A bleak outlook for the coming year led PotashCorp (NYSE: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 (NYSE:FCX) 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 (NYSE:BHP) 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.