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 Mosaic Canada Crop Nutrition, LP, a wholly owned subsidiary of The Mosaic Company (Mosaic Co.), and Potash Corporation of Saskatchewan Inc., a wholly owned subsidiary of Nutrien Ltd. (Nutrien) and 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 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. Finally, the rating confirmations also take into account the disruptions from the Coronavirus Disease (COVID-19) that contributed to circumstances affecting the selling price of potash in certain key Canpotex markets, and hence lower revenues for the Company in 2020.
After a strong first half of 2019, due to 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 (YOY); however, the Company sold a total of only 11.6 million tonnes in 2019, which was below expectations. Brazil remained the largest destination market for the Company’s product, once again accounting for approximately one-quarter of all Canpotex sales. Potash markets exhibited relatively robust demand in the first half of 2020. However, pricing was generally weaker in 2020 compared with 2019, with the Vancouver potash spot price averaging $238 per tonne from January 2020 to June 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 H1 2020, leading to a YOY revenue decline of more than 23% to approximately $1.5 billion despite the strong sales volumes. For the last 12 months ended June 30, 2020 (LTM June 2020), revenues fell more than 13% to approximately 3.0 billion. Even after the recent decline in revenues, the credit metrics remain strong and supportive of the current ratings. DBRS Morningstar’s calculated revenue-to-total-expense ratio fell to 3.3 times (x) in LTM June 2020 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 forecasted to rebound in 2021 on the back of strong market demand due to a continued focus on food security in most of the countries that Canpotex services.
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 in 2020. Certain capital spending initiatives at the Portland, Oregon, terminal, which accounted for 26% of volumes in 2019, similarly continues to support volume growth. Therefore, DBRS Morningstar anticipates that the Company’s business risk profile should improve incrementally during the rest of 2020 and beyond.
DBRS Morningstar anticipates that revenues in FY2020 will continue to be below 2019 and 2018, despite strong sales volumes. The impact of the Coronavirus Disease (COVID-19) pandemic has not yet materially affected potash demand or the Company’s operations, although it has impacted pricing in certain markets. The Vancouver potash spot price in September 2020 was $202 per tonne down from $245 per tonne in January 2020. 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. 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 and prolonged coronavirus impact, escalating global trade frictions and/or the volatile potash markets, could negatively affect the Company’s performance. DBRS Morningstar would not likely consider 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. DBRS anticipates that 2021 will be a year of recovery.
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.
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 02, 2020), 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 firstname.lastname@example.org.
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.
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