Please ensure Javascript is enabled for purposes of website accessibility

Will Tax Changes in Saskatchewan Cripple PotashCorp Further?

By Rich Duprey – Feb 2, 2016 at 1:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The fertilizer producer is feeling the one-two punch of a weak commodities market and a government looking to make up lost revenue.

Underground mining operations like this have propelled PotashCorp to the industry forefront in fertilizer production, but a supply glut is gutting prices. Image source: PotashCorp.

A bleak outlook for the coming year led PotashCorp (POT) to forecast earnings for 2016 that missed analyst expectations by a wide margin and caused it to cut its dividend for the first time in the company's history. What's worse is some analysts think the fertilizer producer didn't go far enough, and it has hanging over it the possibility the Saskatchewan government will change its royalty scheme that could mire it further in a morass of underperformance.

Potash prices pulverize producers
Not that 2015 was anything like a barn-burner, as fourth-quarter revenue tumbled 29% to $1.35 billion. Average realized potash prices for the period were $238 per tonne, a 16% decline from the $284 per tonne it realized a year ago. That also caused earnings to be cut in half as they fell to $201 million, or $0.24 per share, from $407 million, or $0.49 per share.

But it was the outlook for the coming year that necessitated PotashCorp's drastic actions. As the largest fertilizer producer by capacity, its potash sales volumes last year were down 6% from 2014, and it expected they would only hit a range between 8.3 million and 9.1 million tonnes in 2016, which will generate potash gross margins of $800 million to $1.1 billion, a significant decline from 2015 because of the sharp drop in potash prices.

PotashCorp has already begun closing mines to rein in capacity. Last week it announced the indefinite suspension of its Picadilly mine in Saskatchewan, which followed the inventory closure at Cory, Lanigan, and Allan in December, and the closure of Penobsquis in November. It says it doesn't anticipate any more closures going forward, however.

Dividends dug a deep hole
The biggest news may have been its decision to slash its quarterly dividend by 34% to $0.25 per share. It's the first time it's cut the payout, and it follows many others in the mining industry that have reduced or suspended their dividend. Copper and gold miner Freeport-McMoRan (FCX -0.88%) cuts its dividend 84% early in 2015 before suspending it altogether in December. Anglo American, Peabody Energy, and Vale have all reduced or completely suspended their payout.

BHP Billiton (BHP -1.20%) has been one of the last holdouts along with PotashCorp to delay as long as possible cutting or suspending its dividend, but when the world's largest miner reports earnings in February, it may very well join the parade.

By cutting the payout, though, PotashCorp CEO Jochen Tilk says it gives the fertilizer producer the needed flexibility to pursue acquisitions or do stock buybacks. Although investors are probably glad at this point that PotashCorp's pursuit of German potash producer K+S fell through, as it may have been a financial burden it couldn't afford, Tilk said he's no longer interested in going after the miner anyway.

Paying more than its fair share
It may want to hold off on making any moves like that regardless until the provincial government of Saskatchewan decides what it's going to do with the industry's royalty scheme. Last year it had made significant changes to its tax policy that at the time PotashCorp said would reduce its pre-tax earnings by as much as $100 million. Although the finance minister says he's mindful of the deteriorating situation in the commodities market, the government is also losing tax revenues because of the slump in oil prices, and it appears it wants to make it up on the backs of fertilizer producers.

And though PotashCorp is willing to support a "fair and mindful and inclusive" process" for setting policy, Tilk also notes that Saskatchewan, which takes two bites of profits generated, "has the highest royalty regime anywhere in comparison."

Between a rock and a hard place
At this point it's hard to tell which is worse for the fertilizer maker -- the reduced outlook for the industry in 2016 or the government's imposing an even heavier tax burden at a time when it can least afford it. 

PotashCorp has lost more than half its value over the past year, and until clarity on both issues is achieved, investors may want to hold off on jumping in at its new lower price to see if any more shoes still have to fall.

 

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and Freeport-McMoRan Copper & Gold,. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Potash Corporation of Saskatchewan Inc. Stock Quote
Potash Corporation of Saskatchewan Inc.
POT
Freeport-McMoRan Inc Stock Quote
Freeport-McMoRan Inc
FCX
$30.51 (-0.88%) $0.27
Peabody Energy Corporation Stock Quote
Peabody Energy Corporation
BTU
BHP Group Ltd. Stock Quote
BHP Group Ltd.
BHP
$52.59 (-1.20%) $0.64
Vale S.A. Stock Quote
Vale S.A.
VALE
$14.80 (1.09%) $0.16
Anglo American PLC Stock Quote
Anglo American PLC
AAUKF
$33.68 (5.12%) $1.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.