DBRS Confirms Canpotex Limited at A (low) with Stable Trend

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt of Canpotex Limited (Canpotex or the Company) at A (low), with Stable trends. Canpotex’s ratings are underpinned by the flow-through nature of the organization, which allows it to purchase potash from its owners at a price based on the price the potash is sold less all costs properly incurred by Canpotex to deliver and sell the potash, including debt costs. As such, payments made to its shareholders for potash purchased provide a significant freeboard to absorb any unforeseen costs incurred in the marketing, delivery or financing of potash shipments or variation in the price of potash sales. In addition, Canpotex’s shareholders (potash suppliers) indemnify the Company for any expenses not covered by potash sales receipts, including debt service expenses. Together, these factors result in ratings higher than its owners.

Canpotex’s business profile has strengthened modestly with the completion of an expansion of Neptune Bulk Terminals (Canada) Ltd. port operations, a rail maintenance facility and ongoing potash production capacity expansion efforts by its shareholder/shippers Agrium Inc. (rated BBB by DBRS), Mosaic Canada Crop Nutrition, LP and Potash Corporation of Saskatchewan Inc. (rated BBB (high) by DBRS). At the industry level, international potash markets have become more volatile due to the collapse of JSC Belarusian Potash Company (BPC), a major joint potash marketing organization, and with excess capacity at a number of international market suppliers. Heightened market instability could result in downside risk to Canpotex’s ratings.

Canpotex’s operating income (before cost of potash purchased) fell 20.2% in 2012 to
$2.9 billion from 2011 levels due to lower sales volumes and was partially offset by slightly higher realized prices due to weak international potash markets. Shipment levels increased significantly in H1 2013, although potash prices declined sharply following the breakup of BPC. Nonetheless, the margin between potash sales revenue and costs incurred by Canpotex (excluding the cost of potash purchased) remained very large.

The mid-year breakup of the BPC sales organization created further instability in international potash markets with prices dropping 25% to about $300 per tonne at year end and causing buyers to retreat from record H1 2013 purchases leading to the expectation of lower, but still strong, income before potash purchase costs in 2013. Some stability appears to be returning to markets in early 2014, with shippers continuing to adjust production to lower sales along with signs of a potential reconciliation of the BPC participants.

Weak shipments due to market uncertainty in the second half of 2013 and lower potash prices are expected to generate operating cash flow before potash payments in 2013 moderately less than in 2012. As a (partial) offset, the Neptune expansion and the rail maintenance facilities are complete, keeping capex needs contained. In 2014 and forward, increased shipment volumes from shareholder mine expansions should enhance earnings and cash-generating capacity, but potash prices will remain volatile due to excess capacity.

Canpotex completed its first debt issue in 2013 (approximately $135 million). The Company’s indebtedness remains well within its strong financial capabilities despite lower potash sales volumes in 2012 and materially lower potash prices partially offset by the impact of a recovery of potash sales volumes in 2013.

The potash industry continues to operate well below nameplate capacity and new capacity construction continues. This has dual implications for Canpotex with prospects of ongoing pricing pressures for potash but the prospect of higher sales volumes as its participants expand capacity. The depressed market conditions can also be expected to delay the entry of new mines to serve international markets with Canpotex and its shareholders able to benefit when higher prices occur and more capacity is needed. Accordingly, Canpotex’s financial strength is expected to remain strong.

The long-term outlook for international potash demand is good and Canpotex’s existing shareholders are executing expansions of their respective Saskatchewan operations, which are expected to lead to growing operating income for the Company. Accordingly, Canpotex is examining options for additional increases in terminal and other logistics capacity that may require further external funding and higher debt levels.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

DBRS has developed and utilized a credit-specific methodology published in Appendix I of our Base General Methodology for Corporate Companies.