DBRS Confirms Potash Corporation Ratings at BBB (high), R-1 (low)

DBRS has today confirmed the BBB (high) Senior Unsecured Debt rating and the R-1 (low) Commercial Paper rating, both with Stable trends, of Potash Corporation of Saskatchewan Inc. (PCS or the Company). The Company’s status as the leading producer of potash fertilizers is complemented by a strong U.S.-based phosphate fertilizer/industrial products business and a low-cost nitrogen-based fertilizer/industrial supply business focused on the North American market. This makes PCS, in aggregate, the largest fertilizer enterprise in the world by capacity. PCS’s business lines are underpinned by extensive potash and phosphate rock reserves and access to competitively-priced natural gas supplies for nitrogen product production.

High capital expenditures and share repurchase programs have increased the proportion of gross debt in the Company’s capital structure from under 20% at the end of 2007 to the current 37% despite strong operating cash flows.

In 2010 and 2011, PCS returned to its upward earnings trend begun in 2003 and interrupted by a boom/bust scenario in 2008 and 2009, as the Company continued to expand potash production in the presence of strong potash prices as well as solid performance from its Phosphate and Nitrogen units. In 2011, significantly higher fertilizer prices drove an almost 70% increase in net income before non-recurring items as fertilizer markets, particularly potash, continued their recovery from the deep 2009 recession.

PCS’s coverage metrics improved in 2010 and again in 2011, with EBITDA interest coverage of 16.9 times and cash flow-to-total debt of 81%. Its R-1 (low) Commercial Paper rating is supported by strong operating cash flow and solid liquidity. With $1.1 billion in net free cash flow and no major acquisitions, net debt was reduced in 2011. Gross leverage was reduced to 37% from 46% in 2010, but remains high compared with peers in the fertilizer/mining sectors.

Fertilizer demand is expected to increase as growing agricultural demand brought on by high crop prices enhances the economics of fertilizer application. This trend has resulted in expansion of fertilizer production capacity, particularly in the potash sector. PCS has been ahead of the curve in investing in potash capacity, initiating a program in 2003 to double operational capability to 17 million tonnes by 2015.

Rising potash prices have attracted investment by existing and new entrants in the sector to further expand output. With steadily growing food demand matched to potentially chunky increases in production capacity, potash prices could be volatile over the next several years. PCS’s credit metrics improved in 2011, but DBRS expects the Company will need to be judicious in managing expenditures for expansion projects, share buybacks or acquisitions during a period where its dominance of the industry is expected to decrease.

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

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