Qingdao Star.
ROULLIER (FRANCE)
In December 2009, SQM signed a JV agreement with Groupe Roullier to form SQM Vitas. The JV will focus on the development of Specialty Plant Nutrition, Specialty Animal Nutrition, and Professional Hygiene. Initially, SQM Vitas will target the Peruvian, Brazilian, and Thai markets. However, in September 2010, SQM Vitas opened a phosphate plant in Dubai (MAP/urea phosphate). Founded in 1959, Groupe Roullier is a French multinational with operations in 40 countries covering 60 industrial units. The company has annual sales of $3+ billion, and focuses on agro supplies, professional hygiene, mineral and industrial products, plastics, food products, marine biotechnologies, and naval equipment. Roullier intends to expand its Vitas to 25 new countries over the next three years.
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January 2011
AKZO NOBEL (NETHERLANDS)
In mid-2005, SQM signed a global marketing cooperation agreement with Akzo Nobels Chelates and Micronutrients business. With the exception of Italy, Spain, and the United States, SQMs JV with Yara became the exclusive distributor worldwide for Akzo Nobels agricultural applications segment. Chelates are molecules that protect micronutrients from adverse soil conditions, making them more available for plants. Iron is the largest chelated micronutrient product segment, with copper, manganese, and zinc as other important market segments. Chelation of minerals improves the availability of these elements in soil, foliar, and hydroponic applications and allows for healthy plants and crops.
COROMANDEL (INDIA)
In Q2/09, SQM announced a 50/50 JV partnership with Coromandel Fertilizers Ltd. to produce and market water-soluble fertilizers in India. The first phase of the agreement involves a $2 million investment to construct a 15,000 tonne plant in Kakinada, which should be fully commissioned by early 2011. Kakinada is a fertilizer production hotbed, hosting major producers such as Godavari and Nagarjuna, as well as Cormandel. The area offers both an industrial deepwater port and railway terminals (Exhibit 8.79).
Exhibit 8.79: Strategic Location for SQM Coromandel
The worlds largest iodine user has now partnered with SQM.
INDIA
Kakinada
Source: Google Maps; Scotia Capital.
AJAY CHEMICALS (UNITED STATES)
Ajay Chemicals is one of the worlds largest users of iodine, specifically for pharmaceutical and industrial uses. By 1995, limited iodine availability constrained growth. To secure iodine supply, a JV was formed between Ajay (49%) and SQM (51%), which has now become the worlds largest consumer of iodine and the worlds largest producer of iodine derivatives.
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January 2011
Capex Program Signals Plentiful Organic Growth Opportunities

In our view, SQM has a proven ability to capitalize on market opportunities through JV partnerships and/or small, tuck-in acquisitions. In the absence of earnings-accretive external opportunities, SQM continues to commit capital toward its organic growth program. In 2008, SQM spent $287 million (up 55% over 2007) on its capex program, which was followed by $376 million in 2009 (up 18% over 2008). Exhibit 8.80 highlights its capex projects over the past several years.
Exhibit 8.80: SQMs Existing Energy-Related Contracts
2008 Capital Expenditures 2009 Capital Expenditures continue progress on a new NOP facility at Coya Sur; investments related to the increase of potassium-based capacity at Salar de Atacama; upgrades to SQM's railroad system to handle expanded capacity; and various small projects designed to maintain and optimize capacity, yields, and reduce costs.
Annual capex has been steadily increasing.
completion of the lithium carbonate facility expansion; initial construction of a new NOP production facility at Coya Sur; investments related to the increase of potassium-based capacity at Salar de Atacama; upgrades to SQM's railroad system to handle expanded capacity; construction of a new mining camp at Maria Elena; and various small projects designed to maintain and optimize capacity, yields, and reduce costs.
For 2010, SQM budgeted $370 million toward several projects, including: ~$40 million Construction completion of a $150 million potassium nitrate plant at Coya Sur, which increased SQMs NOP capacity by 300,000 tonnes to 950,000 tonnes;
~$125 million Several debottlenecking projects in the Salar de Atacama to continue toward eventual MOP capacity of 2 million tonnes by the end of 2012;
~$140 million maintenance capex; and
~$70 million exploration and other small programs to enhance production infrastructure and labour efficiencies. CAPEX OUTLOOK
Going forward, we expect SQM to spend between $300 million and $350 million per year on growth opportunities in 2011 and 2012. We note that this amount excludes JVs and/or acquisitions that may arise. We highlight some of our forward capex estimates below.
~$125 million Further debottlenecking projects in the Salar de Atacama that will enable an eventual MOP capacity of 2 million tonnes by the end of 2012;
~$150 million maintenance capex; and
~$75 million exploration and other small programs to enhance production infrastructure and labour efficiencies.
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January 2011
Financial Forecast
On the top line, we are looking for overall 2011 and 2012 gross sales of $2.1 billion and $2.4 billion, or a 16.6% year-over-year growth rate (Exhibit 8.81). The majority of our forecast growth in sales is expected to come from potash (MOP and SOP) and potassium nitrate (NOP) sales volume increases, as well as moderate per-tonne price hikes.
Exhibit 8.81: SC Forecast Sales by Business Unit
$700 $600 Forecast
Sales ($M)
$500 $400 $300 $200 $100 $0 2006 2007 2008 2009 2010 2011 2012
SPN
Iodine
Lithium
MOP/SOP
Gross profit should rebound in a similar fashion to sales, but should be dominated even more heavily by MOP (and some SOP) sales due to our expectations for a greater MOP margin contribution relative to SQMs other business segments (Exhibit 8.82). Exhibit 8.83 shows our gross margin forecast by business unit, which we believe will be led by both lithium and MOP/SOP.
Exhibit 8.82: SC Forecast Gross Profit by Business Unit
$300
Gross Profit ($M)
$250 $200 $150 $100 $50 $0 2006
Forecast
2007
2008
2009
2010
2011
2012
SPN
Iodine
Lithium
MOP/SOP
Exhibit 8.83: SC Forecast Gross Margin by Business Unit

100%
Gross Margins (%)
Forecast 80% 60% 40% 20% 0% 2006 2007 2008 2009 2010 2011 2012
SPN
Iodine
Lithium
MOP/SOP
455
January 2011
We forecast 2011 and 2012 EBITDA to come in at $883 million and $1,031 million, respectively, with an average 43% margin. Our EPS estimates for SQM are $1.96 (2011) and $2.34 (2012), above SQMs 2008 record of $1.91. Exhibits 8.84 and 8.85 show our EBITDA and net income forecasts.
$300 $250 Forecast 60% 50% 40% 30% 20% 10% 0% 2006 2007 2008 2009 2010 2011 2012
$200 $150 $100 $50 $0
EBITDA (LHS)
EBITDA Margin (RHS)

$250 Forecast 35% 30% 25% 20% 15% 10% 5% 0% 2006 2007 2008 2009 2010 2011 2012
$200 $150 $100 $50 $0
Net Income (LHS)

Income Margin (RHS)
Before working capital adjustments, we estimate that SQM will generate $845 million and $965 million in cash flow from operations in 2011 and 2012, respectively. Exhibit 8.86 highlights that post 2010, SQMs return on assets and return on equity should return to more normalized levels, but should still above pre-2006 levels.
35% 30%
Forecast
Return (%)
25% 20% 15% 10% 5% 0% 2002 2003 2004 2005 2006 ROA 2007 2008 ROE 2009 2010 2011 2012
456
Income Margin (%)
Net Income ($M)
EBITDA Margin (%)
EBITDA ($M)
January 2011

Exhibit 8.87: Our 2011 and 2012 SQM Estimates vs. Consensus
2011 Scotia Capital Est. Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/ADR) 2,060 883 515 1.96 Low 1,900 780 434 1.41 Street Avg. 2,073 853 501 1.91 High 2,322 965 577 2.39 Net Sales ($M) EBITDA ($M) Net Income ($M) EPS ($/ADR) Scotia Capital Est. 2,401 1,031 617 2.34 2012 Low 2,319 905 534 1.89 Street Avg. 2,498 1,063 662 2.38 High 2,724 1,240 787 2.99
DIVIDENDS
Foreign SQM ADR holders are subject to a 35% Chilean withholding tax.
The companys dividend policy is decided by its Board of Directors, and shareholder approval of the dividend policy is not required. Each Series A and Series B share is entitled to share equally in any dividends declared on the outstanding capital stock of SQM. Dividends payable to holders of ADRs are subject to a 35% Chilean withholding tax (subject to credits in certain cases). Under Chilean law, SQM must distribute a cash dividend of at least 30% of its net income. Historically, SQMs board has followed a policy of paying a single dividend of between 50% and 65% of net income. The dividend policy for 2008 established a 65% of net income benchmark. In mid-2008, SQMs board further modified its policy to pay an interim dividend of 20%, with the remaining 45% paid at the end of the year. As a result of the global financial crisis, SQM reduced its dividend to 50% in 2009. For 2011, 2012, and for the foreseeable future, we expect SQM to continue paying out 50% of its net income as dividends, and we do not expect any interim dividends to be declared during these years. Based on our forecast, we anticipate declared dividends (before withholding tax deductions) of $0.98/ADR and $1.17/ADR in 2011 and 2012, respectively, with each paid in Q2 of the following year.
DEBT
As at September 30, 2010, SQMs net financial debt was $680 million, representing a healthy net debt to EBITDA ratio of less than 1.2x. SQMs borrowings are split between bank debt and publicly issued bonds. Exhibits 8.88 and 8.89 show several breakdowns of SQMs debt.
Exhibit 8.88: SQM Debt Breakdown
Bank ST 3% Bank LT (CP) 3%
Exhibit 8.89: SQM Debt Maturity
0 - 1 years 19%
Bank LT 18%
SQMs debt is rated Baa1 and BBB by Moodys and S&P.
Bonds (CP) 2%
5+ years 52%
1 - 2 years 9% 2 - 3 years 9% 3 - 5 years 11%
Bonds 74%
457
January 2011
SQM is rated Baa1/Stable by Moodys and BBB/Stable by S&P. In mid-2010, Moodys upgraded Chiles credit rating to Aa3 from A1 to reflect the countrys demonstrated economic and financial resilience. The average debt-to-revenue ratio of 25% compares favourably with the Aa median of 88%.
Exhibit 8.90: Summary of SQM Debt
Short-Term Debt
Owing
($M)
Long-Term Debt
Owing
($M)
HSBC Bank Chile BBVA Chile Banco Estado Other
14.5 20.0 30.9 0.1 $65.6
ING Capital LLC Banco Estado NY Branch
80.0 140.0 $220.0
Series
Nominal Currency
(M)
Nominal Interest
(%)
Interest Payments
Principal Payments Par Value

($M)
Single C H G I J Single
0.2
US UF UF CLP UF CLP US
6.13% 4.00% 4.90% 7.00% 3.00% 5.50% 5.50% Nominal Interest

(%)
Semi Semi Semi Semi Semi Semi Semi Interest Payments
Maturity Semi Semi Maturity Maturity Maturity Maturity
2.5 6.1 3.6 1.3 0.4 1.3 2.6 $17.9
Series
Nominal Currency
(M)
Principal Payments Par Value

($M)
Single C H G I J Single
200 2.3 4.0 21,000 1.5 52,000 250
US UF UF CLP UF CLP US
6.13% 4.00% 4.90% 7.00% 3.00% 5.50% 5.50%
Semi Semi Semi Semi Semi Semi Semi
Maturity Semi Semi Maturity Maturity Maturity Maturity
200.0 90.1 155.0 38.4 58.1 95.1 250.0 $886.7
CLP - Chilean Pesos UF - Unidad de Fomento US - U.S. Dollars

458
459
503 218 129 71 32 90 1,043 663 90 290 70 220 11 -36 -11 184 38 5 141
26 0 0 26 26 263 263 263 263 263 263 263 263 263 263 263 263 263 263 263 263 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 263 263 263 263 263 263 263 263 263 0 0 263 263 263 0 0 263 263
Exhibit 8.91: SC Forecast SQM Income Statement
($M) 581 215 180 81 51 79 1,187 760 98 330 70 259 9 -20 -17 232 49 4 180 108 4 501 21 -1 86 21 -1 83 18 1 82 16 2 75 77 1 327 21 0 77 35 1 105 28 2 95 24 1 101
263 0 0 263 263
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 3/31/10 6/30/10 09/31/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 979 247 172 124 140 112 1,774 946 111 718 86 632 14 -20 -13 613 4 -8 -9 106 4 -8 -5 104 2 -7 -4 101 3 -8 -2 94 14 -31 -20 405 2 -8 -11 98 1 -10 -3 141 4 -9 -2 125 3 -8 -5 126 10 -34 -20 490 108 4 377
263 0 0 263 263
Specialty Plant Nutrition Iodine & Derivatives Lithium & Derivatives Industrial Chemicals MOP + SOP Other Total Revenue 146 35 141 21 120 19 112 19 110 20 100 79 442 18 114 18 153 19 132 22 136 77 534 25 169 3 -8 -5 159 30 1 128
263 0 0 263 263
146 43 25 22 72 13 321 175 39 131 216 39 129 228 39 120 764 152 521 218 39 132 270 35 172 273 36 151 231 49 157 991 159 612 264 48 195 249 50 185 24 161 3 -8 -5 150 29 1 120
263 0 0 263 263
166 49 28 24 61 18 345 267 51 195 26 169 2 -7 -5 159 30 1 128

263 0 0 263 263
170 46 32 34 78 23 384
167 52 33 34 74 26 388
649 190 118 116 285 80 1,437
128 63 34 27 125 11 389
173 87 44 40 118 15 477
152 92 37 42 114 23 459
139 56 36 29 152 25 437
591 298 151 138 509 75 1,761
150 63 41 33 202 18 507
153 63 43 33 174 18 483
156 63 44 33 194 23 513
159 63 45 33 230 26 557 293 52 211 28 184 4 -8 -5 174 33 1 140

263 0 0 263 263
617 252 174 132 800 85 2,060 1,073 201 785 103 682 12 -32 -20 642 122 5 515
263 0 0 263 263
731 266 198 149 956 100 2,401 1,249 220 931 120 811 14 -34 -22 769 146 6 617
263 0 0 263 263
COGS Depreciation Gross Margin
SG&A Operating Income
Financial Income Financial Expenses Other Pre-Tax Income
Income Taxes Minority Interest + Other Net Income
Opening ADRs (M) Plus: ADRs Issued (M) Less: ADRs Repurchased (M) Closing ADRs (M) Average ADRs (M) 5.36 310
30% 30% 42% 48% 44% 39% 36%
Net Income per ADR 357 743 154 151 149 139
0.68
1.91
0.33
0.32
0.31
0.29
1.24 594
41%
0.29 153
39%
0.40 189
40%
0.36 167
36%
0.38 184
42%
1.43 693
39%
0.48 217
43%
0.46 210
43%
0.49 220
43%
0.53 236
42%
1.96 883
43%
2.34 1,031
43%
EBITDA EBITDA Margin
January 2011
460
2006 184 248 365 4 33 12 846 917 18 34 2 53 1,871 983 24 33 3 39 1,986 1,120 37 31 3 38 2,567 1,155 35 30 3 40 2,949 1,189 36 30 1 42 2,959 1,264 34 29 1 46 3,087 1,324 55 29 4 46 3,203 1,324 55 29 4 46 3,203 1,303 59 38 4 45 3,017 1,339 62 27 4 46 3,128 1,394 62 26 4 46 3,388 1,370 62 26 4 46 3,553 1,370 62 26 4 46 3,553 1,415 62 26 4 46 3,738 1,458 62 26 4 46 3,689 1,499 62 26 4 46 3,861 164 292 388 4 31 25 904 324 386 541 5 72 12 1,339 569 427 579 10 85 16 1,685 469 398 632 6 94 62 1,661 485 426 647 5 98 52 1,712 536 394 638 5 74 97 1,745 545 394 638 5 74 97 1,745 359 400 634 5 53 118 1,568 387 421 618 6 74 145 1,651 616 431 640 6 52 112 1,856 713 528 634 7 52 112 2,045 713 528 634 7 52 112 2,045 676 612 725 7 52 112 2,184 652 584 685 7 52 112 2,093 699 620 734 7 52 112 2,224 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 604 673 805 8 52 112 2,254 1,539 62 26 4 46 3,931 2011E 0 133 110 0 8 89 105 446 230 286 95 611 477 160 826 47 1,510 2,567 2,949 2,959 3,087 3,203 477 160 912 46 1,596 477 161 769 43 1,450 477 161 852 44 1,533 477 162 827 46 1,513 477 162 827 46 1,513 3,203 477 162 865 45 1,549 3,017 160 471 102 734 235 651 102 989 275 635 110 1,020 365 670 110 1,145 365 670 110 1,145 325 666 114 1,468 420 666 99 1,534 477 162 910 45 1,594 3,128 489 666 110 1,714 477 162 991 45 1,675 3,388 0 188 121 101 14 106 88 619 0 154 140 101 16 17 93 520 0 154 158 101 15 12 94 534 0 100 187 151 16 1 90 545 0 100 187 151 16 1 90 545 0 141 133 57 19 1 13 364 0 83 109 50 16 1 90 349 0 141 94 50 17 1 146 449 0 141 177 120 17 1 146 601 369 662 110 1,743 477 162 1,127 45 1,811 3,553 0 141 177 120 17 1 146 601 369 662 110 1,743 477 162 1,127 45 1,811 3,553 0 141 203 120 17 1 146 627 369 658 110 1,764 477 162 1,289 45 1,973 3,737 0 141 192 120 17 1 146 616 369 654 110 1,749 477 162 1,256 45 1,940 3,689 0 141 205 120 17 1 146 630 369 649 110 1,758 477 162 1,419 45 2,103 3,861 0 141 225 171 17 1 146 701 198 645 110 1,654 477 162 1,593 45 2,277 3,931 0 2 108 1 9 16 57 192 0 180 307 79 565 477 163 542 46 1,228 1,986 0 58 87 1 6 13 33 197 0 180 301 68 548 0 477 155 453 39 1,125 1,871
Exhibit 8.92: SC Forecast SQM Balance Sheet

2012E 604 673 805 8 52 112 2,254 1,539 62 26 4 46 3,931 613 787 941 8 52 112 2,513 1,629 62 26 4 46 4,280
($M)
Cash + Equivalents Receivables Inventory Prepaid Expenses Deferred + Recoverable Taxes Other Current Assets
PP&E Investments Goodwill Long-Term Receivables Intangibles + Other Total Assets
Revolver S/T Debt + Commercial Paper Payables CP of L/T Debt CP of Bonds Deferred Taxes Other Current Liabilities
0 141 225 171 17 1 146 701 198 645 110 1,654 477 162 1,593 45 2,277 3,931
0 141 264 75 18 1 146 644 123 627 110 1,504 477 162 2,092 45 2,776 4,280
L/T Debt L/T Bonds Other Total Liabilities
Paid-in Capital Other Reserves Retained Earnings Minority interest Total Shareholders' Equity
January 2011
461
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 141 93 17 -3 -1 82 330 -108 221 180 101 34 -5 0 104 414 -103 311 501 113 45 -16 -3 217 858 -401 457 86 36 10 0 0 16 149 -80 68 83 39 38 -5 1 65 221 -191 30 82 40 -10 1 -1 38 149 -64 86 75 40 4 5 0 32 157 37 193 327 155 42 1 0 151 676 -298 377 76 32 6 0 0 43 158 -82 75 106 35 -3 0 0 48 187 -5 182 95 36 0 0 0 61 191 -50 142 101 49 0 0 0 35 185 -9 176 379 152 2 0 0 187 720 -145 575 128 48 0 0 0 35 211 -151 60 120 50 0 0 0 35 205 57 262 128 51 0 0 0 35 214 -71 143 140 52 0 0 0 35 227 -105 122 515 201 0 0 0 140 856 -269 587 -166 -107 13 -260 2 2 -179 -174 -250 -18 -10 -279 -71 0 16 -55 -71 0 -25 -96 -113 0 -3 -117 -100 1 -7 -105 -355 1 -19 -373 -73 -23 -1 -97 -69 19 -106 -156 -92 -15 138 31 -25 0 0 -25 -259 -19 31 -247 -93 0 0 -93 -93 0 0 -93 -93 0 0 -93 -93 0 0 -93 -370 0 0 -370 185 293 0 -406 0 72 3 36 148 184 -20 184 164 140 164 304 265 304 569 -112 569 457 9 457 466 70 466 536 232 304 536 0 -1 -3 19 -2 11 26 4 -171 530 359 -7 28 359 387 0 -62 0 -95 0 -157 180 -6 0 -213 0 -38 60 196 0 0 0 255 -104 169 0 -130 0 -64 155 0 0 -114 0 41 110 -36 0 -102 -2 -29 221 329 0 -346 -2 202 -154 0 0 0 0 -154 -170 0 250 -65 -7 8.1 20 0 0 0 37 57 0 229 387 616 -50 -4 0 0 0 -54 0 97 616 713 -354 -4 250 -65 30 -143 -3 182 530 713 0 -4 0 0 0 -4 0 -37 713 676 0 -4 0 -189 0 -193 0 -24 676 652 0 -4 0 0 0 -4 0 47 652 699 -120 -4 0 0 0 -124 0 -95 699 604 -120 -17 0 -189 0 -325 0 -109 713 604
Exhibit 8.93: SC Forecast SQM Cash Flow Statement

2012E
($M)
Operating Activities Operating Income Depreciation + Amortization Write Downs + Accruals Gain/Loss on sale of investments Gain/Loss on sale of PP&E FX + Other CFO (Pre-WC Adj.) Net change in non-cash WC
617 220 0 0 0 140 977 -212 765
Investing Activities Additions/Sale of PP&E Purchase/Sale of Investments Capitalized Interest + Other
-310 0 0 -310
Financing Activities Proceeds/Payments from Debt Proceeds/Payments from Bonds Equity Issuance/Buyback Dividends Other
-171 -17 0 -258 0 -446 0 9 604 613
Effect of inflation on cash and cash equivalents
January 2011
January 2011
Exhibit 8.94: SQM 2011E EPS Sensitivity to Potassium Chloride Volume Changes
2011 Potassium Chloride Volume (000 mt) $396 $421 $446 $471 $496 $521 $546 1,400 1.63 1.66 1.69 1.72 1.75 1.78 1.81 1,500 1.71 1.74 1.77 1.80 1.83 1.86 1.89 1,600 1.79 1.82 1.85 1.88 1.91 1.94 1.97 1,700 1.87 1.90 1.93 1.96 1.99 2.02 2.05 1,800 1.95 1.98 2.01 2.04 2.07 2.10 2.13 1,900 2.03 2.06 2.09 2.12 2.15 2.18 2.21 2,000 2.11 2.14 2.17 2.20 2.23 2.26 2.29
Exhibit 8.95: SQM 2011E EPS Sensitivity to MOP/SOP Gross Margin Changes
2011 MOP/SOP Price ($/mt)
2011 MOP/SOP Gross Margin (%) $396 $421 $446 $471 $496 $521 $546 33% 1.75 1.78 1.81 1.84 1.87 1.90 1.93 36% 1.79 1.82 1.85 1.88 1.91 1.94 1.97 39% 1.83 1.86 1.89 1.92 1.95 1.98 2.01 42% 1.87 1.90 1.93 1.96 1.99 2.02 2.05 45% 1.91 1.94 1.97 2.00 2.03 2.06 2.09 48% 1.95 1.98 2.01 2.04 2.07 2.10 2.13 51% 1.99 2.02 2.05 2.08 2.11 2.14 2.17
Exhibit 8.96: SQM 2011E EPS Sensitivity to Specialty Plant Nutrition Volume Changes
2011 Specialty Plant Nutrition Volume (000 mt) $396 $421 $446 $471 $496 $521 $546 520 1.69 1.72 1.75 1.78 1.81 1.84 1.87 620 1.75 1.78 1.81 1.84 1.87 1.90 1.93 720 1.81 1.84 1.87 1.90 1.93 1.96 1.99 820 1.87 1.90 1.93 1.96 1.99 2.02 2.05 920 1.93 1.96 1.99 2.02 2.05 2.08 2.11 1,020 1.99 2.02 2.05 2.08 2.11 2.14 2.17 1,120 2.05 2.08 2.11 2.14 2.17 2.20 2.23
Exhibit 8.97: SQM 2011E EPS Sensitivity to Specialty Plant Nutrition Gross Margin Changes
2011 Specialty Plant Nutrition Gross Margin (%) $396 $421 $446 $471 $496 $521 $546 24% 1.69 1.72 1.75 1.78 1.81 1.84 1.87 27% 1.75 1.78 1.81 1.84 1.87 1.90 1.93 30% 1.81 1.84 1.87 1.90 1.93 1.96 1.99 33% 1.87 1.90 1.93 1.96 1.99 2.02 2.05 36% 1.93 1.96 1.99 2.02 2.05 2.08 2.11 39% 1.99 2.02 2.05 2.08 2.11 2.14 2.17 42% 2.05 2.08 2.11 2.14 2.17 2.20 2.23
462

Exhibit 8.98: SQM 2011E EPS Sensitivity to Iodine & Derivatives Gross Margin Changes
January 2011
2011 Iodine & Derivatives Gross Margin (%) $396 $421 $446 $471 $496 $521 $546 36% 1.79 1.82 1.85 1.88 1.91 1.94 1.97 39% 1.82 1.85 1.88 1.91 1.94 1.97 2.00 42% 1.84 1.87 1.90 1.93 1.96 1.99 2.02 45% 1.87 1.90 1.93 1.96 1.99 2.02 2.05 48% 1.89 1.92 1.95 1.98 2.01 2.04 2.07 51% 1.92 1.95 1.98 2.01 2.04 2.07 2.10 54% 1.94 1.97 2.00 2.03 2.06 2.09 2.12
Exhibit 8.99: SQM 2011E EPS Sensitivity to Lithium & Derivatives Gross Margin Changes
2011 Lithium & Derivatives Gross Margin (%) $396 $421 $446 $471 $496 $521 $546 33% 1.81 1.84 1.87 1.90 1.93 1.96 1.99 36% 1.83 1.86 1.89 1.92 1.95 1.98 2.01 39% 1.85 1.88 1.91 1.94 1.97 2.00 2.03 42% 1.87 1.90 1.93 1.96 1.99 2.02 2.05 45% 1.89 1.92 1.95 1.98 2.01 2.04 2.07 48% 1.91 1.94 1.97 2.00 2.03 2.06 2.09 51% 1.93 1.96 1.99 2.02 2.05 2.08 2.11
Exhibit 8.100: SQM 2011E EPS Sensitivity to Industrial Chemicals Gross Margin Changes
2011 Industrial Chemicals Gross Margin (%) $396 $421 $446 $471 $496 $521 $546 36% 1.82 1.85 1.88 1.91 1.94 1.97 2.00 39% 1.84 1.87 1.90 1.93 1.96 1.99 2.02 42% 1.85 1.88 1.91 1.94 1.97 2.00 2.03 45% 1.87 1.90 1.93 1.96 1.99 2.02 2.05 48% 1.88 1.91 1.94 1.97 2.00 2.03 2.06 51% 1.90 1.93 1.96 1.99 2.02 2.05 2.08 54% 1.91 1.94 1.97 2.00 2.03 2.06 2.09
Exhibit 8.101: SQM 2011E EPS Sensitivity to FX Rate Changes in the Chilean Peso
2011 Chilean Peso per U.S. Dollar $396 $421 $446 $471 $496 $521 $546 $450 1.78 1.81 1.84 1.87 1.90 1.93 1.96 $480 1.81 1.84 1.87 1.90 1.93 1.96 1.99 $510 1.84 1.87 1.90 1.93 1.96 1.99 2.02 $540 1.87 1.90 1.93 1.96 1.99 2.02 2.05 $570 1.90 1.93 1.96 1.99 2.02 2.05 2.08 $600 1.93 1.96 1.99 2.02 2.05 2.08 2.11 $630 1.96 1.99 2.02 2.05 2.08 2.11 2.14
463
January 2011

Name
Position
Background Mr. Contesse has been CEO since 1988 and previously held the position in 1981 for two years. He has extensive experience in resource and industrial businesses as former CEO of Celco Limitada, Schwager S.A., and Compaa de Aceros del Pacfico S.A. Mr. Contesse is a member of the board of Soquimich Comercial S.A., a SQM subsidiary focused on the sales of fertilizer products. Mr. Ponce has been Chairman of the board since 1987 and joined SQM in 1981. Mr. Ponce is a trained forestry engineer and is also Chairman of the following corporations: Sociedad de Inversiones Pampa Calichera S.A., Sociedad de Inversiones Oro Blanco S.A., Norte Grande S.A., and Soquimich Comercial S.A. Mr. Ramos joined SQM in 1989 and has been CFO & SVP of Business Development since 1994. Mr. Ramos is a trained industrial engineer and a member of the board of Soquimich Comercial S.A. Mr. De Solminihac joined the company in 1988 becoming Vice Chairman of the board for eleven years in 1989. He has been COO since 2000 and previously held an executive role with Raychem Corporation, an electronics manufacturer. Mr. De Solminihac is also a member of the board of Soquimich Comercial S.A. Mr. Brownlee has served on the board since 2001. He is Executive VP and CFO of Potash Corp. and also serves on the board of Great Western Brewing Company and PhilomBios, an agriculture biotechnology company. Mr. Buchi has served on the board of SQM since 1993. He has a background in economics, and previously served as Minister of Finance for the Chilean government. Mr. Buchi is currently a board member of Quienco S.A., Banco de Chile, SACI Falabella, and Madeco S.A., among others. Mr. Yarur has served on the board of SQM since 2003. He is also a member of the Board of Banco de Crdito e Inversiones, Antofagasta Minerals, Invertec Pesquera Mar de Chilo S.A., and is a former Chairman of the Chilean Securities and Exchange Commission and the Council Organization of the Securities Regulators of America. He is trained in economics, finance and information engineering. Mr. Wallace has been on the board of SQM since 2001. He currently serves multiple fertilizer companies as a legal consultant and previously held the position of Senior VP and General Counsel with Yara International ASA until 2008. Mr. Von Appen has been on the board of SQM since 2005. He has an entrepreneurial background and currently serves on the board of Sociedad de Fomento Fabril, while holding a VP role with Centro de Estudios Publicos.
Patricio G. Contesse
President & CEO
n.a.
Julio L. Ponce
Chairman
n.a.
Ricardo R. Ramos
SVP & CFO
n.a.
Patricio T. de Solminihac
EVP & COO
n.a.
Wayne R. Brownlee
Director
n.a.
Hernan B. Buchi
Director
n.a.
Daniel E. Yarur
Director
n.a.
Kendrik Taylor Wallace
Director
n.a.
Wolf Von Appen
Director
n.a.
Other
n.a.
Total Fully Diluted Shares Outstanding % Insider Ownership
n.a 263,196,524 n.a.
Source: Reuters; SQM; Bloomberg; Scotia Capital.
464
Yara International ASA
January 2011

(YAR-OL)
Dec 31, 2010: Rating: Risk: IBES EPS 2011E IBES EPS 2012E 1-Yr Target: 1-Yr ROR: 2-Yr Target: 2-Yr ROR: Div. (Curr.): Yield Valuation: 7x 2012E EBITDA, 11x 2012E EPS, DCF @ 12.4%, 65% RCN Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather Qtly EPS (FD) (Next Release: 15-Feb-11) Y/E DECEMBER-31 Mar Jun 2009A 3.06A 3.88A 2010E 5.27A 12.87A 2011E 7.31 7.10 2012E 7.48 7.44 Qtly CFPS (FD) 2009A 2010E 2011E 2012E Mar -0.37A 11.61A 8.48 7.80 Jun -4.44A 5.57A 8.08 7.42 Sep 1.21A 6.67A 6.54 6.94 Sep -1.81A 7.31A 7.64 7.05 Dec 4.93A 5.39 6.21 6.57 Dec -3.37A 6.78 6.96 6.36 Year 13.08 30.19 27.16 28.43 Year -9.98 31.27 31.16 28.63 337.50 3-Sector Underperform High n.a. n.a. 300.00 -9.2% 320.00 -1.4% 6.34 1.9% Capitalization Shares O/S (M) Total Value (M) Float O/S (M) Float Value (M) 288.8 97,480.6 183.2 61,814.2
P/E 20.2x 11.2x 12.4x 11.9x P/CF n.a. 10.8x 10.8x 11.8x
All financial data is in Norwegian kroner (NOK) unless otherwise noted. Regular Voting Note: Historical price multiple calculations use FYE price. Source: Reuters; company reports; Scotia Capital estimates.
A Play on Natural Gas Price Spreads

Global leader in nitrogen. Yara International is the worlds largest nitrogen fertilizer producer, with ~20 million finished fertilizer tonnes of capacity. It is ranked #1 in ammonia, nitrates, NPK compounds, and specialty fertilizers. Yara also boasts the largest global fertilizer marketing and distribution network.
Low-cost advantages. Yara benefits from favourable cost positions in Europe, with nitrate and NPK costs ~10% below its competitors and an improving ammonia cost structure through its movement away from oil-indexed gas contracts. However, Europe represents only about half of Yaras business. Fundamentals supportive. We expect global nitrogen benchmark prices to deteriorate slightly in 2012. However, increasing nitrogen demand, low grain inventories, strong crop prices, more restrictive Chinese urea export tax rates, higher Ukrainian nitrogen producer delivered gas costs, and the increased relevance of Chinese coal-based urea economics all continue to support Yaras earnings profile. Target valuation. In one year from now, we expect Yara to trade at 7x 2012E EBITDA of NOK13.3 billion, 11x 2012E EPS of NOK28.43, and at about 65% of its replacement cost of NOK368 per share. We use these metrics, as well as a DCF at a 12.4% WACC, to set our one-year target price of NOK300. Current valuation. Yara is currently trading at 8.5x NTM EBITDA, 12.4x NTM EPS, and at 92% of its replacement cost. Our NOK300 target price implies a total rate of return of negative 9.2%. Getting to the next level. While we think Yaras valuation is currently rich, upside can be found in: (1) Yara increasing its share of low-cost gas nitrogen capacity; (2) continued capacity growth announcements to achieve an eventual ~40 million product tonne target; (3) the spread between Zeebrugge gas and Ukrainian producer gas costs; (4) global nitrogen capacity announcements, delays, or cancellations; and (5) further fertilizer demand recovery. We have initiated coverage on the common shares of Yara International ASA with a 3-Sector Underperform rating.
465
January 2011

Yara International offers investors exposure to the #1 nitrogen fertilizer producer on the planet. With ~20 million of finished fertilizer tonnes of capacity, and the worlds largest distribution network, Yara enjoys a cash cost production advantage of about 10% on its nitrates and NPK fertilizers. However, European ammonia and urea production are slightly less positive stories. While its true that Yara has made big strides toward improving its cost positions as it moves away from traditional oilindexed gas contracts to more spot, hub-based contracts Yara is not there yet. In fact, we estimate that 1.1 million tonnes of ammonia capacity are higher on the cost curve than Ukrainian swing nitrogen producers. Compounding the need for Yara to further improve its cost position, based on current economics, is a hefty amount of new global nitrogen capacity slated to come online over the next 12 to 24 months, much of which could be low on the cost curve. While its true that some of the high cost curve projects will likely fall away, coupled with 2.3% to 2.5% annual nitrogen demand growth through 2014E, we see these factors as somewhat offsetting. Accordingly, we are not positive on nitrogen price development through the end of 2012. Following Yaras failed bid for Terra Industries, we speculate that Yara was possibly eyeing PotashCorps nitrogen assets, had BHP been successful (and a seller). Yara is clearly focused on capacity growth in low-cost gas regions (i.e., Qafco and Lifeco), to reach an overall capacity of approximately 40 million product tonnes. Based on Yaras balance sheet strength and track record of transactions, we think further nitrogen asset acquisitions are only a question of when, not if.
Yara is the largest nitrogen producer in the world.
For fiscal 2011, we estimate sales, EBITDA, and fully diluted EPS of NOK77.7 billion, NOK12.8 billion, and NOK27.16, respectively generally in line with consensus estimates (US$1 = NOK6.00). In 2012, we are looking for sales of NOK75.1 billion, EBITDA of NOK13.3 billion, and EPS of NOK28.43. Our forecast 2012 EPS growth rate of 4.7% is due to slight volume increases that are mostly offset by declining nitrogen commodity prices.
INITIATING COVERAGE
We rate Yara 3-SU.
We have initiated coverage on the common shares of Yara International ASA with a 3-Sector Underperform rating. Our one-year target price is NOK300 per share. When included with our 2011 dividend forecast of NOK6.34 per share, we expect a one-year return of negative 9.2%. We value Yara using an equally weighted 7x 2012E EBITDA, 11x 2012E EPS, a DCF at a 12.4% WACC, and 65% of its replacement cost. Yara is currently trading at 8.5x NTM EBITDA, 12.4x NTM EPS, and at 92% of its replacement cost. We expect Yaras gas cost position to deteriorate (before improve) relative to its North American peers, which should move its shares closer to our NOK300 price objective. Our risk ranking for Yara International is High. We believe this risk ranking is justified due to: (1) the cyclical nature of the fertilizer industry, partially offset by low nitrogen demand elasticity; (2) the availability, price volatility, and spread differentials of global natural gas markets; (3) volatile crop price changes (and farmer incomes), to which changes in Yaras share price is strongly correlated; (4) exposure to emerging market risk; (5) the structure of the ~60% government-controlled global nitrogen industry; (6) the never-ending possibility of China reducing its urea export tax rates; and (7) the continued rollout of next-generation crop seeds, which likely require materially less nitrogen fertilizer application.
Our one-year target price is NOK300/share.
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January 2011

Yara International is the worlds largest producer of ammonia, nitrates, and NPK compounds. Additionally, Yara boasts leading positions in specialty fertilizers, boasts one of the most developed fertilizer marketing and distribution networks in the world, and has a small but growing nitrogen-based industrial products business.
The Norwegian government owns 36.2% of Yara.
Yara operates in 50+ countries, and sells to more than 120. The company has three operating segments: Upstream, Industrial, and Downstream. The Upstream segment is the backbone of Yaras production system, producing ammonia, urea, nitrates, NPK compounds, and phosphoric acid. The Industrial Products segment develops and sells nitrogen-based chemical products, industrial gases, and emission-abatement products to non-fertilizer businesses. Finally, Yaras Downstream segment markets and distributes fertilizers, as well as provides agronomic advice to complement and support its fertilizer sales. Headquartered in Oslo, Norway, and with a 105+ year history, todays Yara is the result of a 2004 demerger from Norsk Hydro. Accordingly, the Norwegian Ministry of Trade and Industry holds a 36.2% stake in the company. President and CEO Jorgen Ole Haslestad has led Yara since October 2008. Prior to this role, Mr. Haslestad was a Yara board member between 2004 and 2008. The majority of Mr. Haslestads executive management team were appointed to their positions since he took over as CEO. Together, insiders and related parties control (directly and/or indirectly) less than 1% of Yara International. Since 2004, Yaras common shares have traded on the Oslo Stock Exchange under the ticker symbol YAR. Exhibit 9.1 shows the stocks historical trading prices and volume. As at December 31, 2010, there were 288.8 million shares resulting in a market cap of NOK97.5 billion (~US$16.6 billion). Additionally, Yara has sponsored a Level 1 ADR in the United States. The ADRs are not listed, but trade OTC under the ticker YARIY.
Yara targets a 30% annual dividend payout, averaged over a business cycle.
Yara aims to return between 40% and 45% of net income to shareholders (i.e., dividends + share buybacks), averaged over a cycle. The companys dividend policy is to pay out a minimum of 30% of net income, also over a business cycle, with more than 30% paid out in years of weaker-than-average cash flows, and less than 30% during years of stronger-than-average cash flows. In 2009, total cash returned to shareholders was 19% of net income, which included an annual dividend of NOK4.50/share. Yara reports in Norwegian kroner (NOK or kr) using a December 31 year-end. Its financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).
Exhibit 9.1: Yara International ASA Stock Price Performance
NOK 350 NOK 300 NOK 250 NOK 200 NOK 150 NOK 100 Mar-09
Ticker: Last P rice: M arket C ap: 52 Wk H igh: 52 Wk Lo w: FD Shares O/S: YA R N O N OK 337.50 N OK 97.5B N OK 339.20 N OK 172.40 288.8M
12,000 Daily Volume (000s) 10,000 8,000 6,000 4,000 2,000 0 Dec-10
Price
Jun-09
Sep-09 Y A R (Price)
Dec-09
Mar-10
Jun-10
Sep-10
Y A R (V olume)
OSE Benchmark (rebased)
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January 2011
Corporate Profile
Yara International is the worlds largest producer of nitrogen fertilizers, with #1 global capacity rankings in ammonia, nitrates, NPK compounds, and specialty fertilizers. Additionally, Yara boasts the largest fertilizer marketing and distribution network in the world, accounts for about one-quarter of the global ammonia trade, and is Europes largest nitrogen-based manufacturer of industrial products.
Exhibit 9.2: Gross Capacity by Product
UAN, 2.2 CN solids, 0.8 Ammonia, 8.1
#1 in ammonia, nitrates, NPK, and specialty fertilizers.
NPK, 5.9
Yaras gross production capacity is about 36.5 million product tonnes, of which 80% is composed of ammonia, nitric acid, nitrates, and NPK compounds (Exhibit 9.2). Production capacity of finished fertilizers is about 20 million tonnes. The majority of its capacity is in Europe (its home territory), although Yara continues to expand to lowercost gas regions, such as the Middle East. We estimate that Yara has a 7% market share of the global nitrogen business. The companys long-term goal is to increase sales up to approximately 40 million tonnes, which management believes will optimally utilize its downstream system.
Nitrates, 6.3
Nitric Acid, 8.6
Urea, 4.3
Phos Acid, 0.3
Source: Yara International; Scotia Capital.
To increase its market share, Yara intends to: (1) focus on participating in mature market consolidation; (2) expand its presence in high-growth markets; and (3) increase production in regions with low-cost and stable natural gas supply. Exhibit 9.3 highlights Yaras regional market presence.
Exhibit 9.3: Regional Sales
30,000 Sales (NOK M) 25,000 20,000 15,000 10,000 5,000 0 European Union Other Europe Africa Asia & Australasia North America South and Central America 40,911 Highest grow th region
2005
2006
2007
2008
2009
Exhibit 9.4: Yaras Corporate Level Returns

35% 30%
29.0%
We expect Yara to post much stronger returns in 2010.
25%
21.3% 20.5%
22.4%
22.9% 20.7% 17.4%
20%
16.1%
15% 10% 5% 0%
14.4%
14.1%
8.5%
7.4%
Yaras financial performance in 2009 was abysmal but no different than most global fertilizer producers. Net sales were down 31% year over year to NOK61.4 billion. While sales volumes were, on average, 2.1% below 2008 levels, the collapse of global fertilizer prices was the real culprit for a poor cash return on gross investment (CROGI), and return on capital employed (Exhibit 9.4). We expect Yaras CROGI and ROCE metrics to turn around materially in 2010. Exhibit 9.5 highlights Yaras gross sales by key products and business segments over the past several years.
2005
2006
2007 CROGI
2008 ROCE
2009
2010E
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January 2011
Exhibit 9.5: Yaras Gross Sales by Business Line and Product

Estimated Gross Sales (NOK Billions) 35 30 25 20 15 10 5 0 07 08 09 07 08
NPK 7.4 14.3 8.3 7.1 13.8 9.5 6.3 4.9 5.2 4.2 8.2 14.2 24.7 20.7 15.4 10.9 6.2 6.6 11.0 8.7 8.6 7.4 21.4 29.3
09
07
08
09
07
08
Other
09
07
08
NPK
09
07
08
09
07
08
Other
09
07
08
09
Am m onia
Nitrates
Nitrates
Industrial
UPSTREAM
DOWNSTREAM
INDUSTRIAL
UPSTREAM
Upstream capacity is about 27.1M (gross) mt.
Yaras Upstream segment is the backbone of the companys production system, producing ammonia, urea, nitrates, NPK compounds, and other nitrogen-based products. Upstreams total capacity is about 27.1 million (gross) product tonnes, only half of which is considered finished fertilizer capacity (i.e., ammonia and nitric acid excluded) Specifically, Upstream owns a 100% interest in 11 facilities, and has 25% to 50% interests in another seven plants. Exhibit 9.6 summarizes the typical chemical processes that Yara employs to produce its end-products.
Exhibit 9.6: Upstream Production Processes
Gas Air
Ammonia plant NH3
CO2 Urea
Air
Nitric acid plant HNO3
Ammonium nitrate Calcium nitrate NPK fertilizers DAP/MAP
Rock
Nitrophosphate plant Salts of K, Mg, S
Rock
Phosphoric acid plant H2SO4 H2PO4
Rock
Sulphuric acid plant

Rock
Triple Super Phosphate
Yara is able to swing produce about 2/3 of its ammonia capacity.
We estimate that Yara is able to swing approximately two-thirds of its European-based ammonia production capacity without affecting fertilizer production. How? Yara can mitigate high European energy costs or take advantage of low ammonia prices by closing its ammonia production and running most of its nitrates and NPK facilities based on imported ammonia. For full details on Yaras Upstream business, please refer to page 483.
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January 2011
INDUSTRIAL
Yaras fastest growing business is nitrogen-based environmental products.
Yaras small but rapidly growing Industrial segment helps it diversify beyond high fertilizer cyclicality (and seasonality) by offering products and solutions that are not only suitable for a wide range of industries, but are also in demand on a year-round basis. The primary applications of the Industrial segments products and solutions are for environmental, food and beverage, and civil explosives purposes. Specifically, Yaras products and services within its Industrial segment are organized into four groups: (1) environmental solutions; (2) carbon dioxide and dry ice; (3) chemicals; and (4) technical nitrates. For full details on Yaras Industrial business, please refer to page 489.
DOWNSTREAM
Yaras Downstream segment consists mostly of its worldwide marketing organization as well as its global distribution network for both fertilizers and agronomic solutions. Downstreams primary objective is to sell either produced fertilizers (by Yara or JVs) or third-party sourced product.
Downstream has a physical presence in 50+ countries.
Downstream is physically present in more than 50 countries, with sales to more than 120. While the Downstream segment has 5.6 million product tonnes of its own finished fertilizer manufacturing capacity (or 8.5 million tonnes gross), the majority of its product is transferred into the segment from Upstream. Accordingly, we do not consider Yaras Downstream segment to be relatively capital intensive. For full details on Yaras Downstream business, please refer to page 494.
JOINT VENTURES
Yara has numerous high-quality, strategic joint venture agreements that are mostly with nitrogen producers in lower-cost gas regions of the world. In our minds, these JVs play a significant role in helping Yara reduce its exposure to relatively high-cost European natural gas.
DISTRIBUTION, TRANSPORTATION, AND STORAGE
Yara boasts the worlds largest fertilizer distribution system.
Yara boasts the worlds largest storage capacity for fertilizer, enabling the company to build up stocks before peak seasons, handle unforeseen volatility in deliveries, and take advantage of geographical arbitrage opportunities. Yaras global distribution and marketing network includes more than 200 terminals, warehouses, blending plants, and bagging facilities located in more than 50 countries.
A BRIEF HISTORY OF YARA INTERNATIONAL
The evolution of Yara is rooted in the Norwegian industrial firm Norsk Hydro, which was founded in 1905. Norsk Hydro was the worlds first company to commercially manufacture and market nitrogen fertilizer (calcium nitrate). Over the following decades, Norsk Hydro ventured into numerous business lines, including oil and gas, metals, and of course, fertilizers. Fast-forward to March 2004, when Norsk Hydros Hydro Agri business unit demerged from the conglomerate. Hydro Agri changed its name to Yara International, with its shares listed on the Oslo Stock Exchange. Exhibit 9.7 summarizes key events since the demerger.
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January 2011
Exhibit 9.7: Yaras Key Events Since Its Demerger from Norsk Hydro
2004 2004 2004 2004 2004 2005 2005 2005 2006 2006 2006 2006 2006 2006 2007 2007 2007 2007 2008
Hydro Agri renamed Yara International; shares listed on the Oslo Stock Exchange. Qafco-4 commissioned, the w orld's largest fertilizer complex at the time. Yara becomes Europe's leading CO2 supplier w ith a new plant opened in Germany. Yara buys a 30% stake in Russian NPK and AN producer Rossosh. Yara acquires a 30% stake in Burrup, w hich follow s a 2002 agreement for Yara to market 100% of Burrup's ammonia output. Yara increases its stake in SQM to 24.9%, a relationship that began in 1999, and w hich w as enhanced in 2001 by a global marketing agreement. Yara opens the w orld's largest AdBlue/DEF plant, for European trucks to meet emissions standards. Yara signs a global marketing cooperation agreement for chelated micronutrients w ith Akzo Nobel. Yara takes a 3.2% stake in China BlueChemical's IPO. China BlueChemical is a subsidiary of CNOOC that produces ammonia, urea, and methanol. Yara purchases Mexican fertilizer company Olmeca from SQM. Yara becomes the 2nd largest fertilizer company in Brazil through a 48.1% acquisition of Fertibras for $126 million. At the time, Fertibras ow ned 15% of Fosfertil - the largest phosphate and nitrogen producer in Brazil. Yara divests most of its shipping assets (seven ammonia vessels and three charters) to Bergesen Worldw ide Gas for $347 million. Yara buys remaining 65% of British-based Phosyn. Yara's predecessor company had purchased a 35% stake in Phosyn in 1997. Yara spends $53 million to acquire a 50% interest in fertilizer trading company Balderton. Yara establishes a 50/50 CO2 JV w ith Praxair. Yara establishes a 50/50 mineral fertilizer JV w ith India's 67% state-ow ned Kribhco, to manufacture and sell NPK compounds. Yara enters into a JV w ith Libya's NOC, w hich includes NOC assets of 0.7 million tonnes of ammonia (gross), and 0.9 million tonnes of urea. Yara completes acquisition of Kemira Grow How - one of the leading producers of fertilizers and feed phosphates in the w orld. Yara agrees w ith regulators to dispose of certain Kemira assets that accounted for less than 5% of its revenue. Yara's 25%-ow ned Qafco JV announces Qafco-5, w hich upon completion, w ould increase Qafco output to 3.8 million tonnes of ammonia, and 4.3 million tonnes of urea. Yara divests half of its stake in China BlueChemical and its interest in SQM. The marketing agreement betw een SQM and Yara remains in tact. Somew hat offsetting, Yara enters into a JV w ith India's Deepak Fertilisers, acquires a 25% stake in Agrico Canada, purchases Saskferco, and announces a phosphate rock expansion project. Yara permanently closes its Peremarton NPK plant in Hungary (ex Kemira Grow How ). Construction of Urea-7 begins at Sluiskil. Qafco-6 is announced. Yara acquires the remaining 50% of Balderton for $130 million. Balderton typically trades betw een three and four million tonnes of fertilizer annually. Yara agrees to sell its 15.5% stake in Fosfertil to Vale for $785 million. Yara signs a cash merger agreement w ith Terra Industries. Yara fails to complete its acquisition; and ultimately Terra Industries is acquired by CF Industries. Yara exits its retail activity in South Africa, by selling its 50% interest in Sidi Pirani to its partner, GWK Coop, at book value.
2008 2009 2009 2009 2010 2010 2010 2010
471
Exhibit 9.8: Map of Yara Internationals Operating and Investing Activities
472
26 1,4, 13 19 12 2 8 6, 14, 15, 20 5,17 25 24 3,16 9,22,23 10, 11 7,21 18 27
1, 4,13 19 10, 11 9,22, 23 2 8
28 29 30 31 32 13 14 15 16 17 18 Industrial 19 Koping 20 Paradies Downstream Glomfjord Montoir Ambes Rostock Ravenna Rio Grande 21 22 23 24 25 26 27 Investments (Production) Tringen (49%) Ince (50%) Billingham (50%) Qafco (25%) Lifeco (50%) Rossosh (30%) Burrup (30%)
1 Corporate HQ
2 3 4 5 6 7 8 9 10 11 12
Upstream Sluiskil Brunsbuttel Porsgrunn Ferrara Le Havre Yara Trinidad Tertre Hull Uusikaupunki Siilinjarvi Belle Plaine Sales Offices 2 in North America 36 in Europe 16 in Asia/Oceania 10 in Africa 9 in Latin America
3,16 6, 14, 15, 20 5,17
January 2011
January 2011
What We Like About Yara International

WHEN IN DOUBT, APPLY NITROGEN
Unlike potash- and phosphate-based fertilizers, nitrogen-based fertilizers must be applied to the soil every year to maintain both yield and biomass (Exhibit 9.9). This is due to soils generally being unable to retain nitrogen relative to both potash and phosphate. Usually, between 60% and 65% of annual fertilizer nutrients applied to soil are nitrogen-based.
Exhibit 9.9: N Matters More than P & K
Prim ary Benefit Application
Historically, global nitrogen demand shows much less volatility than both potash and phosphate application volumes. As the worlds largest producer of nitrogen fertilizers, Yaras sales volumes have exhibited much more relative stability than potash and phosphate producers such as PotashCorp and Mosaic. However, we note that ammonia, urea, and other nitrogen-based fertilizer prices are highly volatile, while potash and phosphate prices generally exhibit slightly greater stability.
Potash (K)
Global nitrogen demand is less volatile than phosphate and potash.
16% 23%
Improves crop quality
Phosphate (P)
Annual application not alw ays done (i.e., last year!)
Nitrogen (N)
62%
Increases crop size Most important and commonly lacking nutrient
Annual application is critical
LOW-COST GAS PRODUCTION RISING
As a consumer of high-cost European natural gas, Yaras cash cost advantage has generally been limited to Europe, as it competes locally against higher-cost Ukrainian nitrogen producers.
Yara is continuously increasing its share of low-cost gas feedstock.
To strengthen its nitrogen margins and market share, Yara has made it a top priority to increase the proportion of natural gas that it sources from low-cost regions. Last year, Yaras share of low-cost gas increased to 37% from 29%. This was mostly due to increased production capacity at its Burrup facility, as well as a 50/50 nitrogen complex JV in Libya. Why is sourcing low-cost natural gas important to Yara? Natural gas makes up 75% to 90% of the cash cost of ammonia, up to 80% of the cost of urea, and up to 70% of the cost of other nitrates.
NITROGEN FLEXIBILITY
Unlike potash and phosphate facilities, where fixed costs are relatively high, the majority of Yaras operational cash costs are variable, as purchases and plants can be adjusted at short notice in response to delivery slowdowns (see Exhibit 9.10).
Exhibit 9.10: Mostly Variable Operating Costs
60
2009 Op Cash Costs (NOK Billion)
The majority of Yaras cash costs are variable.
55 50 45 40 35 30 25 20 15 10 5 0 47.4 6.6
What Flexible Production Means - it takes half a w eek to stop and one w eek to start an ammonia/urea complex - cost of stopping a plant is tw o days' energy - cost of starting a plant is three days' energy
Increased energy costs in Europe can be mitigated by importing instead of producing ammonia. Additionally, Yara has the worlds largest storage capacity for fertilizer, enabling the company to build up stocks before peak seasons and thereby handle volatility in deliveries and take advantage of geographical arbitrage opportunities.
Variable costs ~88% - dry raw materials - energy - freight - 3rd party finished fertilizer
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January 2011
SUPERB GEOGRAPHIC DIVERSIFICATION
Although based in Europe, about half of Yaras revenue and investments are from overseas markets (Exhibits 9.11 and 9.12). This diversification allows the company to mitigate against materially damaging weather-related risks.
Exhibit 9.11: Geographic Revenue (2009)
Belgium , 1.9%
Exhibit 9.12: Geographic Investments (2009)

Belgium , 4.3% Denm ark, 0.7% Asia, 1.2% Australasia, 0.0% Finland, 11.6% France, 3.8% Germ any, 4.4% Great Britain, 3.3% Italy, 1.6% Europe 58.5% Latin Am erica, 2.9% North Am erica, 11.7% Spain, 0.1% Sw eden, 1.1% Netherlands, 18.8% Norw ay, 8.8% Other, 0.0%
Half of Yaras business is located outside of Europe.
Asia, 9.2% Australasia, 1.0% Africa, 9.4%
Denm ark, 2.2% Finland, 2.8% France, 8.4% Germ any, 5.6% Europe 50.2% Great Britain, 6.7% Italy, 4.7% Spain, 2.6% Sw eden, 1.9%
Africa, 25.8%
Latin Am erica, 17.5%
North Am erica, 12.7%
Netherlands, 2.3% Norw ay, 2.2% Other, 8.9%
Africa/Middle East. Yara is the only global fertilizer company with a permanent presence in Sub-Saharan Africa. In the Middle East, Yara has a 25% stake in Qafco, the worlds largest production site for ammonia and urea, and it recently strengthened its position in the Middle East through a new JV in Libya. Asia/Australia. In Asia, Yara has numerous sales offices scattered throughout the region, as well as a plant in Malaysia. In Australia, the company has strengthened its foothold by entering into a JV to construct a world-class technical ammonia nitrate (TAN) production facility in Burrup1. Americas. Yara also has a robust presence in Latin America, specifically in Brazil, which we believe is a key growth market for fertilizers. In addition to Yaras fertilizer presence in North America, the company is also developing the NOx abatement market, which in our view offers up to a 10% annual growth rate over the next several years. Europe. Finally, Europe is where Yaras strongest position and market shares remain in fertilizers, nitrogen applications, and environmental solutions.
LOW EUROPEAN PRODUCER NITRATE STOCKS
Nitrate premiums over urea prices are above the fiveyear average.
European nitrate inventories are at or near five-year lows (Exhibit 9.13). In our view, this bodes well for Yara (more than all others), as it reflects positively on the outlook for both nitrate pricing and volumes. For 2011, we forecast nitrate sales from Yaras downstream segment to come in at 6.34 million tonnes. Additionally, nitrate price premiums to urea are now exceeding the five-year average, as well as last years prices (Exhibit 9.14).
In November 2010, Yara commenced legal action against Burrup after the company blocked attempts to allow an independent auditor to undertake a full inspection of Burrups books. Yara, which is a 35% shareholder of Burrup (and markets 100% of the production from Australias only ammonia plant), wanted to address the following concerns: (1) the failure of Burrup to prepare its financial statements; (2) unexplained high costs; (3) the lack of transparency with respect to corporate governance; and (4) media allegations of the misuse of Burrup funds. Burrup subsequently entered into receivership, to which Yara stated, we are more comfortable now with the bank controlling the other 65% of the shares than we were a few weeks ago. Yaras CFO of Asian operations has been placed in charge of Burrup, and operations continue for now. It is possible that Incitec Pivot could be interested in purchasing the 65% of Burrup that is for sale, in order for ANZ Bank to be repaid the $360 million owed to it.
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January 2011
Exhibit 9.13: European Nitrate Stocks Are Low
Exhibit 9.14: Nitrate Premiums Over Urea
Nitrate inventories are at, or near, four-year low s.
Source: Yara International; EFMA; Scotia Capital.
Source: Yara International.
INCREASING EARNINGS STABILITY THOUGH INDUSTRIAL PRODUCTS GROWTH
Yaras Industrial segment develops and markets chemical products and CO2 to non-fertilizer markets. Products and services include nitrogen products for the chemical and civil explosives industries, CO2 for the food and beverage industries, and a growing portfolio of environmental solutions. Over the past several years, volumes from the Industrial segment have shown counter-cyclical development, as seen in Exhibit 9.15.
Exhibit 9.15: Industrial Volumes Are Counter-Cyclical to Downstream Volumes
31% Industrial - Environmental 29% 27% 25% 23% 21% 19% Q1 2004 2005 Q2 2006 2007 Q3 2008 Q4 2009
35% 33% 31% 29% 27% 25% 23% 21% 19% 17% 15% Q1 2004 2005 Q2 2006 2007
Industrial Seasonality
Downstream - CN
Downstream Seasonality
Q3 2008
Q4 2009
Our financial forecast leaves room for Industrial segment upside.
We anticipate that Yaras Industrial segment, and particularly its environmental solutions business, will begin to account for an even greater part of Yaras earnings going forward. Why? Governments around the world continue to tighten regulations and seek solutions for better air quality. Over a full business cycle, Yara aims to achieve an Industrial segment annual growth rate of between 10% and 15%. While we are hopeful that Yara will be able to achieve this, we conservatively model ~5% growth, leaving significant upside to our financial forecast.
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January 2011
Valuation
OVERVIEW
We have initiated coverage on the common shares of Yara with a 3-Sector Underperform rating and a one-year target price of NOK300 per share. When coupled with our forecast NTM dividend of NOK6.34 per share, we expect investors to earn a one-year pre-tax total return of negative 9.2%. Our one-year Yara target price of NOK300 per share is derived from four different valuation methodologies, as follows: (1) a discounted cash flow approach; (2) an enterprise value to forward EBITDA multiple; (3) a price to forward earnings multiple; and (4) a replacement cost new calculation. We weight each of the four approaches equally. Our valuation work is extremely sensitive to various prices, volume, and other assumptions used within our financial forecast (Exhibits 9.16 and 9.17). For full details on our earnings sensitivities, please refer to pages 511-512. We summarize our valuation work below.
Exhibit 9.16: Yara Key Assumptions
2011E Upstream Ammonia (M mt) Total (M mt) Ammonia ($/mt) Urea ($/mt) Industrial Environmental products (M mt) Industrial N-chemicals (M mt) Downstream Nitrates (M mt) NPK (M mt) Total (M mt) 7.3 19.4 360 345 2012E 7.4 19.7 335 315
Exhibit 9.17: Yara Summary Sensitivities

2011E Sensitivity Phosphate Rock Cost ($/mt) Urea ($/mt) Ammonia ($/mt) Nitrates ($/mt) Zeebrugge Gas ($/mmBtu) Crude Oil ($/bbl) Henry Hub Gas ($/mmBtu) NOK (US$)
$10 $10 $10 $10 -$0.50 -3.0 -0.5 0.1
EPS
+ NOK 0.14 + NOK 1.70 + NOK 0.07 + NOK 1.29 + NOK 0.80 + NOK 2.43 + NOK 0.20 + NOK 0.37
1.3 3.1
1.3 3.2
6.3 6.5 20.9
6.5 6.6 21.3
Our DCF approach yields a one-year price value of NOK367 per Yara share. We apply a WACC of 12.4% and a long-term growth rate of 1.75%. Exhibit 9.18 highlights our WACC build-up calculation. Our terminal growth rate of 1.75% is 0.75% below most fertilizer stocks that we cover. Why: (1) nitrogen and Europe are both mature fertilizer markets; (2) there is a significant amount of new ammonia and urea capacity expected online through 2013; and (3) delivered natural gas cost spreads between Yara and swing producers could contract, and widen further between Yara and North American producers.
Exhibit 9.18: Yara WACC
Exhibit 9.19: Yara Summary DCF

(NOK M) EBITDA Less: Taxes Less: Change in NWC Less: CAPEX Free Cash Flow PV of Free Cash Flow 1 Net Present Value Less: Net Debt Equity Value Equity Value (NOK/sh) Equity Value, Rounded (NOK/sh) Last Price, Rounded Implied ROR 119,574 13,603 105,972 NOK366.90 NOK367 NOK338 9% 2011E 12,829 2,077 -722 2,150 9,323 8,292 2
$366.90 1.25% 1.50% 1.75% 2.00% 2.25%
2012E 13,299 2,169 146 2,300 8,685 6,870 3
2013E 13,967 2,299 -48 2,450 9,266 6,519 4

14.4% 301 308 314 321 328
2014E 14,422 2,387 152 2,600 9,283 5,809 5
2015E 14,320 2,364 -149 2,750 9,355 5,206 6

11.4% 381 390 401 412 423 WACC 12.4% 350 358 367 376 386
Terminal 14,570 2,547 -100 3,000 9,123 86,878
13.4% 324 331 338 346 354
10.4% 417 429 442 455 470
Source: Scotia Capital estimates. Source: Scotia Capital estimates.
476
Terminal
January 2011
On a one-year forward EV/EBITDA basis, Yara is currently trading at 8.5x our NTM (2011E) EBITDA estimate of NOK12.8 billion. We believe this is a high trading multiple for Yara, based on the outlook for Western European gas costs, nitrogen prices, and spectacular U.S. shale gas nitrogen economics. Our target 7x EV/NTM EBITDA yields a price value of NOK280 per share in one year from now. Exhibit 9.20 summarizes our justification for a 7x EV/NTM EBITDA multiple. Specifically, we made the following adjustments to our general fertilizer EV/NTM EBITDA multiples:
1. We lowered our general 8x nitrogen EV/NTM EBITDA multiple by 1.5x to 6.5x for Yara. Yara operates as a high-cost producer relative to its North American peers. In our view, Yara could slide further down the nitrogen production cost curve unless its able to bring its low-cost gas share up to 50% over the mid-term (currently one-third). 2. We apply a 10x EV/NTM EBITDA multiple to Yaras Industrial segment, to account for our expectation of strong margin growth within the Environmental Products group.
Exhibit 9.20: Yara EV/NTM EBITDA Buildup
[A]

[B]
Yara EV/EBITDA
[C=A+B]
2012E EBITDA
[D, NOK M]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
Yara Price Value Calculation

(NOK M)
Nitrogen Phosphate Potash Retail Industrial
8.0x 9.0x 11.0x 7.0x -
-1.5x 0.0x 0.0x 0.0x -
[1]
6.5x 9.0x 11.0x 7.0x
10,905 532 0 0 1,862 13,299
82% 4% 0% 0% 14% 100%
5.3x 0.4x 0.0x 0.0x 1.4x 7.1x
2012E EBITDA YAR EV/EBITDA Multiple* Implied EV Cash Debt Equity Value FD Shares O/S (M) Implied Price Value
13,299 7.0x 93,095 2,665 -14,801 80,959 288.8 NOK280.30
[2]
10.0x
Notes 1. High-cost producer relative to North American peers. North American nitrogen economics are improving quickly, low ering Yara's position on the nitrogen cost curve.
Exhibit 9.21 shows Yaras historical forward EV/NTM EBITDA trading range, which has averaged 7.2x over the past several years. Yara has historically traded at a slight discount to its peers (ex 2009), due to a discount placed on nitrogen assets in general, compared with both phosphate and potash. We think that the current 8.5x NTM EBITDA multiple is unsustainable for the reasons given above. We expect Yara to move toward a 7x NTM EBITDA multiple over the coming year.
Exhibit 9.21: Yara EV/NTM EBITDA Chart
20x NTM EV/EBITDA Multiples 15x 10x 5x 0x Dec-06
Jun-07
Dec-07
Jun-08 YAR
Dec-08 YAR Average
Dec-09
Jun-10
477
January 2011
On a forward P/E basis, Yara is currently trading at 12.4x our NTM (2011E) EPS estimate of NOK27.16. In our minds, Yara should move toward 11x NTM EPS over time, which implies a NOK313 price value. Exhibit 9.22 summarizes our justification for an 11x forward P/E multiple. Specifically, we made the following adjustments to our general fertilizer P/E multiples:
1. We apply a 10x nitrogen-based NTM P/E multiple. Yara operates as a high-cost producer relative to its North American peers. In our view, Yara could slide further down the nitrogen production cost curve unless its able to bring its low-cost gas share up to 50% over the mid-term (currently one-third). 2. We apply a 15.5x NTM P/E multiple to Yaras Industrial segment to account for our expectation of strong margin growth within the Environmental Products group.
Exhibit 9.22: Yara NTM P/E Buildup
[A]

[B]
Yara P/E Ratio

[C=A+B]
2012E EPS
[D, NOK/sh]
2012E Weight
[E]
Weighted Multiple
[F=CxD]
Yara Price Value Calculation

(NOK/sh)
Nitrogen Phosphate Potash Retail Industrial

Notes
12.5x 13.5x 16.0x 11.0x -
-2.5x 0.0x 0.0x 0.0x -
[1]
10.0x 13.5x 16.0x 11.0x 15.5x
kr 23.31 kr 1.14 kr 0.00 kr 0.00 kr 3.98 kr 28.42
82% 4% 0% 0% 14% 100%
8.2x 0.5x
2012E EPS YAR P/E Multiple* Implied Price Value
28.42 11.0x NOK312.67
0.0x 0.0x 2.2x 10.9x
1. High-cost producer relative to North American peers. North American nitrogen economics are improving quickly, low ering Yara's position on the nitrogen cost curve.
Exhibit 9.23 shows Yaras historical forward P/E trading range, which has averaged 10.2x over the past five years. Yara has historically traded at a slight discount to its peers, due to a discount placed on nitrogen assets in general, compared with both phosphate and potash. We think that the current 12.4x NTM earnings multiple is unsustainable, and we expect Yara to move toward an 11x forward earnings multiple over the coming year.
Exhibit 9.23: Yara NTM P/E Chart
Jun-07
Dec-07
Jun-08 YAR
Dec-08 YAR Average
Dec-09
Jun-10
Dec-10
478
January 2011
We believe the replacement cost for Yara, net of minority and JV interests, is about NOK368 per share, which is detailed in Exhibit 9.24. Our replacement cost estimates are derived from: (1) current projects under construction; (2) feasibility, pre-feasibility, and scoping studies; (3) inflation-adjusted costs for historical projects; and (4) professional judgment.
Exhibit 9.24: Yara Replacement Cost New (RCN)
Production Plant Phosphate Siilinjarvi, Finland
Division
Product
Capacity
(000 mt)

(NOK M) (NOK/sh)
Upstream
Phosphoric Acid
300 300
882 NOK 882
3.05 NOK 3.05
Nitrogen Sluiskil, Netherlands
Brunsbuttel, Germany Porsgrunn, Norway
Ferrara, Italy Le Havre, France Yara Trinidad, Trinidad Yara Tringen, Trinidad (JV 49%) Tertre, Belgium Hull, UK Uusikaupunki, Finland Siilinjarvi, Finland Belle Plaine, Canada
Ince, UK (JV 50%)
Billingham, UK (JV 50%) Qafco, Qatar (JV 25%) Lifeco, Libya (JV 50%) Rossosh, Russia (JV 30%)
Burrup, Australia (JV 35%) Glomfjord, Norway Montoir, France Ambes, France Rostock, Germany Ravenna, Italy Rio Grande, Brazil Koping, Sweden Paradies, France
Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Upstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Downstream Industrial Industrial
Ammonia Urea NA/Nitrates/UAN Ammonia Urea Ammonia NA/CN NPK Ammonia Urea Ammonia Urea Ammonia Ammonia Ammonia NA/Nitrates Ammonia NA/Nitrates NPK NA NPK Ammonia Urea UAN Ammonia NA/Nitrates NPK Ammonia NA/Nitrates Ammonia Urea Ammonia Urea Ammonia NA/Nitrates NPK Ammonia NA/CN NPK NA/Nitrates NPK NA/Nitrates/UAN NA/Nitrates/UAN NA/Nitrates NPK NPK NA/Nitrates NA/Nitrates
1,700 700 4,100 700 500 500 2,100 2,000 600 500 400 200 300 500 400 1,600 300 600 1,000 200 500 800 1,200 240 200 450 300 300 650 500 700 400 500 300 300 300 300 600 500 600 400 1,200 3,440 900 300 600 600 300 36,280
7,685 2,057 9,348 3,164 1,469 2,260 4,788 5,700 2,712 1,469 1,808 588 1,356 2,260 1,808 3,648 1,356 1,368 2,850 456 1,425 3,617 3,526 547 904 1,026 855 1,356 1,482 2,260 2,057 1,808 1,469 1,356 684 855 1,356 1,368 1,425 1,368 1,140 2,736 7,843 2,052 855 1,710 1,368 684 NOK 107,287
26.61 7.12 32.37 10.96 5.09 7.83 16.58 19.74 9.39 5.09 6.26 2.03 4.70 7.83 6.26 12.63 4.70 4.74 9.87 1.58 4.93 12.52 12.21 1.89 3.13 3.55 2.96 4.70 5.13 7.83 7.12 6.26 5.09 4.70 2.37 2.96 4.70 4.74 4.93 4.74 3.95 9.47 27.16 7.11 2.96 5.92 4.74 2.37 NOK 371.49
NOK 108,169 10,453 12,269 NOK 106,353
NOK 374.54 36.19 42.48 NOK 368.26
479
January 2011
We partially set our one-year Yara target price using 65% replacement cost new (RCN), which yields a price value of NOK239. During the peak of a normal (i.e., not 2008) fertilizer cycle, we expect Yara to trade between 65% and 75% RCN. Conversely, in normal market downturns, Yara could trade as low as 25% RCN. We chose 65% due to an RCN discount that should be placed on European nitrogen assets. Yara is currently trading at 92% RCN compared with the group (ex SQM) at 82.9% RCN (Exhibit 9.25).
Exhibit 9.26: Yara Valuation Summary

Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Metric 11.0x 7.0x 65% 12.4% Value NOK 312.70 NOK 280.30 NOK 239.37 NOK 366.90 Weight Contribution 25% 25% 25% 25% NOK 78.18 NOK 70.07 NOK 59.84 NOK 91.72 NOK 299.82 NOK 300.00
We have set our one-year Yara target price at NOK300, which we derived by equally weighting our four valuation methodologies (Exhibit 9.26). Given our forecast Yara total return of negative 9.2%, coupled with our average total return of 3.2% for the group (Exhibit 9.27), we rate Yara 3-Sector Underperform.
YAR Target Price

20% 15.7% 7.6% 3.9% 0.5% 8.8% 10.0%
15% 10% 5% 0% -5% -10% -15%
Top Pick
3-SU
3-SU
-9.2% YAR
2-SP
2-SP
1-SO
1-SO
1-SO
1-SO
-11.5% IPI
SQM
CF
MOS
POT
K+S
AGU
480

Nam e
Ticker
481
C$7.60 27.5% 1-SO 61 C$8.50 10.0% 9.3% 1-SO 1-SO JOD 45.50 HKD 5.57 C$5.96 A$3.96 ILs 1,732 JOD 17.25 56.36 C$7.78 RMB 66.24 $900.00 HKD 4.02 $58.42 RUB 219 NOK 338 $58 NOK 300 1.3% 24.3% 9.6% -9.2% 3-SU 0.5% 2-SP 21.3% 0.5x 0.3x 83.3 1,771 61.4 1,629 1,269 75.0 191.4 52.2 767.6 7.8 7,021 263.2 2,124 288.8 3,791 25,678 366 6,450 77,459 1,294 10,787 406 50,843 7,043 28,224 15,376 465,815 97,481 3,699 21,383 339 7,519 22,921 1,232 11,658 384 51,720 31,462 16,117 473,760 109,065 1.5% 1.8% 2.2% 6.5% 0.0% 0.7% 0.6% 0.9% 1.2% 0.8% 1.9% 1.7% 44.3% 32.8% 30.9% 68.8% 0.0% 45.0% 25.2% 16.2% 50.0% 0.0% 21.0% 30.4% 15.0% 7.6% 10.2% 6.4% 13.2% 16.5% 2.2% 11.1% 14.0% 9.7% -5.2% 11.3% 14.5% 5.3% 9.4% 19.4% 9.9% 23.0% 11.8% 29.5% 20.9% 5.1% 14.3% 40.8% 22.4% -11.1% 22.3% 23.2% 13.0% 17.5% 0.1x 0.0x 0.0x 0.3x 0.5x 0.0x 0.6x 0.2x 0.2x 1.0x 0.7x 0.9x 0.3x 0.6x 0.4x 0.1x 0.0x 0.0x 0.2x 0.3x 0.0x 0.4x 0.2x 0.2x 0.5x 0.4x 0.5x 0.2x 0.4x 0.2x -0.5x -1.0x -1.3x 1.5x 0.7x -1.5x 1.6x -0.1x -0.1x 2.1x 1.3x 0.5x 4.4x 0.6x 0.6x Margins Y/E Gross (%) 20.6% 32.2% 36.8% 40.5% 25.1% 25.8% 30.1% 57.3% 29.7% 14.8% 40.3% 35.9% 34.4% 23.3% 61.4% 74.4% -2.1% 36.2% 73.7% 40.0% 36.7% 28.6% 23.1% 27.2x 2.7% 48.0% 34.3% 14.4% 24.1% 27.1% 24.9% 12.9% 18.5% 53.7% 62.5% -8.1% 41.4% 48.4% 6.1% 29.2% 40.2% 21.7% 12.0% 19.3% 22.6% 22.1% 8.0% 16.9% 49.6% 54.2% -9.2% 30.6% 39.0% 2.1% 23.5% 13.8x 27.4x 16.2x 20.4x 10.6x 17.4x 24.4x 12.3x 32.1x 19.4x 5.8% 2.8% 0.5% 3.6% 5.1% 4.9% 5.5% -13.3% 1.0% 4.1% 2.2% -3.2% 10.1% 2.3% 5.2x 2.2x 1.3x 1.8x 8.7x 2.7x 4.4x 1.4x 13.4x 4.4x 1.9x 9.6x 2.9x 4.6x 4.7x 18.3x 10.6x 10.7x 10.7x 15.5x 10.8x 13.1x 7.6x 12.2x 21.9x 13.1x 13.1x 14.9x 11.0% 29.9% 32.6% 36.6% 25.4% 28.3% 27.3% 8.3% 26.1% 28.1% 30.8% 18.8% 20.5% 22.1% 24.6x 10.5x 24.8x 86.7x 33.9x 53.1x 38.9x 11.2% 10.1% 1.1% -0.9% 2.2% -2.6% 3.5% 2.8x 2.5x 10.3x 3.8x 3.8x 5.9x 4.8x 11.8x 13.6x 11.6x 33.2x 16.5x 22.1x 18.1x EBITDA (%) Operating (%) P/CF (x) FCF Yield (%) P/BV (x) 2009A (x) 2010E (x) 11.0x 10.3x 11.6x 28.9x 19.8x 19.2x 16.8x 16.2x 8.3x 11.5x 8.5x 14.3x 9.4x 11.5x 7.3x 17.8x 10.0x 23.3x 18.7x 7.3x 12.6x 13.9x Metrics Enterprise Value to EBITDA 2011E (x) 7.8x 6.6x 9.5x 14.0x 11.4x 12.6x 10.3x 12.2x 6.4x 8.3x 7.9x 11.4x 7.4x 9.7x 5.9x 14.2x 8.2x 13.7x 18.2x 14.3x 8.5x 10.4x 10.4x 2012E (x) 8.0x 7.7x 8.6x 11.8x 9.7x 11.4x 9.5x 8.8x 5.1x 7.4x 7.3x 10.1x 15.5x 8.5x 5.0x 12.0x 7.4x 11.3x 15.6x 11.7x 8.2x 9.6x 9.6x 2009A (x) 24.7x 17.6x 19.5x 81.1x 32.1x 29.7x 34.1x 28.3x 25.4x 14.0x 15.6x 22.3x 13.9x 31.8x 11.0x 38.1x 0.7x 35.3x 11.3x 20.6x 25.1x Price to Earnings 2010E (x) 19.7x 21.2x 18.8x 67.3x 41.2x 25.1x 32.2x 21.8x 20.3x 15.4x 12.7x 20.6x 10.5x 25.5x 11.5x 33.6x 0.5x 28.7x 40.7x 26.2x 11.2x 20.0x 23.6x 2011E (x) 12.6x 10.6x 15.4x 27.0x 18.7x 16.7x 16.8x 17.7x 14.5x 11.1x 12.1x 15.4x 8.9x 15.9x 9.2x 24.4x 0.4x 18.3x 29.8x 19.9x 12.4x 15.0x 15.6x 12/31 12/31 12/31 12/31 5/31 12/31 12/31 12/31 6/30 9/30 12/31 12/31 12/31 3/31 12/31 12/31 12/31 12/31 12/31 12/31
$91.75 $135.15 $89.27 $37.29 $76.36 $154.83
158.0 71.9 32.8 75.1 446.9 305.3
14,497 9,719 2,928 2,801 34,125 47,269
15,517 11,658 3,347 11,658 33,028 49,538
0.1% 0.3% 2.0% 0.3% 0.3% 0.6%
2.4% 6.3% 28.8% 10.8% 6.5% 10.9%
3.7% 15.0% 17.9% 7.5% 6.5% 8.5% 9.9%
8.4% 23.8% 114.0% 8.1% 9.6% 17.8% 30.3%
0.4x 0.0x 2.2x 0.2x 0.6x 0.7x
0.3x 0.0x 0.7x 0.1x 0.4x 0.3x
0.8x -1.1x 1.5x -0.7x 3.3x 0.7x
Peer Group Average
Nam e
Ticker
Peer Group Average
January 2011
January 2011
Exhibit 9.29: Yara Tear Sheet

YAR.OL 1-Year Target: 2-Year Target: 1-Year Return: 2-Year Return: NTM Dividend Rating: Risk: NOK 300 NOK 320 -9.2% -1.4% NOK 6.34 3-SU High Last Price: FY End: Market Cap: EV: Avg. Volume: FD Shares O/S: Float: NOK 337.50 Dec. 31 NOK 97.5B NOK 109.1B 2.1M 288.8M 63.4%
Valuation: 7x 2012E EBITDA, 11x 2012E EPS, DCF @ 12.4%, 65% RCN
Ownership Insider Ownership: Institutional Ownership: Target Valuation Price to Earnings (2012E) EV/EBITDA (2012E) Replacement Cost New Discounted Cash Flow Operational Total Upstream (M mt) Ammonia ($/mt) Urea ($/mt) Total Industrial (M mt) Total Downstream (M mt) EPS Estimates Q1 Q2 Q3 Q4 Total Consensus* 2009 3.06a 3.88a 1.21a 4.93a 13.08a Multiple 11.0x 7.0x 65% 12.4% 2010E 19.5 $346 $281 4.2 20.5 2010E 5.27a 12.87a 6.67a 5.39 30.19 22.67 Value NOK 313 NOK 280 NOK 239 NOK 367 2011E 19.4 $360 $345 4.4 20.9 2011E 7.31 7.10 6.54 6.21 27.16 29.30
36.2% 29.9% Weight 25% 25% 25% 25% 2012E 19.7 $335 $315 4.5 21.3 2012E 7.48 7.44 6.94 6.57 28.43 27.36 EPS
+ NOK 0.14 + NOK 1.70 + NOK 0.07 + NOK 1.29 + NOK 0.80 + NOK 2.43 + NOK 0.20 + NOK 0.37
Financial EV/EBITDA P/E P/FCF P/BV Dividend Yield ROE ROA Gross Margin EBITDA Margin EBITDA Growth Income Statement Sales COGS Gross Profit EBITDA Upstream Industrial Downstream Eliminations Net Income EPS (FD) Balance Sheet Cash & Equivalents PP&E Total Assets Short-Term Debt Long-Term Debt Total Liabilities Shareholders' Equity Cash Flow Statement Operating (post-WC) Investing Financing Cash Replacement Cost New Calculated: NOK368/sh
2009 19.9x 25.8x n.m. 3.4x 1.9% 13% 6% 23% 9% -69% 2009 61,418 47,367 14,051 5,482 4,013 1,248 963 -742 3,782
NOK 13.08
2010E 7.3x 11.2x 7.5x 3.4x 1.9% 25% 13% 24% 23% 173% 2010E 66,239 50,515 15,724 14,992 6,047 1,352 7,857 -265 8,720
NOK 30.19
2011E 8.5x 12.4x 10.5x 3.4x 1.9% 20% 11% 21% 17% -14% 2011E 77,707 61,470 16,237 12,829 8,035 1,681 5,713 -2,600 7,843
NOK 27.16
2012E 8.2x 11.9x 11.2x 3.4x 1.9% 19% 11% 20% 18% 4% 2012E 75,062 59,681 15,381 13,299 5,825 1,660 5,511 304 8,210
NOK 28.43
2009 974 22,121 61,665 3,627 14,236 32,802 28,863 2009 11,924 -5,467 -8,747 -2,221
2010E 2,665 22,913 66,447 2,509 12,292 31,613 28,863 2010E 5,721 729 -4,930 1,691
2011E 6,637 22,648 71,268 2,519 11,958 31,682 28,863 2011E 8,277 -2,150 -2,155 3,972
2012E 10,693 22,520 74,780 2,221 11,923 31,078 28,863 2012E 8,415 -2,300 -2,060 4,056
2011E Sensitivity Phosphate Rock Cost ($/mt) Urea ($/mt) Ammonia ($/mt) Nitrates ($/mt) Zeebrugge Gas ($/mmBtu) Crude Oil ($/bbl) Henry Hub Gas ($/mmBtu) NOK (US$) Credit Metrics Net Debt/EBITDA Debt/Total Capital Standard & Poor's: Free Cash Flow EBITDA Less: Taxes Less: NWC Less: CAPEX Free Cash Flow 2009 3.2x 0.38x BBB 2011E 12,829 2,077 -722 2,150 9,323 2010E 1.2x 0.34x
$10 $10 $10 $10 -$0.50 -3.0 -0.5 0.1 2011E 1.2x 0.33x Moody's: 2013E 13,967 2,299 -48 2,450 9,266
2012E 0.2x 0.33x Baa2 2014E 14,422 2,387 152 2,600 9,283
2012E 13,299 2,169 146 2,300 8,685
Peak: Trough:
125% 25%
Target: Current:
65% 92%
All figures in NOK M, unless otherwise noted. * Bloomberg.
482
January 2011
I. Upstream
WORLDS LARGEST NITROGEN PRODUCER AND AMMONIA TRADER
Yaras Upstream segment is the backbone of the companys production system, producing ammonia, urea, nitrates, NPK compounds, and other nitrogen-based products. Upstreams total capacity is about 27 million (gross) tonnes, or about 74% of Yaras overall gross capacity. Specifically, Upstream owns 100% interests in 11 facilities (~5.7 million NH3 tonnes), and has 25% to 50% interests in another seven plants (net ~2.4 million NH3 tonnes). As Exhibit 9.30 highlights, the Upstream portfolio is split into ammonia (30%), nitric acid (19%), urea (16%), NPK (15%), nitrates (13%), and other products (7%). However, between 60% and 70% of Upstreams production is not sold externally, but rather transferred to Yaras Industrial and Downstream segments, which may include further processing before resale.
Exhibit 9.30: Upstream Production Facilities
Plant Location Ownership
(%)
Ammonia Nitric Acid Phos Acid

Urea
(M mt)
Nitrates
(M mt)
NPK
(M mt)
CN solids
(M mt)
UAN
(M mt)
About 2/3 of Upstream production is transferred to other segments.
Sluiskil Brunsbuttel Porsgrunn Ferrara Le Havre Yara Trinidad Yara Tringen Tertre Hull Uusikaupunki Siilinjarvi Belle Plaine Ince Billingham Qafco Lifeco Rossosh Burrup
Netherlands Germany Norway Italy France Trinidad Trinidad Belgium UK Finland Finland Canada UK UK Qatar Libya Russia Australia
100% 100% 100% 100% 100% 100% 49% 100% 100% 100% 100% 100% 50% 50% 25% 50% 30% 35%
1.7 0.7 0.5 0.6 0.4 0.3 0.5 0.4 0.3 0.8 0.2 0.3 0.5 0.4 0.3 0.3 8.2
1.5 1.5 0.7 0.5 0.2 0.3 0.4 0.2 5.2
0.3 0.3
0.7 0.5 0.5 0.2 1.2 0.7 0.5 4.3
1.8 0.9 0.1 0.2 0.3 0.1 3.4
2.0 1.0 0.5 0.3 0.3 4.1
0.6 0.6
0.8 0.2 1.0
Despite an 8% year-over-year increase in ammonia production to 6.6 million tonnes, and flat overall fertilizer sales at 17.3 million tonnes, 2009 was undeniably a poor year for the Upstream segment. Sales were down 43% year over year to NOK25.9 billion, and operating income dropped below NOK1 billion for the first time in several years. However, when the 2008 fertilizer cycle peak is eliminated, revenue was up 9% over 2007, while volume sold increased by 21% from 14.3 million tonnes. Exhibits 9.31 and 9.32 show Upstream return metrics as well as production over the past several years.
Exhibit 9.31: Upstream Return Metrics
45% 40% 35% 30% 25% 20%
16.0% 33.2% 28.7% 26.5% 40.5%
Exhibit 9.32: Upstream Production

14,000
12,236
12,000
10,905 10,642
Production (000 mt)
10,000
8,718
27.9%
8,000 6,000 4,000 2,000 0
7,710
7,900 7,231 6,167 6,639 5,546
5,256
15% 10% 5% 0% 2005
14.3%
14.4% 9.5% 9.1% 6.4%
5,091
7.8%
2006
2007
CROGI
2008
ROCE
2009
2010E
2005
2006
2007
Ammonia
2008
Finished Fertilizer
2009
2010E
483
January 2011
WHAT MATTERS TO UPSTREAM
In our view, strong operational efficiency and competitive raw material (i.e., mostly natural gas) sourcing are the keys to the success of Yaras Upstream business. We highlight each below.
Operational Efficiency
We think Yara should be able to produce at between 85% and 90% of capacity to achieve operational efficiency during a balanced supply/demand market. However, production curtailment decisions are being made constantly in order to maximize overall gross profit for the segment. In 2009, the Upstream segment achieved an 84% utilization rate for its ammonia capacity, 86% for urea, 91% for nitrates, and 67% for NPK. The low utilization rates reflect: (1) NPK curtailments due to low potash and phosphate demand; (2) ammonia curtailments due to a turnaround at Belle Plaine (Saskatchewan); and (3) an accident at Yaras Tertre ammonia plant in Belgium that halted production for about half of 2009.
Raw Material Sourcing Yara has switched gas sourcing to hub-based contracts from oilindexed contracts.
Natural gas typically makes up 75% to 90% of the cash cost of ammonia, up to 80% of the cash cost of urea, and up to 70% of the cash cost of other nitrates. Accordingly, sourcing natural gas is the most important component of running Upstream profitably. The pricing structure of Yaras energy contracts are either spot-based or oil-indexed gas contracts. However, over the past several years, Yara has switched a major part of its European gas sourcing from oil-indexed to hub-based contracts. Why? Yara believes, as we do, that oil will have a stronger price development over time than natural gas. Additionally, Yara has chosen to stay mainly spot on hub exposure and limit its forward buying. Yaras long-term strategy of increasing its capacity in low-cost gas regions is mostly focused on the Middle East and Africa. Last year, Yara increased its share of low-cost gas to 37% from 29%. Exhibit 9.33 shows Yaras realized European and global gas costs compared with standard hub-based spot prices. We think Yara could eventually maximize hub-based contracts at 60%, as several plants such as Brunsbuttel actually run on oil or lack hub alternatives.
Exhibit 9.33: Yaras Gas Costs Compared with Hub-Based Spot Prices
Yara has increased its use of low-cost gas to 37% from 29%.
Yara's effective European gas price advantage ends as oil prices begin to rise faster than gas
Yara's North American nitrogen advantages reduce dramatically
If Yara believes that oil price development w ill be stronger than gas, Yara's European gas costs should not break through Zeebrugge spot prices over the mid-term
Yara's effective global gas cost becomes more expensive than Henry Hub
484
January 2011
CAPACITY EXPANSIONS RAMPING UP
The year 2009 was a strong one for Upstream capacity growth, both organically and through acquisitions.
1. The Belle Plaine facility (formerly Saskferco) in Saskatchewan was integrated into Yaras global
production system, increasing ammonia and urea capacities by 12% and 14%, respectively.
2. Yaras 50/50 Lifeco JV in Libya started up under Yara management, which resulted in increased production compared with historical levels. 3. The 400 million Sluiskil urea expansion project continued construction both on time and on budget. Completion is expected in mid-2011. 4. The $3.2 billion investment in Qafco-5, in which Yara owns a 25% interest, continued construction
with commissioning anticipated for Q2/11.

5. The Qafco-6 urea project was approved, and is currently in the engineering and procurement phase.
This project is expected to increase Qafcos 2012 urea capacity by 1.3 million tonnes for an estimated cost of $610 million.
6. A 60 million investment was made to increase phosphate rock production by 150,000 tonnes per annum at its facility in Siilinjarvi, Finland.
Exhibit 9.34: Aiming for 40 Million Gross Tonnes
45 40 35 Million Product Tonnes 30 - Sluiskil 25 - Qafco-5 20 15 10 5 0 2005 Achieved WIP Objective - Fosfertil - Kemira Growhow - Libya - Balderton - Qafco-6 - Lost Terra
Going forward, Yara will continue to meet is midterm objective of reaching ~40 million product tonnes (Exhibit 9.34). We note that while Yara did not succeed in its acquisition of Terra Industries (that went to CF), Yara demonstrated its strict focus on capital discipline by pursuing only what it perceives to be acquisition targets priced at attractive valuation levels.
YARAS UPSTREAM SWING ADVANTAGE
Yara aims to achieve 40M mt of product capacity over the mid-term.
Exhibit 9.35: Swing Ammonia Capacity

6
We estimate that Yara is able to swing approximately two-thirds of its European-based ammonia production capacity without affecting fertilizer production. How? Yara can mitigate high European energy costs or take advantage of low ammonia prices by closing ammonia production and running most of its nitrates and NPK facilities based on imported ammonia (Exhibit 9.35).
5.0
Ammonia (M mt) 4
3.2
1.3
1
Land-locked
0 Yara Europe Flexible
0.5
Non-Flexible
485
January 2011
OUTLOOK
For 2011 and 2012, we expect nitrogen-based fertilizer prices to be in between 2007 and 2008 levels. Specifically, we are looking for an average 2011 Black Sea ammonia price of $360/tonne. We currently forecast 2012 pricing to decline slightly to $335/tonne. For urea, its a similar story, as we forecast $345/tonne (FOB Black Sea) for 2011, dropping to $315/tonne in 2012. Exhibit 9.36 highlights our price forecast for all products manufactured by Yaras Upstream segment.
Exhibit 9.36: SC Forecast European Nitrogen Fertilizer Posted Prices (Mostly Black Sea)
1,200
Price ($/mt)
We forecast declining nitrogen prices in 2012.
1,000 800 600 400 200 0 2006 2007 Urea 2008 Ammonia 2009 Nitrates 2010 NPK CN
Forecast
2011 UAN
2012
Source: Yara International; Scotia Capital estimates.
We caution readers that we do not expect the Upstream segment to actually realize these prices; they are provided as guidance only. In reality, we estimate that Upstream typically realizes an average 18% discount to posted prices. Why? Between 60% and 70% of Upstream production is transferred to Yaras Downstream and Industrial segments. The Downstream segment typically earns close to posted prices (less customer discounts), as it sells almost its entire inventory to external customers. On Upstream volumes, we estimate 2011 will be flat with 2010, at ~19.4 million tonnes, followed by a slight bump in 2012 to 19.7 million product tonnes. Our estimated drop in nitrogen pricing should be more than offset by a slight pickup in volumes. Specifically, we are looking for 2011 and 2012 sales of NOK34 billion and NOK31.8 billion, respectively (Exhibit 9.37).
Exhibit 9.37: SC Forecast Upstream Sales Volumes
Quarterly Sales (NOK M)
6,000 5,000 4,000 3,000 2,000 1,000 0 2006 Ammonia 2007 UAN 2008 Nitrates 2009 NPK 2010 Urea CN 2011 Total 2012 Sales (RHS) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
Sales Volume (000 mt)
Forecast
We think Upstream will sell 19.4M mt in 2012.
We forecast 2011 and 2012 Upstream EBITDA of NOK8 billion and NOK5.8 billion, respectively. EBITDA margins should peak in 2011, averaging 23%, then drop to the 18% area on the back of sharply lower nitrogen prices that are not fully offset by lower energy costs. We have found that EBITDA margins generally peak in Q1, and then decline as the year progresses. Exhibit 9.38 highlights our quarterly EBITDA and EBITDA margin forecast through 2012.
486
January 2011
Exhibit 9.38: SC Forecast Upstream EBITDA and EBITDA Margins

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2006 2007 2008 2009 EBITDA (LHS) 2010 EBITDA Margin (RHS) Forecast 35% 30% 25% 20% 15% 10% 5% 0% 2011 2012
SEASONALITY Exhibit 9.39: Upstream Seasonality

28% Upstream - Ammonia Pdn Upstream - Finished Pdn 27% 26% 25% 24% 23% 22% 21% 20% Q1 2004 2005 Q2 2006 Q3 2007 2008 Q4 2009 31% 29% 27% 25% 23% 21% 19% Q1 2004 2005 Q2 2006 2007 Q3 2008 Q4 2009
70% Upstream - Op Margin Upstream - CN Solids 60% 50% 40% 30% 20% 10% 0% Q1 2004 2005 Q2 2006 2007 Q3 2008 Q4 2009
30% 28% 26% 24% 22% 20% Q1 Q2 2008 45% 40% 35% 30% 25% 20% 15% 10% 5% Q1 Q2 2008 Q3 2009 Q4 Q1 Q2 2008 2009 Q3 Q4 2009 Q3 Q4
30% Upstream - UAN 28% Upstream - NPK 26% 24% 22% 20%
28% 27% Upstream - Ammonia 25% 24% 23% 22% 21% 20% Q1 Q2 2008 2009 Q3 Q4 Upstream - Urea 26%
29% 27% 25% 23% 21% Q1 Q2 2008 2009 Q3 Q4
30% Upstream - Nitrates 28% 26% 24% 22% 20% Q1 Q2 2008 2009 Q3 Q4
487
EBITDA Margin (%)
EBITDA (NOK M)
488
5,090 1,947 2,246 1,019 2,347 326 12,990 245 268 242 211 224 144 268 370 313 222 308 235 513 582 830 460 478 339 219 323 640 384 269 190 222 292 535 246 243 142 242 292 301 183 243 121 288 299 291 202 249 136 241 302 437 256 250 143 335 338 322 256 282 180 333 283 316 239 236 166 357 336 350 244 280 201 360 390 350 305 325 235 346 337 335 261 281 200 360 414 350 324 345 249 360 414 350 324 345 249 5,546 2,224 2,550 1,049 2,484 350 14,264 6,167 3,227 3,688 956 2,684 351 17,073 1,368 746 720 204 812 86 3,937 1,784 732 514 154 986 125 4,295 1,686 715 757 217 862 81 4,318 1,801 758 797 221 966 188 4,731 6,639 2,951 2,788 796 3,626 480 17,281 1,819 749 970 291 1,013 136 4,978 1,801 773 878 233 931 133 4,749 1,803 848 906 253 821 143 4,774 1,808 751 974 249 985 200 4,966 7,231 3,121 3,728 1,026 3,750 612 19,467 1,757 900 906 269 891 94 4,817 1,945 840 740 221 975 156 4,878 1,795 808 880 261 858 125 4,728 360 414 350 324 345 249 1,813 751 974 249 973 250 5,010 360 414 350 324 345 249 7,310 3,300 3,500 1,000 3,698 625 19,433 360 414 350 324 345 249 8,008 -18% -20% -21% -12% -9% -16%
Exhibit 9.40: SC Forecast Yaras Upstream Segment

(NOK M)
Production/Sales (000 mt) Ammonia Nitrates NPK CN Solids Urea UAN
7,350 3,350 3,600 1,100 3,698 650 19,748 335 378 350 296 315 228
Notional Price ($/mt) Ammonia (fob Black Sea) Nitrates NPK CN Solids Urea (fob Black Sea) UAN
Notional Revenue @ Market (NOK M) Ammonia Nitrates NPK CN Solids Urea UAN Total 8,720 23,659
7,884 15,323 13,844 31,983 1,754 5,504 1,952 4,111 1,711 4,193 2,468 4,207 -21% -4% -19%
17,828 10,596 17,258 2,481 7,229 672 56,065
2,067 1,662 3,177 541 1,508 113 9,068
2,574 1,387 1,786 246 1,557 115 7,666
2,489 1,272 1,389 242 1,278 60 6,730
2,957 1,291 1,320 254 1,371 145 7,338
10,087 5,612 7,672 1,283 5,714 433 30,802
3,595 1,495 1,846 440 1,685 145 9,206
3,598 1,313 1,665 334 1,318 132 8,361
3,862 1,710 1,903 370 1,379 173 9,396
3,905 1,757 2,045 456 1,920 282 10,366

-18%
14,961 6,276 7,458 1,600 6,303 731 37,329

-18%
3,795 2,236 1,903 523 1,844 140 10,442

-18%
4,200 2,087 1,554 429 2,019 234 10,524

-18%
3,878 2,008 1,848 508 1,777 187 10,205

-18%
3,916 1,866 2,045 484 2,015 374 10,699

-18%
15,790 8,197 7,350 1,944 7,655 935 41,870

-18%
14,774 7,598 7,560 1,953 6,989 888 39,762

-18%
Discount to market for internal 22,125

8,876 13,249
Revenue (NOK M)
45,827
7,258
6,063
5,904
6,675
25,900
7,885 18,015
7,266
2,019 5,247
8,048
2,179 5,870
7,620
2,159 5,461
8,552
2,566 5,986
31,486
8,923 22,564
8,614
2,584 6,030
8,682
2,605 6,078
8,419
2,526 5,894
8,827
2,648 6,179
34,543
10,363 24,180
32,803
9,841 22,962
External Internal
18,561 3,564
16% 16% 27% 16% 20% 9% 17%
19,862 3,797
33,455 12,372
6,085 1,173
4,873 1,190
5,395 509
5,534 1,141
21,887 4,013
15%
5,928 1,338
18%
6,341 1,707
21%
6,426 1,194
16%
6,744 1,808
21%
25,439 6,047
19%
6,541 2,073
24%
6,663 2,019
23%
6,459 1,960
23%
6,844 1,982
22%
26,508 8,035
23%
26,978 5,825
18%
Implied COGS EBITDA (reported) EBITDA margin 688 1,552

7% 7% 18% 8% 3%
Depreciation and Amortization 1,648 8,342 555 153
802
1,358
450
458
410 -139
-2%
408 288
4%
1,726 857
3%
408 631
9%
452 942
12%
422 395
5%
438 1,370
16%
1,720 3,338
11%
428 1,646
19%
432 1,587
18%
432 1,528
18%
436 1,546
18%
1,729 6,306
18%
1,737 4,088
12%
Operating income Operating margin
January 2011
January 2011
II. Industrial
YARAS RISING STAR
In our view, Yaras small but rapidly growing Industrial segment helps it diversify beyond high fertilizer cyclicality (and seasonality) by offering products and solutions that are not only suitable for a wide range of industries, but are also demanded on a year-round basis. The primary applications of the Industrial segments products and solutions are for environmental, food and beverage, and civil explosives purposes. Specifically, Yaras products and services within its Industrial segment are organized into four groups: (1) environmental solutions; (2) carbon dioxide and dry ice; (3) chemicals; and (4) technical nitrates. Exhibit 9.41 details the Industrial segments various markets and products.
Exhibit 9.41: Industrial Segments Markets and Products
Environmental Solutions Markets Products Air1 NoxCare Nutriox; Econox CO2 + marble; polyacrylamide Markets Nitrogen chemicals Specialty chemicals Electronics chemicals Chemicals Products Ammonia; Amines; Urea; UF; Nitric Acid; DNTO NitCal; DipCal BoardCare; DES; SES
Environmental Solutions is the fastest growing segment in Yara.
Cleaner air NOx abatement Odor control Improved water quality
Carbon Dioxide & Dry Ice Markets Beverages Food Cold chain management Industrial processes Products CO2 CO2 CO2-based transport CO2 and/or dry ice Markets Civil explosives
Technical Nitrates Products CN; TAN ANFO; CN; TAN
Mining and construction
We anticipate Yaras Industrial segment will begin to account for an even greater part of Yaras earnings going forward. Why? Governments around the world continue to tighten regulations and seek solutions for better air quality. With the U.S. Clean Air Act amendments in effect, Yara is focusing on capturing increased market share in the United States for its main NOx abatement product, AdBlue. Over a full business cycle, Yara aims to achieve an Industrial segment annual growth rate of between 10% and 15%. We believe this may be slightly optimistic. Exhibits 9.42 and 9.43 show the Industrial segments investment returns, as well as the volume growth of its environmental and N-chemical products.
Exhibit 9.42: Industrial Segment Return Metrics
45%
40.1%
Exhibit 9.43: Industrial Segment Volumes

3,500 3,000
2,678 2,668 3,000
40% 35% 30%

25.9% 25.4% 23.4% 19.4% 14.7% 20.5% 15.0% 10.4% 19.5% 19.0%
Industrial Sales (000 mt)
2,500
2,098
2,396
25% 20% 15% 10% 5% 0% 2005 2006 2007

CROGI
2,000
1,655
1,500 1,000
593 893 727
1,219
1,088
1,202
10.2%
500 0
2008
ROCE
2009
2010E
2005
2006
2007
2008
2009
2010E
Environmental Products
Industrial N-Chemicals
489
January 2011
WHY THE INDUSTRIAL SEGMENT MATTERS
As the largest nitrogen manufacturer in the world, Yara must find ways to diversify/stabilize its sales away from the seasonal and cyclical agricultural industry. We sometimes forget that almost one-fifth of global nitrogen consumption is for industrial applications. About 10% of urea is not used as fertilizer, but rather for the production of glue, melamine, and environmental purposes (Exhibit 9.44).
Exhibit 9.44: Why the Industrial Segment Matters
Environment 5% Explosives 17% Melamine 16% Other 8% Environment 12%
18% of nitrogen is used in nonfertilizer products.
Chemicals 78%
Glue 64%
18% of total N consumption
10% of total urea consumption
SMALL DEDICATED CAPACITY
Yaras Industrial segment capacity is small relative to the overall company, with less than 1 million tonnes of dedicated nitric acid and nitrate production capacity (Exhibit 9.45). However, we note that a significant portion of end-product sales start with Upstream production that Industrial internally purchases.
Exhibit 9.45: Yaras Industrial Production Facilities
Plant Location Ownership Ammonia Nitric Acid Phos Acid
(%) (M mt) (M mt) (M mt)
Urea
(M mt)
Nitrates
(M mt)
NPK
(M mt)
CN solids
(M mt)
UAN
(M mt)
Koping Paradies
Sweden France
100% 100%
0.3 0.2 0.5
0.3 0.1 0.4
Exhibit 9.46: A Yara Air1 (AdBlue) Station
YARA AND ADBLUE
Yara is the largest producer of AdBlue in the world.
AdBlue, also known as AUS32, refers to an aqueous urea solution of 32.5% that is used in a process to reduce emissions of oxides of nitrogen from the exhaust of diesel engine motors. AdBlue is carried onboard selective catalytic reduction (SCR) equipped vehicles and is dosed at a rate of 3% to 5% of diesel consumption. SCR systems are currently in use throughout Europe, Japan, Australia, Hong Kong, Taiwan, South Korea, New Zealand, and Singapore.
Source: Brenntag.
490
January 2011
Exhibit 9.47: Air1 Stations in Germany
The U.S. EPAs 2010 legislation limits NOx to levels that will require North American trucks to be equipped with SCR systems post-2010. AdBlue is the same as diesel exhaust fluid, and some OEMs have already developed branded SCR solutions, such as Daimlers BlueTec. Yara is the worlds largest AdBlue/DEF producer, which it markets under the brand Air1. Exhibit 9.47 shows an example of Yaras AdBlue presence in Germany. Yara now sells AdBlue/DEF in more than 45 countries. As an integrated AdBlue/DEF producer, Yaras Industrial segment should benefit from rising urea prices, provided it passes these cost pressures on to preserve profitability. This should be the case, as many sellers are not integrated, and must pass on price hikes to end-users to maintain margins. However, if the opportunity exists, Yara could divert urea toward more fertilizer sales.
Yara sells Air1 (AdBlue) in 45+ countries.
Source: Yara International; Google Maps.
OUTLOOK
We expect selling prices for environmental products and industrial nitrogen-based chemicals to generally follow the development of ammonia and urea prices and, ultimately, natural gas prices. Over the next two years, we are looking for weighted-average environmental products realized prices of $571/tonne and $545/tonne, respectively. Nitrogen-based chemicals, on average, are priced materially lower than the environmental products, as they are more closely related to commodities, with limited market differentiation. For 2011 and 2012, we expect Yaras weighted-average realized industrial chemicals price to come in at $394/tonne for 2011, followed by a 4.6% drop to $376/tonne in 2012 (Exhibit 9.48).
Exhibit 9.48: SC Forecast Realized Industrial Prices by Business Line
900 750 Price ($/mt) 600 450 300 150 0 2006 2007 2008 2009 2010 Industrial N-Chemicals 2011 2012
Forecast
Environmental Products
491
January 2011
On volumes, we are not as optimistic that Yara will be able to achieve its targeted 10% to 15% annual growth rate in its environmental products business. Specifically, we have conservatively forecast a ~5% growth rate for environmental products in 2011 and 2012. For all other businesses in the Industrial segment, we model a 3% annual growth rate in both 2011 and 2012 (Exhibit 9.49).
Exhibit 9.49: SC Forecast Industrial Sales Volumes by Business Line
40% 35% 30% 25% 20% 15% 10% 5% 0% 2006 2007 2008 2009 EBITDA (LHS) 2010 EBITDA Margin (RHS) 2011 2012
1,600 1,400 1,200 1,000 800 600 400 200 0 2006 2007 2008 Environmental Products 2009 2010 Industrial N-Chemicals 2011 Sales (RHS) 2012 3,500 3,000 2,500 2,000 1,500 1,000 500 -
We think environmental products will grow at ~5% per year through 2012.
We forecast 2011 and 2012 Industrial EBITDA contributions of NOK1.7 billion in each year (Exhibit 9.50). We expect a substantial pickup in EBITDA margins during our forecast period, as Yara continues to grow the business and realize enhanced cost savings through economies of scale. We do not think quarterly EBITDA margins in the 12% to 17% range are unrealistic over the next couple of years, but we anticipate this could trend toward the 14% area beyond 2012 due to increased competitive pressures.
Exhibit 9.50: SC Forecast Industrial EBITDA and EBITDA Margins
1,200
Forecast
EBITDA (NOK M)
1,000 800 600 400 200 0
492
EBITDA Margin (%)
Forecast
493
693 1,748 2,441 871 2,415 3,286 1,152 2,745 3,897 264 610 874 256 609 865 284 688 971 298 747 1,045 1,102 2,654 3,755 280 717 997 286 760 1,046 320 754 1,074 316 769 1,085 1,202 3,000 4,202 294 739 1,033 300 783 1,083 336 777 1,113 332 792 1,124 1,262 3,090 4,352 428 359 507 389 663 555 630 380 580 380 590 370 560 310 589 358 517 356 477 329 515 355 554 382 517 356 571 394 571 394 571 394 571 394 571 394 1,903 4,018 5,921 6,118
6,070 48 8,499 65 10,812 182 2,220 12 2,003 54 2,069 33 2,172 51 8,464 150 2,108 14 2,284 47 2,368 36
Exhibit 9.51: SC Forecast Yaras Industrial Segment

(NOK M)
Sales (000 mt) Environmental products Industrial N-chemicals
1,312 3,183 4,496
Realized Price ($/mt) Environmental products Industrial N-chemicals
545 376
Sales (NOK M) Environmental products Industrial N-chemicals 2,562 5,460 8,022 8,562 10,996 2,232 2,058 2,102 2,223 8,615 2,122 2,331 2,404 2,811
2,783 28
4,368 8,570 12,939 9,668

9,543 125
1,148 1,599 2,747
965 1,504 2,469
1,020 1,552 2,572
951 1,320 2,271
4,084 5,975 10,060
854 1,508 2,361
819 1,501 2,321
989 1,607 2,596
1,049 1,762 2,811
3,711 6,378 10,089
1,007 1,744 2,750 2,750

2,723 28
1,028 1,848 2,877 2,877

2,848 29
1,150 1,834 2,984 2,984

2,954 30
1,136 1,871 3,007 3,007

2,977 30
4,321 7,297 11,618 11,618

11,502 116
4,292 7,178 11,470 11,470

11,355 115
Revenue (NOK M)
External Internal
5,382 736
12% 19% 6% 18% 13% 15% 11% 14% 16% 13%
6,918 1,644
10,367 629
1,822 410
1,782 276
1,784 318
1,979 244
7,367 1,248
1,778 344
2,034 297
2,078 326
14%
2,427 385
14%
8,317 1,352
14%
2,304 447
16%
2,493 384
13%
2,482 502
17%
2,658 349
12%
9,937 1,681
14%
9,810 1,660
14%
Implied COGS EBITDA (reported) EBITDA margin 189 537

9% 17% 4% 15% 10% 9% 9% 11% 13%
197 1,440
177 401
46 342
51 211
104 193
38 194
239 940
45 280
44 233
10%
48 256
11%
49 336
12%
186 1,105
11%
45 401
15%
45 338
12%
45 456
15%
45 303
10%
182 1,499
13%
182 1,478
13%
Depreciation and Amortization Operating income Operating margin
January 2011
January 2011
III. Downstream
Yaras Downstream segment consists mostly of its worldwide marketing organization as well as its global distribution network for both fertilizers and agronomic solutions. Downstreams primary objective is to sell either produced fertilizers (by Yara or JVs) or third-party sourced product. Downstream is physically present in more than 50 countries, with sales to more than 120. While the Downstream segment does have 8.5 million product tonnes of its own fertilizer manufacturing capacity (Exhibit 9.52), the majority of its product is transferred into the segment from Upstream. Accordingly, we do not consider Yaras Downstream segment to be relatively capital intensive.
Exhibit 9.52: Downstream Production Facilities
Plant Location Ownership
(%)
Ammonia Nitric Acid Phos Acid

Urea
(M mt)
Nitrates
(M mt)
NPK
(M mt)
CN solids
(M mt)
UAN
(M mt)
Downstream is essentially a margin-based business.
Glomfjord Montoir Ambes Rostock Ravenna Rio Grande
Norway France France Germany Italy Brazil
100% 100% 100% 100% 100% 100%
0.4 0.4 0.5 1.1 0.5 2.9
0.2 0.5 1.4 0.4 2.5
0.5 0.4 0.3 0.6 1.8
0.2 0.2
0.2 0.9 1.1
The business segment is essentially a margin-based business, marking up its purchases from Upstream (~70%), as well as its own production (~30%). In our view, Downstream reduces the high volatility associated with fertilizer manufacturing, such as in the Upstream segment. Exhibit 9.53 highlights the relative stability of Yaras Downstream operating margins. Of course, one should exclude the mid-2008 fertilizer cycle collapse that left Downstream with high-cost inventory on its books.
Exhibit 9.53: SC Forecast Yaras Segmented Operating Lines
80%
Operating Margin (%)
Downstream reduces the margin volatility found in Upstream.
60% 40% 20% 0% -20% -40%
With the exception of m id-2008 collapse of the fertilizer cycle, Yara's Dow nstream segm ent provides m argin stability.
Forecast
2006
2007
2008 Upstream
2009 Dow nstream
2010 Industrial
2011
2012
Downstreams sales volumes have been relatively steady at about 20 million tonnes per year over the past five years, even during the financial crisis. Why? In mid-2008, when fertilizer prices became too expensive for farmers to apply all three macro-nutrients optimally, nitrogen trumped. Nitrogen is almost always the fertilizer of choice. Yaras Downstream sales are typically split 50/50 between Europe and the rest of the world. We note that, following Yaras 2008 acquisitions of Saskferco and a 25% interest in Agrico Canada, its exposure to the U.S. market has been increasing rapidly. Going forward, we continue to believe that Yara is focused on increasing its nitrogen capacity exposure in North America. While the proposed Terra Industries acquisition offered well below replacement cost nitrogen assets, we think that Yaras Downstream segment would have benefited immensely from the cost savings/synergies associated with improved optimization of logistical systems.
494
January 2011
Exhibits 9.54 and 9.55 show Downstreams sales by region and by product.
Exhibit 9.54: Downstream Regional Sales
25,000
Exhibit 9.55: Downstream Product Sales

CN 3% UAN 5% Other 9%
20,000 Sales Volume (M mt)
15,000
Urea 21% NPK 32%
10,000
5,000
0 2005 Europe 2006 North America 2007 Latin America 2008 Africa Asia 2009
Nitrates 30%
Last year, Downstream performed poorly due to reduced volumes, lower market prices, and several position losses. In our view, the primary culprit impacting Downstream was a 38% year-over-year decline in NPK volumes due to low potash and phosphate demand. Asian deliveries (mostly urea and nitrates) increased by 32%, more than offsetting a 10% decline in Downstreams Latin American business.
Exhibit 9.56: Downstream Segment Return Metrics
40% 35% 30% 25% 20% 15%
10.9% 10.7% 14.0% 13.5% 10.1%9.6% 14.9% 15.4% 33.9%
Downstream operating income fell 93% in 2009, but has rebounded well in 2010.
28.3%
While 2009 Downstream revenue came in at NOK45.6 billion (down 30%), operating income fell 93% to NOK262 million. This is with essentially flat volume of 20 million tonnes. Accordingly, the segments CROGI and ROCE metrics were dreadful last year, as can be seen in Exhibit 9.56. In 2010, it has been a materially better story for Downstream, with strong results delivered to date. Why: (1) margins have improved across the board; (2) nitrate prices are up 13% year over year, while European inventories are lower; (3) NPK sales have picked up in core markets; and (4) stronger sales to Asian markets have resulted in premium margins.
10% 5% 0% 2005
4.1% 2.2%
2006
2007
CROGI
2008
ROCE
2009
2010E
495
January 2011
OUTLOOK
Unlike Upstream, our price forecast for Downstream is simply based on our regional fertilizer market price forecast. As we have previously discussed, we expect 2011 and 2012 average European nitrate prices to settle at $414/tonne (FOB Black Sea), or at about a 20% premium to local urea prices, before shipping and other differences are accounted for. We forecast flat NPK prices in 2011 and 2012 at ~$350/tonne. Exhibit 9.57 shows our price forecast through 2012.
Exhibit 9.57: SC Forecast European Nitrogen Fertilizer Posted Prices (Mostly Black Sea)
1,200 1,000 Price ($/mt) 800 600 400 200 0 2006 2007 Urea 2008 Nitrates 2009 NPK CN 2010 Other 2011 UAN 2012 Forecast
We like the stability (ex 2008) that Downstreams sales volumes have shown historically, and we find no reason for this stability not to continue through our 2012 forecast period. Other than seasonality, the only volume adjustment we have made is for new capacity. Specifically, we believe that Downstream will be able to achieve 20.9 million and 21.3 million tonnes of fertilizer sales in 2011 and 2012, respectively (Exhibit 9.58). This should translate into Downstream sales of NOK57 billion for 2011E and NOK55 billion for 2012E.
Exhibit 9.58: SC Forecast Downstream Sales Volumes
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2006 2007 UAN 2008 Nitrates NPK 2009 Urea 2010 CN 2011 Other 2012 Sales (RHS) 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
Downstream should achieve between 20.9M mt and 21.3M mt in each of 2011 and 2012.
496
Forecast
January 2011
We do not expect the sales volume split to deviate too much from 50% Europe and 50% international (Exhibit 9.59). However, if sales do increase in any region, we expect North America and Asia will lead the pack.
Exhibit 9.59: SC Forecast Downstream Sales by Region
7,000 6,000
Forecast
Sales (NOK M)
5,000 4,000 3,000 2,000 1,000 0 2006 2007 2008 2009 Europe 2010 International 2011 2012
Our 2011 Downstream EBITDA forecast of NOK5.7 billion shows material improvement over 2009 and modest 7.7% growth over 2010. In 2012, we are looking for a slight drop to NOK5.5 billion. Quarterly EBITDA margins through 2012 should average in the 10% area, with higher margins typically realized in the first half of the year (Exhibit 9.60).
Exhibit 9.60: SC Forecast Downstream EBITDA and EBITDA Margins
6,000 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 2012
EBITDA (NOK M)
4,500 3,000 1,500 0 -1,500 -3,000 -4,500 2006 2007 2008 2009 EBITDA (LHS) 2010
2011
EBITDA Margin (RHS)
497
EBITDA Margin (%)
Forecast
January 2011
SEASONALITY
Exhibit 9.61: Downstream Seasonality

31% Downstream - Nitrates 29% 27% 25% 23% 21% 19% Q1 2004 33% 31% Downstream - Urea 27% 25% 23% 21% 19% 17% 15% Q1 2004 2005 Q2 2006 2007 Q3 2008 Q4 2009 Downstream - CN 29% 2005 Q2 2006 2007 Q3 2008 Q4 2009 Downstream - NPK 35% 33% 31% 29% 27% 25% 23% 21% 19% 17% 15% Q1 2004 2005 Q2 2006 2007 Q3 2008 Q4 2009
35% 33% 31% 29% 27% 25% 23% 21% 19% 17% 15% Q1 2004 2005 Q2 2006 2007 Q3 2008 Q4 2009
40% Downstream - UAN Downstream - Other Q1 2004 2005 Q2 2006 2007 Q3 2008 Q4 2009 35% 30% 25% 20% 15%
33% 31% 29% 27% 25% 23% 21% 19% 17% 15% Q1 2004 2005 Q2 2006 2007 Q3 2008 Q4 2009
45% Downstream - Op Margin 40% 35% 30% 25% 20% 15% 10% 5% 0% Q1 2004 Q2 2005 2006 Q3 2007 Q4
498
499
2006 2007 2008 Q1-09 12/31/06 12/31/07 12/31/08 3/31/09 83 2,473 1,606 181 296 4,639 4,462 7,283 3,890 860 1,085 1,609 19,189 5,339 8,080 3,736 931 1,190 2,029 21,303 5,609 7,561 3,772 757 981 1,860 20,539 1,474 1,621 1,038 143 265 342 4,882 1,619 1,385 1,102 206 380 517 5,210 1,548 1,690 1,021 175 219 562 5,216 1,449 1,515 1,085 156 145 441 4,791 6,090 6,211 4,246 680 1,009 1,862 20,099 1,426 1,733 1,245 207 245 440 5,296 1,163 1,458 1,075 245 350 468 4,759 1,593 1,868 1,072 222 217 502 5,474 2,030 1,276 939 20 217 490 4,972 6,212 6,335 4,331 694 1,029 1,900 20,501 1,589 1,638 1,187 182 258 498 5,352 1,545 1,527 1,224 227 360 545 5,429 1,646 1,671 872 161 225 496 5,072 71 2,578 2,016 223 488 5,376 82 2,693 2,125 242 304 5,446 719 262 35 76 1,092 644 251 3 77 975 739 346 30 84 1,199 744 334 38 43 1,159 2,846 1,193 106 280 4,425 722 367 47 38 1,174 619 344 22 56 1,041 634 392 50 63 1,139 694 423 52 78 1,246 2,669 1,526 171 235 4,600 719 502 52 108 1,380 631 494 27 100 1,252 688 534 52 88 1,362 Q2-09 6/30/09 Q3-09 Q4-09 2009 Q1-10 09/31/09 12/31/09 12/31/09 3/31/10 Q2-10 6/30/10 Q3-10 9/30/10 Q4-10E 2010E Q1-11E 12/31/10 12/31/10 3/31/11 Q2-11E 6/30/11 Q3-11E 9/30/11 694 470 52 104 1,319 1,557 1,625 1,134 138 206 399 5,059 2,732 2,000 182 400 5,314 6,336 6,462 4,418 708 1,050 1,938 20,911 9,851 9,338 19,189 211 242 224 210 244 229 34,289
33,134 1,154 40,498 920 63,962 944 13,124 193 12,145 95 10,604 103 9,188 117 45,061 508
Exhibit 9.62: SC Forecast Yaras Downstream Segment

Q4-11E 2011E 2012E 12/31/11 12/31/11 12/31/12 2,732 2,150 182 500 5,564 6,463 6,591 4,506 722 1,071 1,976 21,329
(NOK M)
Production (000 mt) Ammonia Nitrates NPK CN solids UAN
Product Sales (000 mt) Nitrates NPK Urea CN Solids UAN Other products
Regional Sales (000 mt) Europe International 10,624 10,680 21,303 221 317 311 224 311 283 41,418 64,905 13,317 12,239 10,707 9,305 45,568 10,965
10,819 146
11,230 9,310 20,539 463 791 483 457 810 621 12,056
11,193 863
2,592 2,290 4,882 384 640 269 384 640 464 246 535 243 246 535 354 183 301 243 183 301 244 202 291 249 202 291 248 253 439 251 249 476 316 338 322 282 256 322 314 283 316 236 239 316 283 336 350 280 244 350 326 12,388
11,986 401
2,552 2,659 5,210
2,451 2,765 5,216
2,436 2,355 4,791
10,031 10,069 20,099
2,980 2,316 5,296
2,347 2,412 4,759
2,564 2,910 5,474
2,600 2,372 4,972 390 350 325 305 350 363 13,308
13,042 266
10,491 10,010 20,501 344 335 279 248 332 322 48,717
47,040 1,676
3,019 2,333 5,352 414 350 345 324 350 369 14,564
14,273 291
2,688 2,741 5,429 414 350 345 324 350 368 14,734
14,440 295
2,464 2,607 5,072 414 350 345 324 350 371 13,892
13,614 278
2,645 2,414 5,059 414 350 345 324 350 369 13,791
13,515 276
10,816 10,095 20,911 414 350 345 324 350 369 56,982
55,842 1,140
11,033 10,297 21,329 378 350 315 296 350 349 54,965
53,865 1,099
Market Price ($/mt) Nitrates NPK Urea CN Solids UAN Other
Revenue
External Internal
32,329 1,960
6% 7% 7% 6% -2% 3% 1%
38,382 3,036
60,257 4,648
12,491 826
12,468 -229
10,431 276
9,215 90
44,605 963
2%
9,882 1,083
10%
7,407 4,649
39%
11,422 966
8%
12,148 1,159
9%
40,859 7,857
16%
12,926 1,638
11%
13,171 1,563
11%
12,582 1,310
9%
12,589 1,202
9%
51,269 5,713
10%
49,454 5,511
10%
COGS + Other Expenses EBITDA EBITDA margin 602 1,107

3% 5% 5% 5% -4% 1%
469 2,007
494 3,412
112 711
119 -454
134 101
124 -96
-1%
489 262
1%
110 936
9%
184 802
7%
123 779
6%
144 1,015
8%
561 3,532
7%
109 1,529
10%
119 1,443
10%
130 1,180
8%
146 1,056
8%
505 5,208
9%
509 5,002
9%
Depreciation and Amortization Operating income Operating margin
January 2011
January 2011
Yaras Role in the Fertilizer Consolidation Theme

Through its failed friendly acquisition of Terra Industries in early 2010, Yara demonstrated its eagerness to continue consolidating the nitrogen industry, with its ultimate goal of achieving an approximately 10% global market share. Yaras rationale for the Terra acquisition was primarily based on: (1) North Americas improved natural gas cost position through shale gas development; (2) the high replacement cost for U.S. nitrogen assets; and (3) the need for the United States to import about half of its annual nitrogen fertilizer requirements. The offer price of $41.40/TRA share equated to an EBITDA multiple of 7.0x before synergies, or 5.9x post synergies.
We think Yara is committed to increasing its North America presence.
We strongly believe that Yara is committed to increasing its presence in the North American nitrogen market, and would likely have been a buyer of PotashCorps nitrogen assets particularly in Trinidad, as Yara has nitrogen assets there. In early 2010, Yara acquired the remaining 50% of Balderton, a European fertilizer and ammonia trading company with strong positions in the Black Sea, Mediterranean, African, and Asian markets. In our view, the Balderton business provides better vertical integration than its previous investments in ammonia shipping assets (divested in 2006).
MORE DIVESTITURES RECENTLY
1. In January 2010, Yara announced the sale of its shares of Fosfertil and Anitapolis. Yara owned 15.5%
of Fosfertil, the biggest producer of phosphate and nitrogen fertilizers in Brazil. The company also sold its 50% share in the Anitapolis phosphate development project. After-tax cash received was $680 million.
2. In May 2010, Yara sold its 100%-owned retail marketing business in South Africa to Farmsecure, as well as its 50% ownership in South African retail company Sidi Parani to GWK Ltd. (Cooperative) for $100 million. Yara will continue to supply urea and fertilizers to the region through Farmsecure and other select importers. 3. In July 2010, Yara decided not to exercise its option to acquire the remaining 75% share in Agrico Canada. Instead, it exercised its put option, which required Agrico shareholders to buy back Yaras 25% stake. In 2008, Yara had been interested in partnering with Agrico to enhance operational efficiencies in Ontario and Western Canada.
IS YARA PLANNING ANOTHER BIG MOVE?
Given Yaras cash cost position in Europe, weak nitrogen demand growth expectations, and relatively high natural gas costs compared with the rest of the planet, we believe Yara will not look to further consolidate the European nitrogen market.
We believe Yara is most focused on increasing its U.S. presence.
In our minds, Yara will likely focus on the United States first, although there doesnt appear to be much left to go around for consolidators and/or new entrants. Brazil and India are other fertilizer demand hotbeds, and both have a track record of hosting successful JVs with Yara. According to the International Fertilizer Association, the greatest increase in demand for nitrogen fertilizers through 2014 is to come from Latin America, followed by Southeast Asia. Beyond nitrogen, Yara may consider taking a stab at potash assets for either its NPK compounding or a standalone wholesale product. However, we think Yara would likely acquire phosphate assets before potash. We note that Yara purchases between 2 million and 2.5 million tonnes of potash per year, mostly from K+S, BPC (i.e., Uralkali and Belaruskali), Silvinit, and Israel Chemicals. In mid-December 2010, Yara signed a five-year potash supply deal with BPC for about 1 million tonnes per year.
500
January 2011
The Strength of Yaras JVs

Yara has numerous high-quality strategic joint venture agreements that are mostly with nitrogen producers in lower-cost gas regions of the world. In our minds, these JVs play a significant role in helping Yara reduce its exposure to relatively high-cost European natural gas. Exhibit 9.63 summarizes Yaras sub100%-owned equity investments.
Exhibit 9.63: Yaras Joint Venture and Equity Investments
Investm ents Location Qatar Trinidad and Tobago Italy Belgium Canada Cyprus Australia Great Britain Norw ay Libya Ow nership 25% 49% 50% 50% 50% 38% 35% 50% 50% 50% Type of Investm ent 4 ammonia plants (+2 projects), 4 urea plants (+2 projects). 2 ammonia plants. Shipping and charter contracts. 2 specialty fertilizer production facilities. Product and services to Canadian retail agricultural sector. Nitrogen fertilizer production. 1 ammonia plant and a TAN project. Ammonium nitrate and compound fertilizers. Supplier of atmospheric, process and specialty gases. Nitrogen assets at Marsa El Brega.
Yaras JVs contribute about 25% of net income.
Qafco Tringen Carbonor NU3 Synagri Yaibera Burrup Grow How Yara Praxair Holding Lifeco
Exhibit 9.64: Yaras JV Book Values (NOK M)

Other, 568 Lifeco, 1,413 Qafco, 3,525
The total book value of Yaras JV assets is about NOK10 billion, with Middle Eastern JVs making up about 50% of the value (Exhibit 9.64). Since the start of 2008, JVs have contributed approximately 25% of Yaras quarterly net income. Qafco seems to provide the most stable source of JV net income to Yara, and we anticipate Lifeco will be similar, although it is too early yet to draw meaningful conclusions. Exhibit 9.65 highlights Yaras quarterly JV net income contribution from each of its investments.
Low-cost gasbased Middle Eastern JVs make up half of Yaras total JVs.
GrowHow, 1,401
Tringen, 179 Burrup, 1,584 Yaibera, 769
Exhibit 9.65: Quarterly Net Income Contribution from Yaras JVs

1,200 JV Net Income (NOK M) 1,000 800 600 400 200 0 -200 -400 -600 Q1-08 Qafco Q2-08 Tringen Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 GrowHow Q4-09 Lifeco Q1- 10 Other Q2- 10 Q3-10E Yaibera/Rossoh Burrup Dividend Yield (RHS) 300% 250% 200% 150% 100% 50% 0%
501
January 2011

NATURAL GAS PRICE VOLATILITY
In our view, the availability and price volatility of natural gas poses the largest risk to Yara. Why? Natural gas typically makes up about 90% of the cash cost of ammonia the basic nutrient used to produce almost all other nitrogen fertilizers. Compounding this risk, fertilizers are typically not sold forward beyond one year out, and therefore cannot be price-hedged effectively.
Yara is reducing its weight of oilindexed gas contracts.
The pricing structure of Yaras energy contracts are either spot-based or forward contracts, which historically have mostly been indexed to the price of oil. However, over the past several years, Yara has switched a major part of its European gas sourcing from oil-indexed to hub-based contracts. Why? Yara believes, as do we, that oil will have a stronger price development over time than natural gas. Additionally, Yara has chosen to stay mainly spot on the hub exposure and limit its forward buying. We believe that Yara is well positioned to cover the risk of spot exposure. The company has the operational flexibility to reduce gas purchases and import ammonia for fertilizer production if gas prices peak. Yara also has a natural hedge in the strong correlation between nitrogen fertilizer prices and global energy prices. To minimize its risk to rising natural gas prices, Yara continues to invest in low-cost gas feedstock regions for new production capacity. Last year, Yaras share of low-cost gas increased to 37% from 29%, mostly as a result of increased production in Burrup and the establishment of Lifeco a 50/50 fertilizer JV in Libya.
Exhibit 9.66: Spot Natural Gas versus Yaras Averages
Source: Yara International.
MODERATE FX RISK
~80% of Yaras debt is in USD.
Yaras most important products and raw materials are either directly denominated or determined in U.S. dollars. In markets outside of the United States, prices will generally adjust to fluctuations in the U.S. dollar exchange rate, although with a time lag. Accordingly, Yara keeps a major part of its debt in U.S. dollars in order to reduce overall currency exposure. In 2009, a 10% weakening of the U.S. dollar against the Norwegian krone (NOK) would have increased profit by NOK1.7 billion. Conversely, a 10% weakening of the euro against the NOK would have reduced profit by NOK315 million.
502
January 2011
NITROGEN HAS LOW BARRIERS TO ENTRY
Unlike potash and phosphate fertilizer capacity, which both require close access to mineable resources, nitrogen capacity can be located almost anywhere. To produce ammonia, the primary feedstock (other than air) is natural gas, resulting in a highly fragmented industry. Developing an ammonia/urea complex requires materially less capital and lead time compared with potash and phosphate plants. Typically, a 1 million tonne ammonia/urea complex costs ~$1.4 billion, and takes up to three years to construct. A 1 million tonne phosphate facility costs about $1.5 billion and takes four years to construct, while a 2 million tonne world-scale conventional potash facility takes between five and seven years to build, with costs up to $4 billion (excluding reserve costs).
Exhibit 9.67: New Urea Capacity
Country Pakistan Pakistan China Venezuela Algeria China Vietnam Venezuela Italy Russia Kazakhstan Egypt Egypt Iran Iran Saudi Arabia China Vietnam Algeria China
Plant Engro Fertilizers Ltd. Agritech Ltd. Various Pequiven Sorfert Algerie Various Vietnam National Chemical Corp. Pequiven Yara Agro-Cherepovets JSC KazAzot Egyptian Fertilizer Company Misr Oil Processing Company (MOPCO) Lordegan Petrochemical Ejroud Saudi Arabian Fertilizer Co. (SAFCO) Various Ca Mau Sharkia El Djazairia El Omani lil Asmida Various
Start Date 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2013 2014 2014
Urea Capacity
(M mt)
1.3 0.1 8.6 1.5 1.3 15.4 0.6 0.7 1.2 0.5 1.8 0.3 1.3 1.1 1.1 1.5 1.4 0.8 2.4 0.6 43.3
Source: IFDC; Scotia Capital.
HIGH GOVERNMENT CONTROL
Nearly 60% of global nitrogen capacity is either directly or indirectly controlled by federal governments. Accordingly, nitrogen-based capital investment and production decisions may be made for political reasons rather than economic reasons, resulting in excess supply and potentially lower prices and margins.
503
January 2011
Adverse weather conditions impact the demand and pricing strategy for Yaras fertilizers, especially during crop planting periods. There is usually only a narrow window for farmers to cultivate their crops; thus, an opportunity for recovery in Yaras sales and earnings would not occur until the next season. Yara mitigates its weather risk by having the worlds largest storage capacity for fertilizer, which allows it to: (1) store excess product during periods of unforeseen low demand; (2) build up reserves prior to peak fertilizer application periods; and (3) move product to strong demand locations. Other weather-related risk mitigants include substantial geographic diversification, as well as an industrial products portfolio that is not constrained by variable weather patterns.
Yaras net income is highly dependent on crop input demand.
Yaras earnings are highly dependent on crop input demand, which is directly affected by forward and spot crop prices, fertilizer prices, farmer economics, government policies and subsidies, availability of farmer and distributor credit, regional fertilizer inventory levels, and competitor actions (i.e., production utilization and capacity decisions). Unlike potash and phosphate, application of nitrogen-based fertilizers cannot remain depressed for an extended period of time. Since the majority of Yaras fertilizer production is nitrogen-based, demand (not necessarily price and margin) volatility is relatively muted compared with the two other major nutrients.
EMERGING MARKET RISKS
Yara has operations in numerous emerging markets that could pose financial, political, economic, and business risks due to the less developed and less predictable legal systems of those countries.
504
January 2011
Financial Forecast
On the top line, we are looking for overall 2011 and 2012 net sales of NOK77.7 billion and NOK75 billion, or a solid 17.4% growth in 2011, followed by a more normal 4.4% decline in 2012 (Exhibit 9.68). The majority of our forecast revenue growth in 2011 comes from near-peak nitrogen pricing.
Exhibit 9.68: SC Forecast Net Sales by Business Unit
External Sales (NOK M)
30,000 25,000 20,000 15,000 10,000 5,000 0 2006 2007 2008 2009 Dow nstream Upstream 2010 Industrial 2011 2012 Forecast
We forecast 2011 and 2012 EBITDA to come in at NOK12.8 billion and NOK13.3 billion, respectively. This should yield EBITDA margins in the 17% to 18% range through our forecast period. The small bump to our forecast 2012 EBITDA margin is mostly due to improvement in Yaras Industrial segment, which typically has fairly strong margins. Our EPS estimates for Yara are NOK27.16 (2011E) and NOK28.43 (2012E), versus a record NOK28.27 in 2008 (Exhibits 9.69 and 9.70).
Exhibit 9.69: SC Forecast EBITDA by Business Unit
8,000 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2012
Upstream should contribute the bulk of EBITDA.
EBITDA (NOK M)
6,000 4,000 2,000 0 -2,000 -4,000 2006 2007 2008 Upstream 2009 Industrial 2010 Dow nstream
2011 EBITDA Margin (RHS)

5,000 Forecast 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 2012
Net Income (NOK M)
3,000 2,000 1,000 0 -1,000 -2,000 -3,000 2006 2007 2008 2009 2010 2011
Net Income (LHS)

Income Margin (RHS)
505
Income Margin (%)
4,000
EBITDA Margin (%)
Forecast
January 2011
We estimate that Yara will generate NOK8.3 billion and NOK8.4 billion in cash flow from operations (after working capital adjustments) in 2011 and 2012, respectively. The NOK0.1 billion year-over-year increase in our forecast 2012 cash flow from operations is mostly due to changes in working capital. Exhibit 9.71 highlights that post-2010, Yaras return on assets and return on equity should go back to more normalized levels, but still above pre-2006 levels.
80% 60% Forecast
Return (%)
40% 20% 0% -20% -40% 2006 2007 2008 2009 ROA 2010 ROE 2011 2012

Exhibit 9.72: Our 2011 and 2012 Yara Estimates vs. Consensus
Our revenue, EBITDA, and earnings estimates are generally in line with the Street.
2011 Scotia Capital Est. Net Sales (NOK M) EBITDA (NOK M) Net Income (NOK M) EPS (NOK/sh) 77,707 12,829 7,843 27.16 Low 53,061 9,232 7,051 24.40 Street Avg. 72,070 12,834 8,048 28.62 High 99,656 17,553 10,851 37.62 Net Sales (NOK M) EBITDA (NOK M) Net Income (NOK M) EPS (NOK/sh) Scotia Capital Est. 75,062 13,299 8,210 28.43
2012 Low 60,111 9,044 5,855 20.30 Street Avg. 76,072 11,511 7,715 27.48 High 102,040 18,296 11,366 39.41
DIVIDENDS
Yara aims to pay a 30% dividend, over a business cycle.
Yara expects to return between 40% and 45% of net income to its shareholders, measured as the sum of dividends and share buybacks averaged over a business cycle. Yaras dividend policy is to pay out a minimum of 30% of net income during a business cycle. The company targets to pay out somewhat more than 30% of net income during years of weaker-than-expected cash flows. Conversely, Yara expects to pay out less than 30% of net income during years of stronger-than-expected cash flows. In 2008, Yara paid out 19% of net income. Last year, it paid out 34%. For 2011, and 2012, we forecast declared dividends of about 20% of net income.
INTEREST RATE RISK
At the end of Q3/10, Yara had NOK2.6 billion of cash on hand, and about NOK2.5 billion of undrawn short-term credit facilities. Exhibit 9.73 details Yaras debt. Yaras debt is rated Baa2 by Moodys and BBB by Standard & Poors in line with most of its fertilizer producer peers. In order to hedge against FX fluctuations between the USD and NOK, Yara issues about 80% of its long-term debt in USD. We estimate that a 100 bp change in interest rates will impact Yaras interest expense by about NOK120 million.
506
January 2011
Exhibit 9.73: Yaras Debt Profile

Debentures
(NOK M)
Bank Loans
(NOK M)
Capital Leases and Other

(NOK M)
Total
(NOK M)
2011 2012 2013 2014 2015 2016+ Total
300 3,602 3,893 7,795
174 81 2,021 93 1,065 700 4,134
15 15 15 15 279 339
189 396 2,036 3,710 1,344 4,593 12,268
507
508
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 12/31/06 12/31/07 12/31/08 3/31/09 6/30/09 09/31/09 12/31/09 12/31/09 3/31/10 46,968 1,155 138 48,262 38,749 -147 3,388 1,373 1,546 44,909 3,352 1,462 278 5,093 421 -470 5,044 833 4,211 -22 4,189
316 0 -13 308 302 0 302 293 291 290 289 289 0 0 0 0 0 293 291 290 289 289 289 0 289 292 290 290 289 289 289 -17 0 -1 0 0 289 289 0 289 0 0 0 0 0 0 0 292 290 290 290 289 289 289 289 0 0 289 289 0 289
Exhibit 9.74: SC Forecast Yara International Income Statement

Q2-10 6/30/10 15,355 350 -26 15,679 11,557 0 1,132 658 444 13,791 1,888 370 3,634 5,892 -718 -263 4,911 1,158 3,753 -37 3,716
289 0 0 289 289 0 289
(NOK M)
Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E 09/31/10 12/31/10 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 12/31/11 12/31/12 16,570 -64 27 16,533 12,976 0 1,129 593 434 15,132 1,401 413 68 1,882 752 -205 2,429 490 1,939 -12 1,927
289 0 0 289 289 0 289
Revenue Other Income Commodity based derivatives (gain/loss) Revenue and other income 44,905 224 4,016 1,487 1,868 52,499 4,987 1,624 325 6,936 982 -581 7,337 1,262 6,074 -38 6,036 -13 8,229 -15 887 -15 1,124 -4 349 2 1,423 -32 3,782 -11 1,522 -3,313 -1,498 10,905 2,664 8,242 55 -261 1,215 313 902 881 -71 1,435 296 1,139 524 -313 415 63 353 -96 -300 412 -1,009 1,421 1,364 -945 3,477 -337 3,814 -575 -229 1,876 343 1,533 2,760 675 15,717 146 82 1,421 654 54 624 246 75 204 365 165 808 1,411 376 3,057 326 40 2,680 460 209 2,097 0 -139 1,958 391 1,567 -12 1,555
289 0 0 289 289 0 289
56,631 930 -75 57,486 70,636 -3,682 4,830 2,095 2,615 76,494 12,282 1,193 -84 -117 278 1,270 2,314 1,428 7,031 1,569 3,951 12,551 -541 -836 11,174 2,382 8,792 -72 8,720
289 0 0 289 289 0 289
87,926 677 173 88,776 13,205 457 1,128 602 533 15,925 2,087 490 213 2,790 0 -139 2,651 529 2,122 -12 2,110
289 0 0 289 289 0 289
17,096 54 -32 17,118 11,598 2,318 1,206 613 479 16,214 11,407 895 1,119 642 433 14,496 11,157 39 1,149 568 599 13,513 47,367 3,709 4,602 2,425 2,044 60,148 11,283 0 1,097 558 385 13,323 14,699 0 1,172 631 460 16,962 50,515 0 4,530 2,440 1,723 59,208 15,302 0 1,119 583 490 17,493 15,723 0 1,155 597 497 17,972 1,920 498 298 2,716 0 -139 2,577 514 2,063 -12 2,051
289 0 0 289 289 0 289
16,089 25 16 16,130 15,097 0 1,152 608 477 17,334 1,761 478 274 2,512 0 -139 2,373 473 1,900 -12 1,888
289 0 0 289 289 0 289
14,281 22 76 14,379
13,401 300 91 13,791
60,867 401 151 61,418
14,693 988 -44 15,637
18,207 184 0 18,390
64,825 1,458 -43 66,239
19,385 196 0 19,580
19,693 199 0 19,892
18,904 191 0 19,095
18,949 191 0 19,140 15,348 0 1,195 628 478 17,650 1,490 479 427 2,395 0 -139 2,256 450 1,806 -12 1,794
289 0 0 289 289 0 289
76,930 777 0 77,707 61,470 0 4,621 2,415 1,943 70,449 7,258 1,943 1,212 10,413 0 -556 9,857 1,967 7,891 -48 7,843
289 0 0 289 289 0 289
74,311 751 0 75,062 59,681 0 4,713 2,428 1,877 68,699 6,363 1,877 2,631 10,871 0 -555 10,316 2,058 8,258 -48 8,210
289 0 0 289 289 0 289
Raw materials, energy costs and freight expenses Change in inventories of own production Payroll and related costs Depreciation and amortization Other operating expenses Operating Costs and Expenses
Operating income
Share of net income in equity accounted investees Interest income and other financial income Earnings Before Interest Expense & Tax (EBIT)
Foreign exchange gain/(loss) Interest Expense and other financial items Income before tax and minority interest Less: Income Taxes Net Income
Minority Interest Net Income after Minority Interest
Basic shares - opening Plus: Equity issued Less: Share buyback Basic shares - closing Average Shares O/S - Basic (M) Average Dilution (M) Average Shares O/S - Diluted (M) 13.87 13.87 6,466
13% 15% 20% 12%
EPS (Basic) EPS (Diluted) 20.60 20.60 8,423 17,812 2,023 1,237
8%
28.27 28.27
3.06 3.06
3.88 3.88
1.21 1.21 846

6%
4.93 4.93 1,376

10%
13.08 13.08 5,482

9%
5.27 5.27 3,238

21%
12.87 12.87 6,550

42%
6.67 6.67 2,475

15%
5.39 5.39 2,729

15%
30.19 30.19 14,992

23%
7.31 7.31 3,373

17%
7.10 7.10 3,313

17%
6.54 6.54 3,120

16%
6.21 6.21 3,023

16%
27.16 27.16 12,829

17%
28.43 28.43 13,299

18%
EBITDA
January 2011
509
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 1,003 2,325 3,195 4,202 2,049 1,036 974 974 1,039 2,512 2,611 1,974 2,110 3,197 3,156 2,108 2,067 3,611 3,611 2,990 3,592 3,541 6,834 8,465 10,062 9,340 7,635 5,816 5,934 5,934 7,171 6,698 6,874 6,689 9,291 20,195 14,720 10,528 8,755 7,853 7,853 8,170 8,560 8,353 0 0 0 0 0 0 0 0 0 541 499 0 0 6 0 3 0 0 0 0 0 0 16,500 22,191 36,655 31,418 22,324 17,673 18,372 18,372 19,370 21,903 21,878 1,175 1,252 3,234 3,088 2,923 2,802 1,920 1,920 1,908 1,810 1,788 206 1,776 4,215 3,913 4,064 3,890 3,591 3,591 5,056 5,264 4,886 7,600 10,412 22,524 21,065 21,863 21,374 22,121 22,121 22,354 23,457 23,045 6,390 6,076 9,590 10,389 11,111 10,311 10,083 10,083 9,870 10,559 9,874 1,393 5,919 4,669 5,041 5,323 5,953 5,577 5,577 5,729 1,861 1,956 33,263 47,626 80,887 74,913 67,608 62,003 61,665 61,665 64,287 64,853 63,426 1,788 1,788 4,886 4,886 22,913 22,913 9,874 9,874 1,956 1,956 66,447 66,447 1,788 4,886 22,868 9,874 1,956 68,596 1,788 4,886 22,808 9,874 1,956 68,765 2,665 2,665 3,171 3,171 9,003 9,003 9,692 9,692 499 499 0 0 25,030 25,030 3,728 3,322 9,586 10,089 499 0 27,224 3,419 3,430 9,738 10,367 499 0 27,453 5,333 3,438 9,348 9,954 499 0 28,572 1,788 4,886 22,738 9,874 1,956 69,814 0 0 0 0 0 0 0 0 0 0 0 5,915 8,226 9,277 8,122 6,949 6,515 6,883 6,883 7,809 6,775 7,160 191 411 1,592 1,142 262 264 551 551 643 699 946 1,716 2,382 7,819 5,942 4,948 5,894 3,545 3,545 3,282 2,490 2,185 589 784 1,542 1,080 1,134 1,029 774 774 921 1,061 1,111 45 27 21 17 15 13 82 82 79 79 23 8,457 11,830 20,251 16,303 13,308 13,713 11,835 11,835 12,734 11,104 11,425 4,732 9,205 20,643 20,206 15,903 11,423 13,936 13,936 13,237 13,546 12,269 318 436 630 588 633 604 300 300 335 379 354 292 309 413 385 345 325 311 311 315 336 319 1,238 2,734 5,675 5,481 5,525 5,521 4,062 4,062 4,278 3,514 3,336 2,192 1,912 3,009 2,740 2,330 2,208 2,358 2,358 2,228 2,233 2,216 17,229 26,426 50,621 45,703 38,044 33,794 32,802 32,802 33,127 31,112 29,919 0 0 8,884 8,884 946 946 2,185 2,185 1,111 1,111 324 324 13,450 13,450 11,938 11,938 354 354 319 319 3,336 3,336 2,216 2,216 31,613 31,613 0 9,248 946 2,185 1,111 252 13,742 11,929 354 319 3,336 2,216 31,896 0 9,503 946 2,185 1,111 179 13,924 11,921 354 319 3,336 2,216 32,070 0 9,124 946 2,185 1,111 107 13,474 11,912 354 319 3,336 2,216 31,611 503 496 493 493 491 491 491 491 491 491 490 2,183 1,092 1,092 1,092 435 435 435 435 435 435 435 12,773 19,420 28,518 26,310 26,547 26,894 28,319 28,319 28,498 30,914 32,755 0 0 0 1,148 1,918 227 -539 -539 1,570 1,761 -322 575 193 164 167 172 162 158 158 167 140 149 16,034 21,200 30,266 29,210 29,564 28,209 28,863 28,863 31,160 33,741 33,507 33,263 47,626 80,887 74,913 67,608 62,003 61,665 61,665 64,287 64,853 63,426 490 490 435 435 34,082 34,082 -322 -322 149 149 34,834 34,834 66,447 66,447 490 435 35,947 -322 149 36,699 68,596 490 435 35,943 -322 149 36,695 68,765 490 435 37,451 -322 149 38,203 69,814
Exhibit 9.75: SC Forecast Yara International Balance Sheet

Q3-10 Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E
(NOK M) Assets Current Assets Cash and Cash Equivalents Prepaid Expenses and Other Receivables Inventories Non-current assets classified as held-for-sale Other liquid assets
6,637 6,637 10,693 3,491 3,491 3,687 9,370 9,370 9,052 10,120 10,120 9,825 499 499 499 0 0 0 30,117 30,117 33,757 1,788 1,788 1,788 4,886 4,886 4,886 22,648 22,648 22,520 9,874 9,874 9,874 1,956 1,956 1,956 71,268 71,268 74,780
Deferred Tax Assets Intangible Assets PP&E Equity Accounted Investees Other Non-Current Assets Total Assets
Current Liabilities Revolver Payables Current Tax Liabilities S/T Debt Other CP of LTD
0 0 0 9,277 9,277 9,007 946 946 946 2,185 2,185 2,185 1,111 1,111 1,111 334 334 36 13,853 13,853 13,284 11,604 11,604 11,569 354 354 354 319 319 319 3,336 3,336 3,336 2,216 2,216 2,216 31,682 31,682 31,078
Long-Term Interest-Bearing Debt Long-term provisions Other long-term liabilities Deferred Tax Liabilities Employee Benefits Total Liabilities
Shareholders' Equity Share Capital Premium paid-in capital Retained Earnings/(Deficit) Translation and Other Reserves Minority shareholders' interest in consolidated subsidiaries Total Shareholders' Equity
490 490 490 435 435 435 38,834 38,834 42,950 -322 -322 -322 149 149 149 39,586 39,586 43,702 71,268 71,268 74,780
January 2011
510
2006 2007 2008 Q1-09 Q2-09 Q3-09 Q4-09 2009 Q1-10 Q2-10 Q3-10 3,352 1,373 1,487 2,095 0 0 0 -720 -967 -1,839 1,019 830 1,223 -1,519 -691 274 3,505 5,646 14,033 349 -1,340 -10,047 3,854 4,305 3,986 602 613 -844 -294 -660 -1,221 138 104 -537 -401 -107 -1,284 4,346 5,555 4,239 4,272 642 568 2,425 -134 -331 -1,603 -167 -130 -2,178 108 59 409 -853 -1,419 -3,210 -521 -974 -2,886 3,046 1,863 14,810 2,524 889 11,924 558 -124 -109 184 529 3,353 -935 2,418 658 -10 -195 220 -951 1,610 -952 658 592 -43 -82 284 -42 2,110 -48 2,062 631 2,439 0 -177 -286 -672 184 872 0 -464 1,958 9,031 -1,375 -3,310 583 5,721 583 0 -417 196 0 2,448 -767 1,682 597 0 -384 199 0 2,332 -283 2,049 4,987 12,281 1,194 -85 -117 279 1,271 2,315 1,888 1,401 1,428 7,032 2,087 1,920 1,761 608 0 -352 191 0 2,208 416 2,624 1,490 -1,870 -2,020 -3,276 -736 -1,063 -1,139 -1,322 -72 -5,078 -9,556 -1,639 -69 -44 226 183 109 46 29 266 10 14 -1,759 -6,988 -12,786 -2,346 -866 -1,173 -1,082 -4,260 -515 -1,026 -1,526 -520 4,405 319 26 6 -5,467 -1,009 3,385 -767 -386 6 -1,147 -500 -2,808 0 3,499 0 38 -500 729 -538 0 0 -538 -538 0 0 -538 -538 0 0 -538 -340 -1,253 -722 -3 0 -2,317 118 -105 1,108 1,004 1,322 1,004 2,325 870 2,325 3,195 1,007 -2,152 -1,014 3,195 4,202 2,049 4,202 2,049 1,036 -62 1,036 974 46 235 -176 298 -12 -41 69 -2,221 3,195 974 -11 65 974 1,039 5,103 -402 -739 -3 0 3,959 11,059 -422 -1,166 -35 0 9,436 -707 -4,613 -2,041 0 0 -240 0 -1,235 -69 -4 -9 -2 0 0 0 -711 -5,856 -2,353 173 0 -1 -1 0 173 -7,188 -1,332 -1,499 -240 0 0 -1,304 0 -1,228 -15 -1 -70 0 0 0 -8,747 -1,334 -2,796 226 1,473 1,039 2,512 -616 -86 -72 4 0 -770 -46 99 2,512 2,611 -30 -3,477 0 -86 0 -1,300 0 -67 0 0 -30 -4,930 0 54 2,611 2,665 170 1,691 974 2,665 -81 0 0 0 0 -81 0 1,063 2,665 3,728 -81 0 -1,740 0 0 -1,821 0 -309 3,728 3,419 -81 0 -92 0 0 -172 0 1,914 3,419 5,333 0 1,304 5,333 6,637
Exhibit 9.76: SC Forecast Yara International Cash Flow Statement

Q4-10E 2010E Q1-11E Q2-11E Q3-11E Q4-11E 2011E 2012E
(NOK M)
Operating Activities Operating Income Add/(deduct) non-cash items: Depreciation and Amortization Net writedowns and reversals Tax paid Equity investee dividends + (Gain)/loss on investments Other + Non-cash FX CFO (pre-WC Adj.) Net change in non-cash WC CFO (post-WC Adj.)
7,258 628 2,415 0 0 -298 -1,452 191 777 0 0 2,011 8,999 -88 -722 1,923 8,277
6,363 2,428 0 -1,273 751 0 8,269 146 8,415
Investing Activities Additions to PP&E Net sales/(purchases) of S/T + L/T investments Proceeds on Sale/Disposal of PP&E/LT Inv. CFI
-538 -2,150 0 0 0 0 -538 -2,150
-2,300 0 0 -2,300
Financing Activities Proceeds from (repayment of) loans Equity issuance/buyback Dividends Net cash transfers (to)/from minority interest Other CFF
-81 -324 0 0 0 -1,831 0 0 0 0 -81 -2,155 0
-334 0 -1,725 0 0 -2,060 0 3,972 4,056 2,665 6,637 6,637 10,693
Foreign currency effects on cash flows
January 2011
January 2011
Exhibit 9.77: Yara 2011E EPS Sensitivity to Ammonia Price Changes
2011 Realized Ammonia Price ($/mt) $8.50 $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $330 24.55 25.35 26.15 26.95 27.75 28.55 29.35 $340 24.62 25.42 26.22 27.02 27.82 28.62 29.42 $350 24.69 25.49 26.29 27.09 27.89 28.69 29.49 $360 24.76 25.56 26.36 27.16 27.96 28.76 29.56 $370 24.83 25.63 26.43 27.23 28.03 28.83 29.63 $380 24.90 25.70 26.50 27.30 28.10 28.90 29.70 $390 24.97 25.77 26.57 27.37 28.17 28.97 29.77 Realized Gas Cost ($/mmBtu)
Exhibit 9.78: Yara 2011E EPS Sensitivity to Urea Price Changes
2011 Realized Urea Price ($/mt) $8.50 $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $315 19.66 20.46 21.26 22.06 22.86 23.66 24.46 $325 21.36 22.16 22.96 23.76 24.56 25.36 26.16 $335 23.06 23.86 24.66 25.46 26.26 27.06 27.86 $345 24.76 25.56 26.36 27.16 27.96 28.76 29.56 $355 26.46 27.26 28.06 28.86 29.66 30.46 31.26 $365 28.16 28.96 29.76 30.56 31.36 32.16 32.96 $375 29.86 30.66 31.46 32.26 33.06 33.86 34.66 Realized Gas Cost ($/mmBtu)
Exhibit 9.79: Yara 2011E EPS Sensitivity to Nitrate Price Changes
2011 Realized Nitrates Price ($/mt) $8.50 $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $384 20.89 21.69 22.49 23.29 24.09 24.89 25.69 $394 22.18 22.98 23.78 24.58 25.38 26.18 26.98 $404 23.47 24.27 25.07 25.87 26.67 27.47 28.27 $414 24.76 25.56 26.36 27.16 27.96 28.76 29.56 $424 26.05 26.85 27.65 28.45 29.25 30.05 30.85 $434 27.34 28.14 28.94 29.74 30.54 31.34 32.14 $444 28.63 29.43 30.23 31.03 31.83 32.63 33.43 Realized Gas Cost ($/mmBtu)
Exhibit 9.80: Yara 2011E EPS Sensitivity to FX Rate Changes
2011 FX Rate (NOK per USD) $8.50 $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 5.70 23.65 24.45 25.25 26.05 26.85 27.65 28.45 5.80 24.02 24.82 25.62 26.42 27.22 28.02 28.82 5.90 24.39 25.19 25.99 26.79 27.59 28.39 29.19 6.00 24.76 25.56 26.36 27.16 27.96 28.76 29.56 6.10 25.13 25.93 26.73 27.53 28.33 29.13 29.93 6.20 25.50 26.30 27.10 27.90 28.70 29.50 30.30 6.30 25.87 26.67 27.47 28.27 29.07 29.87 30.67 Realized Gas Cost ($/mmBtu)
511
January 2011
Exhibit 9.81: Yara 2011E EPS Sensitivity to Oil Price Changes
2011 Crude Oil ($/bbl) $8.50 $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $89 17.47 18.27 19.07 19.87 20.67 21.47 22.27 $86 19.90 20.70 21.50 22.30 23.10 23.90 24.70 $83 22.33 23.13 23.93 24.73 25.53 26.33 27.13 $80 24.76 25.56 26.36 27.16 27.96 28.76 29.56 $77 27.19 27.99 28.79 29.59 30.39 31.19 31.99 $74 29.62 30.42 31.22 32.02 32.82 33.62 34.42 $71 32.05 32.85 33.65 34.45 35.25 36.05 36.85 Realized Gas Cost ($/mmBtu)
Exhibit 9.82: Yara 2011E EPS Sensitivity to Phosphate Rock Cost Changes
2011 Phosphate Rock Costs ($/mt) $8.50 $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $90 24.34 25.14 25.94 26.74 27.54 28.34 29.14 $100 24.48 25.28 26.08 26.88 27.68 28.48 29.28 $110 24.62 25.42 26.22 27.02 27.82 28.62 29.42 $120 24.76 25.56 26.36 27.16 27.96 28.76 29.56 $130 24.90 25.70 26.50 27.30 28.10 28.90 29.70 $140 25.04 25.84 26.64 27.44 28.24 29.04 29.84 $150 25.18 25.98 26.78 27.58 28.38 29.18 29.98 Realized Gas Cost ($/mmBtu)
512
January 2011

FD Shares Controlled Directly or Indirectly 11,598
Name Jorgen Ole Haslestad
Position President and CEO
Background Mr. Haslestad has been President and CEO of Yara International since October 2008. He has 28 years of senior management experience. He is currently a board member of Tandberg ASA and served on Yara's board between 2004 and 2008. Mr. Storvik is Yara's CFO and Head of Strategy. Since 1995, Mr. Storvik has held several senior management positions with both Yara and Norsk Hydro. He began his career at Hydro in 1984. Mr. Holba has held the position of Head of Upstream since October 2006. He began at Hydro in 1981 and has held numerous senior management positions within Hydro Agri and Yara for the past 29 years. Mr. Hogna has served as the Head of the Downstream since August 2009. He has held several senior management positions with Hydro Agri and Yara over the past 9 years. Prior to joining the company he was a consultant with McKinsey for 5 years. Mr. Bonte has been the Head of Industrial since January 2010. He brings 22 years of chemical industry experience with him, ten of which were in senior management positions. Prior to Yara, Mr. Bonte spend five years with Exxon Chemical. Mr. Bakken has 16 years of senior management experience at both Norsk Hydro and Yara. He has been in the position of Senior VP and Head of Strategy & Trade since August 2009. Mr. Hakan Halln has gained extensive HR experience through several HR-related senior management roles at a variety of of companies. He has served as Yara's Chief Human Resource Officer since August 2009. Mr. Faksvaag has been Senior VP and Chief Legal Counsel since May 2008. He has held various legal positions with both Hydro and Yara since 1996. Ms. Slaatten has 15 years of experience in senior management positions gained at two other companies prior to joining Yara in January 2008 as VP Corporate Communications. She has held her current position since October 2009. Dr. Lund has served as Yara's Chairman of the Board since 2004. He has a wide range of international industrial experience having held senior management positions at a variety of companies. Ms. Harstad is a member of the Compensation Committee and has been a member of the board since 2006. She has held several senior management positions at DNV Research & Innovation. Mr. Nergaard is the Chairperson of the Audit Committee and has been a board member since 2004. He is currently a partner in with Norscan Partners AS. He worked for Hydro between 1969 and 2003 and acted as an advisor to Hydro's senior management between 2003 and 2006. Mr. Reitan has been a member of the board since 2009 and brings experience from several senior management positions he held at Aloca and Elkem. Mr. Sundbo has been a Yara employee since 1987. He is the union leader of Yara Porsgrunn. Mr. Andersen has been a board member since 2004 and an employee of Hydro and Yara since 1977. He has been active in union matters since 1980. Mr. Flatebo has been a Yara board member since 2007. He has been a Yara and/or Hydro employee since 1981, holding positions in a variety of areas throughout the two organizations. Ms. Aasheim has been a member of the board since 2010. She has held several senior management positions in Elkem and Hydro
Hallgeir Storvik
CFO & Head of Strategy
17,359
Tor Holba
Head of Upstream
26,417
Egil Hogna
Head of Downstream
8,603
Yves Bonte
Head of Industrial
n.a.
Terje Bakken
Head of Supply & Trade
27,758
Hakan Halln
Chief Human Resource Officer
1,852
Trygve Faksvaag
Chief Legal Counsel Chief Communications and Branding Officer
3,883
Bente G.H. Slaatten
1,375
Oivind Lund
Board Chair
6,000
Elisabeth Harstad
Board Member
n.a.
Leiv L. Nergaard
Board Member
26,923
Bernt Reitan Geir O. Sundbo Frank Andersen
Board Member Board Member Board Member
n.a. 119 396
Svein Flatebo
Board Member
1,410
Hilde Merete Aasheim
Board Member
n.a.
133,693 288,831,251 0.05%
Source: Yara International; Bloomberg; Scotia Capital.
513
January 2011
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514
January 2011
Appendix 1: Conversion Factors

Exhibit 1: Conversion Factors
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Acre Acre Acre Atmosphere Atmosphere Barrel (oil) Cubic foot Cubic foot Cubic foot Cubic foot Cubic foot Cubic meter Cubic meter Cubic meter Cubic meter Cubic meter Degree Fahrenheit Degree Centigrade Dollar/metric ton Dollar/short ton Gallon, Imperial Gallon, Imperial Gallon, US Grain/gallon Grain Sq. foot Sq. meter Sq. meter Sq. mile Sq. mile Ton, long Ton, long Ton, long Ton, long Ton, long/acre Ton, long/sq. ft. Ton, long/sq. inch Ton, metric Ton, metric Ton, metric Ton, metric/hectare Ton, metric/hectare Ton, short Ton, short Ton, short/acre Ton, Brit Shipping Ton, US Shipping Yard = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = 0.4048 4.048 x 10-3 43560 14.696 1.033 42 2.8317 x 10-2 6.2291 7.4805 28.317 0.025 1.308 220 265 6.289 3.5830 x 10 (to the 11th) (F 32) x 0.556 (C x 1.8) + 32 0.90719 1.1023 1.201 4.5461 3.7853 17.12 2.205 x 10-3 9.29 x 10-6 10.764 1.196 259 2.59 1016.05 2240 1.0161 1.12 2.511 1.0937 x 10-4 1.575 2204.6 0.9842 1.102 0.3982 0.446 907.19 2000 2.242 1.05 40 0.9144 Hectares Sq. kilometers Sq. feet Pounds/sq.inch Kilograms/sq.centimeter Gallons, US Cubic meter Gallons, Imperial Gallons, US Liters Tons, US Shipping Cubic yards Gallons, Imperial Gallons, US Barrels (oil) mmBtu Degree Centigrade Degree Fahrenheit Dollars/short ton Dollars/metric ton Gallons, US Liters Liters Parts/million Pounds Hectares Sq. feet Sq. yards Hectares Sq. kilometers Kilograms Pounds Tonnes Tons, short Tonnes/hectare Kilograms/sq.meter Kilograms/sq.mm Pounds L. tons S. tons L. tons/acre S. tons/acre Kilograms Pounds Tonnes/hectare Tons, US Shipping Cubic Feet Meters
Source: Agrium.
515
January 2011
Appendix 2: Product Analysis and Nutrient Factors

Exhibit 1: Product Analysis and Nutrient Factors
PRODUCT ANALYSIS Ammonia, anhydrous Ammonia, aqua Ammonium chloride Ammonium nitrate Ammonium phosphate sulphate Ammonium sulphate Ammonium polyphosphate solution Monoammonium phosphate Diammonium phosphate Nitric acid (100%) Nitric acid (60%) Sodium nitrate Urea Urea ammonium nitrate solutions Urea ammonium phosphate %N 82 20.5-28 25-26 34.5 16 21 10 11 12 18 22.2 13 16 46 28-32 34 33 29 20.5-28 11.9-15.5 0 0 0 0 0 0 0 0 0 0 0 13 0 % P2O5 0 0 0 0 20 0 34 52 51 46 0 0 0 0 0 17 20 29 0 0 52.2 41.3 16-22 44-48 37 19-20 74.2 54 70 0 0 0 0 % K2O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 60 50-54 44 21.9
Calcium ammonium nitrate Calcium nitrate Dicalcium phosphate anhydrous Dicalcium phosphate dihydrate Single superphosphate Triple superphosphate Deflourinated phosphate Fused magnesium phosphate Phosphoric acid 100% Phosphoric acid merchant grade Superphosphoric acid Muriate of potash Potassium sulphate Potassium nitrate Potassium magnesium sulphate NUTRIENT FACTORS To Convert P2O5 BPL KCl K2O (K) Florida Rock: Polk County Mardee County Kapuskasing Rock Western U.S. States Rock
Source: Agrium.
To BPL P2O7 K2O KCl = = = =
Multiply By 2.185 0.4577 0.61 1.6 68-70% BPL 62-66% BPL 83% BPL 70% BPL
516
January 2011
Appendix 3: Raw Material Requirements

Exhibit 1: Raw Material Requirements
Raw Material Requirements

Am m onium Sulphate The production of 1 tonne of ammonium sulphate requires: 0.26 tonnes ammonia 0.75 tonnes sulphuric acid Phosphoric Acid (H3PO4) (Wet Process) The production of 1 tonne of 100% P2O5 as H3PO4 requires: 3.6 tonnes phosphate rock 63% BPL(1) 2.8 tonnes 100% H2SO4 or 2.3 tonnes 100% HCI Phosphoric Acid (Therm al Process) The production of 1 tonne of 100% P2O5 requires: 3.9 tonnes of phosphate rock 63% BPL(1) 1.3 tonnes of silica 0.60 tonnes of coke 13,000 - 15,000 kWh electricity Superphosphate The production of 1 tonne of 20% P2O5 single superphosphate requires: 0.71 tonnes of phosphate rock 63% BPL(1) 0.37 tonnes of 100% H2SO4 Triple Superphosphate The production of 1 tonne of 46% P2O5 triple superphosphate requires: 0.43 tonnes of phosphate rock 63% BPL(1) 0.85 tonnes of 40% P2O5 phosphoric acid (0.34 tonne P2O5) 32-0-0 Solution Monoam m onium Phosphate (MAP) The production of 1 tonne of MAP (11-53-0) requires: 0.128 tonnes of ammonia 1.91 tonnes of phosphate rock at 63% BPL(1) 0.475 tonnes of sulphur (1.35 tonnes of 40% P2O5 phos acid (40% P2O5)(0.54 tonne P2O5)) Diam m onium Phosphate (DAP) The production of 1 tonne of DAP (18-46-0) requires: 0.219 tonnes of ammonia 1.72 tonnes of phosphate rock at 63% BPL(1) 0.427 tonnes of sulphur (1.175 tonnes of phos acid (40% P2O5)(0.470 tonne P2O5)) Sulphuric Acid (H2SO4) The production of 1 tonne of 100% H2SO4 requires: 0.76 tonnes pyrites (48% S) or 0.33 tonnes sulphur UAN The production of 1 tonne of UAN requires: 28-0-0 Solution 0.386 tonnes of 34-0-0 0.310 tonnes of 46-0-0 0.443 tonnes of 34-0-0 0.354 tonnes of 46-0-0 Am m onium Nitrate (34% N) Production of 1 tonne of 34% N ammonium nitrate requires: 0.436 tonnes of total ammonia is required 0.21 tonnes ammonia 0.78 tonnes of 100% HNO3 (0.226 tonne of ammonia) Urea The production of 1 tonne of urea requires: 0.58 tonnes of ammonia 0.76 tonnes of carbon dioxide Nitric Acid (HNO3) The production of 1 tonne of 100% HN03 requires: 0.29 tonnes ammonia Am m onia (NH3) The production of 1 tonne of ammonia requires: 32 - 38 mmBtu natural gas; or 0.9 tonnes naphtha; or 1.05 tonnes fuel oil; or 1.90 tonnes coal; or 8,000 - 12,000 kWh (electrolysis)
(1) 63% BPL = 29% P2O5

Source: Agrium.
517
January 2011
Appendix 4: Planting Calendar

Exhibit 1: Planting Calendar
Source: PotashCorp.
518
January 2011
Appendix 5: China Fertilizer Export Tariffs

Exhibit 1: China Fertilizer Export Tariffs
China Fertilizer Export Tariffs in 2011

Midseason Period Urea Jan 1 - Jun 30 Nov 1 - Dec 31 Jan 1 - May 31 Oct 1 - Dec 31 Jan 1 - Sep 30 Tax Rate 110% Off-season Period Jul 1 - Jan 31 Tax Rate 7% Benchm ark price in off-season RMB 2,100
DAP/MAP NPK TSP MOP/SOP N-P
110% 110% 7% 105% 7%
Jun 1 - Sep 30 Oct 1 - Dec 31
7% 95%
RMB 3,400 for DAP RMB 2,900 for MAP -
China Fertilizer Export Tariffs in 2010

Midseason Period Feb 2 - Jun 30 Sep 16 - Oct 15 Dec 1 - Dec 31 Feb 1 - May 31 Sep 1 - Oct 15 Dec 1 - Dec 31 Jan 1 - Sep 30 Tax Rate Off-season Period Tax Rate Benchm ark price in off-season
Urea
110%
Jul 1 - Jan 31
7%
RMB 2,300
DAP/MAP
110%
Jun 1 - Sep 30
7%
RMB 4,000 for DAP RMB 3,700 for MAP -
NPK TSP MOP/SOP N-P
110% 7% 105% 7%
Oct 1 - Dec 31
95%
Source: Agrium.
519
January 2011
Appendix 6: Fertilizer Minerals and Application Rates

Exhibit 1: Fertilizer Minerals and Application Rates
Potash Minerals/Ores Sylvite Sylvinite Carnallite Kainite Langbeinite Polyhalite Alunite Phosphate Rock Tricalcium phosphate Fluorapatite Carbonate apatite Hydroxyapatite Ca3(PO4)2 Ca10(PO4)6F2 Ca10(PO4)6CO3 Ca10(PO4)6(OH)2 KCl KCl.NaCl KCl.MgCl2.6H20 KCl.MgSO4.3H2O K2SO4.2MgSO4 K2S4.MgSO4.2CaSO4.H2O K2SO4.Al2(SO4)34Al(OH)3
%K2O 63 35 17 19 23 16 11 % P205 46 42 41 42
U.S. Fertilizer Application Rates

Years Ended June 30(1)
Total
Corn
lbs/acre % of area applied lbs applied/acre lbs/acre % of area applied lbs applied/acre lbs/acre % of area applied lbs applied/acre lbs/acre % of area applied lbs applied/acre lbs/acre % of area applied lbs applied/acre
137 96% 132 91 92% 84 17 18% 3 72 95% 68 64 80% 51
58 81% 47 43 67% 29 46 23% 11 31 85% 27 34 57% 19
83 65% 54 71 52% 37 80 25% 20 18 27% 5 48 17% 8
233
Cotton
150
Soybeans
34
Spring Wheat
100
Winter Wheat
78
(1) Corn and cotton data are for the years 2005 and 2008, respectively. Soybeans, Spring Wheat and Winter Wheat data is for the year 2007.
Source: Agrium.
520
January 2011
Appendix 7: Global Fertilizer Trade Flow
Exhibit 1: Global Fertilizer Trade Flow
Note: ICIS cut-off tonnage of 400,000 tonnes.
521
Source: ICIS.
January 2011
Notes
522
Valuation and Key Risks to Target
Hanfeng Evergreen Inc. (HF - T) Valuation Key Risks to Target Valuation Key Risks to Target Valuation Key Risks to Target Valuation Key Risks to Target 12.5x P/E on 2012E EPS Construction progress, urea sourcing, farmer adoption 8.5x 2H/12E EPS + 1H/13E EPS Potash prices, tobacco consumption, competition K+S friendly offer of $4.50/share Financing, feasibility results, competition 0.6x NAV discounted at 10% Financing, drilling results, pre-feasibility results, competition
Migao Corporation (MGO - T)
Potash One Inc. (KCL - T)
Western Potash Corp. (WPX - V)
Appendix A: Important Disclosures

Company Agrium Inc. Hanfeng Evergreen Inc. Intrepid Potash, Inc. K+S AG MagIndustries Corp. Migao Corporation Potash Corporation of Saskatchewan, Inc. Potash One Inc. Sociedad Quimica y Minera de Chile Western Potash Corp. Yara International ASA Ticker AGU HF IPI SDF MAA MGO POT KCL SQM WPX YAR Disclosures (see legend below)* I, N1, P, U T P T P T G, N1, T, U S P G, I, S, U T
I, Ben Isaacson, certify that (1) the views expressed in this report in connection with securities or issuers that I analyze accurately reflect my personal views and (2) no part of my compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by me in this report. This research report was prepared by employees of Scotia Capital Inc. who have the title of Analyst. All pricing of securities in reports is based on the closing price of the securities principal marketplace on the night before the publication date, unless otherwise explicitly stated. All Equity Research Analysts report to the Head of Equity Research. The Head of Equity Research reports to the Managing Director, Head of Institutional Equity Sales, Trading and Research, who is not and does not report to the Head of the Investment Banking Department. The Supervisory Analyst, who reviews the report prior to publication, has a dual reporting line to the Head of Equity Research and the Head of Scotia Capital Compliance. Scotia Capital has policies that are reasonably designed to prevent or control the sharing of material non-public information across internal information barriers, such as between Investment Banking and Research. The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall profitability of Scotia Capital and the revenues generated from its various departments, including investment banking. Furthermore, the research analyst's compensation is charged as an expense to various Scotia Capital departments, including investment banking. Research Analysts may not receive compensation from the companies they cover. Non-U.S. analysts may not be associated persons of Scotia Capital (USA) Inc. and therefore may not be subject to NASD Rule 2711 restrictions on communications with subject company, public appearances and trading securities held by the analysts. For Scotia Capital Research analyst standards and disclosure policies, please visit http://www.scotiacapital.com/disclosures Scotia Capital Research, 40 King Street West, 33rd Floor, Toronto, Ontario, M5H 1H1.
* G I J N1 P S T U
Legend Scotia Capital USA Inc. or its affiliates has managed or co-managed a public offering in the past 12 months. Scotia Capital USA Inc. or its affiliates has received compensation for investment banking services in the past 12 months. Scotia Capital USA Inc. or its affiliates expects to receive or intends to seek compensation for investment banking services in the next 3 months. Scotia Capital USA Inc. had an investment banking services client relationship during the past 12 months. This issuer paid a portion of the travel-related expenses incurred by the Fundamental Research Analyst/Associate to visit material operations of this issuer. Scotia Capital Inc. and its affiliates collectively beneficially own in excess of 1% of one or more classes of the issued and outstanding equity securities of this issuer. The Fundamental Research Analyst/Associate has visited material operations of this issuer. Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect to equity or debt securities of, or have provided advice for a fee with respect to, this issuer.
General Disclosures
This report has been prepared by analysts who are employed by the Research Department of Scotia CapitalTM. The Scotia Capital trademark represents the corporate and investment banking businesses of the Scotiabank Group. Scotia Capital Research produces research reports under a single marketing identity referred to as Globally-branded research under U.S. rules. This research is produced on a single global research platform with one set of rules which meet the most stringent standards set by regulators in the various jurisdictions in which the research reports are produced. In addition, the analysts who produce the research reports, regardless of location, are subject to one set of policies designed to meet the most stringent rules established by regulators in the various jurisdictions where the research reports are produced. This report is provided to you for informational purposes only. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. The securities mentioned in this report may neither be suitable for all investors nor eligible for sale in some jurisdictions where the report is distributed. The information and opinions contained herein have been compiled or arrived at from sources believed reliable, however, Scotia Capital makes no representation or warranty, express or implied, as to their accuracy or completeness. Scotia Capital has policies designed to make best efforts to ensure that the information contained in this report is current as of the date of this report, unless otherwise specified. Any prices that are stated in this report are for informational purposes only. Scotia Capital makes no representation that any transaction may be or could have been effected at those prices. Any opinions expressed herein are those of the author(s) and are subject to change without notice and may differ or be contrary from the opinions expressed by other departments of Scotia Capital or any of its affiliates. Neither Scotia Capital nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. Equity research reports published by Scotia Capital are available electronically via: Bloomberg, Thomson Financial/First Call - Research Direct, Reuters, Capital IQ, and FactSet. Institutional clients with questions regarding distribution of equity research should contact us at 1-800-208-7666. This report and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without the prior express consent of Scotia Capital.
Additional Disclosures
Canada: This report is distributed by Scotia Capital Inc., a subsidiary of the Bank of Nova Scotia. Scotia Capital Inc. is a member of CIPF. Mexico: This report is distributed by Scotia Inverlat Casa de Bolsa S.A. de C.V., a subsidiary of the Bank of Nova Scotia. United Kingdom and the rest of Europe: Except as otherwise specified herein, this report is distributed by Scotia Capital (Europe) Limited, a subsidiary of the Bank of Nova Scotia. Scotia Capital (Europe) Limited is authorized and regulated by the Financial Services Authority (FSA). Scotia Capital (Europe) Limited research complies with all the FSA requirements and laws concerning disclosures and these are indicated on the research where applicable. Scotia Capital Inc. is regulated by the FSA for the conduct of investment business in the UK. United States: This report is distributed by Scotia Capital (USA) Inc., a subsidiary of Scotia Capital Inc., and a registered U.S. broker-dealer. All transactions by a U.S. investor of securities mentioned in this report must be effected through Scotia Capital (USA) Inc. Non-U.S. investors wishing to effect a transaction in the securities discussed in this report should contact a Scotia Capital entity in their local jurisdiction unless governing law permits otherwise.
Definition of Scotia Capital Equity Research Ratings & Risk Rankings We have a three-tiered rating system, with ratings of 1-Sector Outperform, 2-Sector Perform, and 3-Sector Underperform. Each analyst assigns a rating that is relative to his or her coverage universe. Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Statistical and judgmental factors considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst forecasts, consistency and predictability of earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director of Research and the Supervisory Analyst jointly make the final determination of all risk rankings. The rating assigned to each security covered in this report is based on the Scotia Capital research analysts 12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace.
Ratings Risk Rankings
1-Sector Outperform The stock is expected to outperform the average 12-month total return of the analysts coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. 2-Sector Perform The stock is expected to perform approximately in line with the average 12-month total return of the analysts coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. 3-Sector Underperform The stock is expected to underperform the average 12month total return of the analysts coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Other Ratings Tender Investors are guided to tender to the terms of the takeover offer. Under Review The rating has been temporarily placed under review, until sufficient information has been received and assessed by the analyst.
Low Low financial and operational risk, high predictability of financial results, low stock volatility. Medium Moderate financial and operational risk, moderate predictability of financial results, moderate stock volatility. High High financial and/or operational risk, low predictability of financial results, high stock volatility. Caution Warranted Exceptionally high financial and/or operational risk, exceptionally low predictability of financial results, exceptionally high stock volatility. For risk-tolerant investors only. Venture Risk and return consistent with Venture Capital. For risktolerant investors only.
Scotia Capital Equity Research Ratings Distribution*
Distribution by Ratings and Equity and Equity-Related Financings*

Percentage of companies covered by Scotia Capital Equity Research within each rating category. Percentage of companies within each rating category for which Scotia Capital has undertaken an underwriting liability or has provided advice for a fee within the last 12 months.
For the purposes of the ratings distribution disclosure the NASD requires members who use a ratings system with terms different than buy, hold/neutral and sell, to equate their own ratings into these categories. Our 1-Sector Outperform, 2-Sector Perform, and 3-Sector Underperform ratings are based on the criteria above, but for this purpose could be equated to buy, neutral and sell ratings, respectively.
Scotia Capital Equity Research Team

HEAD OF EQUITY RESEARCH John Henderson, P.Eng ...............................(416) 945-7393 john_henderson@scotiacapital.com SUPERVISORY ANALYST Claude King, CFA.........................................(416) 863-7985 claude_king@scotiacapital.com DIRECTOR, MANAGEMENT Erika Osmond...............................................(416) 945-4529 erika_osmond@scotiacapital.com CONSUMER DISCRETIONARY Cable Jeff Fan, CA, CFA ........................................(416) 863-7780 jeff_fan@scotiacapital.com Hotels, Restaurants & Leisure Turan Quettawala, CFA................................(416) 863-7065 turan_quettawala@scotiacapital.com Media Paul Steep....................................................(416) 945-4310 paul_steep@scotiacapital.com CONSUMER STAPLES Retailing Patricia Baker, Ph.D. ....................................(514) 287-4535 patricia_baker@scotiacapital.com ENERGY Alternative Fuels & Chemicals Sam Kanes, CA, CFA...................................(416) 863-7798 sam_kanes@scotiacapital.com Oil & Gas Integrated and E&P Mark Polak, CFA ..........................................(403) 213-7349 mark_polak@scotiacapital.com Oil & Gas International E&P Gavin Wylie ..................................................(403) 213-7333 gavin_wylie@scotiacapital.com Oil & Gas E&P Jason Bouvier, CFA .....................................(403) 213-7345 jason_bouvier@scotiacapital.com Patrick Bryden, CFA.....................................(403) 213-7750 patrick_bryden@scotiacapital.com William Lee, P.Eng. ......................................(403) 213-7331 william_lee@scotiacapital.com Vladislav Vlad ..............................................(403) 213-7759 vladislav_vlad@scotiacapital.com FINANCIALS Banks & Diversified Financials Kevin Choquette, CFA, CMA........................(416) 863-2874 kevin_choquette@scotiacapital.com Diversified Financials Small Cap Phil Hardie, CFA, P.Eng...............................(416) 863-7430 phil_hardie@scotiacapital.com INDUSTRIALS Diversified Industrials Mark Neville, CFA ........................................(514) 350-7756 mark_neville@scotiacapital.com Industrial Products Neil Forster, CFA..........................................(416) 863-2899 neil_forster@scotiacapital.com
Transportation & Aerospace Turan Quettawala, CFA................................(416) 863-7065 turan_quettawala@scotiacapital.com INFORMATION TECHNOLOGY Hardware & Equipment Gus Papageorgiou, CFA ..............................(416) 863-7552 gus_papageorgiou@scotiacapital.com Software & Services Paul Steep ....................................................(416) 945-4310 paul_steep@scotiacapital.com MATERIALS Agriculture Christine Healy, CA ......................................(416) 863-7902 christine_healy@scotiacapital.com Global Fertilizers Ben Isaacson, CFA.......................................(416) 945-5310 ben_isaacson@scotiacapital.com Gold & Precious Minerals David Christie, P.Geo ...................................(416) 863-7141 david_christie@scotiacapital.com Trevor Turnbull, MSc ....................................(416) 863-7427 trevor_turnbull@scotiacapital.com Leily Omoumi ...............................................(416) 945-4527 leily_omoumi@scotiacapital.com Metals & Mining Lawrence Smith, CFA...................................(416) 945-4526 lawrence_smith@scotiacapital.com Jackie Przybylowski, P.Eng..........................(416) 863-2852 jackie_przybylowski@scotiacapital.com Mark Turner, P.Eng .. ...................................(416) 863-7484 Mark_turner@scotiacapital.com Paper & Forest Products Benoit Laprade, CA, CFA .............................(514) 287-3627 benoit_laprade@scotiacapital.com MEXICO Construction Marcos Durn y Casahonda, CFA..... 011-52-55-9179-5209 marcos_duran@scotiacapital.com (Scotia Inverlat Casa de Bolsa) Retailing Rodrigo Echagaray............................ 011-52-55-9179-5236 rodrigo_echagaray@scotiacapital.com (Scotia Inverlat Casa de Bolsa) Transportation & Aerospace Rodrigo Echagaray............................ 011-52-55-9179-5236 rodrigo_echagaray@scotiacapital.com (Scotia Inverlat Casa de Bolsa) PORTFOLIO STRATEGY Vincent Delisle, CFA.....................................(514) 287-3628 vincent_delisle@scotiacapital.com Hugo Ste-Marie, CFA ...................................(514) 287-4992 hugo_ste-marie@scotiacapital.com REAL ESTATE & REITs Mario Saric, CA, CFA ...................................(416) 863-7824 mario_saric@scotiacapital.com Pammi Bir, CA, CFA.....................................(416) 863-7218 pammi_bir@scotiacapital.com
SPECIAL SITUATIONS Anthony Zicha.............................................. (514) 350-7748 anthony_zicha@scotiacapital.com TELECOMMUNICATION SERVICES Jeff Fan, CA, CFA ....................................... (416) 863-7780 jeff_fan@scotiacapital.com UTILITIES Energy Infrastructure Sam Kanes, CA, CFA.................................. (416) 863-7798 sam_kanes@scotiacapital.com Tony Courtright, CA..................................... (416) 945-4536 tony_courtright@scotiacapital.com Renewable Power Ben Isaacson, CFA...................................... (416) 945-5310 ben_isaacson@scotiacapital.com ECONOMICS Warren Jestin .............................................. (416) 866-6136 Aron Gampel ............................................... (416) 866-6259 Pablo Brard................................................ (416) 862-3876 Derek Holt.................................................... (416) 863-7707 Patricia Mohr................................................ (416) 866-4210 Mary Webb .................................................. (416) 866-4202 PORTFOLIO ADVISORY GROUP (SCOTIAMCLEOD) Managing Director: Stewart Hunt................................................ (416) 863-2855 Trading Elliott Fishman ............................................. (416) 863-7860 Tara Quinn................................................... (416) 863-7149 Dave Stephens ............................................ (416) 862-3115 Portfolio Manager: Stephen Uzielli............................................. (416) 863-7939 Equity Advisory Paul Danesi ................................................. (416) 863-7735 Geoff Ho, CFA ............................................. (416) 865-6354 Institutional Equity Sales & Trading Toronto ........................................................ (416) 863-2885 1-888-251-4484 Montreal....................................................... (514) 287-4513 Vancouver ................................................... (604) 661-7411 1-888-926-2288 New York ................................................ (212) 225-6605/04 1-800-262-4060 Boston ......................................................... (617) 330-1477 Mexico City, MX ................................ 011-52-55-9179-5181 (Scotia Inverlat Casa de Bolsa) London, U.K. .................................... 011-44-207-826-5919 Singapore .................................................... (65) 6305-8350 (65) 6305-8347
www.scotiacapital.com
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Trademark of The Bank of Nova Scotia. The Scotia Capital trademark represents the corporate and investment banking businesses of The Bank of Nova Scotia, Scotiabank Europe plc, Scotia Capital Inc. and Scotia Capital (USA) Inc. all members of the Scotiabank Group and authorized users of the mark. Scotia Capital Inc. is a member of CIPF.

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Equity Research Industry Report

The Distraction Is Over Back to Fundamentals

Materials Global Fertilizers

The Distraction Is Over...Back to Fundamentals

The Distraction Is Over...Back to Fundamentals

Source: Green Markets; Bloomberg; Scotia Capital.

Materials Global Fertilizers

The Distraction Is Over...Back to Fundamentals

101 102 104

108 109 110 114 116 123 134 140

Materials Global Fertilizers

147 150 154 161 164 170 172

258 259 260 264 265 272

The Distraction Is Over...Back to Fundamentals

276 285 290 293 295 300 302

404 405 406 412 414

Materials Global Fertilizers

The Distraction Is Over...Back to Fundamentals

Ticker HF-T MGO-T MAA-T KCL-T WPX-T

2010E 8.3x 7.0x 7.7x

EV/EBITDA 2011E 2012E 7.7x 6.5x 7.1x 6.0x 5.1x 5.5x

2010E 10.4x 9.0x 9.7x

Price/Earnings 2011E 2012E 10.5x 10.2x 10.4x 10.5x 10.2x 10.4x

Source: Reuters; Scotia Capital estimates.

AGU is the largest retail ag supplier in North America.

CF is North Americas largest nitrogen producer.

Materials Global Fertilizers

IPI is the largest MOP producer in the United States.

K+S is the worlds largest salt and fourth-largest potash producer.

MOS is the worlds largest phosphate producer.

POT is the worlds largest potash producer.

SQM is the worlds largest NOP, iodine, and lithium producer.

Yara is the worlds largest nitrogen producer.

The Distraction Is Over...Back to Fundamentals

How the Senior Producers Stack Up

Exhibit 1.4: 2011E EBITDA by Company

12 10 8 6 4 2 0 YAR AGU MOS POT K+S CF SQM IPI

Source: Scotia Capital estimates.

Source: Scotia Capital estimates.

Exhibit 1.5: Nitrogen EBITDA Weight by Company

Exhibit 1.6: Phosphate EBITDA Weight by Company

SQM K+S IPI

Source: Scotia Capital estimates.

Source: Scotia Capital estimates.

Exhibit 1.7: Potash EBITDA Weight by Company

Exhibit 1.8: Non-NPK EBITDA Weight by Company

Source: Scotia Capital estimates.

Source: Scotia Capital estimates.

Exhibit 1.9: 2011E ROE by Company

Exhibit 1.10: 5-Year Avg. EPS Growth by Company

Source: Scotia Capital estimates.

Source: Scotia Capital estimates.

Materials Global Fertilizers

Our Top Picks

Agrium is our top global fertilizer pick for 2011.

Bloomberg Fert Index (rebased)

The Distraction Is Over...Back to Fundamentals

Bloomberg Fert Index (rebased)

Materials Global Fertilizers

MOSAIC 1-SO, $82 ONE-YEAR TARGET

Sep-09 MOS (Price)

Mar-10 S&P 500 (rebased)

Bloomberg Fert Index (rebased)