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 enhanced 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. The successful completion of its current potash expansion program, expected by 2015, will bolster the Company’s market position as a key potash supplier.

Fertilizer demand has been increasing as growing agricultural demand, brought on by growing wealth in developing countries, leads to high crop prices, which support the economics of fertilizer application. This trend has resulted in the 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 per year by 2015. Recently, less than expected growth in potash consumption and expanded industry productive capacity have led to potash price weakness and the delay/postponement of other potash expansion projects, leaving PCS in the position of potentially having substantially completed its expansion program when the potash market tightens.

DBRS expects that potash prices will be the key to PCS’s near-term earnings, with higher expected deliveries in 2013 than in 2012, due to higher export sales. With significant excess capacity in the hands of producers, production control will be important to potash price strength, but on average, DBRS expects prices to be below 2012 levels, reducing overall profitability. Nitrogen-based fertilizer markets are expected to remain strong as North American producers reap higher market share with low gas prices. Phosphate earnings are expected to weaken despite higher sales volumes as mine/plant operating issues are resolved, but average product prices are expected to decline. The net expected result is moderately weaker 2013 earnings, subject to the vagaries of weather. Combined with higher dividends in 2013, partially offset by moderating capital expenditures as potash expansion projects are brought into production, DBRS expects the Company’s net debt levels be flat to higher during the year and its credit metrics to be weaker.

Over the medium term, significantly reduced expansion expenditures and the higher earnings potential of successfully expanded potash operations are expected to lead to reduced debt levels and strong financial metrics, leading to a potential increase in the Company’s ratings.

Nonetheless, with steadily growing food demand matched to potentially chunky increases in production capacity, potash prices could be volatile over the next few years. PCS’s credit metrics may weaken from their current strong position before recovering potash markets lead to higher operating cash flows. DBRS expects the Company will need to be judicious in managing expenditures for expansion projects, shareholder returns or acquisitions in a period of expected potash price volatility to maintain its current credit strength.

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.