Potash producer protests move

Royalties review met with anger

Saskatchewan is preparing to review its Byzantine potash royalty regime, and Premier Brad Wall thinks it is long overdue.

“Without the incentives that are overlaid on top of the royalty structure for brownfield and greenfield investment, we have the highest potash taxes on earth,” he said in an interview. “Higher than Russia.”

But in this week’s budget, Wall introduced one interim tax change that has already drawn a furious response from the world’s biggest fertilizer company.

Saskatchewan is stretching out the timing in which miners make deductions for expansions and maintenance spending. That has a significant impact on Potash Corp. of Saskatchewan Inc., which is wrapping up a $ 6 billion expansion program in the province. Potash Corp. expects budget proposals will cut its pre- tax earnings by $ 75 million to $ 100 million this year.

“Changing the rules midstream impacts the ability of our shareholders to earn a fair return on their capital and undermines Saskatchewan’s relative competitiveness,” chief executive Jochen Tilk said.

In response, Wall noted that potash companies have benefited from the province’s generous capital spending incentives for many years. But he also extended an olive branch to the industry with his promise to address high potash taxes as part of the government’s review of the royalty regime.

Many people felt this review is overdue. Academic Jack Mintz of the University of Calgary has been a frequent critic of the royalty structure, saying it is too convoluted and benefits absolutely no one. It involves a number of different levies and is heavily weighted toward price as opposed to volume. That is currently a negative for the government, as prices have remained low over the last couple of years while production capacity has expanded. The government said it would consult with the industry before introducing any changes.

Randy Burton, a spokesman for Potash Corp., said the company is open to changes in the royalty regime, but also thinks the current structure has worked well and does not need to be overhauled.

“We’re partial to the existing scheme because it’s been proven to work,” he said. “We’re just a little concerned there might be unintended consequences from a review if the industry is not closely consulted.”

Wall said it could make sense to have a regime that is weighted less towards price and more toward volume. But at the end of the day, he expects the total take from the industry to be relatively similar to what it is today once a more simplified regime is introduced.

In addition to the tax change in Saskatchewan, the potash industry received bad news from China this week, where a benchmark sales contract was signed at a surprisingly low price.

Belarusian Potash Co. ( BPC) agreed to sell potash to China for $ 315 US a tonne in the first half of 2015. That was 3.3 per cent higher than the prior contract, but lower than some in the industry anticipated. Russian producer OAO Uralkali was hoping for an increase of up to 10 per cent.

But TD Securities analyst Greg Barnes noted that the higher U. S. dollar and lower oil prices have changed the game in recent months, and there was a “growing view” that potash producers would be lucky to get a five per cent increase in the contract.

Uralkali and BPC used to market their potash jointly, and this deal suggests the industry is getting more competitive in negotiating contracts. The Canadian producers still work together to sell their potash to offshore markets through Canpotex Ltd. Investors will be watching to see if they take the same price in China as BPC.