Citi 2015 Basic Materials Conference - Seeking Alpha...Jan 20, 2016 · Citi 2015 Basic Materials...

Citi 2015 Basic Materials Conference

Jochen Tilk

President & CEO


1

This presentation contains forward-looking statements or “forward-looking information” (“forward-looking statements”). These statements can be identified by expressions of belief, expectation or intention, as well as those statements that are not historical fact. These statements often contain words such as “should,” “could,” “expect,” “may,” “anticipate,” “believe,” “intend,” “estimates,” “plans” and similar expressions. These statements are based on certain factors and assumptions as set forth in this document, including with respect to: foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, and effective tax rates. While the company considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Forward-looking statements are subject to risks and uncertainties that are difficult to predict. The results or events set forth in forward-looking statements may differ materially from actual results or events. Several factors could cause actual results or events to differ

Forward-looking Statements

materially from those expressed in forward-looking statements including, but not limited to, the following: variations from our assumptions with respect to foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, and effective tax rates; fluctuations in supply and demand in the fertilizer, sulfur, transportation and petrochemical markets; changes in competitive pressures, including pricing pressures; costs and availability of transportation and distribution of our raw materials and products, including railcars and ocean freight; risks and uncertainties related to operating and workforce changes made in response to our industry and the markets we serve; risks and uncertainties related to our international operations and assets; failure to prevent or respond to a major safety incident; adverse or uncertain economic conditions and changes in credit and financial markets; the results of sales contract negotiations within major markets; economic and political uncertainty around the world; risks associated with natural gas and other hedging activities; changes in capital markets; unexpected or adverse weather conditions; catastrophic events or malicious acts, including terrorism; changes in currency and exchange rates; imprecision in reserve estimates; adverse developments in new and pending legal proceedings or government investigations; our prospects to reinvest capital in strategic opportunities and acquisitions; our ownership of non controlling equity interests in other companies; the impact of further technological innovation; increases in the price or reduced availability of the raw materials that we use; security risks related to our information technology systems; strikes or other forms of work stoppage or slowdowns; timing and impact of capital expenditures; rates of return on, and the risks associated with, our investments and capital expenditures; changes in, and the effects of, government policies and regulations; certain complications that may arise in our mining

i l di t i fl bilit t tt t t i d l d kill d l i k l t d t t ti l lprocess, including water inflows; our ability to attract, retain, develop and engage skilled employees; risks related to reputational loss; earnings; and the decisions of taxing authorities, which could affect our effective tax rates. Additional risks and uncertainties can be found in PotashCorp’s Form 10-K for the fiscal year ended December 31, 2014 under the captions “Forward-Looking Statements” and “Item 1A –Risk Factors” and in PotashCorp’s other filings with the US Securities and Exchange Commission and the Canadian provincial securities commissions. Forward-looking statements included in this presentation are given only as at the date hereof. PotashCorp disclaims any obligation to update or revise any forward-looking statements in this presentation, whether as a result of new information, future events or otherwise, except as required by law.

Slide #2

PotashCorp Overview

W ld’ l t f tili d b itWorld’s largest fertilizer producer by capacity; #1 in potash and among the largest in nitrogen and phosphate.

Canadian potash operations and strategic offshore investments position us to benefit from growth markets.

World-class nitrogen and phosphate businesses focused on historically more stable feed and industrial markets.

Slide #3


2

Potash Supply and Demand Outlook

80 Shipments POT Shipment Forecast Range

Million Tonnes KCl

Supply/Demand Balance Expected to be Similar to Historical Levels

Global Potash Supply and Demand

10

20

30

40

50

60

70

80 Shipments POT Shipment Forecast RangeOperational Capability* CRU Shipment ForecastFertecon Shipment Forecast

Source: Fertecon, CRU, IFA, PotashCorp

02000 2002 2004 2006 2008 2010 2012 2014 2016F 2018F 2020F

Slide #5

* Estimated annual achievable production level from existing operations; announced probable and possible projects; assuming typical ramp-up periods for new capacity. Probable and possible projects based on PotashCorp’s view of project probabilities.


3

4.7

4.9

Projected Operating Capability Modestly Above Demand Over Coming Years

~74

Global Potash Supply and Demand: A Closer Look

~4

4.0

3.4

4.4

2.5

1.8

2.5

~11 ~70

3.0~65

~59

Other

Latin America

China

India

Demand Growth

2015E Operating

Capability**

2020E Demand Outlook*

Operational CapabilitySurplus

2020E Operating

Capability**

GreenfieldExpansions

Canadian Brownfield Expansions

Other BrownfieldExpansions

Depletion2015FDemand

Source: Fertecon, CRU, Public Filings, PotashCorp

Slide #6

*2020 demand estimate based on 2.5-3.0% long-term growth rate

**Estimated annual achievable production level from existing operations; announced probable and possible projects; assuming typical ramp-up periods for new capacity. Probable and possible projects based on PotashCorp’s view of project probabilities

Capital Allocation


4

1

Priority to Support Existing Assets and Dividend; Continue to Explore Opportunities

Our Approach to Capital Allocation

Growth & Return

Support existing asset base by investing required maintenance capital

Support existing dividend by utilizing cash flowValue

1

3

2

Use surplus capital to fund best value creation alternatives

Debt Management

Organic Growth

M&A / Investments

ShareBuybacks

DividendIncrease

Return to Debt Holders Invest in Growth Return to Shareholders

3

Slide #8Source: PotashCorp

22.9

3.5

Cumulative Spending (2005-2014) - US$ Billions

2

-9.5

-4.226.9

Potash Expansions a Priority Over Past Decade; Now Nearly Complete

10-Year Historical Cash Flow Summary

0.5 0.2

Ending Cash

Balance(Dec, 2014)

ShareBuybacks

-7.7

Dividends

-3.4

EquityInvestments

& Other

-1.9

OpportunityCapital

SustainingCapital

TotalFunds

Available

Financing Activities

OperatingCash Flows

OpeningCash

(Jan, 2005)

Cash Sources Cash Uses

Invested in Growth

58%Returned to Shareholders

42%

Capital Allocation

15% 36% 7% 13% 29%% Allocation by Category:

Type of Usage:

Slide #9Source: PotashCorp


5

Cash From Operations Supports Both Dividend and Sustaining Capex

PotashCorp Cash Flow From Operations Sensitivity*

4.0 Maint. CAPEX (2017+) Dividend

US$ - Billions

Q3 2015

1.0

2.0

3.0

Dividend ~$1.2B

Sustaining Capex~$0.7B

Source: PotashCorp

0.0$200 $250 $300 $350

Slide #10

Average Realized Potash Price

* Estimate assumes potash sales volumes of 10mmt, FX at 1.30 CAD per USD; nitrogen/phosphate earnings, SG&A, finance costs, freight rates and other income in line with 2015E. Does not include working capital changes.

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6

Macroeconomic Environment & Potash Markets

GDP Growth Rate

2015E 3 Y A (% Ch )

Emerging Market Uncertainty and Weaker Ag Environment Create Recent Headwinds

Macroeconomic Factors

FX Change vs USD Crop Price Changes

-3.0%

-2.0%

-1.0%

0.0%

1.0%

Brazil Indonesia China US India

2015E vs 3-Yr Avg (% Change)

-25%

-20%

-15%

-10%

-5%

0%Brazil Indonesia India China

-25%

-20%

-15%

-10%

-5%

0%Corn Sugar Soybeans Wheat Palm Oil

-5.0%

-4.0%

Source: IMF, Bloomberg

-35%

-30%

-35%

-30%

Slide #13

Macroeconomic uncertainty significant contributor to fertilizer market challenges in 2015

As at November 26, 2015


7

Global Crop Price Index* Forecast

225

250

275Actual Forecast

Price Index (2005 = 100)

Forecast Moderate – but Supportive – Crop Price Environment

0

25

50

75

100

125

150

175

200

225

Source: Bloomberg, BMI

1990 1995 2000 2005 2010 2015F 2020F

Base case: No major supply/demand shocks, moderate economic and energy price environment.Upside Factors: Supply side shock, demand surge (favorable biofuel policy), spike in energy prices.Downside Factors: Favorable global growing conditions, government policy change (e.g. lower biofuel mandates or China/India grain price support), negative food consumption event.

* Based on corn, soybean, wheat, palm oil and sugar prices. Forecast based on Bloomberg consensus and BMI.

Slide #14

Return over operating and land costs

US$/Acre

Lower Returns but Levels Remain Supportive

Farmer Returns a Key Driver of Potash Consumption

600 Return over operating and land costs

Reals/Acre

US Corn Brazil Soybean

50

100

150

200

250

300

350

400

450



-50

0

Source: USDA, IMEA, Conab, PotashCorp

0

* 2015F represents the 2015/16 Brazilian crop year.

Slide #15

Despite macroeconomic pressures, farmer returns on key crops in most growing regions remain at supportive levels


8

7,00080

Potash Consumption –Million Tonnes KCl Equivalent

Crop Production a Key Driver of Potash Consumption

Crop Production –Million Tonnes

Crop Production Growth Expected to Underpin Potash Growth

3,000

4,000

5,000

6,000

30

40

50

60

70

Potash Consumption Crop Production

2,000201995 2000 2005 2010 2015F 2020F

Source: Fertecon, CRU, FAO, PotashCorp

Slide #16

Crop production growth has historically been less sensitive to macroeconomic factors

80 Shipments Shipment Range70

Million Tonnes KCl

Strong Potash Consumption Drivers Support Our Long-term Growth Potential

Global Potash Demand

10

20

30

40

50

60

70~70

Source: Fertecon, CRU, IFA, PotashCorp

02000 2002 2004 2006 2008 2010 2012 2014 2016F 2018F 2020F

Longer-term growth expected between 2.5% and 3.0%, in line with historical trend; assumes a moderated, less volatile pricing environment

Slide #17


9

Despite Macro Headwinds, Offshore Demand Expected to Remain Historically High

Potash Market Outlook

Highlights (2015F)Potash Shipments (million tonnes)

4

6

8

10

12

14

16 China: 14.0 – 14.5mmt

• Consumption trends have been strong in recent years

• VAT and currency changes creating some market uncertainty, but represent small percentage change in farmer costs

India: 4.2 – 4.5mmt

• Growth in domestic NPK compound production supporting potash imports

• Currency weakness and below average monsoon causing some near-term uncertainty

Other Asia: 8.3 – 8.7mmt

• Consumption needs remain significant

• Higher inventories and FX volatility have presented headwinds

0

2

China India Other Asia

Latin America

North America

2013 2014 2015F*

Source: PotashCorp

Slide #18

g y p

Latin America: 10.5 – 11.0mmt

• Weaker currencies increasing farmer costs but supporting crop export margins

• Strong second half Brazilian demand despite FX and credit related challenges

North America: 8.5 – 9.0mmt

• Healthy fall application season expected to reduce distributor inventory* As at Oct 29, 2015; represents midpoint of guidance range

Despite Macroeconomic Pressure, Potash Remains Affordable

Potash Costs by Region and Major Crop

Cost as a Percentage of Revenue

2

4

6

8

10 2015E 5-year Avg

g

Source: Fertilizer Week, USDA, IPNI, PotashCorp

Slide #19

0China Rice India Wheat Malaysia Oil

PalmBrazil Soybean US Corn

Potash costs as a percentage of revenue remains largely in line with prior years


10

Large Application Deficit Due to Rising Crop Removal

US Potash Application Balance*

Regional Application Deficit (2010)Potash Application vs Removal

-6

-3

0

3

6

9

12

-40

-20

0

20

40

60

80 Balance (RHS) Application Rate Nutrient Removal

Lbs/Acre (K20) Balance - Million Tons KCl Million Short Tons KCl Equivalent

3.7

1.4

0 7 0 70 5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Source: USDA, AAPFCO, PotashCorp

-12

-9

-80

-60

75 78 81 84 87 90 93 96 99 02 05 08 11 14

* Calculations based on commercial fertilizer application data, estimated nutrients available from manure and crop removal rates for all major crops grown in the US.

0.7 0.7 0.6 0.60.4

0.0

0.5

CentralPlains

Mountain LakeStates

Midwest Other West Delta

Slide #20

718 000

Rs/Tonne (Lines)

Demand Has Started to Recover With More Stable Pricing

India Retail Potash Prices and Sales

Million Tonnes (Bars)

1

2

3

4

5

6

7

2 000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Source: FAI, Katana

00

2,000

2008 2009 2010 2011 2012 2013 2014 2015F

Slide #21


11

VAT Impact Expected to be Small Part of Total Fertilizer Cost

Chinese Potash Costs

Percentage of Revenue

Chinese Rice Farmer Fertilizer Costs (2015E)

~1.74% ~1.95%

2

4

6

8

10 Cost of N and P Cost of Potash

g

Source: Fertilizer Week, USDA, IPNI, PotashCorp

Slide #22

0Pre-VAT

(Retail Potash Price US$350)Post-VAT

(Retail Potash Price US$390)

Strategic & Other Highlights


12

Strategic Highlights

• Rocanville expansion nearing completion; Picadilly capacity in early ramp-up

• Operational capability aligned with anticipated demand; costs continue to declinePotash

• Completed Lima expansion in October adding an additional 100,000mt of NH3 capacity

• Evaluating additional brownfield expansion at GeismarNitrogen

• Focused on improving reliability; P2O5 production continuing to improve

• Margin improvement opportunities identified and being implementedPhosphate

Source: PotashCorp

• Stable dividend and healthy balance sheet continue to be our priority

• Evaluating other strategic opportunitiesCapital

AllocationStrategy

Slide #24

Lower-cost Delivered Supplier Given Geographic Positioning and Logistical Capability

PotashCorp Positioning – North America

1 S k t h O ti1. Saskatchewan Operations

• 5 lower-cost potash operations; 2015 YTD cash-related COGS of ~$83/tonne*

• Finalizing Rocanville expansion (our largest and lowest cost operation), enabling further cost reductions in 2016

• Operational capability aligned with expected near-term demand; maintain flexibility to meet surges

2. North American Production/Distribution

• Extensive and highly efficient North American infrastructure, including:

o 4,200 specialized potash railcars o >150 owned or leased US distribution pointso Hammond IN warehouse/distribution facility

Source: PotashCorp

Slide #25

o Hammond, IN warehouse/distribution facility enables by-pass of Chicago rail congestion

• Top-rated North American sales team

* Cash costs refers to total cost of goods sold less depreciation and amortization.


13

Lower-cost Delivered Supplier Given Port Access and Logistical Capabilities

PotashCorp Positioning – Offshore

1. New Brunswick Opportunity

• Increasing operational capability to 1.8mmt through new Piccadilly mine

• Only East Coast potash port capability in North America, with flexibility to serve existing and new markets

• Supply agreement with Heringer; more than 1mmt per year to be served from New Brunswick or from Saskatchewan through Canpotex

2. Canpotex Positioning

• One of Canada’s premier exporting companies, serving approximately 35 countries

• Economies of scale, efficiencies and superior customer service through:

o 5 400 specialized potash railcars and a state of

Source: PotashCorp

Slide #26

o 5,400 specialized potash railcars and a state-of-the-art railcar maintenance facilityo Two deep water ports (Vancouver, BC and Portland, WA) o Fleet of ocean vessels

• Member company distribution investments in key markets, including Brazil, China, etc.

Try Our Overview Site: www.potashcorp.com/overview

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Slide #27

Citi 2015 Basic Materials Conference - Seeking Alpha...Jan 20, 2016 · Citi 2015 Basic Materials...

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