Daily Letter | 1

27 November 2011

Agriculture -- Fertilizer

Keith Carpenter, MBA, CFA kcarpenter@canaccordgenuity.com Vitali Savitski vsavitski@canaccordgenuity.com

1.416.869.7325 1.416.869.7354

GLOBAL MACRO ISSUES ARE INCREASING FERTILIZER PRODUCERS EARNINGS RISK

Given rising investor risk aversion resulting from the deteriorating global outlook, coupled with increasingly patient buyers (distributors, farmers) regarding fertilizer purchases, we have lowered our earnings expectations and multiples as a result. We continue to rate the shares of Potash Corp. a BUY, but have lowered our 12-month target price to US$60.00 from US$73.00, based upon a 14.5x multiple (16.5x previously) to our blended 2012E/2013E EPS of US$4.17. Given the added risk potential to fertilizer producers in general, we have removed Potash Corp. from Canaccord Genuitys Focus List. We continue to rate the shares of Agrium a BUY, but have lowered our 12-month target price to US$93.00 from US$117.00, based upon a 10.5x multiple (12.5x previously) to our blended 2012E/2013E EPS of US$8.90. We have lowered our rating on Mosaic to a HOLD from Buy due to the added risk of a potential delay that may result from the ongoing court case involving the permitting of the South Fort Meade phosphate mine. Although we assume the case will eventually work in Mosaics favour, it is a growing concern that our F2013 earnings estimate (which begins June 1, 2012) may be at risk to potential further delays in the judicial process. As a result, we are lowering our multiple slightly more than we have for either POT or AGU. Our 12month target price is lowered to US$62.00 from US$82.00, based upon an 11x multiple (13.5x previously) to our blended 2012E/2013E EPS of US$5.63.

Agriculture fundamentals are positive, but near term global concerns weigh on sector
Although we believe global grain inventories and associated stocks-to-use ratios remain tight on a historic basis (Figure 1), there has been downward pressure on soft commodity futures prices as investors lower their contract positions in the face of increasingly bearish macro news (Figure 2). Over the past few months, we have witnessed occurrences of strong purchases by the Chinese and others on price dips, but the overall trend has been bearish. With the recent negative pressure experienced in grain and oilseed futures pricing, this has resulted in pressure to the pricing level of crop inputs, including fertilizer. Given the relative tightness in global grain and oilseed inventories, expectations of a significant US corn crop planting in 2012 (the highest expected since 1944), and relatively low global fertilizer inventories (as a result of just-in-time inventory management), we envision some seasonal support to the fertilizer equities leading into the spring, which provides us some fundamental comfort in 2012, but we understand that appears distant given the immediate concerns of investors today regarding global debt issues. Financial Canaccord Genuity is the global capital markets group of Canaccord Financial Inc. (CF : TSX | CF. : AIM) The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analysts personal, independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information, please see the Important Disclosures section in the appendix of this document or visit Canaccord Genuitys Online Disclosure Database.

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27 November 2011

Figure 1: Global grain and oilseed inventories and stocks-to-use

700 600 500 400 300 200 100

World Grain & Oilseed Stock s

32% 30% 28% 26% 24% 22% 20% 18% 16% 14% 12%
2011/12E
(Soybeans)

1971/72

1975/76

1979/80

1983/84

1987/88

1991/92

1995/96

1999/00

2003/04

World Ending Stocks, mt (LS)

Source: USDA, Canaccord Genuity estimates

Stocks to Use (RS)

Figure 2: March 2012 corn and soybean futures (indexed as at January 3, 2011)
150 140 130 120 110 100 90 80 3-Apr-11 3-Sep-11 3-Jun-11 3-Jul-11 3-May-11 3-Aug-11 3-Feb-11 3-Mar-11 3-Oct-11 3-Jan-11 3-Nov-11 86.2 105.3 (Corn)

Corn

Soybeans

Source: Bloomberg, Canaccord Genuity research

2007/08

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Fertilizer pricing impact

Within the fertilizer segment, prices are currently being pressured lower in both nitrogen and phosphate, while previously announced spot price increases in potash are currently unrealistic in the short term (in our view). Nitrogen Not surprisingly, absent any supply shocks, urea pricing tends to follow the short term direction of grain pricing. Over the past month, we have repeatedly witnessed buyers delaying tenders and purchases with the belief that producers and traders will lower their asking prices, and as a result, lower pricing has been secured. This practice is expected to continue for as long as the bearish macro picture pressures farmers revenues lower (i.e., grain prices). In ammonia, we are witnessing similar action occur, coupled with the pressure from lower phosphate pricing. Although Gazprom is reportedly lowering gas costs to the Ukraine, which would make the marginal urea production from Ukraine have an operating cost that would decline sub US$300/t from US$350/t today, with current Black Sea pricing at US$470/t fob, we believe this announcement was psychological and does not alter our view of the nitrogen market. We had previously assumed that urea and ammonia pricing would decline on average by 4% through 2012 as a result of a loosening of supply that followed numerous unplanned outages in 2011. Now we assume that the average pricing of the nitrogen fertilizers declines an additional 4% through 2012. Phosphate In phosphate, our expectations through 2012 were for lower pricing resulting from an over-supply situation (i.e., the ramp up of the Maaden facility), which is proving to be the case. In addition, buyers are becoming increasingly patient, expecting lower pricing in the near future. We believe the only potential near-term catalyst to reverse the trend in 2012 is if Mosaic permanently loses its ability to mine its South Fort Meade asset as a result of the ongoing environmental permitting issues (discussed further below). A final decision is pending with an unknown timeline. We had previously assumed that average phosphate fertilizer pricing would decline by 6% through 2012 due to the increased supply resulting from the ramp up of the Maaden facility. Now we assume that the average price of phosphate will decrease by an additional 5%. Potash In potash, all immediate spot price increases are being rebuffed by buyers. Regardless of a farmers ability to generate positive returns, from a psychological point of view, farmers react negatively to increased costs (higher potash pricing) when revenues (grain prices) are heading lower. As a result, our original estimated potash price increases for 2012 (although modest) are lowered and pushed out further into the year. Furthermore, given recent comments by China and India, we would expect both of their contract renewals to be delayed (China to Q2 and India to Q3). We had previously assumed that the average price of potash would increase by 10% through 2012 as a result of the favourable supply/demand balance. We now assume that the average price increase will be 6% through 2012.

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From a pricing point of view, we favour the supply/demand balance in potash first (modest increase), nitrogen second (modest decrease) and phosphate third (slightly higher decrease). If the macro outlook continues to deteriorate, we would expect all three nutrients to realize lower pricing into 2012, and depending on the severity of that outlook, there may be possible production curtailments. We have received numerous inquiries on what the potential worst case scenario may be, and whether or not we would expect a repeat of 2008-9 when potash demand decreased from 50mt in 2008 to 30mt in 2009. We do not believe so due to the lack of inventories today versus Q4/08. Distributors held significant inventories then, and when the market turned for the worse, buyers were not willing to pay the high price that the distributor was asking to cover their high cost inventory. Eventually the distributors took significant write-offs, and have moved to a justin-time inventory management ever since. As a result, in a recession-type environment, pricing should correct relatively quicker and volumes should remain fluid. The wild card would be if potash producers decided to hold back sales at the expense of significant volumes, which we would view as a negative development.

Estimate revisions
As a result of our commentary above, we have lowered our fertilizer pricing expectations for all three nutrients, but have left our estimated volumes unchanged. Our revised EPS estimates are as follows: Figure 3: Estimate revisions

Current Q* Potash Corp Revised Original Agrium Revised Original 0.92 0.95

F2011E F2011E 3.65 3.68

F2012E F2012E 4.11 4.35

F2013E F2013E 4.23 4.45

2.00 2.04

9.39 9.42

9.26 9.65

8.54 9.01

Mosaic Revised 1.37 Original 1.37 * Q4/11 for Potash Corp. and Agrium; Q2/F12 for Mosaic
Source: Canaccord Genuity estimates

5.48 5.61

5.77 6.48

We have also lowered our multiples further to reflect the lower risk aversion in the marketplace.

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Target and ratings changes

Corp. Potash Corp. (POT) We continue to rate the shares of Potash Corp. a BUY, but have lowered our 12-month target price to US$60.00 from US$73.00, based upon a 14.5x multiple (16.5x previously) to our blended 2012E/2013E EPS of US$4.17. Given the added risk potential to fertilizer producers in general, we have removed Potash Corp. from Canaccord Genuitys Focus List. Agrium (AGU) We continue to rate the shares of Agrium a BUY, but have lowered our 12-month target price to US$93.00 from US$117.00, based upon a 10.5x multiple (12.5x previously) to our blended 2012E/2013E EPS of US$8.90. Mosaic (MOS) We have lowered our rating on Mosaic to a HOLD from Buy due to the added risk of a potential delay that may result from the ongoing court case involving the permitting of the South Fort Meade phosphate mine. The appeals process at South Fort Meade is taking longer than anticipated, and in an environment where risk aversion is increasing, we feel the shares will underperform their peers under coverage until a resolution is reached. There remain two issues under appeal: one, an appeal has been lodged with the appellate court on the entire injunction, and the initial court date in March 2012 has been announced; two, regarding the uplands mining injunction, the district court has ignored, for the second time, direction from the appellate court. As a result, Mosaic has now appealed to the appellate court for the third time on the uplands mining, with an estimated timetable of a further decision within another two-to-three months. Although we assume the case will eventually work in Mosaics favour, it is a growing concern that our F2013 earnings estimate (which begins June 1, 2012) may be at risk to potential further delays in the judicial process. Under a worst case scenario (the permanent closure of the SFM facility), we estimate that Mosaics annual earnings would be negatively impacted by 8.9%. However, offsetting price adjustments (as a result of a tightening phosphate market due to the mine closure) would likely lower the impact to a negative 4-5%. As a result, we are lowering our multiple slightly more than we have for either POT or AGU. Our 12-month target price is lowered to US$62.00 from US$82.00, based upon an 11x multiple (13.5x previously) to our blended 2012E/2013E EPS of US$5.63.

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Looking into 2012

We remain of the belief that under a scenario where Europe does not implode, Potash Corp. would be our preferred fertilizer producer given that the potash supply/demand fundamentals appear to be in the best position through 2012 versus nitrogen and phosphate. In addition, we estimate that Potash Corp. will benefit from increased sales volumes in potash due to its expansion program. Furthermore, given the current tight corn situation, the USDA forecasts the upcoming US corn planting acreage to be in excess of 94 million acres, the most since 1944. Any timing issues from the current fall season (to the spring) and strong demand should provide support to fertilizer equities at that time. As per Figure 4, our relative call on Potash Corp. has been correct, but obviously the absolute returns on the sector have been quite poor as of late due to the increased global sovereign debt risk. We highlight that the corn future price in the chart as the long term correlation between corn and POT is 0.88. We feel that from a fundamental viewpoint, grain inventories should remain relatively tight, allowing the average grain price to remain competitively priced. This should allow Potash Corp. to provide a continued relative outperformance into 2012. Figure 4: Corn future relative to POT, MOS and AGU share price (indexed as at January 3, 2011)
145 135 125 115 105 95 85 75 65 55 3-Apr-11 3-Sep-11 3-Jun-11 3-Jul-11 3-May-11 3-Aug-11 3-Feb-11 3-Mar-11 3-Oct-11 3-Jan-11 3-Nov-11 MOS 105.4 (Corn) 78.3 (POT) 71.3 (AGU) 64.7 (MOS)

Corn (Dec)

POT

AGU

Source: Bloomberg, Canaccord Genuity research

Although this is not our forecast, if one were to assume that the European issue causes a return to another severe recession, we would then assume that Agrium would outperform Potash Corp. (in that both would lose share price value, but Agrium less than Potash Corp.) due to the following reasons: under this scenario, we would assume that Potash Corp. would cut production significantly, while Agrium would not (the company would sell its product through its retail business); due to the JIT inventory situation, we do not assume that Agrium would experience material write-downs (unlike 2009), and given the higher multiple attached to POT shares, continued multiple compression would impact POT disproportionately versus Agrium, in our view.

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Investment risks
Potential risks to our investment theses and target price valuation methodologies include, but are not limited to: Agrium Political risk: As we have seen in Argentina and most recently in Egypt, political policies can have an impact on the company's ongoing operations or construction activities, potentially adversely affecting the company financially. Energy costs: Agrium's operations may be negatively impacted by a sharp increase in natural gas prices. Due to the size of the company's nitrogen operations, such an impact could potentially be significant financially. Sulphur: As it is a key ingredient in the production of phosphate fertilizers, the company requires an uninterrupted supply of sulphur. If supply were constrained, production of the end product may be negatively impacted, potentially affecting the earnings contribution to the company. Mosaic Company Brine inflow: Water inflow is the single most structural risk to a potash mine. It is not an uncommon event, and is often dealt with through the use of pumps. If water inflow becomes uncontrollable, it can ruin a mine, which may have a material impact to the company's earnings. At Esterhazy, brine inflow has been managed since 1985. In early 2007, the brine inflow at Esterhazy increased significantly, beyond that of pumping capabilities. The company responded by grouting around the inflow and succeeded in lowering the level of inflow to that of the previous two-decade average. Sulphur: As one of the key ingredients in the production of phosphate fertilizers, the company requires an uninterrupted supply of sulphur. If the supply were constrained, the production of the end product would be negatively impacted, potentially affecting the earnings contribution to the company Ammonia: Ammonia is a key input for the production of phosphate and its cost can impact margins. Management has in place long-term contractual arrangements for the supply of ammonia and hedges the cost through a natural gas hedging program. Mosaic will take positions in natural gas up to a year to lock in the cost for its expected annual production. The company does not speculate on gas beyond its requirements. As a rule, approximately 80% of the upcoming quarter will be hedged, followed by 50-60% two and three quarters out and 15-20% 12 months out. Potash Corp. Brine inflow: Water inflow is the single most structural risk to a potash mine. It is not an uncommon event, and is often dealt with through the use of pumps. If water inflow becomes uncontrollable, it can ruin a mine, which may have a material impact to the company's earnings. Sulphur: As one of the key ingredients in the production of phosphate fertilizers, the company requires an uninterrupted supply of sulphur. If the supply were constrained, the production of the end-product would be negatively impacted, potentially affecting the earnings contribution to the company.

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APPENDIX: IMPORTANT DISCLOSURES Analyst Certification: Each authoring analyst of Canaccord Genuity whose name appears on the front page of this investment
research hereby certifies that (i) the recommendations and opinions expressed in this investment research accurately reflect the authoring analysts personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analysts coverage universe and (ii) no part of the authoring analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the investment research.

Site Visit:

An analyst has visited Agrium's material operations in Calgary, AB. No payment or reimbursement was received from the issuer for the related travel costs. An analyst has visited The Mosaic Company's material operations in Plymouth, MN. No payment or reimbursement was received by the issuer for the related travel costs. An analyst has not visited Potash Corporation of Saskatchewan Inc.'s material operations.

Price Chart:*

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27 November 2011 Distribution of Ratings:
Global Stock Ratings (as of 4 November 2011) Rating Buy Speculative Buy Hold Sell Coverage Universe # 494 83 192 12 781 % 63.3% 10.6% 24.6% 1.5% 100% IB Clients % 36.4% 68.7% 18.2% 16.7%

Canaccord Ratings System:

BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months. HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months. SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months. NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer. Risk-adjusted return refers to the expected return in relation to the amount of risk associated with the designated investment or the relevant issuer.

Risk Qualifier:

SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may result in material loss.

Canaccord Research Disclosures as of 27 November 2011

Company Agrium Inc. Potash Corporation of Saskatchewan Inc. The Mosaic Company Disclosure 1B, 2, 7 7 7

The relevant issuer currently is, or in the past 12 months was, a client of Canaccord Genuity or its affiliated companies. During this period, Canaccord Genuity or its affiliated companies provided the following services to the relevant issuer: A. investment banking services. B. non-investment banking securities-related services. C. non-securities related services. In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for Corporate Finance/Investment Banking services from the relevant issuer. In the past 12 months, Canaccord Genuity or any of its affiliated companies have been lead manager, co-lead manager or co-manager of a public offering of securities of the relevant issuer or any publicly disclosed offer of securities of the relevant issuer or in any related derivatives. Canaccord Genuity acts as corporate broker for the relevant issuer and/or Canaccord Genuity or any of its affiliated companies may have an agreement with the relevant issuer relating to the provision of Corporate Finance/Investment Banking services. Canaccord Genuity or any of its affiliated companies is a market maker or liquidity provider in the securities of the relevant issuer or in any related derivatives. In the past 12 months, Canaccord Genuity, its partners, affiliated companies, officers or directors, or any authoring analyst involved in the preparation of this investment research has provided services to the relevant issuer for remuneration, other than normal course investment advisory or trade execution services. Canaccord Genuity intends to seek or expects to receive compensation for Corporate Finance/Investment Banking services from the relevant issuer in the next six months. The authoring analyst, a member of the authoring analysts household, or any individual directly involved in the preparation of this investment research, has a long position in the shares or derivatives, or has any other financial interest in the relevant issuer, the value of which increases as the value of the underlying equity increases. The authoring analyst, a member of the authoring analysts household, or any individual directly involved in the preparation of this investment research, has a short position in the shares or derivatives, or has any other financial interest in the relevant issuer, the value of which increases as the value of the underlying equity decreases. Those persons identified as the author(s) of this investment research, or any individual involved in the preparation of this investment research, have purchased/received shares in the relevant issuer prior to a public offering of those shares, and such persons name and details are disclosed above.

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