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

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

PCS’s strong business profile as a leading global fertilizer supplier 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 19 million tonnes per year of nameplate capacity by 2016. 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 its competitive nitrogen-based and solid phosphate-based businesses focused on North American markets, PCS has a solid position as a key supplier in the global food supply chain. Although potash fertilizers are in current oversupply, DBRS believes that PCS’s in-place capacity could lead to higher earnings and operating cash flows as excess potash capacity is absorbed by ongoing market growth.

PCS’s 2014 earnings (before non-recurring items) have leveled off following an almost 50% decline from post-recession high levels in 2011, in part because of the stabilization of potash prices after the breakup in mid-2013 of the joint marketing arrangement between Russian and Belarusian potash producers, which drove potash prices down by 25% to 40%; improved Phosphate operating profit after a near-70% decline from 2011 levels; and generally steady Nitrogen unit gross profits. H1 2015 earnings (annualized) were comparable with 2014 earnings.

PCS has generated positive net free cash flow since 2009, despite sharply increasing dividend payments and capital expenditures (capex) that has averaged more than three times depreciation. Nonetheless, with declining potash and phosphate fertilizer prices since 2011–2012, operating cash flow has decreased. As well, during the period since 2009, net debt has increased by only $102 million, despite $3.2 billion in net share purchases, resulting in the Company’s key credit metrics weakening since 2011 but remaining solid for its current ratings.

The Company’s key credit metrics remain solid for its rating but have deteriorated over the last few years from strong levels in 2011, as earnings and cash flow have weakened because of declines in potash and phosphate prices. Nonetheless, the Company has remained net free cash flow positive during this period of heavy expansion capex (now being reduced) and rising dividends. With potash prices appearing to have stabilized and with unused potash production capacity, the Company’s financial metrics are expected to strengthen as fertilizer prices improve and PCS’s expanded potash capacity is more fully utilized.

DBRS expects PCS’s earnings in 2015 to be flat-to-down versus 2014, as potash demand eases below record 2014 levels, continuing pressure on potash prices partially offset by lower costs due to the weak Canadian dollar, new low-cost capacity and efficiency programs. Earnings from the Nitrogen unit are expected to be weaker for the year due to lower prices and a more subdued market for nitrogen products, while the Phosphate unit is expected to benefit from the shift to a more profitable product mix and supportive market fundamentals. Over the medium term, PCS should be able to more fully utilize its increased potash operational capability and potash prices should improve as surplus capacity is absorbed by consumption growth. Combined with expected moderately growing output from the Nitrogen unit, earnings are expected to increase.

With flat-to-down earnings, capex of $1.2 billion and higher dividends expected, DBRS anticipates PCS to generate a modest net free cash flow deficit in 2015; however, DBRS does not expect a material change in the Company’s net debt level and key credit metrics are expected to remain in line with current ratings. Over the medium term, reduced expansion capex, higher earnings potential of expanded potash operations and improvements in other business units are expected to lead to improving financial metrics.

That said, PCS announced in June 2015 that it has made a private proposal to Germany-based agricultural and industrial commodities producer K+S AG (K+S), to negotiate a multi-billion dollar acquisition of K+S by PCS, which K+S has rejected to date. The status, including the financing of any potential acquisition, remains uncertain. Accordingly, DBRS expects that PCS will need to carefully manage expenditures for shareholder returns or acquisitions if it wishes to remain on track for improvement in its financial strength.

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.

The applicable methodologies are Rating Companies in the Mining Industry (September 2014), Rating Companies in the Industrial Products Industry (June 2015) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015), which can be found on our website under Methodologies.

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