DBRS Confirms Agrium at BBB, Trend Stable

DBRS has today confirmed the Issuer and Senior Debt ratings of Agrium Inc. (Agrium or the Company) at BBB with Stable trends, reflecting the Company’s position as one of the world’s leading agricultural retailers, as well as an important primary producer of nitrogen, potash and phosphate-based fertilizers.

Despite the Company’s recent acquisitive and expansionary nature, its credit metrics remain cyclically strong for its ratings. Agrium generated record net income ($1.4 billion) in 2011 and earnings remained at near-record levels for the first nine months of 2012. Operating cash flow continues to be strong, and to date has been well matched to dividend, capex and working capital needs, yielding consistently positive net free cash flows.

Post-September 30, 2012, Agrium has made or committed to significant cash outflows, including: (1) CAD 1.8 billion to fund Glencore International plc’s (Glencore) acquisition of Viterra Inc. (Viterra), which closed in Q4 2012 and which DBRS expects will result in a net outflow of approximately CAD 575 million following Agrium’s purchase of Viterra retail supply assets in Q1 2013; (2) CAD 900 million share repurchase in Q4 2012; (3) increasing dividends paid from $0.11 per share in 2011 to $0.725 per share in 2012, and a rate of $2.00 per share (annualized) in 2013; and (4) additional expenditures of about CAD 1.2 billion on the Vanscoy potash expansion project, scheduled for initial production in 2014. These higher outflows, in a period of general uneconomic uncertainty and currently softening potash and phosphate markets, are expected to result in higher, but manageable, debt in 2013.

The favourable outlook for farm commodity prices, the expected acquisition of Viterra retail assets in early 2013 and less disruption to potash production at Vanscoy than in 2011 all lead to DBRS’s expectation that Agrium’s earnings will be strong in 2012 and 2013, rivaling record levels in 2011 despite lower expected prices for potash. Nonetheless, Agrium’s credit metrics are expected to weaken despite robust earnings, as debt levels increase with higher impending cash outflows. Leverage, with Q4 2012 outflows, is expected to increase on a pro forma basis, easing after funds are returned from Glencore. Over the longer term, reduced expansion expenditures and added productive capacity are expected to contribute to debt reduction and an improved financial profile. Acquisitions will continue to remain the wild card.

Agrium also currently faces a shareholder challenge from JANA Partners LLC, a U.S.-based value-oriented investment advisor, which may impact Company strategy. That said, DBRS expects the Company will be judicious in its spending choices in order to maintain its balance sheet strength.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Mining Industry (June 2011), and Rating Companies in the Industrial Products Industry (June 2011), which can be found on our website under Methodologies.