Considering PotashCorp's (NYSE:POT) dramatic announcement on Thursday that it was slashing its quarterly dividend by 60% to just $0.10 per share amid continuing weakness in the fertilizer components, the crop nutrient producer's management probably have a lot on their minds.
On the upside, they have one less worry in the wake of reports from mid-July that the Saskatchewan provincial government will be easing up its review of its potash royalty scheme.
For the fifth time in the last sixth quarters, PotashCorp had to lower its earnings expectations for the coming year. It says it now expects to earn between $0.40 and $0.55 cents per share, down from the $0.60 to $0.80 per share range it cut its guidance to in April. It had started off the year with a slightly more robust forecast of generating between $0.90 and $1.20 per share.
With net profits falling 30% in the current quarter to $121 million, the last thing it would need is for the government to take an even larger tax bite.
The Saskatchewan government initiated a significant change to its tax policy last year that at the time PotashCorp said could reduce its pre-tax earnings by as much as $100 million, but amid falling tax revenues, the province said it would also review the entire royalty scheme.
Taxing potash's patience
Under the current system, which is admittedly complex, Saskatchewan taxes producers twice: once for potash mined on government property, and again for production of potash in the province, but at a rate based on the price of the crop nutrient rather than the volume produced.
When potash prices were running near $900 per metric ton several years ago, undoubtedly the province enjoyed a windfall and didn't complain, but in the ensuing years, values of all commodities have fallen. Potash in particular has suffered as a result of the collapse of the Belorussian-Russian cartel, which had acted to constrain supply and keep prices elevated.
In 2013, just prior to Belaruskali and Uralkali splitting apart in a bid for more market share, potash was going for around $400 per metric ton, but quickly dropped to $315 per tonne immediately afterwards. India recently signed a contract for 2016 potash delivery at $227 per tonne while China, the world's largest importer (and thus able to command a better price) just signed an annual contract for $219 per metric ton. Canpotex, the North American potash marketing organization owned by PotashCorp, Mosaic (NYSE:MOS), and Agrium (NYSE: AGU), is still in the process of negotiating a delivery price with China.
But prices remain depressed. In its just-released earnings report, PotashCorp said it realized average prices of just $154 per metric ton in the quarter, below the $178 per metric ton it got in the first quarter and a far sight below the $273 per metric ton it realized in the year-ago period.
2 for me, 1 for you
That kind of low pricing cuts into the take the Saskatchewan government gets, but a royalty scheme based on production volumes ought to net it more. While production is also falling -- PotashCorp produced 2.27 million metric tons of fertilizer component in the second quarter, down from 2.39 million metric tons a year earlier -- it has still produced more potash than its sold for three straight quarters.
But producers are beginning to rationalize their mining output. PotashCorp announced it was suspending operations at its Picadilly mine in New Brunswick and temporarily halted production at both its Allan and Lanigan projects in Saskatchewan.
Similarly, Mosaic recently announced that it was idling its provincial Colonsay mine and laying off 330 workers, while Canpotex shelved plans to construct a $775 million export terminal at the Port of Prince Rupert due to "economic and commercial considerations."
Gone, but not forgotten
The continued unraveling of the potash market has finally convinced the Saskatchewan government to slow down its review of how royalties are levied. While it says the review will remain ongoing, the province's economy minister says now is not the time to upset the apple cart. "When we see prices recovering and volumes improving, then perhaps we can move forward," he was quoted as saying, "But at this time, we just don't think that's the right move to make."
PotashCorp remains optimistic there's a light at the end of the tunnel, and has pointed out that previously, years during which China was late signing its benchmark delivery contract (or never signed one) have been followed immediately by years with higher demand and prices. The market, however, is still in flux and remains in oversupply. It remains to be seen whether enough mines have been idled, production has been sufficiently cut, and demand is becoming strong enough for that predicted U-turn to occur. Those factors are more than enough to concern investors without adding the possibility of a disruptive tax royalty scheme to the mix.