Morningstar DBRS Confirms Credit Ratings on Canpotex Limited at A (low) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the Senior Unsecured Debt credit rating of Canpotex Limited (Canpotex or the Company) at A (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations acknowledge Canpotex's solid performance in 2023. Although sales declined significantly to $5.3 billion versus $9.8 billion in 2022, they still remained higher than any time in the decade prior to 2022. Furthermore, the decline was mostly driven by a significantly lower year-over-year (YOY) implied average selling price of potash (IASP), where price declined by more than 40% from the exceptional pricing environment of 2022, and only a relatively smaller driver of the decrease was because of a volume decline of 6.7% YOY. Despite an increase in the global potash demand from 2022, there were adverse pricing conditions and volume moderation in 2023, which was due in part to Russian and Belarusian volumes returning to certain potash markets. Additionally, adverse pricing conditions and volume moderation did not have any impact on the Company's credit profile, as the revenue-to-total expense ratio (as defined by Morningstar DBRS) remained well above 3.5 times for 2023 and business risk profile factors such as solid shareholder support, shareholder contractual commitments, and an impressive logistics network remained strong.

CREDIT RATING DRIVERS
Morningstar DBRS expects Canpotex's credit ratings to remain stable over the medium term owing to the Company's strong business risk profile, which should remain supported by a range of factors including an exclusive right to export potash produced in Canada by its shareholders/producers (or their respective applicable affiliates) that is destined for markets outside of Canada and the United States; cost pass-through rights, which cover the Company's debt interest and principal repayments; implied credit support from its shareholders; and a solid and growing distribution network. Morningstar DBRS notes the incremental strengthening of the business risk profile owing to supply chain expansion projects but expects any such progressions to be currently insufficient to precipitate any positive credit rating action. Conversely, though highly remote, any adverse credit rating action could be triggered from a weakening of the operating structure such as any explicit or implicit weakening of the shareholders' support or contractual commitments.

EARNINGS OUTLOOK
Morningstar DBRS expects Canpotex's sales volumes to increase from 12.7 million tonnes in 2023 largely because of demand recovery on account of a lower expected IASP than the $419 per tonne in 2023. The moderation in the IASP should be driven by the stabilization of global supplies as Russian and Belarusian supplies return to certain potash markets. Following broader cost pressures across the economy, Morningstar DBRS expects Canpotex's costs to increase. Despite increased costs, the overall revenue-to-total expense ratio (as defined by Morningstar DBRS) should remain strong relative to the historical standards, hence reflecting the continued robustness of Canpotex's financial risk profile.

CREDIT RATING RATIONALE
Canpotex's credit ratings are supported by its strong business risk profile, which includes contractual commitments from 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 Nutrien (Canada) Holdings ULC (formerly, Agrium Inc.)), continuing implied support of its shareholders'/producers' respective investment-grade ultimate parent companies (Mosaic Co. and Nutrien), Canpotex's cost pass-through rights, which also include debt interest and principal repayments and a solid and growing logistical infrastructure footprint.

The credit ratings also consider Canada's material share of global potash markets and Canpotex's exposure to the cyclical potash commodity.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors 
In the analysis of Canpotex, the relative weighting of the five primary Business Risk factors as cited in the methodology was approximately equal. 

(B) Weighting of FRA Factors 
In the analysis of Canpotex, a single Financial Metric (revenue-to-total expense ratio) was considered. 

(C) Weighting of the BRA and the FRA 
In the analysis of Canpotex, the Business Risk factors carry greater weight than the Financial Metric. 
 
Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- General Corporate Methodology: Appendix 1 - Canpotex Limited (April 15, 2024),
https://dbrs.morningstar.com/research/431154

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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