##### 





Managements Discussion & Analysis of Operations and Financial Condition Overview of the Global NutrientIndustry    (PICTURE) This managements discussion and analysis focuses on long-term vision, strategy
and growth opportunities through the perspective of management and includes a
discussion of historical performance for the three years ended December 31,
2002.




(PICTURE) The following managements discussion and analysis is in U.S. dollars except
where otherwise stated and should be read in conjunction with the consolidated
financial statements and related notes on pages 56  86 and other financial
information on pages 89 to 91. Both pages 22 and 23, titled Core Market
Strength, do not form part of the managements discussion and analysis. Key factors impacting world nutrient markets

The availability of arable land for food production is essential as less than
two percent of food energy comes from the worlds oceans, lakes and rivers. The
worlds existing arable land base is gradually declining and the application of
nitrogen, phosphate and potash nutrients is needed to improve crop yields in
order to feed a world of more than six billion people today. The Potash and
Phosphate Institute (PPI) estimates that over 30 percent of the worlds grain
production can be directly attributed to balanced nutrient application. Grain supply and demand

Agriculture is the primary driver of demand for nitrogen, phosphate and potash.
In 2002, primarily due to weather-related problems, crop yields were well below
average in many of the key grain exporting regions including the United States,
Canada and Australia. The decline in grain production in these key regions
increased world grain prices late in 2002. The grain Stocks-to-Use ratio
measures the relationship between grain inventories and historical consumption
levels. This ratio has declined for the last four years and is currently at
over a 20-year low. Over the past five years annual consumption of grain has
been outstripping annual production and pricing increases have resulted in
2002. There is a strong correlation between crop prices and nutrient prices and
many of the key drivers for the grain market are common to the nutrient market.
Understanding the




18     Managements Discussion and Analysis





---



##### 





importance of these dynamics to our industry helps explain the global factors influencing
our business. The important factors affecting supply and demand are as follows: Nutrient demand WORLD POPULATION GROWTH AND ECONOMIC GROWTH RATES
 n
 
 Demand for grain is driven by world population growth and economic growth rates,
especially in developing countries;  n
 
 World population growth and economic growth rates also influence industrial use of
nitrogen, phosphate and potash. Industrial demand accounts for 15 percent of total use. WEATHER n
 
 Weather conditions affect planting and consequently have a major influence on total
use of nutrients in any given season. WORLD GRAIN MARKETS n
 
 85 percent of the worlds fertilizer consumption is used for crop application. Higher
grain prices motivate growers to increase output yields. Where possible, the grower
will expand seeded acreage and optimize crop inputs. The result is significant growth
in demand for nutrients and agronomic application services;  n
 
 Fertilizer consumption is also affected by new technology such as seed genetics. Nutrient supply CHANGES TO PRODUCTION CAPABILITY
 n
 
 Construction of new facilities and upgrades to existing facilities increase the
availability of nutrients. Closures of older, less economic facilities reduce supply. CHANGES IN WORLD FERTILIZER PLANT OPERATING RATES n
 
 The ability to supply the market competitively is affected by a number of factors
including: fluctuations in the input costs relative to realized prices, unexpected
production or transportation problems and political instability in key producing regions
which may include South America or the Middle East. GOVERNMENT INTERVENTION n
 
 Government intervention can impact either supply or demand by creating barriers to
trade in fertilizers, subsidizing domestic fertilizer production or providing price support
for agricultural products. All these factors interact to set the global nutrient supply and demand balance, which in
turn determines prices.  (PHOTOS)




(PHOTOS)




Managements Discussion and Analysis     19





---



##### 





Overview of the Global Nutrient Industry       (PHOTOS)




(PHOTOS) Global nutrient supply and demand balance

Over the past 10 years, global nitrogen production capacity and consumption
have each grown by approximately two million tonnes per year. The majority of
recent nitrogen capacity additions and demand increases have been in Asia and
Latin America. Future additions will likely be built in regions with abundant
supplies of low-cost natural gas. No new gas-based nitrogen facilities have
been built in North America and Western Europe for the past 10 years because of
the relatively high cost of natural gas. World growth in nitrogen demand for

2003 and 2004 is expected to increase by 2.2 percent or 1.8 million tonnes per
year. Much of this demand growth will occur in developing countries. A number
of these regions have similar farm sizes and crop mixes to North America but
nutrient application rates are significantly lower. This makes these countries
particularly well suited to improvement in yields through balanced nutrient
application. Growth in new capacity is expected to be less than demand for at
least the next three years, as very few new facilities are currently under
construction. The tighter supply and demand balance is expected to result in
strengthening nitrogen prices over the period. There are no dominant producers
in the global nitrogen sector. We are the largest nitrogen producer in the
Western hemisphere yet our production accounts for only three percent of the
global nitrogen production. Furthermore, approximately half of the worlds
nitrogen production is located in China, the Former Soviet Union (FSU) and
India, where operating rates can be unpredictable due to aging plants and poor
maintenance practices. By comparison, our facilities undergo regular scheduled
maintenance, process optimization and ongoing technology upgrading. As a
result, ours are among the most efficient facilities in the world.




20     Managements Discussion and Analysis





---



##### 





Only one third of the worlds nitrogen is manufactured with low-cost natural
gas. New facilities need to be located near competitively priced gas supplies
and developed transportation infrastructure to be able to compete
internationally. Both our Alaskan and Argentine facilities meet these
requirements. The factors affecting growth in supply and demand for phosphate
and potash are somewhat similar. For phosphate, recent supply additions in Australia and India resulted in a
temporary surplus in 2001 and 2002. This led to production shutdowns in North
America in 2001 causing pricing to gradually recover in late 2001 and into the
first half of 2002. Pricing weakened in the latter half of 2002 with the
restart of some of this shut-in production. Globally, there is limited new
phosphate capacity projected through 2006 outside of China. Even with the
anticipated additions from China, a continued gradual tightening of the supply
balance is forecast through 2006. We are purely a domestic regional producer of
phosphate with the only plant in Canada and one of three production facilities
in the U.S. Pacific Northwest. In potash, the balance of supply and demand has remained stable. Two major
producing associations account for approximately 70 percent of world potash
requirements. We are a member of one of these, Canpotex, which is an
association of Canadian potash exporters. The second group is comprised of
producers from the FSU. Both these groups have the ability to meet normal
increases in global demand for the foreseeable future. No new significant
potash capacity additions are therefore expected for at least the next five
years. These global supply and demand factors are the key drivers of our Wholesale
business and their complex interaction often has unpredictable results,
particularly in the short-term when erratic weather patterns are factored in.
For these reasons, we must manage our business with a long-term strategic view.  (PHOTO)





(PHOTOS)




Managements Discussion and Analysis     21





---



##### 



Core Market Strength

(NITROGEN)
    
    (PHOSPHATE)
    
    (POTASH)
    
    (RETAIL)Nitrogen N
    
    Phosphate P
    
    Potash K
    
    Retail OperationWe can produce 7.2 million
tonnes of nitrogen products
from our 11 facilities in North
America and Argentina.
    
    1.3 million tonnes of phosphate
products can be produced at
our two facilities in Alberta,
Canada and Idaho, U.S.
We sell into regional markets,
and are able to save
transportation costs.
    
    Our Saskatchewan, Canada
facility can produce
1.8 million tonnes annually.
The site has reserves in
excess of 100 years.
    
    We offer a full range of crop
solutions from our 225 farm
centres in North America
and 18 farm centres and
two satellite facilities in
South America.


(CORN CHART)

Agriums location advantage

Our Operations are strategically located near low-cost raw material inputs and
close to key agricultural growing regions. Our locations in Argentina, Alaska
and Western Canada give us access to low-cost natural gas. By supplying locally
produced product to our Argentine and Western Canadian customers, we have a
transportation advantage over our competitors giving us higher realized net
prices. Our location advantage comes from producing where costs are low and
market potential is high.

Retail Return on Invested
Capital (%)
    
    Ammonia Price Advantage
($/tonne)
    
    Phosphate Price Advantage
(DAP $/tonne)
    
    Argentine Urea Price Advantage
($/tonne)(RETURN)Source: Agrium.
    
    (AMM PR ADV)Source: 2002 Green Markets, Delivered (del).
    
    (PH PR ADV)Source: 2002 BJ&A, Western Canadian DAP is MAP adjusted.
    
    (UREA PRICE ADV)Source: 2002 BJ&A, Agrium.


22     Core Market Strength





---



##### 



Quality low-cost materials

Producing quality nutrients begins with a reliable, low-cost supply of raw
materials. Agrium Operations are strategically located near these raw
materials, enhancing our ability to serve customers efficiently and
cost-effectively.

Global Potash Production
Cost Curve (KCI $/tonne)
    
    North American Ammonia Production
Cost Curve (NH3 $/tonne)
    
    Natural Gas Advantage
($/MMBtu)
    
    Sulphur Advantage
(US$/tonne)(POTASH PROD)Source: British Sulphur 2001 Potash Study (excludes producers from the Former Soviet Union).
    
    (AMM PROD)Source: BJ&A (includes
hedging assumptions)
Average 2002 costs.
    
    (NAT GAS ADV)Source: CIBC, Agrium
Average 2002 prices.
    
    (SULPHUR ADV)Source: 2002 BJ&A, Agrium,
Delivered (del),
Average 2002 costs.


(CORN CHART)

(POTASH DEP)
    
    (GAS COST)
    
    (GAS FLAME)
    
    (SULPHUR)The worlds largest potash
deposit is located in the
province of Saskatchewan,
Canada, the lowest-cost
producing region in
the world.
    
    Our gas cost has historically been
below NYMEX as a result of a cost
advantage for natural gas purchased
in Western Canada and long-term
natural gas supply agreements at our
Alaskan and Argentine facilities.
    
    We own three of the six
world-scale plants built in
North America since 1980.
The Argentine facility is
one of the most energy
efficient in the world.
    
    The sulphur we source for our
phosphate production is a
by-product of oil and gas
operations in Western Canada
and mining operations in
the Western U.S.


Core Market Strength     23





---



##### 





Our Company  (PHOTOS)





Who we are

We are a major, integrated, international producer and marketer of the three
primary nutrients and a number of micronutrients. We are also a major retail
supplier of nutrients and agronomic services in North and South America. We are
the only North American company integrated from the production of raw material
inputs to the supply and servicing of growers. This diversity is what
distinguishes us from our competitors. Our vision

To be a top-tier global Corporation providing diversified agricultural and
industrial products and services in a manner that maximizes growth in
shareholder value. (PHOTOS) Our strategy

Our strategy is focused on achieving shareholder value through global growth and
diversification. We manage short-term risks and uncertainties but we focus on long-term
reward. Our strategies to achieve our vision are to: CONTINUOUSLY IMPROVE BASE BUSINESS COMPETITIVENESS: n
 
 Focus on lowering costs and increasing margins;  n
 
 Debottleneck and rationalize assets based on market conditions;  n
 
 Employ best practices and best economic technology;  n
 
 Generate timely, accurate information for decision making;  n
 
 Focus on customer needs. DISCIPLINED INVESTMENT APPROACH: n
 
 Build and buy at the right time in the cycle;  n
 
 Use appropriate financial vehicles to support investment;  n
 
 Maintain economic access to capital markets and investment grade rating. GROW TO INDUSTRY LEADERSHIP POSITION: n
 
 Capture synergies from size;  n
 
 Enhance geographic and product diversification;  n
 
 Increase market capitalization which will improve liquidity, leading to a premium
stock multiple. CONTINUE TO BUILD ON OUR HIGH PERFORMANCE CULTURE BY: n
 
 Stressing accountability, commitment and partnership throughout the organization
to provide a foundation for sustainable growth. This strategic framework builds upon our current operations and is our basis for future
profitable growth.




24     Managements Discussion and Analysis





---



##### 





Our markets and operations

Our key Wholesale sales regions are in North America, North East Asia and Argentina.
In these areas we have established a well-developed infrastructure to distribute production
from our 14 facilities to our customers. In our U.S. Retail business, we operate 225 retail farm centres in the Midwest, Pacific
Northwest, Northeast and California. Our geographically diverse North American operations
help to insulate the business from unfavorable crop prices or adverse weather conditions
in any single region. We also operate 18 farm centres in Argentina supplemented by two satellite outlets.
The goal in establishing retail farm centres in Argentina was to introduce bulk blending
and application equipment to an industry that was largely focused on bagged, prilled
and non-blended nitrogen. These efforts have had a significant impact on the
modernization of agriculture in Argentina. Our risk management strategies

The global fertilizer business, like all agriculture-based industries, is subject to risks and
uncertainties in commodity prices, the weather and political uncertainty as well as many
risks specific to each product. We strive to minimize risk by focusing on our strengths
while maintaining a balance in our product mix that mirrors global demand patterns.  n
 
 Wholesale commodity prices are volatile and driven by the world supply and demand
balance as well as grain prices. Our business is susceptible to price swings from the
time of production until sale which can significantly impact profitability. We mitigate
this risk through our geographic sales diversity and by locating production facilities
in low-cost natural gas regions;  n
 
 Weather can also have a significant impact on demand. We must manufacture
product throughout the year in order to meet peak season demand and we must
react quickly to changes in expected weather patterns that affect demand. We do
this by decreasing or increasing production and by moving product to locations
where demand is strongest. However, our ability to react appropriately is limited
by the shortness of the peak selling season;  n
 
 Political and economic uncertainty is an inherent risk in operating in a globally
competitive market. Our strategy for mitigating political and economic risk in countries
such as Argentina is to partner with large local firms, obtain non-recourse financing
and locate facilities where product can be exported and sold in U.S. dollars. Our Industry and our Operations face a number of other controllable and uncontrollable
risks including the following: SPECIFIC FACTORS WITHIN OUR CONTROL: n
 
 Selling, general and administrative expenses and non-commodity input costs;  n
 
 Gas and currency hedging decisions;  n
 
 Production rates and inventory levels at multiple locations;  n
 
 Working capital management;  n
 
 Investment capital spending. GENERAL FACTORS OUTSIDE OF OUR CONTROL: n
 
 Weather conditions;  n
 
 General economic, political or business conditions;  n
 
 Global nutrient supply and demand;  n
 
 Domestic and international pricing;  n
 
 Domestic and foreign government regulation or intervention;  n
 
 Transferability and convertibility of foreign currencies;  n
 
 Fluctuations in natural gas or other commodity input costs;  n
 
 Actions by competitors.





(PHOTOS)




Managements Discussion and Analysis     25





---



##### 





Our Company  (PHOTOS)





(PHOTO) Our products and services Nitrogen

We operate eleven production facilities in Western Canada, the United States
and Argentina with the capacity to produce 7.2 million tonnes of nitrogen
products annually. 2002 Production
    
    
    2002 SalesProduction/Market Area
    
    (tonnes 000s)
    
    
    (%)
    
    
    (tonnes 000s)
    
    
    (%)Canada
    
    
    2,498
    
    
    
    46
    
    
    
    1,460
    
    
    
    26United States
    
    
    2,466
    
    
    
    45
    
    
    
    2,326
    
    
    
    41Argentina
    
    
    516
    
    
    
    9
    
    
    
    231
    
    
    
    4Export Markets
    
    
    
    
    
    
    
    
    
    
    1,659
    
    
    
    295,480
    
    
    
    100
    
    
    
    5,676
    
    
    
    100
 OUR STRATEGY FOR NITROGEN HAS SEVERAL ELEMENTS: n
 
 Maintaining our competitive position from our existing plants in Western Canada
where we have access to lower cost natural gas than U.S.-based plants;  n
 
 Maintaining our competitive industry leadership position in the Western hemisphere
through economies of scale;  n
 
 Continuously improving our facilities to drive costs down and improve efficiency
and reliability;  n
 
 Managing the risk of volatile natural gas pricing in North America through a disciplined
hedging program;  n
 
 Optimizing our extensive storage and distribution infrastructure to ensure our products
are in the right place at the right time for our customers;  n
 
 Sourcing product from our domestic production base or from offshore suppliers,
depending on specific market conditions;  n
 
 Investing in major international growth opportunities in areas with abundant supplies
of low-cost natural gas which can be secured under long-term contracts;  n
 
 Maintaining production discipline by monitoring production costs and inventory levels;  n
 
 Developing innovative technologies to meet the future needs of our customers.




26     Managements Discussion and Analysis





---



##### 





Our nitrogen business faces a number of specific risks and uncertainties: The most significant of these risks and uncertainties include adverse weather conditions,
access to cost-competitive natural gas and production reliability at our manufacturing facilities.  n
 
 We mitigate risks relating to adverse weather conditions through sales to industrial
customers that are not dependent on the weather and geographic distribution;  n
 
 In the long term, we mitigate volatility in natural gas prices by locating or acquiring
facilities in areas where we can secure long-term supplies of natural gas at fixed
prices. The Alaskan and Argentine nitrogen facilities are examples of this strategy.
Approximately 80 percent of our remaining ammonia production is in Alberta where
natural gas prices have historically traded at a discount to the NYMEX, providing
us with a production cost advantage;  n
 
 In recent years, there has been increased volatility in natural gas prices due largely to
declining reserves in both the U.S. and Canada. Our strategies for managing this risk
include:  n
 
 Hedging programs that utilize derivative swap and option agreements to fix the
price for a portion of our natural gas input requirements. Our objective is to fix
natural gas costs at a price that enables our facilities to remain competitive with
imported product;  n
 
 By purchasing lower-cost imported product, when available, and adjusting
production levels at our facilities;  n
 
 By restricting or shutting-in production at our higher-cost North American nitrogen
facilities when cash costs of production are higher than prevailing product prices;  n
 
 Reflecting increased natural gas input costs in our selling prices where market
conditions permit.  n
 
 The main risks currently facing our nitrogen production Operations are the supply
of natural gas to our Alaskan facility as discussed in our North America Wholesale
section and mechanical production issues at our Argentina facility as addressed in
the South America Wholesale section. These two issues could have a material effect
on our performance in the near term until the issues are resolved;  n
 
 In the longer term, new technology could enhance the efficiency of nutrient uptake
and reduce nutrient run-off. Our own research is focused on controlled release
technology that increases the efficiency of nitrogen uptake by regulating nitrogen
availability during periods of peak crop growth. At present, sales of these products
represent only a small percentage of our sales.





Nitrogen Volumes(tonnes 000s) (BAR CHART) Nitrogen Unit Revenues
and Costs ($/tonne) (BAR CHART)




(PHOTOS)

Managements Discussion and Analysis     27





---



##### 





Our Company  Phosphate Volumes(tonnes
000s)(Phosphate Volumes) Phosphate Unit Revenuesand Costs
($/tonne)(Phosphate Unit Revenues and Costs) (PICTURE:OUR COMPANY)




Phosphate
We have the capacity to produce 1.3 million tonnes of phosphate products each
year from our two facilities in Alberta and Idaho. The primary feedstock for
the plant in Alberta is the phosphate rock mine in Ontario, which has an
estimated reserve life of 17 years. The primary feedstock for the plant in
Idaho is the nearby phosphate rock mine, which has an estimated reserve life of
eight years and is adjacent to other available reserves. Further investment in
our phosphate rock mines is required to access these reserves longer-term,
which could increase the Idaho reserves from eight to 20 years. 2002 Production
    
    
    2002 SalesProduction/Market Area
    
    (tonnes 000s)
    
    
    (%)
    
    
    (tonnes 000s)
    
    
    (%)Canada
    
    
    631
    
    
    
    59
    
    
    
    708
    
    
    
    63United States
    
    
    440
    
    
    
    41
    
    
    
    421
    
    
    
    37Export Markets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,071
    
    
    
    100
    
    
    
    1,129
    
    
    
    100
 OUR PHOSPHATE STRATEGY IS TO: n
 
 Integrate the supply of phosphate ore and ammonia to our facilities to reduce
costs and increase reliability;  n
 
 Continuously improve the operation of our facilities to drive down unit costs
and improve efficiency;  n
 
 Capitalize on our low cost of transporting product from our facilities to our
key phosphate markets in Western Canada and the Pacific Northwest;  n
 
 Take advantage of low-cost sulphur and sulphuric acid in our regional
production locations. Sulphur is used in the manufacture of sulphuric acid
which is used in production of phosphate nutrients. Sulphur and sulphuric acid
are by-products of oil and gas production and mining operations in Western
Canada and the U.S. Pacific Northwest. The primary risk facing our phosphate business is the availability and
potential cost volatility of key raw materials. We mitigate these risks by
owning and integrating the phosphate rock supply and maintaining access to
low-cost sulphur. We also have an indirect hedge against volatility in ammonia
input costs through our Nitrogen Operations. Potash

Our potash mine and mill in Saskatchewan currently has the capacity to produce
1.8 million tonnes of potash annually and has sufficient ore reserves to
maintain current production levels for the next 100-plus years. 2002 Production
    
    
    2002 SalesProduction/Market Area
    
    (tonnes 000s)
    
    
    (%)
    
    
    (tonnes 000s)
    
    
    (%)Canada
    
    
    1,530
    
    
    
    100
    
    
    
    136
    
    
    
    9United States
    
    
    
    
    
    
    
    
    
    
    974
    
    
    
    61Export Markets
    
    
    
    
    
    
    
    
    
    
    488
    
    
    
    301,530
    
    
    
    100
    
    
    
    1,598
    
    
    
    100
 OUR POTASH STRATEGY IS TO: n
 
 Maintain a low-cost production position through operational excellence and
improved productivity;  n
 
 Maintain production discipline to control production costs and inventory
levels;  n
 
 Expand U.S. sales, principally through integration with our U.S. Retail
business. Our potash business faces the same exposure to weather and North American grain
prices as nitrogen and phosphate. However the strong international component of
our sales provides geographic diversity, which mitigates this risk.




28     Managements Discussion and Analysis



---



##### 



(Photo of growers in wheatfield) Retail
Our Retail businesses operate independently but in cooperation with our
Wholesale Operations in both North and South America. Retail operations are
comprised of 225 farm centres in the United States and 18 in Argentina and
provide us with an opportunity to work closely with growers to understand their
needs. Our agronomists and retail crop consultants provide advice and state-of-the-art
technical services to growers while promoting agronomic practices that maximize
yield and protect the environment. By assisting growers with the science of
agriculture, we ensure that farmers return the earths natural elements in an
efficient manner while expanding their production of safe, abundant and
high-quality crops for millions of people. THE MAIN ELEMENTS OF OUR RETAIL STRATEGY ARE AS FOLLOWS: n
 
 Educate growers in the benefits of balanced nutrient application. This
increases the demand for our products and services and improves the
profitability of the grower;  n
 
 Minimize risk through geographic and product diversity;  n
 
 Continuously reposition capital investment from underperforming outlets to
higher return opportunities;  n
 
 Focus on customer needs and relationships;  n
 
 Provide a source of stable cash flow and attractive investment returns;  n
 
 Provide direct access to growers;  n
 
 Develop innovative sales and collection programs. MANAGEMENT OF RETAIL RISKS

Farm centres require only limited investment in capital infrastructure and
working capital. Our 225 farm centres are located in 22 U.S. States from
California to Maryland. This geographical and product diversity provides
additional stability in returns as regional weather patterns or changes in
demand tend to compensate across regions. In Argentina, retail operations face unique risks relating to currency
devaluation and extended credit terms. Currency risk is managed by tying prices
to U.S. dollars at the point of sale. Receivables can be collected after
harvest requiring us to extend credit to growers for as long as 180 days. In
order to secure our receivables from growers, we negotiate contracts for
delivery of grain and oilseed as settlement for receivables from sales of crop
nutrients.




Potash Volumes(tonnes
000s)(Potash Volumes) Potash Unit Revenues
and Costs
($/tonne)(Potash Unit Revenues and Costs) (Photos of crops)




Managements Discussion and Analysis     29



---



##### 



Our Performance
and Outlook





(PHOTOS p.30)





Understanding our performance Business segmentation
 Understanding our business segments is important to understanding our
performance. We manage and report our business through four primary operating
segments and a fifth non-operating segment for Corporate and inter-segment
eliminations. The primary operating segments are divided geographically and
then into functional areas as follows: (CORPORATE CHART) Currency

We use the U.S. dollar as our reporting currency and report in millions of U.S.
dollars unless otherwise stated. The U.S. dollar is the international currency
for our Industry and the majority of our business is transacted in U.S. dollars
or U.S. dollar equivalents. Seasonality

Our business is seasonal in nature. Agricultural sales are concentrated in the
spring and fall planting seasons while produced inventories are accumulated
throughout the year. Significant cash collections occur after the planting
seasons in North America and after harvest in South America. North and South
America have opposite spring and fall seasons. Working capital requirements
tend to peak in April and October and are lowest in July and December. The timing of the start of the spring and fall application seasons is entirely
driven by the weather. As the start of the seasons is unpredictable, sales may
often shift between quarters and make year-over-year comparisons by quarter
difficult or even misleading. We therefore consider the most meaningful
historical comparisons to be on a semi-annual calendar year basis. We market a
diverse line of products to a wide variety of industrial customers. These
markets provide consistent, year-round demand and in part serve to offset the
seasonal nature of the agricultural market. The largest component of our
industrial sales is nitrogen products sold to support resin, industrial-grade
ammonium nitrate and pulp and paper production.




30     Managements Discussion and Analysis





---



##### 



(PHOTOS p.31)

The table below sets out the highlights of our consolidated performance by
quarter over the three years ended December 31, 2002:

First
    
    
    Second
    
    
    First
    
    
    Third
    
    
    Fourth
    
    
    Second(millions of dollars except per share data)
    
    Quarter
    
    
    Quarter
    
    
    Half
    
    
    Quarter
    
    
    Quarter
    
    
    Half
    
    
    Year2002Net sales
    
    
    318
    
    
    
    792
    
    
    
    1,110
    
    
    
    466
    
    
    
    507
    
    
    
    973
    
    
    
    2,083Net earnings (loss)
    
    
    (36
    )
    
    
    23
    
    
    
    (13
    )
    
    
    1
    
    
    
    12
    
    
    
    13
    
    
    
    per share (basic)
    
    $
    (0.33
    )
    
    $
    0.16
    
    
    $
    (0.16
    )
    
    $
    (0.01
    )
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    (0.08
    )EBIT (1)
    
    
    (36
    )
    
    
    55
    
    
    
    19
    
    
    
    19
    
    
    
    26
    
    
    
    45
    
    
    
    64EBITDA (2)
    
    
    (2
    )
    
    
    87
    
    
    
    85
    
    
    
    61
    
    
    
    66
    
    
    
    127
    
    
    
    212Cash provided by operating activities (3)
    
    
    2
    
    
    
    75
    
    
    
    77
    
    
    
    28
    
    
    
    119
    
    
    
    147
    
    
    
    224Capital expenditures
    
    
    5
    
    
    
    3
    
    
    
    8
    
    
    
    15
    
    
    
    29
    
    
    
    44
    
    
    
    52Non-cash working capital
    
    
    278
    
    
    
    254
    
    
    
    254
    
    
    
    300
    
    
    
    210
    
    
    
    210
    
    
    
    210Total debt
    
    
    840
    
    
    
    777
    
    
    
    777
    
    
    
    779
    
    
    
    762
    
    
    
    762
    
    
    
    7622001Net sales
    
    
    381
    
    
    
    803
    
    
    
    1,184
    
    
    
    410
    
    
    
    469
    
    
    
    879
    
    
    
    2,063Net earnings (loss)
    
    
    7
    
    
    
    45
    
    
    
    52
    
    
    
    (17
    )
    
    
    (80
    )
    
    
    (97
    )
    
    
    (45
    )per share (basic)
    
    $
    0.04
    
    
    $
    0.37
    
    
    $
    0.41
    
    
    $
    (0.17
    )
    
    $
    (0.72
    )
    
    $
    (0.90
    )
    
    $
    (0.49
    )EBIT (1)
    
    
    29
    
    
    
    91
    
    
    
    120
    
    
    
    (15
    )
    
    
    (74
    )
    
    
    (89
    )
    
    
    31EBITDA (2)
    
    
    61
    
    
    
    122
    
    
    
    183
    
    
    
    28
    
    
    
    (39
    )
    
    
    (11
    )
    
    
    172Cash provided by (used in) operating activities
    
    
    (112
    )
    
    
    108
    
    
    
    (4
    )
    
    
    (12
    )
    
    
    103
    
    
    
    91
    
    
    
    87Capital expenditures
    
    
    37
    
    
    
    48
    
    
    
    85
    
    
    
    35
    
    
    
    44
    
    
    
    79
    
    
    
    164Non-cash working capital
    
    
    449
    
    
    
    404
    
    
    
    404
    
    
    
    429
    
    
    
    283
    
    
    
    283
    
    
    
    283Total debt
    
    
    970
    
    
    
    959
    
    
    
    959
    
    
    
    977
    
    
    
    980
    
    
    
    980
    
    
    
    9802000Net sales
    
    
    310
    
    
    
    700
    
    
    
    1,010
    
    
    
    378
    
    
    
    485
    
    
    
    863
    
    
    
    1,873Net earnings (loss)
    
    
    (4
    )
    
    
    51
    
    
    
    47
    
    
    
    13
    
    
    
    22
    
    
    
    35
    
    
    
    82per share (basic)
    
    $
    (0.06
    )
    
    $
    0.44
    
    
    $
    0.38
    
    
    $
    0.10
    
    
    $
    0.17
    
    
    $
    0.27
    
    
    $
    0.65EBIT (1)
    
    
    3
    
    
    
    86
    
    
    
    89
    
    
    
    29
    
    
    
    45
    
    
    
    74
    
    
    
    163EBITDA (2)
    
    
    27
    
    
    
    112
    
    
    
    139
    
    
    
    55
    
    
    
    76
    
    
    
    131
    
    
    
    270Cash provided by (used in) operating activities
    
    
    20
    
    
    
    129
    
    
    
    149
    
    
    
    (61
    )
    
    
    168
    
    
    
    107
    
    
    
    256Capital expenditures
    
    
    39
    
    
    
    43
    
    
    
    82
    
    
    
    42
    
    
    
    55
    
    
    
    97
    
    
    
    179Non-cash working capital
    
    
    270
    
    
    
    216
    
    
    
    216
    
    
    
    407
    
    
    
    299
    
    
    
    299
    
    
    
    299Total debt
    
    
    656
    
    
    
    660
    
    
    
    660
    
    
    
    909
    
    
    
    816
    
    
    
    816
    
    
    
    816




|1 |  | Earnings before interest expense and income taxes.                                                                                                                                                         
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|2 |  | Earnings before interest expense, income taxes, depreciation, depletion and amortization.                                                                                                                  
| 
|3 |  | The Company has reclassified certain amounts in the 2002 quarterly Statement of Cash Flows within the
category of Operating. The individual quarters for 2002 have been adjusted for this reclassification.

Managements Discussion and Analysis     31





---



##### 





Our Performance
and Outlook  (PERFORMANCE OUTLOOK PAGE 32)




(SUNFLOWER PAGE 32) Non-GAAP disclosure

Management considers earnings (loss) before interest expense and income taxes
(EBIT) and earnings (loss) before interest expense, income taxes, depreciation,
depletion and amortization (EBITDA) to be key measures of performance. This is
because income tax jurisdictions and business segments are not synonymous and
management believes that allocation of income tax charges distorts the
comparability of historical performance for the different business segments.
Similarly, financing and related interest charges cannot be allocated to all
business segments on a basis that is meaningful for comparison with other
companies. EBIT and EBITDA are not recognized measures under GAAP and our method of
calculation may not be comparable to other companies. EBIT should therefore not
be used as an alternative to net earnings (loss) as determined in accordance
with GAAP. Similarly, EBITDA should not be used an alternative to cash provided
by operating activities as determined in accordance with GAAP. Objectives

Our key fiscal objective for 2002 was to improve our financial position
following a poor year for the Industry in 2001. A number of factors had
contributed to debt levels that we considered were significantly higher than
prudent:  n
 
 High levels of capital expenditures between 1998 and 2000 attributable to the
expansion of our international nitrogen assets and capital projects designed to
reduce costs in our domestic phosphate operations;




32     Managements Discussion and Analysis



---



##### 





n
 
 Our acquisition of the Alaskan nitrogen facility and related U.S. West Coast
assets in late 2000 was largely debt financed;  n
 
 Record North American gas prices in late 2000 and early 2001, followed by
adverse weather in many domestic and international markets, left us with record
levels of inventory at the end of the peak spring season in 2001. This required
additional debt financing. These factors had precluded us from using anticipated cash flow to repay
short-term bank indebtedness in 2001 and resulted in a debt-to-debt plus equity
ratio significantly in excess of our targets. Achievements and overall performance

The following table summarizes the increase (decrease) in net earnings (loss)
from the prior year for 2002, 2001 and 2000: (millions of dollars)
    
    2002
    
    
    2001
    
    
    2000Net earnings (loss) previous period
    
    (45
    )
    
    
    82
    
    
    
    62North America WholesaleNitrogen pricing and volumes
    
    (127
    )
    
    
    117
    
    
    
    130Nitrogen manufacturing costs
    
    
    40
    
    
    
    (140
    )
    
    
    (49
    )Phosphate
    
    
    31
    
    
    
    (13
    )
    
    
    (41
    )Potash
    
    
    9
    
    
    
    (12
    )
    
    
    4Depreciation
    
    (6
    )
    
    
    (25
    )
    
    
    (14
    )Facility shut down costs
    
    
    7
    
    
    
    (15
    )
    
    
    North America Retail EBIT
    
    
    1
    
    
    
    4
    
    
    
    4South America Wholesale EBIT(1)
    
    
    6
    
    
    
    8
    
    
    
    (5
    )South America Retail EBIT(1)
    
    
    16
    
    
    
    2
    
    
    
    6Selling, general and administrative costs
    
    
    9
    
    
    
    (7
    )
    
    
    Other
    
    
    8
    
    
    
    (3
    )
    
    
    (4
    )Interest costs
    
    
    6
    
    
    
    (37
    )
    
    
    Tax impact on variances
    
    
    --
    
    
    
    43
    
    
    
    (11
    )Argentine charges
    
    
    45
    
    
    
    (49
    )
    
    
    Net earnings (loss)
    
    
    --
    
    
    
    (45
    )
    
    
    82
  1
    
    Before Argentine charges. Improved business fundamentals late in 2002 resulted in a stronger second half
than 2001, and a return to modest profitability for the second half of the
year. Key factors affecting overall results for the year compared to 2001 and
2000 included the following: NORTH AMERICA WHOLESALE n
 
 In 2002, selling prices for nitrogen were lower than 2001 due to an
Industry-wide reduction of inventory levels and the resultant aggressive price
competition. In early 2001, international nitrogen prices rose to record levels
as a result of the tight supply situation created by gas-related shutdowns in
the first quarter in North America. We benefited from this through our Alaskan
nitrogen operations which produced at full capacity;  n
 
 Phosphate gross profit in 2002 improved due primarily to resolution of
production problems in prior years at both facilities. NORTH AMERICA RETAIL n
 
 A sixth consecutive year of record of earnings before interest expense and
income taxes. SOUTH AMERICA n
 
 Additional Argentine charges in 2002 relating to the continuing devaluation of
the Argentine peso. These losses on devaluation of the Argentine peso were
partially offset by recovery of loss provisions on receivables recorded in
2001. Argentine charges are defined as net losses due to the devaluation of the
Argentine peso and the forced conversion of U.S. dollar receivables into
Argentine pesos (see South America business segment for more detailed
explanation);  n
 
 The positive impact of devaluation on Argentine peso denominated costs in 2002;  n
 
 Renegotiation of Argentine gas supply contract prices.




(PHOTOS)




Managements Discussion and Analysis     33



---



##### 





Our Performance
and Outlook  (LS PICTURE FOLIO 34)




(RS PICTURE FOLIO 34) CORPORATE AND CONSOLIDATED

Selling, general and administrative costs in the North America Wholesale and
Corporate segments have decreased on a combined basis in response to a
conscious effort to limit discretionary spending. In March 2002, we successfully completed an issue of 11.2 million common shares
at $9.85 per share for net proceeds of $106-million. Together with improved
cash flow generated from Operations and reductions in working capital these
proceeds were used to reduce debt. This allowed us to achieve our primary goal
for 2002. Our efforts to reduce debt through the issue of equity and reductions in
working capital are also reflected in lower overall interest charges compared
to 2001. The increase in interest on the long-term debt component compared to
2001 reflects a full year of interest expense related to our Argentine
non-recourse financing completed in the second quarter of 2001. Compared to
2000, interest expense has increased due to financing costs associated with
completing the acquisition of the Alaskan nitrogen facility and related U.S.
West Coast assets in September of 2000 and discontinuing interest
capitalization following start-up of our Argentine nitrogen facility. CAPITAL EXPENDITURES

Capital expenditures for 2002 were $52-million compared to $164-million in 2001
and $179-million in 2000. The significant reduction was due to two factors:  n
 
 The completion of major investment projects in the previous years including our
Argentine nitrogen facility, Ontario phosphate mine and the new purified
phosphoric acid unit at our Idaho phosphate operation;  n
 
 The deferral of all new investment capital and non-essential sustaining capital
in 2002. The combination of these actions allowed us to reduce our debt-to-debt plus
equity ratio from 57 percent in 2001 to 50 percent in 2002. This is still
higher than the 48 percent at the end of 2000 and our goal is to further reduce
our debt in 2003. Outlook for 2003

In 2003, we expect North America Wholesale results to improve in response to an
anticipated return to more normal weather conditions and improved nutrient
prices and demand. High natural gas costs will increase nitrogen costs and may
affect margins but, in tight supply conditions, we expect increased costs to be
reflected in selling prices. Improved weather and anticipated increases in planting of corn and wheat acres
in 2003 should also result in another good year for our North America Retail
operations. In South America, the agriculture sector continues to show strength in an
otherwise depressed economy and we continue to believe it will be a positive
force for economic recovery. Our Argentine nitrogen facility, however, may face
production constraints until delivery and installation of a new heat exchanger
for the urea plant. Further discussion of the outlook for 2003 for each of our Operations can be
found in the segmented performance section of this report together with
discussion of significant uncertainties facing the Operations. Overall, we are
expecting these factors to result in improved performance in 2003.




34     Managements Discussion and Analysis



---



##### 





Industry risk assessment

While global supply and demand balances are tight, there are also a number of
unknowns:  n
 
 The impact of possible hostilities in the Middle East is difficult to predict.
However any disruptions in supply from affected regions would likely have the
impact of increasing global nitrogen prices;  n
 
 Weather continues to be a concern in our key markets. Over the past two years a
large area of Western Canada experienced some of the worst droughts on record,
significantly impacting fertilizer use and crop yields. In certain areas, the
poor yields may lead to nutrient carry-over in the soil for the upcoming
growing season;  n
 
 In the global market, uncertainty remains regarding Chinas level of
participation in the international urea market;  n
 
 The ability of nitrogen producers to offset recent increases in North American
natural gas prices by increasing nitrogen prices is uncertain. Fourth quarter
2002 regional nitrogen prices in some U.S. markets were below the cash
production costs. Some North American producers are also experiencing financial
difficulties and their pricing strategies are unpredictable;  n
 
 We have an advantage over many of our North American competitors because of the
availability of lower-cost Alberta gas and our fixed base-price contracts in
Alaska and Argentina. There is, however, some uncertainty as to the quantity in
both the short- and long-term of natural gas deliverable to our Alaskan
facility under the Alaska supply contract;  n
 
 We have financially hedged approximately 10 percent of our North American
natural gas requirements for 2003. Given tight nitrogen supply conditions, we
expect higher costs to be reflected in selling prices. Sensitivity of earnings to changes in key variables

The following table illustrates the effect of changes in key variables on net
earnings based on levels of activity in 2002. These levels of activity may
differ in 2003 and future years and the impact of one factor may compound or
offset others. These sensitivities should not, therefore, be used to forecast
future results. IncreaseIncrease
    
    
    (decrease)Increase
    
    
    (decrease)
    
    
    in earningsin factor over
    
    
    in net earnings
    
    
    per share(1)Key variable
    
    a full year
    
    
    (millions of dollars)
    
    
    ($ per share)North America  WholesaleSelling PricesAmmonia
    
    U.S. $10/tonne
    
    
    
    9
    
    
    
    0.07Urea
    
    U.S. $10/tonne
    
    
    
    15
    
    
    
    0.12Phosphate(2)
    
    U.S. $10/tonne
    
    
    
    7
    
    
    
    0.05Potash
    
    U.S. $10/tonne
    
    
    
    10
    
    
    
    0.08Natural gas cost(3)
    
    U.S. $0.10/MMBtu
    
    
    
    (4
    )
    
    
    (0.03
    )Exchange rate
from Cdn.$ to U.S.$
    
    C$0.01
    
    
    
    (1
    )
    
    
    (0.01
    )South America  WholesaleSelling PricesUrea
    
    U.S. $10/tonne
    
    
    
    3
    
    
    
    0.02Exchange rate from Argentine Pesos to U.S.$
    
    2 pesos
    
    
    
    1
    
    
    
    0.01
  1
    
    Based on 126 million common shares outstanding at December 31, 2002.2
    
    MAP or DAP equivalent.3
    
    Based on natural gas requirements not under fixed price contract at January 1, 2002.




(PICTURE PAGE 35)




Managements Discussion and Analysis     35



---



##### 





Our Performance
and Outlook  (PHOTOS)





(PHOTO) Commitments

Our future financing and operating commitments are summarized as follows: (millions of dollars)
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007Long-term debt and capital leases
    
    
    25
    
    
    
    120
    
    
    
    49
    
    
    
    51
    
    
    
    54Operating leases (1)
    
    
    37
    
    
    
    31
    
    
    
    30
    
    
    
    22
    
    
    
    18Natural gas(2)(3)
    
    
    492
    
    
    
    92
    
    
    
    89
    
    
    
    84
    
    
    
    84Power, sulphuric acid and other (3)
    
    
    34
    
    
    
    23
    
    
    
    23
    
    
    
    23
    
    
    
    22Profertil natural gas and other
    
    
    25
    
    
    
    25
    
    
    
    25
    
    
    
    25
    
    
    
    25
  1
    
    These leases relate to short-term leases for rail cars and distribution facilities in North America Wholesale and for vehicles and
application equipment in North America Retail.2
    
    Represents the minimum commitments for North American natural gas calculated using prevailing NYMEX forward prices at
December 31, 2002. We commit a large percentage of our production volume requirements for the next year at floating prices.
The prices paid at the time of actual purchase may not reflect this December 31, 2002 benchmark.3
    
    Liquid markets exist for the possible resale of natural gas, sulphuric acid and power purchased under the majority of these
commitments. Gains or losses could be incurred on resale of purchases under fixed price commitments. Included in the commitments outlined above are scheduled debt repayments of $25-million
in 2003 and $120-million in 2004 which we anticipate will be repaid through cash flow from
operations. Liquidity

The actions taken to improve our financial position for 2002 have also strengthened our
financial flexibility for 2003. At December 31, 2002, our liquid resources and facilities were
comprised of the following:  n
 
 Cash and short-term investments of $109-million;  n
 
 Unused short-term bank revolving credit facilities of $281-million;  n
 
 A $125-million facility for the sale of eligible North America Wholesale and North
America Retail accounts receivable on a non-recourse basis. At December 31, 2002,
we had sold $114-million under this program. These accounts receivable are not
reflected in our balance sheet. These facilities, together with our cash balances, should be sufficient to meet our
commitments. The $225-million syndicated revolving credit facility expires in May, 2003
and we anticipate renewing this facility prior to that date. Our plans are also to continue
to limit non-essential capital spending in 2003 to sustaining levels with minimal
investment capital. Our average annual sustaining capital expenditures are estimated
to be approximately $80- to $100-million.




36     Managements Discussion and Analysis





---



##### 





Environmental

We are affected by extensive environmental regulations relating to both current
and discontinued operations for future site decommissioning, restoration and
reclamation. We make provisions for future liabilities over the life of the
underlying assets where expenditures are considered likely under existing
legislation and are reasonably estimable. Where expenditures are expected to
reduce future contamination or increase the life or efficiency of the facility,
they are capitalized. Expenditures relating to pre-existing conditions are
expensed or charged against provisions. As at December 31, 2002, provisions
totalling $94-million are recorded as other liabilities. Contingent liabilities
also exist where future liabilities may arise under existing regulations or
agreements in effect, but where the timing, nature and extent of remedial work
have not been agreed on or cannot be determined. Key accounting estimates and new standards

Application of accounting estimates requires certain assumptions to be made
regarding future events. These estimates require experience and judgment and
are subject to inherent risk of inaccuracy, particularly where they relate to
events expected to take place well into the future. We therefore examine
long-term estimates on a regular basis and adjust them prospectively where
necessary. New accounting standards adopted in 2002 include Section 3062 of the Canadian
Institute of Chartered Accountants handbook relating to goodwill and other
intangible assets. Under this standard, annual amortization of goodwill
(approximately $4-million in 2001) was discontinued and replaced with an annual
impairment test. This test was completed in the third quarter of 2002 and it
was determined that goodwill of our phosphate business amounting to
approximately $45-million was impaired. Under the transitional provisions of
this standard, $29-million net of tax was charged directly to retained earnings
as a change in accounting policy. Note 2 of the consolidated financial statements outlines the impact of new
standards on our financial statements. In 2003, we anticipate the Canadian Institute of Chartered Accountants will
issue a new standard on Asset Retirement Obligations which we expect to be
consistent with the Financial Accounting Standards Board Statement 143 in the
U.S. This standard will address site remediation issues on retirement and
requires liabilities to be recorded if a legal or contractual obligation
exists. We do not anticipate that this will have a significant impact on our
current site decommissioning, restoration and reclamation obligations on
adoption in 2003. We continually review provisions as circumstances and
regulations change. Adjustments are made on a prospective basis. (PHOTO: WORKERS)





(PHOTOS: PRODUCE)




Managements Discussion and Analysis     37





---



##### 



Financial Discipline
    
    Key value measurementsat December 31, 2002




Our vision is to maximize shareholder value through global growth and
diversification. One of the four major strategies that we employ to achieve
this vision is maintaining a disciplined investment approach in our management
of assets and capital. This strategy has three components: utilizing a
counter-cyclical approach to our investment decisions, using appropriate
capital market instruments to fund our investments and ensuring economic access
to capital markets by protecting our investment grade credit rating. Source: Agrium.





(SUNFLOWER CHART - KEY VALUE MEASUREMENTS)








EBITDA Interest Coverage
    
    Market Capitalization(multiple)
    
    (millions of dollars)(BAR CHART)
    
    (BAR CHART)Debt-to-Debt Plus Equity
    
    Shareholders Equity(%)
    
    (millions of dollars)(BAR CHART)
    
    (BAR CHART)





Capital structure

Maintaining financial flexibility through
our investment grade credit rating is
a long-standing objective. As a result of
the poor year we had in 2001, we had to
strengthen our balance sheet to preserve
this. Therefore, in March of 2002, we
raised net proceeds of $106-million of
new equity capital using the proceeds
to repay existing bank indebtedness.




38     Managements Discussion and Analysis





---



##### 





Investment value

Between 1998 and 2001 we made significant
investments in a number of projects which
will have long-term benefit to Agrium. This
included investments in nitrogen assets and
retail facilities in Argentina, a phosphate rock
mine in northern Ontario and the upgrading
of our phosphate facility in Idaho. These
projects were completed in 2001.
In 2002, we reduced capital
spending to sustaining only,
deferring many projects in
order to conserve capital. (SUNFLOWER IMAGE)





Capital Expenditures
    
    EBITDA(millions of dollars)
    
    (millions of dollars)(BAR CHART)
    
    (BAR CHART)Cashflow
from Operating
Activities(millions of dollars)
    
    Return on AverageInvested Capital(%)(BAR CHART)
    
    (BAR CHART)








Working capital

In 2002, a renewed emphasis was
placed on managing working capital with
the goal that a reduction in working capital
would contribute significantly as a source of
operating cash flow during the year. This goal
was accomplished as inventory and accounts
receivable levels were reduced and changes
to working capital contributed $55-million
to cash flow from Operations in the year.





Accounts Receivable/Net
Sales(%)
    
    Year-end AccountsReceivable(millions of dollars)(BAR CHART)
    
    (BAR CHART)Inventory/Cost of Product
    
    Year-end Inventory(%)
    
    (millions of dollars)(BAR CHART)
    
    (BAR CHART)




Managements Discussion and Analysis     39





---



##### 





Segmented
Performance
and Outlook    North America Wholesale Gross
Profit and EBIT (millions of dollars) (CHART) (PICTURE: FIELDS)




North America Wholesale Operations Performance objectives
 Our operating plan for our North America Wholesale business for 2002 was based
on an assumption of a return to more normal weather conditions in our key
market areas and a modest recovery in nitrogen and phosphate prices. We also
planned a number of initiatives and strategies designed to support our overall
Corporate vision and to conserve cash resources. These included:  n
 
 Significant operating cost and capital expenditure reductions or deferrals;  n
 
 Cost and margin improvement initiatives;  n
 
 Asset management practices to improve operational reliability;  n
 
 Working capital reductions;  n
 
 Asset optimization and production strategies for reacting to unexpected changes
in demand;  n
 
 Resolution of our dispute with Union Oil Company of California (Unocal) and
related gas supply issues. Achievements and other developments EARNINGS FROM OPERATIONS BEFORE INTEREST EXPENSE AND INCOME TAXES
 EBIT for Wholesale operations in North America was a disappointing $40-million,
a reduction from $64-million in 2001 and significantly less than $166-million
in 2000. Major contributing factors were as follows:  n
 
 2002 nitrogen sales volumes were approximately 500,000 tonnes higher than 2001
and 933,000 higher than 2000. Higher sales volumes in 2002 were the result of
increased sales to U.S. and Canadian agricultural customers. In 2000, sales
volumes reflected only three months of sales from the Alaskan nitrogen facility
and related U.S. West Coast assets, which were acquired in September 2000;  n
 
 Global nitrogen sales prices were lower overall for 2002 compared to 2001 and
2000. However, nitrogen prices were at their lowest point from mid-2001 to
mid-2002. An unprecedented drop in global demand during the spring of 2001, as
a result of adverse weather conditions and low crop prices, led to high global
inventories and low nitrogen prices over this twelve month period. Nitrogen
prices strengthened significantly in the second half of 2002, led by a recovery
in crop prices, strengthening industrial demand and production interruptions in
a number of locations worldwide;  n
 
 2002 nitrogen unit cost of product sold declined due to the various cost
reduction initiatives at a number of our facilities. Our natural gas hedging
activity was successful in reducing volatility in our gas costs. After
incorporating hedging losses of $46-million in 2002, natural gas costs were
similar to 2001 and 2000 which incorporated hedging gains of $70-million and
$93-million respectively. Our average gas prices, including hedging, for 2002,
2001 and 2000 were $2.47, $2.53 and $2.34 respectively;  n
 
 Phosphate margins in 2002 improved over 2001 and 2000 as both our Alberta and
Idaho phosphate facilities were unaffected by production interruptions which
impacted 2000 and 2001. These interruptions related to the impact of the start
up of our Ontario phosphate mine on production from our Alberta phosphate
facility and the equipment failure at our Idaho facility late in 2000;  n
 
 2002 potash sales volumes increased by 18 percent over 2001 and seven percent
over 2000. These increases were largely due to higher sales to North American
customers and higher export volumes;  n
 
 Depreciation and depletion charges for 2002 were slightly higher than 2001 due
to write-offs of impaired assets totalling $14-million. 2001 included the
$7-million write-off of the Henry, Illinois facility. Depreciation for both
2001 and 2002 was higher than 2000 as a result of these write-offs and the
acquisition of the Alaskan nitrogen facility and related U.S. West Coast
assets;  n
 
 Selling, general and administrative costs were significantly lower than 2000
and 2001 reflecting lower inter segment cost allocations together with other
cost reductions and deferrals. We expect that selling, general and
administrative costs will be marginally higher in 2003;  n
 
 Other expenses for 2002 were lower than 2001 mainly due to lower idle facility
costs but were higher than 2000. The increase over 2000 is due to idle facility
costs and increased site restoration and reclamation provisions.




40     Managements Discussion and Analysis



---



##### 





CAPITAL EXPENDITURES

We successfully reduced capital expenditures to $41-million in 2002 compared to
$126-million in 2001 and $94-million in 2000. This was achieved by deferring
non-essential expenditures as part of our cost reduction initiatives and the
completion of major capital projects in prior years. ALASKAN GAS SUPPLY DISPUTE

Our dispute with Unocal over their natural gas supply and delivery obligations,
environmental liabilities and the Earn-out payment is ongoing. Unocal has
curtailed supply to our Alaska nitrogen facility since July of 2002. We were
able to offset some of these curtailments by obtaining natural gas from other
oil and gas companies under interruptible contracts late in 2002. We have
initiated legal proceedings against Unocal in respect of these matters and we
have asserted in the litigation that Unocal has breached its warranty
obligations with respect to gas supply. As a result of these interruptions, this facility operated at an average of 76
percent of capacity in the second half of the year. While we expect the
facility to maintain current average production rates of approximately 75
percent of capacity over the next 12 months, there is a risk that available gas
from Unocal and other suppliers may not be sufficient to maintain those rates,
particularly during the winter months. Unocal continues to advise us of
downward revisions to the reserves. Because of the uncertainty relating to the
reserves, no assurance can be given as to the long-term gas supply for this
facility. Should the requirements of the facility not be met by Unocal or from
existing supply sources from other producers, development of new natural gas
reserves will be required to return the facility to full production. This would
be expected to take 18 to 36 months from commencement of development. Operations at the Alaskan facility at current levels will depend on third party
supply for volumes above those actually delivered by Unocal. If we are
economically unable to offset that reduction from other sources, we may be
subject to increased expenses and the plants competitive position and carrying
value may be impacted. The agreement for the purchase of the Alaskan assets contains an Earn-out
arrangement entitling Unocal to certain payments based on the capacity of the
plant and forecast prices specified in the agreement for a period of six years
following the acquisition. We continue to dispute any liability for an Earn-out
payment but have accrued the potential liability arising from the date of
acquisition to December 31, 2002. In the event the courts ultimately determine
we are liable, additional Earn-out payments may become due in respect of
subsequent years. Outlook for 2003

In 2003, we expect North American demand for nutrients to improve in response
to higher grain prices and in anticipation of a return to more normal weather
conditions. Demand should be supported by a forecasted increase in seeded
acreage for the major crops that consume the most fertilizer, such as corn,
wheat and canola. The following table illustrates the significant increases in
U.S. cash crop prices over the last year: U.S. MID-WEST CASH CROP PRICES Corn
    
    
    Wheat
    
    
    SoybeansDate
    
    ($/bushel)
    
    
    ($/bushel)
    
    
    ($/bushel)December 28, 2001
    
    $
    1.93
    
    
    $
    3.01
    
    
    $
    4.20December 27, 2002
    
    $
    2.46
    
    
    $
    3.46
    
    
    $
    5.70Increase %
    
    
    27%
    
    
    
    15%
    
    
    
    36%
 The world nitrogen market appears to be relatively tight. This is the result of
strong demand from Latin America and parts of Asia, and reduced exportable
supplies from countries such as Indonesia and Venezuela. Based on their
domestic strike, Venezuelan nitrogen products are not anticipated to be
available in any significant volumes until after the 2003 spring season. North
American inventories remained more than 20 percent below the five-year average
at the end of December 2002. The recent rise in North American gas prices is
expected to further tighten the balance of supply and demand. In the medium term we continue to believe that the shortfall in world nitrogen
production capacity additions relative to forecast growth in demand will result
in a further tightening of the supply and demand balance.




(PICTURES: CROPS)




Managements Discussion and Analysis     41



---



##### 





Segmented
Performance
and Outlook                    (PICTURES: FARMS)




Phosphate demand is expected to continue its slow recovery in 2003 as markets
continue to absorb the new global capacity. Higher grain prices and low
inventories are expected to be positive drivers. However, higher ammonia input
costs due to rising natural gas costs may impact margins. Potash inventories in North America declined to more normal levels by the end
of 2002 and potash demand should benefit from expected increases in planted
acres of wheat and corn. This should result in firmer prices during 2003. Nitrogen revenues, costs and gross profit

Sales volumes in 2002 increased over 2001 despite a second year of drought
conditions in Western Canada as an aggressive pricing approach resulted in
improved sales volumes compared to 2001 when pricing was significantly higher,
affecting demand. Sales volumes for 2000 were lower than both 2002 and 2001
mainly due to the inclusion of only three months of sales from the acquisition
of the Alaskan nitrogen facility and related U.S. West Coast assets in
September of 2000. Selling prices in the 2002 spring season were substantially lower than in
previous years due to an Industry-wide emphasis on a reduction of inventory
levels carried over from 2001 and resultant aggressive price competition.
International and U.S. prices started to recover in the second half of the
year. Unit cost of product sold was lower than previous years due to increased
production volumes and our cost-saving initiatives. Natural gas comprises
approximately 70 to 85 percent of the cost of producing ammonia and, after
taking hedging gains and losses into account, were at similar levels to 2001
and 2000. The overall combination of these factors resulted in a decrease in
nitrogen gross profit in 2002 of $87-million compared to 2001 and $109-million
compared to 2000. Phosphate revenues, costs and gross profit

Sales volumes for 2002 have increased significantly over 2001 and 2000
primarily due to increased production and availability of product from our
Alberta and Idaho facilities. Improved performance at the Alberta facility was
attributable to increased supply of phosphate rock from our Ontario mine where
the remaining start-up issues were resolved. In 2002, we achieved a production
record of one million tonnes at our Ontario facility. Our Idaho facility had a
full year of production following mechanical failures at the plant in late 2000
and the start-up of the new purified phosphoric acid unit in mid-2001, both of
which impacted production levels. Phosphate sales prices strengthened in the first half of 2002 due primarily to
production cut-backs in North America and some tightening in the balance of
supply and demand. This balance had been disrupted in 2000 and 2001 by new
capacity from India and Australia. However, in response to improving prices,
some production was resumed and global pricing softened again later in the
year. Despite being a regional producer, our Operations are affected by
international pricing and our domestic prices followed international patterns. Our unit phosphate production costs continued to fall in 2002 due to absorption
of fixed costs over increased production and cost reduction initiatives at all
facilities. The cost of phosphate rock ore delivered to Alberta from our
Ontario mine also decreased due to improved volumes. Overall, phosphate gross profit was $37-million in 2002 compared to $6-million
in 2001 and $19-million in 2000 as a result of these factors. Potash revenues, costs and gross profit

Potash sales volumes for 2002 increased over 2001 for both domestic and export
sales as a result of increased sales to U.S. customers and increased demand
from China and Brazil. Unlike nitrogen and phosphate, our North American
markets are primarily in the U.S. and were not impacted by the drought in
Western Canada. Some erosion in international prices occurred in 2002 due to increased price
competition for our export sales through Canpotex. Potash costs of production
declined in 2002 due to higher production volumes and to cost reduction
initiatives at our Saskatchewan mine. Overall, potash gross profit was $67-million in 2002 compared to $58-million in
2001 and $70-million in 2000 as a result of these factors.




42     Managements Discussion and Analysis



---



##### 



(PICTURE: CROPS)



North America Retail Operations Earnings from Operations before interest expense and income taxes
 EBIT from Retail operations in North America was a sixth consecutive record for
the segment, mainly due to a strong fourth quarter in the Midwest and
California. Fertilizer sales revenues declined by five percent due to lower
nitrogen prices but were more than offset by increased sales of seed and
chemicals. Despite the increase in revenues, gross profit remained unchanged
due to lower chemical margins and product mix. We were able to reduce our selling, general and administrative expenses by
$2-million in 2002 resulting in higher overall EBIT than the previous year and
established a new record for the segment. Retail outlook and strategy

The new U.S. Government farm aid program, low grain inventories and resultant
increased prices should encourage increased planting of corn and wheat acres in
2003 and a reduction in soybeans. Fertilizer application rates are higher on
corn and wheat than soybeans and, as a result, the Midwest farm centres should
benefit from increased fertilizer sales. Grower consolidation is expected to continue and lead to consolidation in the
retail sector. This will come at the expense of independent dealers as these
smaller businesses do not have the revenue base to sufficiently fund the many
administrative functions required in todays market. Our size, geographic and product diversity, and stability of earnings and cash
flow reduce our exposure to risks such as poor weather and economic conditions
although we are not immune to their impact. Other areas of concern to our
business include:  n
 
 Dry conditions in parts of the U.S. Pacific Northwest which may increase the
chance that some growers will not receive sufficient water to produce economic
yields;  n
 
 The chemical market continues to decrease due to lower chemical use as a result
of genetically modified seeds and lower chemical prices resulting from
increased generic chemicals;  n
 
 Direct selling to growers from chemical manufacturers. We believe we will be able to more than offset reductions in chemical sales
with increased sales of genetically modified seed. Chemical manufacturers do
not have the ability to seriously erode our customer base because of our
distribution network. We do believe these trends offer opportunities to align
ourselves more closely with these manufacturers recognizing our contribution to
the market.




(PICTURE: FARMS) North America Retail Gross
Profit and EBIT (millions of dollars)(CHART)




Managements Discussion and Analysis     43



---



##### 





Segmented
Performance
and Outlook           (PICTURE: TRACTOR)




South America The political and economic environment
 Our operations in Argentina are subject to a number of risks including
fluctuations in foreign currency exchange rates, limitation on foreign exchange
convertibility and transferability, credit, expropriations and other economic,
political and regulatory policies of Government. In January 2002, the Argentine Congress cancelled the Convertibility Law
which pegged the Argentine peso to the U.S. dollar on an equivalent basis. This
led to immediate devaluation of the Argentine peso. Despite conducting our
business in South America in U.S. dollars in order to mitigate the currency
risk, these new laws forced us to convert our U.S. dollar receivables into
Argentine pesos at below market rates. Our 2001 financial statements reflected
the initial impact of this devaluation and forced conversion based on a rate of
1.7 Argentine pesos to the U.S. dollar. The political and economic environment in Argentina remained volatile
throughout 2002. The new free-floating Argentine peso continued to devalue
against the U.S. dollar before stabilizing in mid-year. The Argentine peso
reached a low of 3.80 to the U.S. dollar in mid-year and remained low until the
end of the third quarter when the rate improved to 3.60. The Argentine peso
strengthened further in the fourth quarter to close the year at approximately
3.37 Argentine pesos to the U.S. dollar. Most agricultural companies, including
ourselves, are supporting their employees with cost of living increases and
base salary increases in order to offset the 41 percent increase in inflation. There has been some relaxation in foreign currency convertibility and
transferability. Dividends out of audited Argentine profits and payment of
interest on foreign third-party debt without permission of the central Bank of
Argentina are now permitted. However, there is no assurance the Government of
Argentina will not re-establish these restrictions or impose other fiscal
changes in the future which could negatively affect the economic viability of
our Argentine operations. Favourable weather conditions have prevailed throughout 2002 in Argentina while
global crop prices have risen by 15 to 40 percent over the previous year. The
anticipated decrease in fertilizer demand due to the economic climate did not
materialize to the extent expected and, together with reduced nitrogen
production from our Argentine facility, led to a need for nitrogen imports.
Agriculture remains the one sector of the Argentine economy that demonstrated
strength in 2002. (PICTURES: FACTILITY AND SUNFLOWERS)




44     Managements Discussion and Analysis



---



##### 





South America Wholesale Operations Our Wholesale operations in Argentina are conducted through our 50-percent
share in the Profertil S.A. (Profertil) joint venture with Repsol YPF, a large
international oil and gas company based in Spain. Earnings from Operations before interest expense and income taxes

Nitrogen sales volumes for the Argentine facility for 2002 were slightly higher
than 2001, the first year of commercial production, but below our technical
capacity due to unplanned downtime. When operating, the plant production rates
were higher than design capacity, but ongoing mechanical problems required
unscheduled shutdowns for maintenance and repairs and affected overall
production levels. At the end of the year both the ammonia and urea plants were running above
design rates. There are mechanical concerns with the heat exchanger in the urea
plant and current repairs are considered temporary until the new urea heat
exchanger with upgraded metallurgy is installed early in 2004. The cost of the
upgraded heat exchanger is not material. Until the current heat exchanger is
replaced, some production interruptions may occur. As a precaution, a back-up
unit from our Alberta nitrogen facility will be delivered to Argentina in April
2003 for installation by mid-year, which should minimize the risk of production
interruptions. Sales for 2002 were almost evenly divided between domestic and export sales.
Prices for nitrogen are generally denominated in U.S. dollars but domestic
sales are settled in equivalent Argentine pesos based on the exchange rate at
the time of sale. They are therefore largely insulated from the impact of
devaluation. Domestic sales prices are based on parity with imports and
declined with international prices throughout the first half of 2002 and
recovered later in the year. This was not sufficient to offset earlier
declines. 2002 plant costs of production were significantly lower than the previous year
for three main reasons:  n
 
 Plant labour costs are generally denominated in Argentine pesos and benefited
from currency devaluation;  n
 
 Profertil was able to favourably renegotiate the U.S. dollar based pricing of
the gas supply contracts for the plant as a result of Government decrees
requiring the renegotiation of all U.S. dollar-based contracts. The current
pricing agreement will remain in effect until April 2003 and is at a discount
to the U.S. base-price specified in the original contract. The natural gas
supply for the facility is secured under three 12-year contracts at prices
which we anticipate will continue to be competitive with similar
export-oriented facilities in Trinidad;  n
 
 Electricity costs have also been renegotiated at significantly lower prices
than the prior year. Selling, general and administrative expenses for 2002 also declined from the
prior year due to the devaluation of the Argentine peso and the relocation of
the Corporate head office from Buenos Aires to the plant site in Bahia Blanca. Argentine peso translation losses of $14-million were recorded on Profertils
monetary assets, primarily Argentine peso denominated Value Added Taxes
receivable. These losses resulted from the decline in the Argentine peso from
1.7 Argentine pesos to the U.S. dollar at the beginning of the year to 3.37 at
the end of 2002. Overall, EBIT for wholesale operations in South America increased by $6-million
before Argentine charges compared to the prior year as a result of these
factors. Outlook and strategy

The agriculture sector continues to show strength in an otherwise depressed
economy and we continue to believe it will be a positive force for economic
recovery. In 2002, planted acres and application rates were better than
anticipated and close to 2001 levels and we expect that total nutrient use in
Argentina will be higher in 2003. Profertils ability to export product for
U.S. dollars and currently to retain proceeds offshore in U.S. dollars to repay
international debts, affords some protection from further currency and economic
risk. It also allows Profertil to participate in the expected recovery of the
global fertilizer Industry. Our challenge and focus in Argentina over the next two years will be to
continue reacting to economic and political developments. At the plant,
resolving the mechanical problems is key to maximizing returns.




South America Wholesale Gross
Profit and EBIT (millions of dollars)(CHART)(1) Before Argentine charges. (PICTURES: CROPS)




Managements Discussion and Analysis     45



---



##### 





Segmented
Performance
and Outlook  South America Retail Gross
Profit and EBIT (millions of dollars)(CHART)(1)Before Argentine charges. (PICTURES: SOUTH AMERICA)




(PICTURE: FARMERS) South America Retail Operations Earnings from Operations before interest expense and income taxes
 Our Retail operation in Argentina has fared significantly better than expected
in 2002, despite the economic and political difficulties. Revenues were lower
than the previous year due to the economic recession and the shortage of
available product. However the cost structure has been reduced substantially as
a result of the Argentine peso devaluation resulting in a continued growth in
gross profit. Selling, general and administrative costs have similarly benefited from the
devaluation of the Argentine peso as have non-cash depreciation charges. Overall EBIT for Retail in South America improved substantially in 2002. The
main reason was the recovery of $8-million of the $27-million of receivables
provided for in 2001. This was due to more favourable exchange rates than
anticipated when the convertibility law was cancelled. Additional losses of
$34-million in 2002 (2001  $23-million) on translation of the assets and
liabilities into U.S. dollars were charged directly to the cumulative
translation adjustment account under shareholders equity in accordance with
GAAP as the retail operation is considered self-sustaining. Outlook and strategy

The uncertain political and economic outlook facing Profertil is also faced by
Retail. Until the political and fiscal environment becomes stable, we will
continue to experience the risks associated with potential fiscal changes,
credit losses, currency rate exposure and currency convertibility and
transferability risk. We remain optimistic for the operation because of its
importance to the Argentine agricultural sector and our strategy is to continue
to further grow the business where we can do so without risking significant
additional capital. There is some risk from the actions of integrated competitors. Integration
could lead to inter-segment subsidization of their fertilizer operations by
grain trading operations and consequently result in an erosion of margins in
Retail. Other

Other is a non-operating segment consisting of Corporate administrative
activity and inter-segment charges and eliminations. The primary reason for the
increase over previous years is increased inter-segment interest charges which
are offset as income in the respective business segments.




46     Managements Discussion and Analysis



---



##### 





Forward-Looking
Statements




Except for statements of historical fact, the statements in, or incorporated by
reference, in this Managements Discussion and Analysis of Operations and
Financial Position constitute forward-looking statements under applicable
securities legislation. These forward-looking statements include, but are not
limited to, references to:  n
 
 the amount and type of future capital expenditures;  n
 
 business strategies and plans for implementing them;  n
 
 competitive strengths, goals, expansion and growth of our business and
operations; and  n
 
 plans and references to our future results. These forward-looking statements are based on certain assumptions and analysis
made by us in light of our experience and perception of historical trends,
current conditions and expected future developments as well as other factors we
believe are appropriate in the circumstances. However, whether actual results
and developments will conform with our expectations and predictions is subject
to a number of risks and uncertainties, including, but not limited to:  n
 
 General economic, market and business conditions, including:  n
 
 supply and demand for grain and other agricultural crops;  n
 
 changes in government agricultural, safety, environmental and other legislation
and policies;  n
 
 fluctuations in foreign exchange rates, commodity, feedstock and nutrient
prices or other costs that cannot be recovered through nutrient price
increases;  n
 
 actions by competitors and others in our market areas, including changes to
industry capacity and utilization and product pricing;  n
 
 performance by customers, suppliers, personnel and counterparties to financial
instruments.  n
 
 Weather conditions and seasonal patterns.  n
 
 The outcome of our dispute with Unocal.  n
 
 General operating risks associated with:  n
 
 the efficiency of our production facilities including currency convertibility
and transferability restrictions;  n
 
 the level and effectiveness of future capital expenditures and reliability of
performance of existing capital assets;  n
 
 ability to transport or deliver production to markets;  n
 
 present and discontinued mining operations;  n
 
 investment in foreign jurisdictions;  n
 
 labour disruptions.  n
 
 Strategic risks including:  n
 
 our ability to implement our business strategy;  n
 
 results of our risk mitigation strategies, including hedging and insurance;  n
 
 uncertainty as to the feedstock reserves owned or otherwise available to us;  n
 
 our ability to integrate any assets we may acquire or the performance of those
assets;  n
 
 the opportunities, or lack of opportunities, that may be presented to and
pursued by us; and other factors, many of which are beyond our control. Consequently, all of
the forward-looking statements made in, or incorporated by, reference in this
Managements Discussion and Analysis of Operations and Financial Position are
qualified by these cautionary statements and there can be no assurance that the
actual results or developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected consequences to, or
effects on, us. We do not undertake any obligation to update forward-looking statements even if
circumstances or Managements estimates or opinions should change. Investors
should not place undue reliance on forward-looking statements.




Managements Discussion and Analysis     47