##### 



Managements discussion & analysis of operations & financial condition
    
    Page 16February 11, 2004This managements discussion & analysis of operations and financial
condition is focused on long-term vision, strategy and growth
opportunities, as well as discussion of historical performance for
the three years ended December 31, 2003. Dollar amounts refer to
U.S. dollars except where otherwise stated and this discussion
should be read in conjunction with the consolidated financial
statements and related notes on pages 58-86. Pages 21, 25, 31, 37,
43 and 47 do not form part of managements discussion & analysis.
    Capitalizing on our strategic strengths 
 Overview of 2003
   Our operations performed very well in 2003. The 2003
net loss of $21-million is not directly comparable to
the break-even results in 2002 or the net loss of
$45-million in 2001. 2003 results include the impact
of the $140-million after-tax asset impairment charge
relating to our Kenai, Alaska, nitrogen facility
recorded in the fourth quarter, and 2001 results
include charges of $49-million resulting from the
fiscal crisis in Argentina. Excluding the Alaskan
nitrogen facility asset impairment, 2003 provided
strong earnings of $119-million which far exceed the
results of the past few years. The main reason for our success in 2003 was the
tightening of the global supply and demand balance
for each of the three major nutrients, particularly
in our wholesale nitrogen business. This resulted in
substantial increases in both international and
domestic nitrogen prices and is reflected in our
wholesale margins for both North and South America.
Our phosphate business also benefited from improved
pricing and increased margins over 2002, at a time
when many other North American producers were faced
with declining margins. Our potash margins were
slightly lower due to the strengthening Canadian
dollar and increases in ocean freight rates. However,
we achieved two price increases in the North America
market in the second half of the year that gave a
year-over-year increase of $3 per metric tonne for
all North America potash sales. Our North America Retail business, a stable segment
of our business, recorded its seventh consecutive
year of record earnings before interest expense and
income taxes. The conditions that led to our success in 2003 are
still in place. The global grain stocks-to-use ratio
is at a 25-year low, providing underlying support for
crop prices that should lead to strong nutrient
demand. In North America and elsewhere, nutrient
inventories are low providing support for continued
strength in prices.
 The global industry 
   n
    
    World population is growing, and the ability to feed the population
is limited by a declining arable land base on a per capita basis;  n
    
    Crops consume nutrients contained in the soil and in order to
maintain or increase crop yields, proper nutrient balance must be
maintained through replacement practices;  n
    
    Demand for nitrogen, phosphate and potash for use in the manufacture
of a wide range of industrial products is growing. As a leading producer of nitrogen, phosphate and
potash, and a retail supplier of agricultural inputs
and services, we believe our operations are well
positioned for continued success and profitability. Supply and demand 
  (POPULATION TO FOOD PRODUCTION GRAPH)




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Page 17  Understanding the impact of global supply and demand
fundamentals is important to understanding our
business potential and our results. Many of the key
drivers for the grain market are also drivers of the
nutrient market, as there is a positive correlation
between crop prices and nutrient demand. This is
because optimal nutrient application maximizes crop
yields. Global demand for grain is driven by world population
growth and by improving diets in developing countries
as disposable incomes increase. World grain inventory
levels relative to consumption also influence nutrient
demand. The supply of grain is limited by the
availability of arable land for cultivation, as well
as the soil and weather conditions for producing
optimal crop yields. In addition to the factors affecting global and
regional grain markets, demand for nitrogen, phosphate
and potash is also affected by increasing industrial
demand in the manufacture of a wide range of
synthetic-fibre plastics, resins, pharmaceuticals,
soft drinks, detergents and other applications.
Industrial use accounts for approximately 14 percent
of global fertilizer consumption. Factors that affect the supply of our products include
the rate of construction for new production
facilities, operating rates of existing facilities,
government intervention, unexpected interruptions in
the supply of raw materials and various other factors
affecting the economics of production such as raw
material input costs. In the longer term, the growth in demand for grain and
the need to increase crop yields are met by new seed
varieties, increases in nutrient application rates and
therefore increased nutrient production. However, it
requires significant investment and years of lead time
to bring new facilities on stream. This leads to
short-term imbalances between supply and demand and
creates the cyclical effect that characterizes most
commodity industries. Recent supply and demand trends 
 Agriculture
  In 2003, weather conditions in North America improved
significantly over the previous two years. However,
global grain consumption (GRAIN INVENTORY SITUATION GRAPH)
 continued to exceed production due to poor crops in
Eastern and Western Europe and drought conditions in
Australia. These conditions have provided underlying
support for crop prices. Average Crop Prices5-Year2003
    
    
    2002
    
    
    2001
    
    
    Avg.United States (U.S.$/bushel)Corn No. 2 Yellow
    
    
    2.33
    
    
    
    2.19
    
    
    
    1.97
    
    
    
    2.11Wheat SRW (a)
    
    
    3.46
    
    
    
    3.27
    
    
    
    2.63
    
    
    
    2.77Soybeans No. 1 Yellow
    
    
    6.30
    
    
    
    5.07
    
    
    
    4.53
    
    
    
    5.08Canada (C$/bushel)Canola (b)
    
    
    8.75
    
    
    
    9.14
    
    
    
    7.53
    
    
    
    7.89Wheat (c)
    
    
    6.99
    
    
    
    6.07
    
    
    
    5.85
    
    
    
    6.12
 (a)
    
    Soft red winter wheat.(b)
    
    Source: Winnipeg Commodity Exchange.(c)
    
    Source: Canadian Wheat Board, RJ OBrien. Crop year price data, eg. 2003 refers to 2002/03 crop year. Nutrients  Nitrogen production capacity additions are sporadic.
North American capacity has declined in each of the
past five years, and Western Europe capacity has
declined in each of the past four years. This is
because of the relatively high cost of natural gas,
the primary raw material used in the manufacture of
nitrogen fertilizers. The majority of recent nitrogen
capacity additions and demand increases have been in
the Middle East, Asia and Latin America where there
are available supplies of low-cost natural gas.
Overall, additions in nitrogen capacity have not kept
pace with growth in demand, and this has led to a
tightening in the balance of supply and demand. In 2001, two new phosphate facilities were brought on
stream in India and Australia. These additions,
together with other capacity increases in China,
initially created a supply surplus. Over the past two
years, international markets have been adjusting to
this increase in supply, although some surplus
capacity still exists. No new potash mines have been started up in more than
a decade, but existing mines have significant growth
potential and long-term reserves. Three international
marketing associations supply approximately 70 percent
of the worlds potash requirements. We market and
export potash through our membership in Canpotex
Limited, one of the largest potash marketing and
distribution companies. In 2003, nitrogen prices rose substantially. The main
reasons for this were firm grain prices, increased
global demand and reduced production from the United
States (U.S.) and Venezuela. Demand from Latin
American countries was particularly strong. Phosphate
prices also responded to increased Latin American
demand and increased ammonia and sulphur input costs.
International potash prices were steady, but margins
were negatively impacted by increased ocean freight
rates and the stronger Canadian dollar. However,
increased ocean freight rates helped raise domestic
North and South American nitrogen prices by increasing
the cost of imports.




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Managements discussion & analysis
of operations & financial condition
    

Page
18
     Capitalizing on our strategic strengths 
 Our Company
  Our vision 
  Our strategy 
  Continuously improve base business competitiveness by: n
    
    Focusing on customer needs and service;  n
    
    Focusing on lowering costs and increasing margins;  n
    
    Debottlenecking and rationalizing assets based on market conditions;  n
    
    Employing best practices;  n
    
    Generating timely, accurate information for decision making. Maintain a disciplined investment strategy by: n
    
    Building and buying assets at the right time in the cycle;  n
    
    Using appropriate financial vehicles to support investment;  n
    
    Maintaining economic access to capital markets and an investment grade credit rating. Grow to an industry leader position by: n
    
    Capturing synergies from size;  n
    
    Diversifying geographically and by product mix;  n
    
    Becoming the first choice for investors in the fertilizer sector, leading to a premium stock multiple. Continue to build on our high performance culture by: n
    
    Using inspired leadership, results-orientation, ownership mindset,
integrity and capacity for change to create a competitive advantage and
deliver outstanding business results.
 Our advantage 
   n
    
    We are the only publicly traded North American company with
operations in all areas of the fertilizer industry value chain. We are
engaged in the production of many of the raw materials we consume, the
manufacture and wholesale marketing of each of the three major nutrients
and the supply of products and services to growers at the retail level;  n
    
    Our strategic product mix closely mirrors global consumption
patterns;  n
    
    Our portfolio includes a blend of international nitrogen assets with
low-cost natural gas supplies under long-term contracts and domestic
nitrogen, phosphate and potash assets;  n
    
    We have well established systems for distribution and storage of our
products in North America. This enables us to access premium markets
cost-effectively;  n
    
    Excluding our Alaskan facility, over 80 percent of our North American
nitrogen production is in Alberta, where natural gas prices have
historically traded at a discount to the New York Mercantile Exchange
(NYMEX), providing us with a production cost advantage over other North
American producers;  n
    
    Three of our nitrogen facilities are among the six most recently
built in North America, helping to make us one of the lowest-cost North
American producers in all three primary nutrients;  n
    
    Our 50 percent owned nitrogen facility in Argentina is the largest
single train urea and ammonia facility in the world. Low-cost natural
gas is supplied to the facility under long-term, fixed base-price
contracts.




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Page 19 (PICTURE)
    
    (PICTURE)
  These key factors provide balance between risk and
reward as well as a sustainable source of cash flow.
This allows us to take advantage of opportunities that
may arise during lean times in the nutrient cycle and
position ourselves to capitalize on periods of rising
prices. Our operations and markets 
  Our key wholesale sales regions are in North America,
South America, Northeast Asia and Western Mexico.
Transportation and logistics are critical to success
in these regions, and we have established a
well-developed infrastructure consisting of owned,
leased and third-party distribution capacity that we
use to efficiently transport production from our 14
facilities to our customers. Our retail business in the U.S. and Argentina provides
agricultural outputs and services to growers. The
geographic diversity of our U.S. farm centres helps
reduce the risk associated with unfavourable regional
economic or weather conditions. These farm centres
also provide a stable base of earnings and cash flow.
 (NATURAL GAS USE BAR GRAPH) (REALIZED PRICES LINE CHART)




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Managements
discussion & analysis of operations & financial condition
    
    Page 20
     Capitalizing on our strategic strengths 
 Our products & services
  Nitrogen 
  Our 11 nitrogen production facilities in Western
Canada, the U.S. and Argentina have the capacity to
produce approximately seven million tonnes of nitrogen
products annually. We are one of the top two nitrogen
producers in the world, with approximately three
percent of the global nitrogen market. We sell
approximately 74 percent of these products to
agricultural customers and the remaining 26 percent
for industrial applications. Low-cost natural gas is critical to the profitability
of nitrogen operations. At current North American
prices, natural gas accounts for almost 90 percent of
the cash cost of producing ammonia, the building block
for all nitrogen products. As previously mentioned, over 80 percent of our
production capacity outside Alaska and Argentina is
located in Alberta, where we have historically enjoyed
a natural gas cost advantage over U.S. producers, and
our facility in Argentina is supplied under long-term,
low-cost natural gas contracts. 2003 Production
    
    2003 SalesProduction/Market Area
    
    
    
    
    
    Tonnes (000s)
    
    
    %
    
    
    Tonnes (000s)
    
    
    %Canada
    
    
    
    
    
    
    2,570
    
    
    
    50
    
    
    
    1,638
    
    
    
    30United States
    
     Alaska
    1,173
    
    
    
    23
    
    
    
    
    
    
    
     Lower 48
    791
    
    
    
    15
    
    
    
    1,863
    
    
    
    35Argentina
    
    
    
    
    
    
    617
    
    
    
    12
    
    
    
    348
    
    
    
    6Export markets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,541
    
    
    
    29
 (2003 NATURAL GAS CONSUMPTION BAR GRAPH) (2003 AMMONIA AVERAGE SELLING PRICES BAR GRAPH)




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(AGRIUM'S GLOBAL NITROGEN MARKETS)




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##### 



Managements discussion & analysis of operations & financial condition
    
    Page 22
 (PHOTO)
    
    (PHOTO)
  Phosphate 
  Phosphate includes both solid products such as
monoammonium phosphate (MAP) and ammonium phosphate
sulphate (APS), as well as various liquid forms of
phosphoric products. Unlike our nitrogen operations
which service both domestic and international markets,
our phosphate business is focused on regional
customers in Western Canada and the U.S. Pacific
Northwest. The average selling price in these markets
is higher than the price in Florida where the majority
of other North American producers are located. The primary inputs for the production of phosphates
are phosphate rock ore, sulphur and ammonia. Access to
low-cost supplies of these raw materials is key to
profitability. Our plant in Alberta is in the
proximity of our nitrogen facility, which supplies the
ammonia, and close to abundant supplies of sulphur.
 Phosphate rock ore is supplied by rail from our mine
in Ontario, which has an estimated remaining reserve
life of over 15 years. Our plant in Idaho is located
near our second mine, which has an estimated remaining
reserve life of eight years, and is adjacent to other
available reserves that could be used to extend the
life of the facility. 2003 Production
    
    

    2003 SalesProduction/Market Area
    
    Tonnes (000s)
    
    
    %
    
    
    Tonnes (000s)
    
    
    %Canada
    
    
    561
    
    
    
    53
    
    
    
    595
    
    
    
    55United States
    
    
    498
    
    
    
    47
    
    
    
    495
    
    
    
    45
 Potash
   (2003 PHOSPHATE AVERAGE SELLING PRICE BAR GRAPH)
    
    (POTASH PRODUCTION GRAPH)




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Page 23 (PHOTO)
    

(PHOTO)
  2003 Production
    
    

    2003 SalesProduction/Market Area
    
    Tonnes (000s)
    
    
    %
    
    
    Tonnes (000s)
    
    
    %Canada
    
    
    1,665
    
    
    
    100
    
    
    
    150
    
    
    
    9United States
    
    
    
    
    
    
    
    
    
    
    942
    
    
    
    57Export markets
    
    
    
    
    
    
    
    
    
    
    570
    
    
    
    34
 Retail 
  In North America, our retail business consists of 206
facilities in the U.S. marketing under the names of
Western Farm Service (WFS) in the West and Crop
Production Services (CPS) in the Midwest and
Northeast. Retail provides us with valuable direct
contact with end users of our products. We provide
inputs and services to maximize the growers income.
In 2003, 46 percent of our retail businesses revenues
pertained to fertilizer, with similar revenues derived
from agricultural chemicals and the balance
contributed by seed and application services. Our professional agronomists and crop advisors located
at retail outlets design innovative solutions to
grower challenges. Our precision application of crop
nutrients and soil products uses specially designed
software and global positioning satellite technology.
Over 1,200 weather stations in the West
use predictive software to optimize chemical
applications and maximize irrigation effectiveness.
The ideal balance between yields and input costs can
be achieved through proper analysis and
recommendations.
 Our U.S. retail business is based on relationships and
is labor intensive rather than capital intensive. We
achieve a competitive advantage through dedicated and
experienced employees who understand our customers
needs. Key elements of the success of our retail
operations are:  n
    
    Geographic and product diversity;  n
    
    Constant repositioning of capital from under-performing facilities to higher return opportunities;  n
    
    Our superior team of people. We provide above-average compensation for above-average performance;  n
    
    Size provides opportunities to test innovative ideas without risking the future viability of the Company. Our retail business in Argentina is known as
Agroservicios Pampeanos S.A. (ASP). It consists of 18
farm centres that are similar to those in the U.S.
Midwest. The primary purpose of this retail operation
has been to promote sound crop fertility programs and
convert the market to higher quality granular products
that can be bulk blended with other nutrients. This
allows for economic increases in application rates.
This strategy meshes well with our South America
Wholesale operation by increasing nitrogen application
in the higher-margin domestic market. In Argentina, one of the most stable sectors of the
economy is agriculture. Strong crop prices, a
relatively stable peso and near-term political
stability have improved the Argentine agricultural
economy in 2003. Crops and inputs are sold on an
equivalent U.S. dollar basis at prices that are
determined by international markets, but most other
operating expenses are incurred in Argentine pesos.
These peso denominated operating expenses have
decreased significantly in U.S. dollar terms with the
devaluation of the peso in January 2002.




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Managements discussion & analysis of operations & financial condition
    
    Page 24
    Capitalizing on our strategic strengths 
 Our performance & outlook
   Understanding our performance
 
 Application of critical accounting policies and estimates
 Application of the following accounting policies
requires us to make estimates of future events that
may have a material effect on current or future
financial results. These estimates require experience
and judgment and are subject to inherent risk of
inaccuracy, particularly where they relate to events
that are expected to take place in the future. Revenue recognition
We recognize revenues from our operations when the
product or service is delivered to the customer and
the risks and rewards of ownership are transferred to
the customer. Transportation costs, where applicable,
are recovered from the customer through product or
service pricing. In certain cases, application of
this policy may require estimates to be made of a
component of the revenue recognized, discounts and
allowances, the cost of the product or service
delivered and the creditworthiness of the customer.
We make these estimates based on the most recent
information available and historical trends, but they
may be affected by subsequent changes in market
conditions. Capital assets
Capital assets are recorded at cost and include the
cost of replacements and betterments. Cost is defined
as expenditures incurred up to the commencement of
commercial production, and includes internal and
external costs of personnel, material and services as
well as interest capitalized during construction.
 IMPAIRMENT
The fair value of our capital assets is based on
their capacity to generate future cash flows. Cash
flows can be affected by a number of factors such as
new technology, market conditions for our products,
availability of raw material inputs and estimated
service lives of the assets. We review the carrying
value of our capital assets on a regular basis. If
impairment has occurred, an impairment charge is
recognized immediately. DEPRECIATION  Initial service life estimates are based on
experience and current technology. However, these
estimates may be extended through proper maintenance
and sustaining capital programs. Factors affecting
the fair value of our assets and the useful lives of
our assets are constantly changing. We therefore
periodically review the estimated remaining lives of
our facilities and adjust our depreciation rates
prospectively where appropriate. Environmental and asset retirement obligations




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(FINANCIAL STABILITY)




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Managements discussion & analysis of operations & financial condition
    
    Page 26
   Other environmental liabilities relate to obligations
to remediate existing conditions that may have been
caused by ongoing or discontinued operations. Where
these obligations are reasonably estimable, they are
expensed net of anticipated recoveries by discounting
expected future cash outlays. Estimating the cost of asset retirement and other
environmental liabilities requires extensive judgement
about the nature and timing of the work to be carried
out, and these estimates are subject to considerable
uncertainty. Changes in the applicable laws and
regulations as well as ongoing developments in the
policies and expectations of the regulatory agencies,
latent or evolving site conditions, and changes in the
timing of expenditures may all have a significant
impact on the accuracy of the financial estimates. We
monitor these factors in determining the amount of our
estimates and make adjustments to our estimates using
the best available data. Potential future costs which could be material, but
which are not reasonably estimable due to uncertainty
of outcome, timing and the nature of work to be
performed, are considered contingencies, and no
liability is recorded until the amount becomes likely
or estimable. At December 31, 2003, our environmental provisions
totalled $87-million (2002  $79-million) and
our asset retirement obligations totalled $43-million
(2002  $35-million). Foreign currency translation  Argentina  On October 1, 2003, we changed the translation method
for ASP to the temporal method to reflect the changing
circumstances under which it now conducts business.
Under this method, monetary assets and liabilities are
translated at period-end rates and the translation
gain or loss is reflected in the income statement.
Non-monetary assets and liabilities are converted at
historical rates. We consider this change appropriate
because of the relaxation of the legal requirement to
transact business in pesos, and the gradual
orientation of the agricultural sector to the U.S.
dollar because of its export focus. The transition to
the new policy is reflected prospectively in our
financial statements from October 1, 2003. Adoption of new accounting policies 
 Stock-based compensation
 For grants issued in prior years, we continue to
disclose the pro-forma effect on earnings. Asset retirement obligations   n
    
    The fair value of anticipated asset retirement obligations are
capitalized as part of the carrying amount of the asset and the asset is
depreciated over its estimated useful life;n
    
    The corresponding net present value of the liability is recognized
immediately and accreted by a charge to earnings over the estimated time
period until settlement of the obligation. Previously, the undiscounted estimate of anticipated
costs of site restoration was accrued over the period
up to the date the obligation was expected to settle.
The effect of this change is disclosed in note 2 to
the financial statements. Non-GAAP disclosure 
  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)
determined in accordance with GAAP as an indicator of
our performance. Similarly, EBITDA should not be used
an alternative to cash provided by (used in) operating
activities as determined in accordance with GAAP. For
a reconciliation of EBIT and EBITDA to net earnings
(loss), refer to the table on page 28. We also make reference to earnings excluding the
after-tax asset impairment charge and EBIT excluding
the asset impairment charge. These measures are not
recognized measures under GAAP. Earnings excluding the
after-tax asset impairment charge is determined by
adding to net earnings the after-tax impairment
charge. EBIT excluding the asset impairment charge is
determined by adding the pre-tax asset impairment
charge to earnings before interest expense and income
taxes. We consider the exclusion of the asset
impairment charge from these measures to be useful as
the asset impairment charge does not directly relate
to operations for 2003.




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Page 27 (PICTURE)
    
    (PICTURE)
 Sensitivity of earnings to changes in key variables 
   Impact of Change on:Amount of Change
    
    
    Net Earnings
    
    

Earnings
per Share(a)Key Variable
    
    Over a Full Year
    
    
    (millions of U.S. dollars)
    
    
    (U.S. dollars per share)North AmericaWholesale selling pricesAmmonia
    
    U.S.$10/tonne
    
    
    
    10
    
    
    
    0.08Urea
    
    U.S.$10/tonne
    
    
    
    14
    
    
    
    0.11Phosphate(b)
    
    U.S.$10/tonne
     
   
    
    5
    
    
    
    0.04Potash
    
    U.S.$10/tonne
    
    
    
    10
    
    
    
    0.08Natural gas
cost(c)
    
    U.S.$0.10/MMBtu
    
    
    
    6
    
    
    
    0.05Exchange
rate from C$ to U.S.$(d)
    
    
    C$0.01
    
    
    
    3
    
    
    
    0.02South AmericaWholesale selling pricesUrea
    
    U.S.$10/tonne
    
    
    
    3
    
    
    
    0.02Exchange rate fromArgentine
pesos to U.S.$(e)
    
    0.3 pesos
    
    
    
    1
    
    
    
    0.01
 (a)
    
    Based on 127 million shares outstanding at December 31, 2003.(b)
    
    MAP equivalent.(c)
    
    Based on natural gas requirements not under fixed price contract at January 1, 2004, excluding natural gas hedging impact.(d)
    
    Excludes Canadian dollar hedging.(e)
    
    Excludes Value Added Taxes (VAT) receivable impact.  Seasonality
 We market a diverse line of products to a wide
variety of industrial customers that comprise
approximately 20 percent of our North America
Wholesale sales. These markets provide consistent,
year-round revenue, and in part serve to offset the
seasonal and cyclical nature of the agricultural
market.




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Managements discussion & analysis of operations & financial condition
    
    Page 28
  Performance highlights 
  2003First
    
    
    Second
    
    
    First
    
    
    Third
    
    
    Fourth
    
    
    Second
    
    
    2003(millions of dollars, except per share amounts)
    
    Quarter
    
    
    Quarter
    
    
    Half
    
    
    Quarter
    
    
    Quarter
    
    
    Half
    
    
    Full YearNet sales
    
    
    372
    
    
    
    929
    
    
    
    1,301
    
    
    
    561
    
    
    
    637
    
    
    
    1,198
    
    
    
    2,499EBITDA (a)
    
    
    37
    
    
    
    165
    
    
    
    202
    
    
    
    88
    
    
    
    106
    
    
    
    194
    
    
    
    396Less: depreciation and amortization
    
    
    32
    
    
    
    35
    
    
    
    67
    
    
    
    34
    
    
    
    39
    
    
    
    73
    
    
    
    140Less: asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235
    
    
    
    235
    
    
    
    235EBIT (b)
    
    
    5
    
    
    
    130
    
    
    
    135
    
    
    
    54
    
    
    
    (168
    )
    
    
    (114
    )
    
    
    21Less: interest expense and income taxes
    
    
    11
    
    
    
    61
    
    
    
    72
    
    
    
    29
    
    
    
    (59
    )
    
    
    (30
    )
    
    
    42Net earnings (loss)
    
    
    (6
    )
    
    
    69
    
    
    
    63
    
    
    
    25
    
    
    
    (109
    )
    
    
    (84
    )
    
    
    (21
    )per share  basic
    
    
    (0.07
    )
    
    
    0.53
    
    
    
    0.46
    
    
    
    0.18
    
    
    
    (0.89
    )
    
    
    (0.71
    )
    
    
    (0.25
    ) diluted
    
    
    (0.07
    )
    
    
    0.47
    
    
    
    0.43
    
    
    
    0.17
    
    
    
    (0.89
    )
    
    
    (0.71
    )
    
    
    (0.25
    )Cash provided by operating activities
    
    
    37
    
    
    
    36
    
    
    
    73
    
    
    
    47
    
    
    
    69
    
    
    
    116
    
    
    
    189Non-cash working capital
    
    
    134
    
    
    
    203
    
    
    
    203
    
    
    
    210
    
    
    
    217
    
    
    
    217
    
    
    
    217
 2002First
    
    
    Second
    
    
    First
    
    
    Third
    
    
    Fourth
    
    
    Second
    
    
    2002(millions of dollars, except per share amounts)
    
    Quarter
    
    
    Quarter
    
    
    Half
    
    
    Quarter
    
    
    Quarter
    
    
    Half
    
    
    Full YearNet sales
    
    
    318
    
    
    
    792
    
    
    
    1,110
    
    
    
    466
    
    
    
    507
    
    
    
    973
    
    
    
    2,083EBITDA (a)
    
    
    (2
    )
    
    
    87
    
    
    
    85
    
    
    
    61
    
    
    
    66
    
    
    
    127
    
    
    
    212Less: depreciation and amortization
    
    
    34
    
    
    
    32
    
    
    
    66
    
    
    
    42
    
    
    
    40
    
    
    
    82
    
    
    
    148EBIT (b)
    
    
    (36
    )
    
    
    55
    
    
    
    19
    
    
    
    19
    
    
    
    26
    
    
    
    45
    
    
    
    64Less: interest expense and income taxes
    
    
    
    
    
    
    32
    
    
    
    32
    
    
    
    18
    
    
    
    14
    
    
    
    32
    
    
    
    64Net 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
    ) diluted
    
    
    (0.33
    )
    
    
    0.15
    
    
    
    (0.16
    )
    
    
    (0.01
    )
    
    
    0.07
    
    
    
    0.06
    
    
    
    (0.08
    )Cash provided by operating activities
    
    
    2
    
    
    
    75
    
    
    
    77
    
    
    
    28
    
    
    
    119
    
    
    
    147
    
    
    
    224Non-cash working capital
    
    
    278
    
    
    
    54
    
    
    
    254
    
    
    
    300
    
    
    
    210
    
    
    
    210
    
    
    
    210
 2001First
    
    
    Second
    
    
    First
    
    
    Third
    
    
    Fourth
    
    
    Second
    
    
    2001(millions of dollars, except per share amounts)
    
    Quarter
    
    
    Quarter
    
    
    Half
    
    
    Quarter
    
    
    Quarter
    
    
    Half
    
    
    Full YearNet sales
    
    
    381
    
    
    
    803
    
    
    
    1,184
    
    
    
    410
    
    
    
    469
    
    
    
    879
    
    
    
    2,063EBITDA (a)
    
    
    61
    
    
    
    122
    
    
    
    183
    
    
    
    28
    
    
    
    (39
    )
    
    
    (11
    )
    
    
    172Less: depreciation and amortization
    
    
    32
    
    
    
    31
    
    
    
    63
    
    
    
    43
    
    
    
    35
    
    
    
    78
    
    
    
    141EBIT (b)
    
    
    29
    
    
    
    91
    
    
    
    120
    
    
    
    (15
    )
    
    
    (74
    )
    
    
    (89
    )
    
    
    31Less: interest expense and income taxes
    
    
    22
    
    
    
    46
    
    
    
    68
    
    
    
    2
    
    
    
    6
    
    
    
    8
    
    
    
    76Net 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
    ) diluted
    
    
    0.03
    
    
    
    0.33
    
    
    
    0.36
    
    
    
    (0.17
    )
    
    
    (0.72
    )
    
    
    (0.90
    )
    
    
    (0.49
    )Cash provided by (used in) operating activities
    
    
    (112
    )
    
    
    108
    
    
    
    (4
    )
    
    
    (12
    )
    
    
    103
    
    
    
    91
    
    
    
    87Non-cash working capital
    
    
    449
    
    
    
    404
    
    
    
    404
    
    
    
    429
    
    
    
    283
    
    
    
    283
    
    
    
    283
 (a)
    
    Earnings before interest expense, income taxes, depreciation, amortization and asset impairment.(b)
    
    Earnings before interest expense and income taxes.




---



##### 



Page 29  Summary of year-over-year changes 
  (millions of dollars)
    
    2003
    
    
    2002
    
    
    2001Changes in net earnings (loss)Net earnings (loss)  previous year
    
    
    
    
    
    
    (45
    )
    
    
    82Year-over-year change due toNorth America Wholesale EBIT (a)Nitrogen: pricing and volumes
    
    
    261
    
    
    
    (127
    )
    
    
    117manufacturing costs
    
    
    (96
    )
    
    
    40
    
    
    
    (140
    )Phosphate
    
    
    7
    
    
    
    31
    
    
    
    (13
    )Potash
    
    
    (6
    )
    
    
    9
    
    
    
    (12
    )Depreciation and amortization
    
    
    3
    
    
    
    (6
    )
    
    
    (25
    )Asset impairment
    
    
    (235
    )
    
    
    
    
    
    
    Facility costs
    
    
    (2
    )
    
    
    7
    
    
    
    (15
    )Selling, general and administrative costs
    
    
    (11
    )
    
    
    9
    
    
    
    (3
    )Other
    
    
    (10
    )
    
    
    13
    
    
    
    (11
    )North America Retail EBIT (a)
    
    
    12
    
    
    
    1
    
    
    
    4South America Wholesale EBIT (a)
    
    
    73
    
    
    
    7
    
    
    
    (14
    )South America Retail EBIT (a)
    
    
    (38
    )
    
    
    42
    
    
    
    (5
    )Other EBIT (a)
    
    
    (11
    )
    
    
    (11
    )
    
    
    5Interest expense
    
    
    5
    
    
    
    6
    
    
    
    (37
    )Foreign exchange and Argentine charges
    
    
    10
    
    
    
    18
    
    
    
    (20
    )Tax expense
    
    
    17
    
    
    
    6
    
    
    
    42Net earnings (loss)  current year
    
    
    (21
    )
    
    
    
    
    
    
    (45
    )Changes in cash provided by operating activitiesCash provided by operating activities  previous year
    
    
    224
    
    
    
    87
    
    
    
    256Year-over-year change due toNet earnings (loss)
    
    
    (21
    )
    
    
    45
    
    
    
    (127
    )Non-cash items
    
    
    145
    
    
    
    44
    
    
    
    (7
    )Non-cash working capital
    
    
    (159
    )
    
    
    48
    
    
    
    (35
    )Cash provided by operating activities  current year
    
    
    189
    
    
    
    224
    
    
    
    87
 (a)
    
    EBIT before foreign exchange and Argentine charges.




---



##### 



Managements discussion & analysisof operations & financial condition
    
    Page 30
      Capitalizing on our strategic strengths Our financial performance
 Overview of consolidated financial highlights 
 Net
earnings
 We experienced a net loss in 2003 of $21-million ($0.25 loss per diluted
share). Excluding the Alaskan nitrogen facility asset impairment charge of
$140-million after-tax, earnings for 2003 were $119-million or $0.82 diluted
earnings per share. This compared to earnings of $-nil in 2002 ($0.08 diluted
loss per share) and a net loss of $45-million in 2001 ($0.49 diluted loss per
share). 2003 was the beginning of a turnaround for our Company. Excluding the Alaskan
nitrogen facility asset impairment, it was our best year since 1998 and an
indication of the long awaited upturn in the nitrogen cycle. Consolidated EBIT was $21-million for 2003, compared to $64-million in 2002 and
$31-million in 2001. 2003 EBIT was reduced by $235-million relating to the
asset impairment of our Alaskan nitrogen facility. Excluding this charge, 2003
consolidated EBIT was $256-million. Fuelled by substantially higher grain
prices in the spring season, demand for nitrogen was particularly strong and
was reflected in both international and domestic margins. This improved the
results of our wholesale businesses in both North and South America
considerably over the prior years. Our North America Retail business reported strong EBIT. Profitability was
driven by higher nitrogen selling prices and improved chemical volumes. Further detailed discussion of segmented operating results is provided on pages
36 to 44. Interest expense of $63-million for 2003 was lower than the $68-million in 2002
due to the impact of debt repayments. Both 2003 and 2002 were lower than the
$74-million in 2001, due to the 2001 equity issue and the cash conservation
measures taken in 2002 and 2003, both of which enabled us to virtually
eliminate our short-term bank indebtedness.
 Earnings excluding the after-tax asset impairment charge and EBIT excluding the
asset impairment charge are not recognized measures under GAAP. Earnings
excluding the after-tax asset impairment charge is determined by adding to net
earnings the after-tax impairment charge. EBIT excluding the asset impairment
charge is determined by adding the pre-tax asset impairment charge to earnings
before interest expense and income taxes. We consider the exclusion of the
asset impairment charge from these measures to be useful as the asset
impairment charge does not directly relate to operations for 2003. Cash
provided by operating activities

Cash provided by operating activities was $189-million for 2003, compared to
$224-million for 2002 and $87-million for 2001. 2003 decreased over 2002 due to
an increase in working capital resulting from higher accounts receivable,
inventories and prepaids, partially offset by higher accounts payable and an
increase in the current portion of long-term debt. As a result of our favorable
cash position, we did not use our accounts receivable asset securitization
program at year-end 2003, compared to the $114-million in cash generated by
this program at year-end 2002. Increased inventories and prepaids are a result
of our North America Retail business unit pre-buying nitrogen with the
expectation that fertilizer prices will increase in 2004. The improvement in
cash provided by operating activities in 2003 and 2002 over 2001 is mainly
attributable to increased earnings.




---



##### 



(INVESTMENT VALUE)




---



##### 



Managements discussion & analysis of operations & financial condition
    
    Page 32
  (PICTURE) Capital
expendituresCapital expenditures for the three years ended
December 31, 2003, were as follows: (millions of dollars)
    
    2003
    
    2002
    
    2001Sustaining capital
    
    
    97
    
    
    
    51
    
    
    
    91Investment capital
    
    
    2
    
    
    
    1
    
    
    
    7499
    
    
    
    52
    
    
    
    164
 Our capital expenditure programs typically comprise both sustaining and
investment capital. Sustaining capital is necessary for the continued safe and
efficient operation of our facilities and extends their useful lives.
Investment capital includes new opportunities and significant expansion of
existing operations. In 2002 and 2003, our capital expenditures were
substantially all sustaining capital in order to conserve cash. A normal level
of sustaining capital for our operations is approximately $80-million per year,
but this fluctuates year to year depending on foreign exchange rates,
maintenance requirements and scheduling of periodic turnarounds at our major
facilities. Capital expenditures also include an Earn-out for the contingent
acquisition price of our Alaskan nitrogen facility that is further discussed on
page 40. In 2003, sustaining capital expenditures of $97-million were higher than 2002,
largely due to the deferral of non-mandatory sustaining capital from 2002 into
2003. In both 2003 and 2002, we investigated numerous plant capital expansion and
debottlenecking projects. However, concentration on improving our balance sheet
through overall debt reduction resulted in a decision not to proceed with the
majority of these projects. Capital investment for 2003 and 2002 was
significantly lower than 2001 because of the completion of major investment
projects in 2001. These projects included our Argentine nitrogen facility, our
Ontario phosphate mine and our Idaho phosphate operation.
 (PICTURE) Financial
position
Our ongoing objective to strengthen our financial position and reduce our debt
started in 2002 with the issue of $106-million of common shares and effective
management of working capital and capital expenditures. In 2003 we continued
these efforts, constraining capital expenditures and continuing initiatives to
drive down operating costs. Our efforts have been successful, despite some increase in working capital
mainly due to not utilizing our accounts receivable securitization program.
This factor has been more than offset by improvements in cash provided by
operating activities before changes in working capital. Significant financing transactions in 2003 included the following:  n
    
    In December 2003, we announced that we would redeem
our $50-million, six percent convertible redeemable preferred
securities. These preferred securities subsequently were
converted into common shares at a conversion price of
$11.9677, resulting in the issuance of an additional
4.18 million common shares in January 2004;n
    
    On December 29, 2003, we made the first scheduled annual
repayment of $15-million on our $75-million, 6.86 percent
senior notes. Our debt-to-debt-plus-equity ratio decreased from 57 percent in 2001 and 50
percent in 2002 to 47 percent at December 31, 2003. Including the outstanding
preferred securities as debt in accordance with U.S. GAAP, these ratios were 70
percent, 64 percent and 62 percent respectively prior to the redemption of the
securities referred to above. After pro-forma reflecting the redemption in
accordance with U.S. GAAP, the ratios were 67 percent, 61 percent and 58
percent respectively.




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##### 



Page 33
  (PICTURE)
 (PICTURE)
   Aggregate contractual obligations
 
  Payment Due by PeriodLess Than
    
    
    1-3
    
    
    4-5
    
    
    After(millions of dollars)
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 Years
    
    
    TotalLong-term
debt (a)
    
    
    121
    
    
    
    154
    
    
    
    74
    
    
    
    386
    
    
    
    735Operating
leases (b)
    
    
    41
    
    
    
    57
    
    
    
    23
    
    
    
    14
    
    
    
    135Purchase
obligations (c)(d)(e)
    
    
    568
    
    
    
    254
    
    
    
    110
    
    
    
    175
    
    
    
    1,107Total
    
    
    730
    
    
    
    465
    
    
    
    207
    
    
    
    575
    
    
    
    1,977
 (a)
    
    Failure to maintain certain financial ratios and other covenants may trigger early repayment provisions (see financial covenants on page 35).(b)
    
    Includes short-term leases for railcars and distribution facilities in North America Wholesale, vehicles and application equipment in North America Retail and other computer equipment leases.(c)
    
    Includes minimum commitments for North American natural gas based on prevailing NYMEX forward prices at December 31, 2003. We commit to purchase a large percentage of our production volume
requirements for the next year at floating prices, and actual prices paid may differ.(d)
    
    Liquid markets exist for the possible resale of North America Wholesale natural gas, sulphuric acid and power purchased under the majority of these commitments, but gains or losses could be incurred
on resale.(e)
    
    Includes our 50 percent share of Profertil annual gas purchase commitments totalling $265-million.  (CAPITAL SPENDING BAR CHART)
 (TOTAL DEBT BAR CHART)




---



##### 



Managements discussion & analysis
of operations & financial condition
    
    Page 34
 (PICTURE)
    

(PICTURE)
  Liquidity 
   n
    
    Interest payments;n
    
    Taxes;n
    
    Peak seasonal working capital requirements;n
    
    Capital expenditures;n
    
    Preferred securities charges and declared common share dividends;n
    
    General operations.
 At December 31, 2003, liquid resources consisted of:  n
    
    Cash and short-term investments of $200-million, including
$62-million relating to Argentina of which $10-million is denominated
in pesos;n
    
    Unused short-term bank credit facilities of $266-million in North
America and $22-million in Argentina;n
    
    A $125-million non-recourse facility for the sale of eligible North
America Wholesale and North America Retail accounts receivable, as
discussed below. At December 31, 2003, $125-million of this facility
was unused (2002  $11-million);n
    
    Other non-cash working capital of $217-million. Our revolving credit facilities in North
America expire in May and December 2004 and we
expect to re-negotiate or replace these
facilities with similar arrangements prior to
expiry.
   (CASH AND CASH EQUI. GRAPH)
    

(QUICK RATIO GRAPH)




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##### 



Page 35 (PICTURE)
    

(PICTURE)
  Off-balance sheet arrangements
Certain of our U.S. subsidiaries may sell up to
$125-million of eligible accounts receivable to
a financial institution on a non-recourse
basis. Fees and expenses paid to the financial
institution are based on the accounts
receivable sold and prevailing commercial paper
rates. The agreement expires in December 2007
and may be terminated earlier by either party. This facility provides us with the flexibility
to immediately realize cash for the sale of
receivables up to the amount of the program. Accounts receivable sold and fees and expenses
paid under this program are summarized in note
6 to the financial statements. Financial covenants
Our credit facilities, debentures and senior
notes require us to maintain certain financial
ratios and other covenants customary for these
types of agreements. Failure to comply with
these requirements may require accelerated
repayment of these obligations. Within our bank credit facilities, the
principal financial covenants include a
requirement to maintain a debt-to-EBITDA ratio
below a maximum level, a requirement to
maintain a minimum EBITDA-to-interest expense
ratio and a requirement to maintain a minimum
level of shareholders equity. These
calculations are subject to certain exclusions,
and the requirements must be met on a quarterly
basis calculated for the trailing 12-month
period. The principal financial covenants within our
senior note agreements include financial
covenants providing for a maximum level of
total debt and senior debt-to-debt-plus-equity.
The agreements require us to maintain a minimum
level of shareholders equity. These
calculations are also subject to certain
exclusions and the requirements must be met on
a quarterly basis.
 At December 31, 2003, we were in compliance
with all of our financial and other covenants,
and we believe we have sufficient additional
room within the calculations to remain
compliant for 2004 and the foreseeable future.
In the first quarter of 2004, we retired our
$75-million seven percent debentures due
February 1, 2004. This debt retirement was
funded with cash on hand and was a continuation
of our debt reduction strategy and the
strengthening of our financial ratios. Debt ratings
As at December 31, 2003, our debt instruments
and preferred securities were rated by the
principal bond rating services as follows: SeniorUnsecured Notes
    
    Preferredand Debentures
    
    SecuritiesMoodys Investors Services
    
    Baa2
    
    Baa3Dominion Bond Rating Service
    
    BBB
    
    Pfd  3YStandard and Poors
    
    BBB
    
    BB+
 Outstanding share and preferred security data
The number and outstanding principal amount of outstanding shares and preferred
securities as at January 31, 2004, are as follows: Number
    
    Amount(millions)
    
    (millions of dollars)Common shares
    
    
    131
    
    
    542Eight percent non-convertible
preferred securities (a)
    
    
    7
    
    
    172
 (a)
    
    We have the right to issue common shares and use the proceeds to
redeem these securities.




---



##### 



Managements discussion & analysis
of operations & financial condition
    
    Page 36
      
 Capitalizing on our strategic strengthsBusiness segment performance North America Wholesale operations 
 Performance objectives
The primary goals for our North America
Wholesale (NAW) operations for 2003 were:  n
    
    To continuously improve the operation of all our facilities to
increase efficiency and drive down unit costs;n
    
    To improve our competitive position for our existing plants in
Western Canada and Alaska where we have access to lower cost natural
gas and sulphur than our North American competitors;n
    
    To increase profitability by operating certain nitrogen plants only when warranted by market conditions. Our main strategies for achieving these objectives were:  n
    
    Ongoing optimization of operating costs, capital expenditures and working capital;n
    
    Adoption of best asset and material management practices to improve
operational reliability and help reduce costs;n
    
    Growing our industrial sales base to help offset the seasonality of
our agricultural business;n
    
    Management of the risk of volatile natural gas prices negatively
impacting margins in North America through a limited hedging program
using derivative instruments;n
    
    Optimization of our extensive storage and distribution
infrastructure in the most cost-effective manner to ensure our products
are in the right place at the right time for our customers;n
    
    Sourcing product from our North American production base or from
offshore suppliers, depending on market conditions.
 Achievements
As 2003 unfolded, the anticipated tightening in
the supply and demand balance for nitrogen was
more pronounced than expected. With grain
stocks at historical lows, grain prices
remained firm, and with more normal weather
conditions, demand for nutrients in our key
market areas increased. Higher global nitrogen
prices were reflected in our margins. EBIT
before the pre-tax impairment charge for
wholesale operations in North America for 2003
was $186-million compared to EBIT of
$40-million in 2002 and EBIT of $64-million in
2001. A critical component to our success as a
commodity company is effective control of fixed
costs. North America Wholesale fixed costs are
comprised of labor, benefits, maintenance,
supplies, insurance, property taxes and other
miscellaneous items. In 2003 we successfully
kept fixed costs, on a local currency basis, at
levels equivalent to 2002. Strengthening of the
Canadian dollar in 2003 resulted in these costs
increasing on a U.S. dollar basis. (SALES GRAPH)




---



##### 



(NORTH AMERICAN STORAGE AND DIST.)




---



##### 



Managements discussion & analysis
of operations & financial condition
    
    Page 38
  NITROGEN
Gross profit from wholesale nitrogen was
$228-million compared to $63-million in 2002
and $150-million in 2001. The increase over
2002 and 2001 can be summarized as follows: 2003 vs 2002
    
    2002 vs 2001(millions of dollars)
    
    
    
    Variance
    
    VarianceSales revenue
    
     volumes
    
    
    (53)
    
    
    72 price
    
    
    314
    
    
    (137
    )Cost of product
    
     volumes
    
    
    47
    
    
    (62
    ) price
    
    
    (143)
    
    
    40Total variance in gross profit
    
    
    165
    
    
    (87
    )
  n
    
    Increased nitrogen margin per tonne was the key reason for our
increased profitability in 2003. Nitrogen margin per tonne on average
was 300 percent higher than 2002 and 50 percent higher than 2001.
Driven by strong demand internationally and in our market areas,
increased prices more than offset the impact of higher production costs
and lower volumes;n
    
    Wholesale sales volumes for 2003 were approximately 403,000 tonnes
lower than 2002, due partly to lower production from our Alaskan
nitrogen facility as a result of gas delivery shortages under our
long-term contract with Union Oil Company of California (Unocal).
Production from some of our other facilities was also subject to
temporary cut-backs in times of peak gas prices where incremental
volumes could not be shipped to our marginal markets profitably.
However, on average, our facilities operated at 83 percent of capacity
for the year compared to the industry average of 76 percent;
 n
    
    Unit cost of product sold for 2003 increased over 2002 due to
higher gas costs and absorption of fixed costs over a lower production
base. Nitrogen production costs at our Alberta facilities are incurred
in Canadian dollars and were adversely affected by the strength of the
Canadian dollar. In 2003, cost increases of approximately $4 per tonne
were attributable to strengthening of the Canadian dollar. Our nitrogen
unit cost of product was marginally lower in 2002 than in 2001 due
mainly to lower natural gas costs. The following table summarizes North America
Wholesales average cost of natural gas
consumption for the three years ended 2003. (dollars per MMBtu)
    
    2003
    
    2002
    
    2001Average  unhedged
    
    
    3.79
    
    
    2.31
    
    
    3.20Hedging impact
    
    
    (0.09
    )
    
    0.32
    
    
    (0.52
    )Overall weighted average North America
    
    
    3.70
    
    
    2.63
    
    
    2.68NYMEX
    
    
    5.44
    
    
    3.25
    
    
    4.38
 The spread between our weighted average North
American gas cost is due to the AECO/NYMEX
basis differential and low-cost gas at our
Kenai, Alaska, nitrogen facility. Our hedging
program for 2003 was significantly reduced from
prior years, as strong demand for nitrogen
products created a situation where increased
gas costs resulted in higher North American
nitrogen selling prices.
   (NITROGEN GRAPH)
    

(PHOSPHATE GRAPH)(NITR. REV. COSTS GRAPH)
    

(PHOS. REV. COSTS GRAPH)




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##### 



Page 39
  PHOSPHATE  2003 vs 2002
    
    
    2002 vs 2001(millions of dollars)
    
    Variance
    
    
    VarianceSales revenue
    
     volumes
    
    
    (8
    )
    
    
    53 price
    
    
    30
    
    
    
    6Cost of product
    
     volumes
    
    
    7
    
    
    
    (51
    ) price
    
    
    (22
    )
    
    
    23Total variance in gross profit
    
    
    7
    
    
    
    31
  n
    
    Phosphate margin per tonne for 2003 was 21 percent higher than
2002 and almost five times higher than 2001. In 2003, phosphate
selling prices continued the improvement that began in 2002 in
response to increased global demand in Latin America and the
impact of increased global ammonia and sulphur costs. Although
we are a regional producer in North America, our markets are
indirectly affected by international pricing;n
    
    Unlike many other producers who faced significant increases
in sulphur product and shipping costs, the proximity of our
operations to significant low-cost sulphur supplies mitigated
cost increases. As a result, we were able to increase our
margins while most other North American producers were
faced with lower margins; (POTASH VOLUMES BAR GRAPH) (POTASH REVENUES AND COST BAR GRAPH)
 n
    
    Phosphate sales volumes declined slightly from 2002 due
to reduced production at our Alberta facility. Volumes in 2002
were higher than 2001 because of increased product availability
attributable to improved phosphate rock supply from our Ontario
mine and improved production levels at our Idaho facility;n
    
    With production costs at our Alberta facility denominated
in Canadian dollars, 2003 costs increased overall by
approximately $17 per tonne primarily as a result of the
strengthening Canadian dollar. POTASH  2003 vs 2002
    
    
    2002 vs 2001(millions of dollars)
    
    Variance
    
    
    VarianceSales revenue
    
     volumes
    
    
    6
    
    
    
    25 price
    
    
    (4
    )
    
    
    (4
    )Cost of product
    
     volumes
    
    
    (4
    )
    
    
    (14
    ) price
    
    
    (4
    )
    
    
    2Total variance in gross profit
    
    
    (6
    )
    
    
    9
  n
    
    Potash margin per tonne for 2003 was 12 percent lower than
2002 and 14 percent lower than 2001. The decline was due
largely to increases in international ocean freight rates and the
stronger Canadian dollar, although later in the year, some price
increases occurred to partially offset this;n
    
    potash sales volumes were four percent higher than
2002. Volumes in 2002 had increased by 18 percent over
2001, due to higher sales to North American customers and
higher export volumes;n
    
    Our potash facility, like other Canadian facilities, incurs costs
primarily in Canadian dollars. In 2003, cost increases of
approximately $4 per tonne were attributable to the
strengthening of the Canadian dollar.




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Managements discussion & analysisof operations & financial condition
    
    Page 40
  (PICTURE) DEPRECIATION AND AMORTIZATION  North America Wholesale depreciation in 2004 is expected to be approximately
the same as 2003, despite a reduction in the carrying value of our Alaskan
nitrogen facility in 2003. We anticipate that two-thirds of the $35-million
carrying value of our Alaskan nitrogen facility may be depreciated in 2004, the
first year of its estimated two-year remaining life. This estimate of Alaskan
nitrogen facility depreciation in 2004 depends on the estimated life of the
plant which could be increased, and depreciation reduced, if additional gas
supplies are identified. KENAI, ALASKA, NITROGEN FACILITY ASSET IMPAIRMENT  We expect that shut down costs will be incurred in the event the facility
closes at the end of 2005. These costs cannot be recorded until they are
incurred, which means they will not be charged to the statement of operations
until 2005. Estimated Earn-out obligations to Unocal, which are the subject of legal
dispute, will be expensed in 2004 and 2005 as incurred, but are forecast to be
higher in 2005 than 2004. Since the shut down costs and majority of Earn-out
expenses will be charged to income in 2005 the Alaskan nitrogen facility could
record a net loss in 2005. This will depend on product prices, resolution of our legal dispute with
Unocal, and any alternative supplies of natural gas to the facility which may
become available. There is also risk of an additional write down of the Alaskan
nitrogen facility book value in late 2004 depending on the outcome of the above
items.
 (PICTURE) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)  ROYALTIES AND OTHER TAXES  OTHER EXPENSES  Other developments in North America Wholesale UNOCAL DISPUTE
  With the benefit of supplementary gas purchased from other suppliers in the
area, we were able to operate the Kenai facility at an average of 71 percent of
capacity throughout 2003.




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Page 41
  However, Unocal further reduced the gas to 50 percent in November 2003. As
weather conditions also restricted third-party supply, we were constrained to a
single train operation which will continue through to spring. We anticipate
increasing production in the summer of 2004 as additional gas becomes
available. While higher production rates may be attained, we are expecting
minimum average operating rates of 50 percent for 2004 and 2005. Operating
rates will vary depending on gas supply. The indicated gas supply from Unocal to the facility will be insufficient to
operate the facility past the end of 2005. Recent gas discoveries made by Cook
Inlet producers, including Unocal, suggest there are significant gas resources
in the Cook Inlet. We are actively pursuing alternative gas supplies for the
facility and are continuing to work with the State of Alaska and gas producers
to maintain plant operations and our employee base in the region, although it
remains uncertain whether we will be able to secure additional gas supply on
economic terms. The agreement for the purchase of the Alaskan nitrogen facility and related
assets contains an Earn-out arrangement entitling Unocal to certain payments
for a period of six years commencing in September 2000. The liability for, and
the manner of calculating, these payments are specific issues under dispute in
the litigation. Due to the significant uncertainties created by the dispute coupled with our
inability to reach a commercial settlement with Unocal on reasonable terms, we
reduced the carrying cost of the facility at the end of 2003 to reflect the
lack of sufficient low-cost gas supply to meet plant requirements. The impairment of the Alaskan nitrogen facility resulted in a non-cash,
after-tax charge of $140-million (pre-tax charge of $235-million) in our fourth
quarter financial results. In calculating the impairment, we used gas supply
indications from Unocal and did not assume significant alternative gas
supplies, since long-term gas supply contracts had not then, nor have as yet,
been arranged. While we believe that no amount is payable to Unocal in the event that Unocal
fails to meet its obligations under the gas supply agreement, additional
Earn-out payments may become due if we are ultimately unsuccessful in the
litigation.
 PURCHASE OF PURIFIED PHOSPHORIC ACID (PPA) ASSETS  NEW PRODUCT DEVELOPMENT  South America Wholesale operations 
  Performance objectives  Achievements and other developments  In April 2003, we completed mechanical repairs by installing a temporary heat
exchanger two months ahead of schedule, allowing the plant to run consistently
above design capacity for the remainder of the year. This also allowed us to
capitalize on the upturn in the international nitrogen markets.
   (NUT. CONS. LINE GRAPH)
 (UREA PRICE ADV. BAR CHART)




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Managements discussion & analysisof operations & financial condition
    
    Page 42
  To ensure future reliability, construction of a new heat exchanger with
upgraded metallurgy will be complete in late 2004 for installation in the first
quarter of 2005. The original unit replaced in 2003 will be repaired and
retained as back-up. The climate of political and economic uncertainty in Argentina continued, but
the agricultural sector prospered. The peso strengthened from 3.4 pesos to the
U.S. dollar at the beginning of the year to 3.0 to the U.S. dollar at December
31, 2003. This illustrates improved economic stability for Argentina but
increases our local peso-based costs. Foreign currency controls have been relaxed considerably, and payment of
dividends and interest and repayment of debt is now permitted with fewer
restrictions. Our 50 percent investment in Profertil comprises $173-million for
our proportionate share of net assets of the joint venture. EBIT for 2003 was $63-million compared to losses before interest expense and
income taxes of $2-million and $18-million for 2002 and 2001 respectively.
Significant factors affecting South America Wholesales results for 2003
compared to 2002 and 2001 include the following:  n
    
    Margins for 2003 increased significantly over both 2002 and
2001 due to the higher pricing driven by international demand
as discussed earlier;n
    
    Sales volumes also increased significantly in 2003 due to
increased product available as a result of less plant down-time
and improved operating rates over 2002;n
    
    Unit cost of product for 2003 decreased over 2002 and 2001
primarily driven by volume increases, although inflationary
increases and the strengthening peso against the U.S. dollar
have partially offset this improvement;n
    
    Other includes SG&A expenses, depreciation, Argentine
charges and miscellaneous expenses;  n
    
    SG&A expenses for 2003 are largely unchanged from 2002,
but are somewhat lower than 2001 due to ongoing
devaluation of the peso between late 2001 and mid 2002
that continued to reduce peso costs in U.S. dollar terms;n
    
    Depreciation is based on historical exchange rates and has
not varied significantly from 2001 to 2003;n
    
    Argentine charges represent foreign exchange gains or
losses on conversion of peso denominated assets, primarily
recoverable Value Added Taxes (VAT). For 2001, this also
included losses on the forced conversion of U.S. dollar
receivables of $2-million and cash balances into pesos,
and in 2002, included recovery of these losses. In 2003,
the peso strengthened, and VAT balances were largely
recovered. We expect to recover the remaining $11-million
of VAT in 2004. In the meantime, the peso denominated
VAT receivable is a partial currency hedge against other
peso denominated expenses. Profertil utilizes 88,574 MMBtu of natural gas daily. Profertil has three
natural gas supply contracts expiring in 2012. They are firm supply, U.S.
dollar denominated contracts supplying 73,811 MMBtu per day of natural
gas. Repsol-YPF S.A., our joint venture partner in Profertil, supplies 50
percent of this long-term contracted gas.
 In December 2003, after a competitive bidding process, Profertil signed a new
10-year contract (expiring in 2013) with Repsol-YPF S.A. for an additional
14,762 MMBtu per day of gas at U.S. dollars with pricing agreed for the first
three years. Previously this gas was purchased on the spot market. Profertil
needed this additional long-term gas contract because the plant consistently
produced above nameplate capacity. In January of 2002 the Government of Argentina introduced the Economic
Emergency Law, which gave it sweeping powers to address the countrys economic
challenges. The pesification of the economy, i.e. the forced conversion of
U.S. dollar denominated assets into Argentine pesos followed by devaluation of
the pesos, gave Profertil significant cost advantages. The terms of Profertils three long-term gas contracts did not change, but the
pricing did. These U.S. dollar denominated natural gas contracts were then paid
in pesos at the prevailing exchange rate relative to the U.S. dollar. For the
first six months of 2002, the gas suppliers had to accept lower payments as the
value of the peso moved from 1:1 in January to a low of 3.7:1 by July of 2002.
During the next year (July 2002 to July 2003) the U.S. dollar value of
Profertils gas payments was determined solely by the U.S. dollar to peso
exchange rate. No negotiations were involved. The law requires that after a six-month period, the suppliers and buyers must
negotiate to establish the exchange rate at which the contractual obligations
will be fulfilled. If no mutually satisfactory settlement is reached, the court
is the final arbitrator. From July 2003 onwards, Profertil reached agreement with the three gas
providers on the exchange rate to be used until the end of 2003. In 2004,
further negotiations on the exchange rate to be used for pricing will be
required. Independently of these three gas contracts, the Government of Argentina has
frozen rates for natural gas transportation, water, electricity and
telecommunications. These rates currently are substantially lower than the
original contractual rates. However, the Government of Argentina has declared
its intention to increase the rates to their original contractual values over
an unspecified time frame. North America Retail operations 
 Performance objectives
  Achievements  Significant factors affecting North America Retails results for 2003 compared
to 2002 and 2001 include the following:  n
    
    Increased gross profit on fertilizer sales, particularly nitrogen, as we
were able to maintain consistent margins on higher unit sales prices;




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(RETAIL OPERATIONS)




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Managements discussion & analysis
of operations & financial condition
    
    Page 44
 (PICTURE)
    
    (PICTURE)
  n
    
    Stronger than anticipated chemical sales due to increased insect
and disease pressure in our California markets;  n
    
    While SG&A costs for North America Retail increased for 2003 over
2002 and 2001 reflecting higher activity, SG&A costs were stable as a
percentage of sales. South America Retail operations 
 Performance objectives
 Achievements and other developments
As expected, the agricultural economy in
Argentina remained healthy throughout 2003, and
demand for crop inputs continued to increase.
As a result, prices and volumes increased and
revenues exceeded 2002 by 15 percent.
Fertilizer margins declined because we were not
able to increase prices sufficiently to offset
cost increases. Our product cost is based on
imported product that increased by 50 percent
in line with international pricing. EBIT of $2-million in 2003 decreased from
$25-million in 2002 but improved over the loss
before interest expense and income taxes of
$26-million in 2001. Factors affecting the
comparability of these results include the
following:  n
    
    2003 results were adversely affected by the impact of stronger peso
on peso denominated expenses;  n
    
    Despite lower EBIT in 2003, our retail operation was successfully
able to operate without parent company financial support;
 n
    
    In 2002, gains of $8-million were realized from the collection of
receivables at better exchange rates than provided for in 2001. In
addition, the carrying value of 2001 closing inventories was adjusted
for the devaluation of the peso and, when sold in 2002, reflected a
lower cost of product sold than the ongoing cost of importing new
product;  n
    
    2001 results were affected by losses totalling $27-million from the
forced conversion of U.S. dollar receivables into pesos. South America Retail operations are now managed
through North America Retail in order to obtain
more direct access to North America Retail
expertise and other management synergies. We
continue to believe South America Retail has a
role in promoting the benefits of nutrient
application to the farmers in Argentina and
expanding the higher-margin domestic market for
output from our Profertil production facility. Other 
  Corporate general and administrative costs
increased in 2003 over 2002 and 2001 due to the
impact of the stronger Canadian dollar and
increased employee incentive expense.
Incentives were not paid in 2002 or 2001 as our
financial performance did not meet the minimum
incentive plan targets in those years. In 2003, we also continued to investigate the
feasibility of building a world-scale ammonia
and urea production facility in Western
Australia as part of a consortium. The project
agreement expired in July 2003 without
consensus on a number of key issues, and the
consortium of companies brought together for
the feasibility study was disbanded. We are
continuing to independently investigate the
development of the project.




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Page 45 (PICTURE)
    
    (PICTURE)
  Looking forward to 2004 
 Industry fundamentals
  n
    
    Global grain stocks remain at record low levels due to reduced
production across Europe, the former Soviet Union and China. The world
stocks-to-use ratio is forecast to drop to 16 percent in 2004, its
lowest level in 25 years. In addition, consumption of corn for the
production of ethanol fuels is growing. This is anticipated to lead to
continued strong global grain prices, which supports higher fertilizer
use;  n
    
    In the U.S., continuing strength in grain prices coupled with
higher crop yields are expected to lead to improved farm incomes and
increased cash available to purchase crop nutrients in the coming
growing season;  n
    
    In Canada, crop yields were closer to normal levels in 2003 after
two years of severe drought conditions. We expect farmers in Western
Canada, in particular, to be looking to maximize yields in the next
growing season, as grain inventories remain well below average;  n
    
    In Argentina, agriculture is expected to continue to show strength
because of its export orientation of U.S. dollar denominated products,
while the overall economy will likely struggle for some time to come. Nitrogen
The global nitrogen supply and demand balance
remains tight, despite the restart of some U.S.
capacity in the second half of 2003. Chinas
net urea exports for 2003 were approximately
2.6 million tonnes, but their exports are
expected to decline into next spring as their
domestic demand increases, and they face lower
government export incentives and higher
transportation costs.
 Because of a tight supply and demand balance
for nitrogen, we anticipate any short-term
increases in North American gas prices will be
reflected in higher nitrogen selling prices. In
addition, we expect that selling prices will
remain strong in the event of a decline in gas
prices. Production from our Profertil nitrogen facility
and plant reliability should be maintained in
2004, although reliability of power supply to
the plant is still expected to keep operating
rates below equivalent North American plants. Phosphate
Phosphate prices are expected to improve in
2004 as a result of continuing high ammonia and
sulphur input costs, and strong demand from
Latin America. World phosphate demand is
significantly influenced by unpredictable
demand from China and India, which together
account for more than 30 percent of world
phosphate imports. Limited new phosphate
capacity outside of China is projected through
2006, and a gradual tightening of the balance
of supply and demand is expected. Our acquisition of the lease of significant
reserves of phosphate rock from Astaris will
add security of supply to our current reserves
in Southeast Idaho. Additionally, the equipment
acquired from Astaris facility will be used to
expand fertilizer production in our existing
product lines at our Idaho phosphate facility. Potash
International demand for potash is expected to
grow in 2004, but current capacity will likely
be sufficient to absorb increased demand so
price increases may be modest. Price increases
in the fall of 2003 and early 2004, however,
should largely offset the negative impact of a
stronger Canadian dollar and higher ocean
freight rates that are anticipated to continue
in 2004. Our production levels for potash are expected
to remain at current levels and production
costs will continue to be affected by changes
in the Canadian dollar.




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Managements discussion & analysis
of operations & financial condition
    
    Page 46
   Retail
The expected strength in grain and nutrient
prices should allow our retail operations in
North America to continue their pattern of
solid earnings. Pursuing opportunities to grow
our retail operations in North America either
incrementally or through a larger acquisition
remains key. In South America, we expect the uncertain
political and economic climate to persist.
Agriculture is forecast to continue to be a
positive force for recovery, and moderate
increases in EBIT should be achievable. Key risks and uncertainties 
  Raw materials
Low-cost raw material inputs such as natural
gas, phosphate rock and potash ore are crucial
to our business. These materials are subject to
price volatility that can have a significant
impact on our profitability. In the long term,
locating or acquiring our facilities in areas
of abundant low-cost supplies will manage this
volatility, or where security of supply may be
at risk, we may develop our own sources of
supply and integrate them with our operations. In the shorter term, we manage volatility in
our raw material input costs through the use of
derivative products and other contractual
arrangements where available. However, these
strategies cannot eliminate these risks
entirely. There is ongoing uncertainty as to the quantity
of low-cost natural gas that will be delivered
to our Alaskan facility under the Unocal supply
contract. As discussed under the segmented
performance section for North America
Wholesale, we are currently engaged in
litigation and arbitration with Unocal over
these and other matters, and the outcome
remains subject to the uncertainty related to
legal issues. Weather
Weather can have a significant and
unpredictable 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
utilizing long-range weather outlooks in our
annual planning and by adjusting production
levels and moving product to locations where
demand is strongest. However, our ability to
react is limited by the shortness of the peak
selling season. Geographic diversity of our wholesale markets
and our retail facilities affords some
protection against adverse regional weather
patterns, but we also strive to mitigate our
exposure through increased sales to industrial
customers. Pricing and markets
Wholesale nutrient prices can be volatile and
are driven by the world
supply and demand balance as well as grain prices and regional market conditions. Geographic sales
diversity and accurate forecasting of
 both short-term and long-term market conditions
are essential. This allows us to balance
production levels with anticipated demand or to
divert production to the most profitable
markets using our extensive distribution
system. The ability of nitrogen producers to continue
to offset increases in North American natural
gas prices by increasing nitrogen prices is not
assured. Should international prices retreat or
North American gas prices increase
substantially further, this may attract
additional imported product into our market
areas and could affect pricing. In the global market, uncertainty remains over
the participation level of China and other
major producers and consumers in the
international urea and phosphate markets.
Changes in the requirements of these countries
can have a significant impact on demand and,
consequently, on the price of our products. Operations and transportation
Our operations face a number of additional
risks including production reliability at our
manufacturing facilities, the reliability of
our storage and distribution systems, a growing
concern around the environmental impact of
nitrogen fertilizers, and the unpredictable
strategies of suppliers and competitors,
particularly those in financial distress. Global nitrogen capacity
The global nitrogen industry faces risks
associated with increased capacity scheduled to
come on stream after 2005. The current high
capacity utilization is due to strong
industrial and agricultural demand, the closure
of certain high-cost plants and technological
refinements that have improved operating rates
at some facilities. Current growth in global nitrogen demand has
been met by swing producers restarting
facilities and by producers increasing
operating rates in response to rising prices.
It is estimated that only 6.2 million metric
tonnes of global nitrogen capacity was idle at
the end of 2003, compared to the total world
nitrogen capacity of 128.6 million metric
tonnes. (UREA SUPPLY-DEMAND GRAPH)




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(NEW PRODUCT APPLICATIONS)




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Managements discussion & analysis
of operations & financial condition
    
    Page 48
 (PICTURE)
    
    (PICTURE)
  Political risk
Political and economic uncertainty is an
inherent risk in operating in a global
competitive market. Our strategy for mitigating
political and economic risk is to partner with
reputable firms, obtain non-recourse financing
and locate facilities where product can be
exported and sold in U.S. dollars. While we attempt to meet or exceed all
existing regulatory requirements including
environmental regulations, we cannot predict the
impact of future regulations that may affect our
business. Our operations are also subject to
extensive fiscal and regulatory control in all
countries where we do business. Compliance with
existing and possible future regulations may
involve additional expense. Currency risk
We conduct our operations in three primary
currencies: U.S. dollars, Canadian dollars and
Argentine pesos; and we report in U.S. dollars.
We manage exposure to the Canadian dollar
partially through currency hedging programs and
exposure to pesos by converting them into U.S.
dollars wherever possible.
 In Argentina, retail operations face unique
short-term risks relating to currency
devaluation and extended credit terms. Currency
risk is managed by tying selling prices to U.S.
dollars at the point of sale. Receivables are
generally 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. New accounting standards
   (2003 U.S.$ C$ EXCHANGE RATE BAR CHART)
    

(2003 U.S.$ PESO EXCHANGE RATE BAR CHART)




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Page 49    Capitalizing on our strategic strengths 
 Forward-looking statements
  Except for statements of historical fact, the
statements in, or incorporated by reference in,
this managements discussion & analysis of
operations and financial condition 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;  n
    
    plans and references to our future results;  n
    
    industry fundamentals. These forward-looking statements are based on
certain assumptions and analyses 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
    
    investment in foreign jurisdictions;  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
    
    labor 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 thereof, that may be presented to and pursued by us;  n
    
    technological changes; 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 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.