DBRS Confirms Potash Corporation Issuer and Senior Debt Ratings at BBB (high), Stable Trend

DBRS has today confirmed the Issuer and Senior Unsecured ratings of Potash Corporation of Saskatchewan Inc. (PCS or the Company) at BBB (high), with Stable trends as PCS nears completion of a multi-year expansion of its potash operations and with potash markets appearing to be returning to a more stable footing. The Company’s commercial paper rating, supported by good operating cash flow and liquidity, is also confirmed at R-1 (low), Stable trend.

Recently, PCS’s earnings (before non-recurring items) have tailed off since a post-great recession peak in 2011 even though sales volumes have generally grown as profitability in its Potash and Phosphate units declined, partially offset by continuing solid contribution from its Nitrogen unit. A 38% drop in average potash prices and 24% drop in phosphate fertilizer prices from 2011 levels brought on by excess industry capacity and the potash market disruption caused by the dissolution and apparent change of the marketing strategy of the participants in the Belarusian Potash Company (BPC), a major competitor, were key factors in reducing earnings. PCS’s response to the price weakness in potash markets has been to continue its historic approach to match its production to demand – idling its excess production capacity – even though the Company remains one of the lowest cost producers in the potash sector.

Due to the decline in potash and phosphate prices, the Company’s credit metrics have softened over the last few years from levels strong for its rating in 2011 as earnings and cash flow have weakened. Nonetheless, the Company’s net free cash flow has remained positive during this period of heavy expansion capital expenditures (now being reduced) and its metrics generally remain at or above levels required for its rating levels. As a result, PCS has kept its debt levels in check despite its significant investments in potash capacity and share repurchases.

DBRS expects that PCS 2014 earnings before non-recurring will be down from 2013 levels due to the sharp drop in potash prices following the dissolution of BPC in mid-2013 and the negative impact of weather-related transportation issues in Q1 2014. More recently, stability appears to have returned to potash markets and prices appear to have bottomed for the near term and may well be climbing. Major potash producers, including PCS, are not producing at current nameplate capacities and customers appear to be actively engaged with producers in meeting their potash needs. With good product demand and the general matching of potash production to demand, the remainder of 2014 and into 2015 should show improvements for PCS compared to the second half of 2013.

Over the mid-to-longer term, PCS is well positioned to benefit from expected ongoing demand increases from international potash markets with current potash operational capability of about nine million tonnes and nameplate capacity expected to grow to 18 million tonnes by 2015. Combined with expected steady-to-growing output from its Nitrogen and Phosphate units, PCS earnings potential is expected to increase.

PCS’s status as a leading fertilizer producer is being enhanced as it nears completion of a multi-year program to expand its potash production capacity by 50%, which is expected to provide 18 million tonnes per year of nameplate capacity by 2015. The Company’s increased scale and presence in the potash market is expected to allow it to reap the benefits of potash demand growth over the next several years. Combined with a strong, U.S.-centered, phosphate-based business and a competitive North American-focused nitrogen-based fertilizer business, PCS has a solid position as a key supplier in the global food supply chain. Although potash fertilizers are in current oversupply, DBRS believes PCS’s in-place capacity could lead to higher earnings and operating cash flows as surplus potash capacity is absorbed into a growing market and the need for added capacity arises.

The demonstration that potash market stability has returned combined with further progress towards the successful completion of the Company’s potash expansion program can be expected to enhance the Company’s operating cash flow and its resultant credit metrics. That said, PCS has been an active purchaser of its own shares spending $6.8 billion since 2008 during a period of heavy investment in expanding facilities. In addition, the Company has indicated an interest in increasing its investment some of its minority-held fertilizer companies or it may seek to make new material acquisitions. Accordingly, PCS will need to carefully manage expenditures for shareholder returns or acquisitions in relation to fertilizer market conditions and cash flow generation if it wishes to remain on track for ongoing improvement of its credit metrics.

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

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The applicable methodology is Rating Companies in the Mining Industry, which can be found on our website under Methodologies.

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