DBRS Changes Under Review Status of Potash Corporation of Saskatchewan Inc. to Negative from Developing

DBRS Limited (DBRS) has today changed the Under Review status of the Issuer Rating and Senior Unsecured Debt rating of Potash Corporation of Saskatchewan Inc. (PCS or the Company) to Under Review with Negative Implications from Under Review - Developing. The ratings remain unchanged at BBB (high). On August 30, 2016, PCS confirmed that it was in merger discussions with Agrium Inc. (Agrium; rated BBB by DBRS). As a result, DBRS placed both PCS’s and Agrium’s ratings Under Review with Developing Implications, pending further information/analysis regarding the merger, which is expected to close in mid-2017. The change of the Under Review status to Negative for PCS reflects the continued weakening of the Company’s financial risk profile on a stand-alone basis, which has deteriorated markedly over the last 12 months (LTM) to September 2016, and the negative implications this in turn may have on the rating of the merged entity. Today’s action does not affect Agrium’s BBB ratings, which remain Under Review with Developing Implications.

Operating results in the LTM period to September 2016 point to an acceleration of the weakening trend that has been underway for years. The primary driver was again a weak pricing environment that reflects persistent oversupply in the global fertilizer market. PCS’s key credit metrics for the LTM to September 2016 are no longer consistent with an investment-grade rating category. Although market conditions appear to have firmed somewhat in Q3 2016, and the Company expects this to continue into 2017, visibility regarding the operating environment going forward remains poor. On the other hand, PCS’s business profile is expected to improve in the near term as its low cost Rocanville, Saskatchewan, potash expansion operation ramps up to become the Company’s largest.

Going forward, PCS’s stand-alone financial risk profile will hinge largely on the performance of the global fertilizer market, primarily the market for potash. Should the recent positive trend in pricing continue, freight costs per tonne remain roughly flat and per-unit operating costs improve modestly as Rocanville reaches full capacity, DBRS projects that PCS could achieve steady progress in improving its financial profile and bring its financial metrics to levels more consistent with its rating. However, given the uncertainty regarding this potential scenario and the weakness of the financial metrics for an operator in a highly cyclical industry, if EBITDA and operating cash flows do not begin to show notable improvement over the next two quarters, DBRS could downgrade PCS’s ratings. DBRS is continuing its review of the PCS-Agrium merger.

Notes:
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 2016) and Rating Companies in the Industrial Products Industry (April 2016), which can be found on our website under Methodologies.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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