Scotai Global Fertilizer Jan 2011

Equity Research Industry Report

January 2011

The Distraction Is Over Back to FundamentalsLaunching 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

The Distraction Is Over...Back to FundamentalsBHP 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 IndexSC 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.

1


January 2011

ContentsThe 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 Target2011+ Catalysts 2011+ Concerns NPK Pricing Forecast Summary Valuation Highlights

10 11 12 1314 15 16 17

Overview Fertilizer Indices Peak & Trough Valuation Summary EV-to-EBITDA Price to Earnings Discounted Cash Flow Replacement Cost NewKey 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 2628 29 32 35 37 39 40 42 44 49 57

2

The Distraction Is Over...Back to FundamentalsIndias 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&AFertilizer M&A: Looking Ahead Do Grain Prices Influence Fertilizer Stocks? Nitrogen Outlook

69 69 70 72 73 7475 80 89

Benchmark Price Forecast Supply & Demand Forecast The State of the Nitrogen MarketPhosphate Outlook

89 90 9194

Benchmark Price Forecast Supply & Demand Forecast The State of the Phosphate MarketPotash Outlook

94 95 97101

Benchmark Price Forecast Supply & Demand Forecast The State of the Potash MarketAgrium Inc. Still Acquisition Hungry

101 102 104107

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

3


January 2011

Wholesale: Phosphate Wholesale: Potash III. Advanced Technologies Key Investment Risks Financial Forecast Earnings Sensitivities Management & DirectorsCF Industries Holdings, Inc. North Americas Nitrogen Bellwether

147 150 154 161 164 170 172173

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 & DirectorsIntrepid Potash, Inc. A Unique Potash Pure Play

174 175 176 183 185 192 199 204 205 206 210 216 218219

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 & DirectorsK+S AG Welcome Back to Saskatchewan!

220 221 222 224 226 233 240 241 244 245 246 249 255 256257

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

4


January 2011

II. K+S Salt III. K+S Nitrogen IV. K+S Complementary Key Investment Risks Financial Forecast Earning Sensitivities Management & DirectorsThe Mosaic Company Phosphate Leader with Potash-Focused Growth

276 285 290 293 295 300 302303

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 & DirectorsPotash Corporation of Saskatchewan, Inc. Inflection Point Achieved

304 305 306 309 311 318 328 335 337 340 341 345 350 352353

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 & DirectorsSociedad 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 401403

Investment Thesis & Recommendation Capital Markets Profile Corporate Profile What We Like About SQM Valuation

404 405 406 412 414

5


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 & DirectorsYara International ASA A Play on Natural Gas Price Spreads

421 426 430 435 438 441 446 448 450 452 454 455 462 464465

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 & DirectorsAppendix 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 FlowPrices 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 513515 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.

6


January 2011

Investment HighlightsWe 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 MetricsLast 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.

7


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.

8


January 2011

How the Senior Producers Stack UpExhibit 1.3: 2011E Revenue by Company14 Assumed FX: EUR/USD = 1.3; NOK/USD = 6.0 2011E Revenue ($ Billions)

Exhibit 1.4: 2011E EBITDA by Company5.0 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 CompanyCF 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 CompanyMOS 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 CompanyIPI 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 CompanyAGU 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 CompanyPOT SQM K+S YAR AGU MOS CF IPI 10% 13% 16% 19% 22% 25% 28%

Exhibit 1.10: 5-Year Avg. EPS Growth by CompanyIPI 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%



9


January 2011

Our Top PicksAGRIUM 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)Source: Bloomberg; Scotia Capital.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)Source: Bloomberg; Scotia Capital.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)Source: Bloomberg; Scotia Capital.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+ CatalystsExhibit 1.15: 2011+ CatalystsAgrium1-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 Industries2-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 Potash3-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+S1-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.

Mosaic1-Sector Outperform Target: $82/sh

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.

PotashCorp1-Sector Outperform Target: $168/sh

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.

SQM2-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.

Yara3-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+ ConcernsExhibit 1.16: 2011+ ConcernsAgrium1-Sector Outperform Target: $106/sh

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 Industries2-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 Potash3-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+S1-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.

Mosaic1-Sector Outperform Target: $82/sh

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.

PotashCorp1-Sector Outperform Target: $168/sh

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.

SQM2-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.

Yara3-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 SummaryWe 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 HighlightsOVERVIEW

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 PricesAGU 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 Returns20% 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 IPI1

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 2005NTM 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.

Source: Bloomberg; Scotia Capital estimates.

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 Mutliples18x 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 Mutliples15.0x 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

Source: Bloomberg; Scotia Capital.

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 SpreadsPhosphate/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 AdjustmentsExhibit 1.26: EV/NTM EBITDA Multiple BuildupEV/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 Mutliples25.0x 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 EBITDA14x 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 EBITDA180% 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 ValuesNTM 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 AdjustmentsExhibit 1.32: NTM P/E Multiple BuildupNTM 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 Returns60%

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 OutperformK+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 RCNAGU 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 SummaryAGU SC Target %RCN Market %RCN

Exhibit 1.38: Key RCN AssumptionsPotash (Conventional) Phosphoric Acid

Trough

Peak

CF

Trough

Peak

DAP/MAPIPITrough Peak

Potash (Solution)MOSTrough Peak

Ammonia/Urea Ammonia Urea Phosphate Rock

K+S

Trough

Peak

POT

Trough

Peak

YAR

Trough

Peak

$00% 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 RisksWe 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 RisksInvestment 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 LessBY 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 2050129.5 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.

8

1.5%

6China's "Great Leap Forw ard" - w idespread fam ine - prem ature deaths (~30M) - natural disasters - fertility rate drops by about half

1.0%

4

2

Actual and forecast w orld population (LHS)

0.5%

0 1950 1975 2000 2025ESource: U.S. Census Bureau; Scotia Capital.

0.0% 2050E

Exhibit 1.41: 2050E PopulationUS 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 Fast0.6 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 IncreasingMeat Consumption130 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 Consumption55 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 2011POST-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 1972Farm Equity

U.S. farm er credit profile im proving since m id2008.

10%

5%

1976

1980

1984

1988

1992

1996

2000Debt/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 1960Nominal Net Farm Income Fourth highest nom inal net farm incom e ever.

1970

1980Real 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

CORNSource: 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

2008231 Margin

2009

2010

325 Margin

Source: K+S; Scotia Capital.

33


January 2011

Exhibit 1.48: Historical Grain Production CostsOverhead 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 ImminentAfter 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 RisingOver 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 Highs220Peak Oil

2010

FAO Food Price Index

Extreme weather drives higher crop and food prices, thus improving fertilizer affordability.

200 180 160 140 120 100

2008Russia Wheat Crisis Argentina Soybean Drought

2007

2009 2006Australia Drought

Australia Drought

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Source: FAO; Scotia Capital.

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 fo

Scotai Global Fertilizer Jan 2011

Documents

materials

railroad loading

cf sends letter

85m st trinidad

environmental

electric car

global mining

scotia capital