DBRS Morningstar Confirms Canpotex Limited at A (low) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of Canpotex Limited (Canpotex or the Company) at A (low) with Stable trends. The rating action primarily reflects the Company’s unique set of structural strengths, including contractual commitments of its shareholders/producers and implied support of its shareholders’/producers’ respective investment-grade ultimate parent companies. Canpotex holds the exclusive right to export potash produced in Canada by its shareholders/producers or their respective affiliates that is destined for markets outside of Canada and the United States, and is afforded cost pass-through rights, including all operating expenses, debt interest, and principal repayments. The Company has also developed an impressive intermodal logistical infrastructure footprint, which facilitates the distribution of millions of tonnes of potash to markets outside of Canada and the United States each year. While potash markets are subject to significant volatility, the Company’s unique structural strengths largely insulate it from the vagaries of these markets.

Potash markets exhibited relatively robust demand in the first half of 2019 and appeared on track to achieve the forecast annual global demand projection of 67 million tonnes. Yet as a result of global trade tensions and weaker demand in key palm oil-producing countries (Indonesia and Malaysia), the second half of 2019 was underwhelming, and actual global demand for the year came in at 64.5 million tonnes. Canpotex—which only sells potash to markets outside of Canada and the United States—was able to successfully shift some volumes from these key markets to China, a market that saw deliveries rise 23% year over year; however, the Company sold a total of only 11.6 million tonnes, which was below expectations. Brazil remained the largest destination market, once again accounting for one-quarter of all sales. Pricing was generally better in 2019 compared with the previous two years, with the Vancouver potash spot price at $266 per tonne from April to December (Canpotex’s realized prices are not linked to this index, but this index is helpful to DBRS Morningstar as a guide to standard-gradespot prices). As a result, the Company’s implied average realized price rose in 2019, allowing for a revenue increase of more than 9% to approximately $3.5 billion despite the reduced sales volumes. This revenue increase resulted in a notable improvement in DBRS Morningstar’s calculated revenue-to-total-expense ratio to 3.8 times (x) in 2019 from 3.5x in 2018. DBRS Morningstar believes that this metric best captures the benefits of Canpotex’s collection of structural strengths, which continued to indicate a very strong financial profile.

The addition of hundreds of new railcars—which Canpotex commissioned and then leased from third-party leasing companies and therefore are not reflected as capital investments on the cash flow statement—will support growth and efficiency in 2020 and beyond. Certain capital spending at the Portland, Oregon, terminal, which accounted for 26% of volumes in 2019, will similarly support growth. Therefore, DBRS Morningstar anticipates that the Company’s business risk profile will continue to improve incrementally in 2020.

DBRS Morningstar anticipates that revenues in 2020 will fall somewhat despite a projected recovery in sales volumes. The impact of the Coronavirus Disease (COVID-19) pandemic has not yet materially affected potash demand or the Company’s operations. Activity through Q1 2020 was strong, and there was no change in the Vancouver potash spot price in April 2020, remaining unchanged from January 2020. As an essential good that can be transported without significant need for human interaction, Canpotex expects the impact of the pandemic on its operations to be relatively modest. Overall, DBRS Morningstar projects a weakening of the DBRS Morningstar revenue-to-total expense ratio metric in 2020, but at well over 3x, DBRS Morningstar expects Canpotex’s financial risk profile to remain very robust.

A greater-than-expected coronavirus impact, escalating global trade frictions and the volatile potash markets, could negatively affect the Company’s performance. DBRS Morningstar is not considering a negative rating action, unless there are any material changes in the Company’s structural business strengths. DBRS Morningstar is also not considering a positive rating action for the foreseeable future.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are the General Corporate Methodology: Appendix 1 — Canpotex Limited (April 24, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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