DBRS Confirms Agrium’s Senior Debt at BBB, Trend Stable

DBRS has today confirmed the Senior Debt rating of Agrium Inc. (Agrium or the Company) at BBB with a Stable trend, reflecting the Company’s position as one of the leading agricultural retailers in the world, as well as an important primary producer of nitrogen, potash and phosphate-based fertilizers. Agrium’s total assets have grown by almost 450% since the end of 2005 as the Company was very acquisitive, particularly in the Retail component of its business, which now provides about one-third of Company EBITDA before corporate and other costs.

During the Company’s growth period between 2005 and 2011, gross debt in its capital structure has ranged from as high as 42% (52% when capitalizing operating lease obligations, which are a significant factor in its Retail unit) to only 29% at the end of September 2011 (37% when capitalizing operating leases). DBRS expects the Company to remain acquisitive as its strategy is focused on achieving growth in all business units.

The Company’s Retail component (distribution and sale of crop nutrients and other products to farmers and others) provides more stable earnings than its commodity-focused Wholesale unit (primary production of fertilizers and related products), albeit with lower margins expected over the long term. The stability of Retail earnings was even illustrated by relatively steady performance from the division through the unusually deep recession of late 2008 and early 2009. The EBITDA margin on Retail sales peaked at 10% in 2008 and dipped to 4% in recessionary 2009, whereas the EBITDA margin on Wholesale sales peaked at 36% in 2008 but fell 16 points to 20% in 2009.

Agrium’s earnings made a significant recovery in 2010 from the sharp downturn in the 2008/2009 recession, with net earnings reaching $714 million, the second highest level on record. This recovery was supported by strengthening industry fundamentals, including the rebound in crop nutrient demand and margins across all three business units (Wholesale, Retail and Agrium Advanced Technologies). Fertilizer use continued to recover in 2010 following an unprecedented decline in U.S. demand for all three major crop nutrients in the 2008/2009 crop year, but consumption remained below 2007 levels. High crop prices supported by ongoing growth in food consumption and low crop inventories have expanded the economic benefit of fertilizer use to farmers, helping to maintain upward momentum in fertilizer prices. Robust agricultural crop prices continued into 2011 and Agrium’s earnings for the first nine months of 2011 grew at a record pace.

Agrium has remained acquisitive, purchasing AWB Limited (AWB), an Australian agricultural retailer and commodity manager for AUD 1.2 billion in December 2010. The Company subsequently sold the majority of AWB’s commodity management businesses in early 2011 to Cargill, Incorporated (Cargill), recouping about $694 million in cash laid out in 2010. Agrium also made a number of other, smaller, acquisitions in 2010 and year-to-date 2011, largely to complement its Retail and Agrium Advanced Technologies units. As a result, the Company’s gross debt stood at $2.6 billion, up from $1.8 billion at the end of 2009. Nonetheless, with stronger earnings and cash flow, the Company’s credit metrics were solid for the rating, with gross leverage of 29% (37% when considering operating lease obligations), cash flow-to-total debt of 79% and EBITDA interest coverage of 17.9 times. These levels are consistent with the BBB Senior Debt rating, given the high level of commodity pricing in the first nine months of 2011.

Agricultural markets remain in good balance, with lower-than-average grain inventories and North American farmers earning healthy returns at current commodity prices. In the near term, potash, phosphate and nitrogen-based fertilizers continue to perform well, leading to the expectation for healthy earnings at Agrium into 2012. Over the longer term, fundamentals for fertilizers are robust, supported by global population growth and growing levels of meat consumption as economic wealth in lesser-developed countries rises and there is greater need to optimize yields as the base of available arable land per person diminishes. These should lead to solid demand for Agrium’s products. The main concern arises on the supply side of the crop nutrient business, with producers in the potash, nitrogen and phosphate fertilizer markets seeking to expand production capacity. A mismatch in expected demand growth and these new supplies could lead to a temporary reduction in fertilizer prices, which would have a knock-on effect on Agrium’s earnings.

Agrium is also expanding its fertilizer production capacity on several fronts, including plans to add 1,000,000 tonnes to its potash production capacity; triple the size of its 26%-owned Egyptian nitrogen production facility, as well as develop brownfield expansions of its North and South American nitrogen capacity; and to expand the production capacity of its controlled-release fertilizer products. In addition, the Company seeks to double EBITDA from its Retail unit over 2010 levels to $1.0 billion by 2015. These efforts could lead to higher debt levels in the future.

In addition, Agrium has been an aggressive acquirer in the past and further acquisitions should not be ruled out. In these circumstances, DBRS expects the Company to be judicious in its acquisition choices, as well as in terms of designing the financing structures that would support any potential acquisitions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Mining and Rating Companies in the Industrial Products Industry, which can be found on our website under Methodologies.