DBRS Morningstar Confirms Ratings on 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 confirmations primarily reflect the Company’s unique set of structural strengths, including the contractual commitments of its shareholders Mosaic Canada Crop Nutrition, LP (Mosaic LP), a wholly owned subsidiary of The Mosaic Company (Mosaic Co.), and Potash Corporation of Saskatchewan Inc. (PCS), a wholly owned subsidiary of Nutrien Ltd. (Nutrien), and its producers (Mosaic LP, PCS, and Nutrien subsidiary Agrium Inc.) as well as implied support of its shareholders’/producers’ respective investment-grade ultimate parent companies (Mosaic Co. and Nutrien). 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 U.S., and is afforded cost pass-through rights, covering 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 U.S. each year. While potash markets are subject to significant volatility, the Company’s unique structural strengths largely insulate it from these inherent price variances. Finally, the rating confirmations also take into account the disruptions from the Coronavirus Disease (COVID-19) pandemic that contributed to circumstances affecting the selling price of potash in certain key Canpotex markets in 2020, resulting in lower year-over-year (YOY) revenues. Offsetting this, the volume of potash sold by Canpotex in 2020 was higher YOY, driven by continued growth in the use of fertilizers in emerging countries, and rising potash prices in late 2020 and 2021. Potash prices in Canpotex markets have experienced upward momentum in 2021, particularly in Brazil which is the Company’s largest market.

As an essential good that can be transported without significant need for human interaction, the impact of the pandemic on Canpotex's operations has been relatively modest. In F2020, Brazil remained the largest destination market for the Company’s product, once again accounting for approximately one-quarter of all Canpotex sales, followed by China and then India. Potash markets exhibited relatively robust demand in 2020. However, pricing was generally weaker in 2020 compared with 2019, with the Vancouver potash spot price averaging $220 per tonne during 2020. (Canpotex’s realized prices are not linked to this index, but this index is helpful to DBRS Morningstar as a guide to standard-grade spot prices.) As a result, the Company’s implied average realized price fell during 2020, leading to a YOY revenue decline of 17% to approximately $2.9 billion despite the strong sales volumes, which were almost 9% higher on a YOY basis. The decline in revenues was in part offset by a lower cost of sales. Total distribution expenses were higher YOY but lower per unit of potash sold. Therefore, even after the drop in revenues, the credit metrics remain strong and supportive of the current ratings. DBRS Morningstar’s calculated revenue-to-total-expense ratio fell to 3.0 times (x) in YE2020 from 3.8x in YE2019 and 3.5x in YE2018. DBRS Morningstar believes that this metric best captures the benefits of Canpotex’s collection of structural strengths and indicates the continuation of a very strong financial profile. The decline in the revenue-to-total-expense ratio is viewed as temporary, given that potash prices are forecast to rebound in 2021. Overall, DBRS Morningstar projects an improvement of its revenue-to-total expense ratio metric to above 3.0x in 2021. Thus, DBRS Morningstar expects Canpotex’s financial risk profile to remain very robust.

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—continued to support growth and efficiency. Certain capital spending initiatives at the Portland, Oregon, terminal, which accounted for 26% of volumes in 2020, similarly continue to support volume growth. Therefore, DBRS Morningstar anticipates that the Company’s business risk profile should improve incrementally during 2021 and beyond.

Factors that could negatively affect the Company’s performance include a greater-than-expected and prolonged impact of the coronavirus, escalating global trade frictions, and/or volatility in the potash markets. DBRS Morningstar would likely not consider a negative rating action unless there are any material changes in the Company’s structural business strengths, which are weighted more heavily in comparison to the financial metrics for Canpotex versus more typical corporations. DBRS Morningstar is also not considering a positive rating action for the foreseeable future. DBRS Morningstar anticipates that 2021 will be a year of recovery.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are the General Corporate Methodology: Appendix 1 – Canpotex Limited (April 30, 2021, https://www.dbrsmorningstar.com/research/377784) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021, https://www.dbrsmorningstar.com/research/372344) which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

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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