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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt ratings 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 Agrium Inc. (rated BBB by DBRS), Mosaic Canada Crop Nutrition, LP and Potash Corporation of Saskatchewan Inc. (rated BBB (high) by DBRS) 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 price or volume variation on potash sales or unforeseen costs incurred in the marketing, delivery or financing of those 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 account for Canpotex’s ratings being higher than those of its shareholders.

Canpotex’s business profile continues to strengthen with the completion of an expansion of Neptune Bulk Terminals (Canada) Ltd. port operations in 2011, a railcar maintenance facility in 2012 and ongoing potash production capacity expansion efforts by its shareholders/suppliers. The Company is currently engaged in restructuring its relationship with and expanding the operations of Portland Bulk Terminals, L.L.C., which is being financed with a portion of the proceeds of a $250 million debt issue completed in January 2015.

Canpotex’s operating income (before cost of potash purchased) fell 7.9% in 2013 to $2.6 billion from 2012 levels because of sharply lower potash sales prices following the mid-2013 collapse of JSC Belarusian Potash Company, a major joint potash marketing organization, partially offset by higher sales volumes. Despite near record sales volumes in H1 2014, operating income was down 35.0% compared to H1 2013 due to a sharp decline in potash selling prices. Nonetheless, with Canpotex’s net free cash flow before payment to producers for potash averaging $2.5 billion per year in the five years ending 2013 ($2.3 billion to June 30, 2014, annualized), the Company’s financial strength remains solid despite pro forma debt levels rising to about $380 million following the $250 million debt issue completed in January 2015.

International potash markets have been volatile over the last ten years, but potash prices appear to have stabilized following an approximate 25% decline since 2011 and 2014 consumption is estimated to have been near record levels.

DBRS expects potash shipments in H2 2014 to have been similar to H1 2014, resulting in near record shipments. With prices stable to slowly trending up, H2 2014 income before payments to producers is expected to be flat compared with H1 2014, but down about 10% on an annualized basis from 2013.

The Canadian portion of Canpotex’s 2015 operating costs is expected to be reduced by the strong U.S. dollar partially offset by higher debt service costs caused by higher debt levels. Combined with solid international potash consumption, apparent potash price stability and expanding exports by Canpotex, Canpotex’s earnings before payments to potash producers is expected to grow.

Canpotex debt levels have increased with the $250 million debt issue in early January 2015. Combined with largely flat earnings and operating cash flow, higher debt levels and interest expenses, coverage metrics are expected to weaken somewhat in 2015 but remain strong for the Company’s ratings.

Over the long term, the outlook for international potash demand is positive and as Canpotex’s shareholders ramp up expansions of their Saskatchewan operations, growing shipments and sales volumes are expected for the next several years. Given the Company’s apparent current strategy to externally fund projects, this growth in handling volumes may lead to further potential port and infrastructure expansions requiring added external debt financing.

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.

The applicable methodology is General Corporate Methodology (November 2014), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.