In a sign of just how quickly global commodity markets have deteriorated, Potash Corp. of Saskatchewan Inc. is mothballing one of its newest mines – a $2-billion New Brunswick operation that was in production for little more than a year.
The suspension of potash production at the Picadilly, N.B., mine will throw 420 to 430 people out of work. That comes on top of the permanent closing of Potash Corp.'s Penobsquis mine in November, which cost 140 contract jobs in the province.
Plummeting potash prices are mainly to blame. The crop nutrient began its swoon four years ago as weak crop prices and currency declines pinched demand. Prices also suffered from increased competition following the breakup in 2013 of a Russian-Belarussian marketing cartel that previously helped limit supply.
In recent months, the commodity's swoon has picked up speed, with some prices falling by a quarter since last spring. That has ramped up pressure on Potash Corp., driven down its share price and increased doubts about whether it can sustain its large dividend.
The potash collapse left the world's largest fertilizer company with little choice but to shutter its New Brunswick mines, which are its highest-cost operations, chief executive officer Jochen Tilk said in a phone interview.
"Our employees [in New Brunswick] have been phenomenal," he added. "That makes this particularly sad. There is nothing they could have done differently."
The decision hits hard at New Brunswick's economy, which already suffers from high levels of joblessness. It also underlines how thoroughly the market for potash has soured in the space of less than a year. Just as with oil, metals and other commodities, next to no one predicted the fertilizer's brutal price decline ahead of time.
The Picadilly mine commenced production in November, 2014. A few months later, in late May, 2015, Potash Corp. still felt confident enough in the outlook for its key product to launch an $8.7-billion (U.S.) bid for K+S AG, a German potash producer.
It was forced to beat a retreat when fertilizer prices went into freefall. Potash Corp. killed its K+S offer in early October and began looking at ways to trim its potash glut. In addition to closing the Penobsquis mine, it suspended production at three of its Saskatchewan mines for three weeks.
Few observers, however, foresaw the shuttering of the Picadilly mine. "We have been waiting for something to give in a deteriorating potash industry, but we did not expect this development," Joel Jackson, an analyst at BMO Nesbitt Burns, wrote in a note to clients.
The company estimates that the Picadilly suspension will reduce its cost of goods sold by at least $40-million this year, although that saving will be partly offset by severance and transition costs.
In addition, the move will eliminate the need for about $50-million in capital spending this year and about $135-million in additional capital expenditures over the subsequent two years.
The savings are vital if Potash Corp. wants to maintain its dividend. Many investors have been skeptical about the company's ability to maintain the payout in light of the dismal outlook for potash prices.
The stock rose on Tuesday following announcement of the mine suspension, but it has still lost nearly half its value over the past year. At current prices, the dividend works out to an eye-popping 9.2-per-cent yield.
BMO's Mr. Jackson said the company's moves address some of the concerns around the sustainability of the dividend. Assuming potash prices stabilize, the savings "could work to give [Potash Corp.] very narrow breathing room in 2017," he said.
Andrew Wong, an analyst at RBC Dominion Securities, calculated that free cash flow in 2017 may increase to $1.4-billion as a result of the mine suspension, just slightly more than current dividend payments of $1.3-billion.
However, "we stress that there is still very little breathing room in the payout ratio and there remains potential downside risk from further weakening in commodity prices," he wrote in a note.
The mine suspension is wrenching news for New Brunswick, a have-not province that struggles to attract well-paid jobs. Mr. Tilk declined to reveal how much higher the costs were at Picadilly than in the company's other operations but he indicated the disparity was substantial.
"We had invested $2-billion [Canadian] to date [in the Picadilly project] and so we looked at every option and every possibility to find a solution," but without finding a way to bridge the cost gap, he said.
He stressed that the company will do its best to help the province cope with the decision. The company will keep a crew of about 35 people at Picadilly to maintain the mine and will make about 100 positions in its Saskatchewan operations open to those who are losing their jobs in New Brunswick. It will also set up a $5-million fund to help laid-off employees find new jobs and assist local businesses and charities.
If potash prices do recover, the mine could reopen, a process that would take about a year, the company estimated.