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Winter woes drive up costs at Agrium potash mine, impede product rail shipments

CALGARY - Nasty weather is driving up costs at Agrium's potash mine expansion in Saskatchewan and making it more difficult for the fertilizer maker to get its products to market.

On a conference call on Friday, company executives said the cost of the Vanscoy project, southwest of Saskatoon, has risen by 25 per cent over the original estimate of $1.5 billion. That brings its price tag close to $1.9 billion.

Ron Wilkinson, who is in charge of Agrium's wholesale division, said Saskatoon suffered through temperatures colder than minus 30 degrees Celsius for much of December, while high winds have made work even more difficult.

"It's been extremely hard to make progress in those conditions while we have a full workforce on site. So productivity has been extremely poor," he said.

Construction is about 65 per cent complete on a project that is expected to boost production capacity at the mine by 40 per cent by 2015.

"At this point, this is our best estimate. We've got a huge focus on contractor productivity going forward and obviously there's some risk there, but we're confident we can hold it at this number," said Wilkinson.

Calgary-based Agrium (TSX:AGU) said it's keeping its eye on another weather-related challenge — getting its crop nutrients to customers by rail.

Snow and cold have slowed rail shipments. That, combined with last year's bumper crop of grain in Western Canada and several other factors, has led to a traffic jam on the tracks. Farmers have argued grain shipments are not as high a priority to rail companies as other products, like oil.

Western Canadian growers produced 75.9 million metric tonnes of grain last year, nearly 40 per cent higher than the five-year average, Alberta's premier said Friday in pushing for improved rail service.

"The weaknesses in our grain-handling transportation system need to be fixed," Alison Redford said in a release.

Later Friday, Alberta Agriculture Minister Verlyn Olson told reporters the logistical problems moving grain and other commodities by rail are not getting better and he will address solutions with his federal and provincial counterparts.

Olson said one key step is to make sure there is "greater financial accountability" for railways, given that all other shippers and grain handlers along the line are punished financially for delayed service.

Earlier this week, Hunter Harrison, the CEO of Canadian Pacific Railway Ltd. (TSX:CP), said his company is working on easing the grain backlog, but it can't "push the envelope" in bad weather conditions.

"You cannot run a train down the side of a mountain at 40-below safely... We've got a lot of employees that have had frostbite from getting out in this weather... When the weather gets like that, with an air brake system, your capacity is virtually cut in half," he said.

Agrium relies on rail to export its product to the U.S. and overseas, via export points like the Port of Vancouver. The poor weather, and the railways' efforts to balance all of their customers' needs, means some of Agrium's crop nutrients haven't been able to move. And that's had a bit of an impact on the amount it's been able to produce, CEO Chuck Magro told reporters.

"We're talking to all of our supply chain partners. So far, things look a little bit better in February, but it has impacted our business, not only in sales, but we have lost production because we didn't have enough movement to keep our production plants running at full rates," he said.

"So we're hopeful that the worst is behind us, but it is a balancing act that I think the railroads are really struggling with."

Farmers — Agrium's customers — have been growing increasingly frustrated as their grain piles up in bins. If they're unable to sell their grain and bring in income, it could cause some uncertainty around fertilizer purchases.

The good news about the huge harvest is that the crops soaked up a lot of nutrients from the soil, so farmers are likely going to be eager to replenish their fields with Agrium's products this spring, added Magro.

On Thursday, Agrium posted a drop in net earnings to US$99 million, or 66 cents per share.

That's a big drop from US$354 million, or $2.34 per share, in the same period a year earlier, as the company saw a 25 per cent price drop in potash, phosphates and nitrogen.

Magro said it was a "noisy" quarter, with a $257-million purchase gain for the Viterra acquisition and a $220-million goodwill impairment for the Landmark business in Australia, among other one-time items.

Sales dropped to US$2.867 billion from US$3.093 billion.

Agrium's retail division posted record fourth quarter sales of US$2.1 billion, up from $2 billion reported in the prior year.

Agrium shares closed up $2.15 or about two per cent higher Friday to C$100.80 on the Toronto Stock Exchange.

— with files from Dean Bennett in Edmonton

Follow @LaurenKrugel on Twitter

The Canadian Press


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