DBRS Comments on Potash Corp.’s Share Repurchase Program

DBRS today notes that Potash Corporation of Saskatchewan Inc. (PCS or the Company, rated BBB (high) and R-1 (low), with a Stable trend) has announced that its board of directors has approved, subject to regulatory approval, a program authorizing the purchase and cancellation of up to 5% of the Company’s outstanding common shares for up to $2 billion over a one-year period by way of a normal course issuer bid.

DBRS is of the opinion that the share repurchase program will not unduly impair PCS’s credit metrics, particularly in light of the expected decline in the Company’s expansion expenditure requirements as it completes major potash capacity additions to reach 17 million tonnes of capacity by 2015.

The current share repurchase program is similar to ones carried out by the Company in 2008 and 2010. In those cases, gross debt in the Company’s capital structure increased during the year of purchase to over 40% but moderated in subsequent years. Assuming PCS funds the share purchases fully with debt (despite the $630 million of cash on its balance sheet at June 30, 2013), the Company’s gross debt leverage of 25% at June 30, 2013, would, on a pro forma basis, rise to about 40%. Nonetheless, coverage metrics would remain adequate for the rating.

Fertilizer demand is expected to increase over the long term as greater agricultural product demand brought on by a growing world population and higher wealth in the developing world lead to higher and more nutritious food consumption. This trend has also 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.

With steadily growing food demand matched to potentially chunky increases in fertilizer production capacity, potash prices could be volatile over the next several years. PCS’s higher debt levels will require it to be judicious in managing expenditures for expansion projects, shareholder returns or acquisitions if it wishes to maintain balance sheet strength during a period where the Company’s dominance of the industry is expected to be challenged.

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.