PotashCorp suspends its newest mine in NB

Potash Corp. of Saskatchewan (TSX: POT; NYSE: POT) is indefinitely suspending its new Picadilly potash mine in New Brunswick to lower its company-wide costs — dismissing roughly 430 workers. 

“It’s just a very sad day for us. We have made a significant investment in New Brunswick. We had a lot of great employees, some of whom have been with the company close to 30 years, so this is kind of a blow to the PotashCorp family,” the company’s director of public relations and communications Randy Burton said in an interview.

The Saskatoon-based fertilizer giant has invested more than US$2 billion to date at Picadilly, with construction starting in 2008 and production beginning in late 2014. Expected potash production from the mine had been 450,000 tonnes this year and 1.8 million tonnes annually when fully ramped up. 

PotashCorp intends to keep up to 100 employees on the payroll for the four-month transition, after which it will retain 35 workers for care and maintenance, for as long as the mine is offline.

Picadilly’s estimated holding costs are US$20 million for 2016 and US$15 million in the following years.

The suspension reflects the weakening global commodity markets, particularly for potash, Burton says. “We are in a situation were there is essentially an overhang or overproduction … and prices are soft, and they are getting softer … they are at a 10-year low.”

PotashCorp is focusing on its five lower-cost potash mines in Saskatchewan — Rocanville, Cory, Allan, Lanigan and Patience Lake — and has mothballed its New Brunswick operations. In November, it shut down Picadilly’s neighbouring Penobsquis mine.

While the company anticipated production costs at Picadilly would be lower than at Penobsquis, they are still higher than the Saskatchewan mines, Burton explains, without providing figures.

“Given what’s going on in global markets, we just felt that we couldn’t continue any longer. So we’re suspending operations there, and we’re focusing more on our Saskatchewan assets, which are more competitive and lower cost,” he says.

By optimizing its Saskatchewan production, the miner forecasts lowering the cost of sold goods by US$40 million to US$50 million in 2016, which will be partly offset by the expected US$35 million in severance and transition costs.

Picadilly’s suspension will also cut US$50 million from capital expenses in 2016, and US$135 million in 2017 and 2018.

Despite this writedown, Raymond James analyst Steve Hansen notes the closure could boost PotashCorp’s weakening free cash flow profile.

PotashCorp will serve its international customers — previously served by New Brunswick — from Saskatchewan through Canpotex, the international marketing arm for PotashCorp and fertilizer producers Agrium (TSX: AGU; NYSE: AGU) and Mosaic (NYSE: MOS). Potash has offered its 2.5-million-tonne-per-year export terminal in Saint John, N.B., to Canpotex in exchange for a 750,000-tonnne increase in its annual volume entitlement. With this, PotashCorp’s Canpotex allocation climbs 1.2% to 51.5%.

“We have waited for something to give in a deteriorating potash industry, but we did not expect this development in which PotashCorp cuts production from its only mine outside of Canpotex,” BMO analyst Joel Jackson says in a note.

The Picadilly mine in New Brunswick was “an important strategic hub of production” that helped PotashCorp ship directly to the Brazilian market, Hansen notes, adding that the shutdown speaks to the global potash market’s “troubled nature.”   

Before the suspension, Jackson had estimated US$400 million and US$150 million of dividend shortfalls in 2016 and 2017. But considering PotashCorp’s recent actions and assuming potash prices stabilize, he predicts the miner could gain “narrow breathing room in 2017.”

PotashCorp is opening 100 positions for the affected Picadilly workers in Saskatchewan. It plans to establish a $5-million community investment fund to help employees transition and find work.

“Our anticipation is that with this move in New Brunswick, we will not be forced to have any lay-offs in Saskatchewan,” Burton said.