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.

Financial performance in 2021 was relatively strong, driven by 35% higher year-over-year (YOY) revenues, mainly a consequence of an almost 40% greater YOY realized average selling price (ASP) of potash. However, in 2021 the Company also faced headwinds by way of higher shipping and other operating costs and global supply chain constraints. Nonetheless, these headwinds were not strong enough to offset the meaningfully higher ASP achieved in 2021. The Company entered 2022 with an already strong demand and pricing environment for potash, mainly due to continued growth in the use of fertilizers in emerging countries. The previously tight dynamics of potash markets were further accentuated by Russia’s invasion of Ukraine in late February 2022. Belarus and Russia are the second- and third-largest global exporters of potash, respectively, together accounting for almost 40% of annual global export of potash. Canada is the number one exporter of potash, accounting for almost 40% of annual global export. Thus, the global sanctions on Russia and Belarus and the related uncertainties, in DBRS Morningstar’s opinion, have led to a supply-related price runup for potash in the near term.

In F2021, Brazil remained the largest destination market for the Company’s product, accounting for 30% of all Canpotex sales volumes, followed by Indonesia (14%) and China (11%). India and Malaysia each accounted for 6% of the Company’s sales volumes. The Vancouver Free on Board (FOB) standard bulk Muriate of Potash spot price index, to which the Company generally achieves premium pricing, averaged $210 per tonne during 2021 compared to $220 per tonne in 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.) Potash markets exhibited relatively robust demand in 2021 and potash pricing was relatively higher during the second half of 2021. Subsequent to Russia’s invasion of Ukraine, the above-noted index spot price jumped significantly, reaching $392 per tonne in February 2022 and moving to $562.50 per tonne since March 2022. The Company’s implied ASP grew during 2021 to $310 per tonne, leading to a YOY revenue increase of 35% to approximately $3.9 billion. Total distribution expenses were meaningfully higher YOY, both on an absolute basis and on the basis of per unit of potash sold. DBRS Morningstar’s calculated revenue-to-total expense ratio grew to 3.3 times (x) in YE2021 from 3.0x in YE2020. 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. Thus, the strength in credit metrics remained supportive of the current ratings. In February 2022, prior to Russia’s invasion of Ukraine, contracts were signed with India and China at $590 per tonne, reflecting a much higher contract price as compared with $247 per tonne in 2021. Since then, the pricing environment has strengthened due to Russia’s invasion of Ukraine and the related supply uncertainties. Overall, DBRS Morningstar projects an improvement of its revenue-to-total expense ratio metric to be above 3.3x in 2022 driven by continued strong demand and pricing environment, somewhat offset by headwinds from continued higher freight costs. 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 sustainment capital spending at the Neptune Vancouver terminal and Portland, Oregon, terminal, which accounted for 61% and 22% of volumes in 2021, respectively, continue to support reliable operations; and the rail expansion initiatives at the Portland, Oregon, terminal similarly continue to support volume growth. Therefore, DBRS Morningstar anticipates that the Company’s business risk profile should improve incrementally during 2022 and beyond.

Factors that could negatively affect the Company’s performance include a greater-than-expected volatility in the potash markets and/or trade disputes. DBRS Morningstar would likely not consider a negative rating action unless there are 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.

ESG CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929

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

The principal methodologies are the General Corporate Methodology: Appendix 1 – Canpotex Limited (March 25, 2022; https://www.dbrsmorningstar.com/research/394214) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929 ).

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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