Potash Corporation of Saskatchewan's (POT) CEO Jochen Tilk on Citi 2014 Basic Materials Conference - Conference Call Transcript

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Potash Corporation of Saskatchewan Inc. (POT) Citi 2014 Basic Materials Conference Call December 3, 2014 9:30 AM ET

Executives

Jochen Tilk - Chief Executive Officer

Analysts

PJ Juvekar - Citigroup

PJ Juvekar

Thank you. Jochen just joined the company earlier this year after a long career in mining, most recently as CEO of Inmet Mining. This is a very interesting time in potash industry, and we look forward to getting an update on the business.

Jochen Tilk

Thank you so much. Well, thank you, PJ for the introduction. You said it’s the first conference, but it's also the first time that I was not introduced as the new CEO of the PotashCorp. Thanks for that. It's a pleasure to be here and thank you very much for giving me the opportunity to speak about PotashCorp and quite frankly speak a little about the experience that I had in the last five months. And five months is actually the tenure of my position since I arrived at PotashCorp, which was officially July 1, 2014.

Just to give you a second to look at the obligatory forward-looking statements. Most of you, all of you will know PotashCorp. It's a company that's been around for quite some time and we just celebrated our 25th anniversary as a publicly-traded company. Most of you know that PotashCorp was a Crown company, which is a publicly-owned or government-owned company in Canada. And exactly 25 years ago, the company went private and an IPO and that was the beginning of the PotashCorp.

We are the world's largest fertilizer producer by capacity and we are the number one producer in potash and among the largest in nitrate and phosphate. We have Canadian operations in potash that are located in the province of Saskatchewan and Cory, which happens to be the province I and my wife moved to, so it's our new home. We also have two mines in New Brunswick, one under construction and just commissioned, and an older one that will be commissioned out. We have nitrogen assets in United States. We have a big nitrogen plant in Trinidad. And we have phosphate operations, mines and plants in the United States.

In terms of potash, one of the reasons why we're the go-to company in potash is we have the largest margins. We have some of the highest margins in the industry. And as you may know, the entry barrier in potash is among the highest, I think, in any industry. I come from the commodity business. So my whole history has been coal, iron ore, base metals. And we always speak a lot about the entry barriers that we see, because it's a big factor in our long-term prospects. And I tell you because potash mines tend to be very deep. They tend to be very complex. They penetrate water barriers, that means complex shaft development. They're the highest. I think we now have a new potash mine in greenfield potash mine somewhere in the area of $10 billion. So it just gives you perspective.

And our nitrogen and phosphate business is located in United States in Trinidad, some of the best historically established, and we do capture market in the feed industry and industrial products, which again is a market of higher margins, which gives us a bit of a competitive advantage.

One of the things that we're very proud from a potash coke standpoint is that we produce strong cash flow and clearly when I extrapolate the future and we talk a little bit about the future, that's one of the opportunities that you will see in one of the number one questions that I tend to get and have been receiving as well, what will you do; what will the company do with the ongoing cash flow, the ever growing cash flow.

So there are some projections in the upcoming slides, but we've done it historically as well. When you look at our cash flow in 2013 from operating activities, it's $3.2 billion. And we’ve just come off. We're virtually in the final stages of completing a large decade-long investment program of $8.3 billion. Most of that went into the expansion of potash mine. We've underwent significant expansion programs. We actually developed new shaft, and I'll speak to the state of them, but the good news is that we're at the final stage. And as you will see, with that, we capture 40% of the world's incremental capacity. So 40% of the future incremental capacity you may see in potash is ours. And we're 95% completed. So ours is non-hypothetical. Ours is obviously real.

We are well-positioned in the potash business. There is a number of factors, but the only key factor is the geography. We're in Canada in potash. Probably, you'll all agree, one of the most stable and reliable countries. We have some of the lowest operating costs, which is the quality of our assets that we've owned for long time. And we have significant flexibility, which in this type of environment is most important. We have a flexibility to bring production on. We also have the flexibility to respond to market and as the future grow, we have the flexibility to grow with the market.

And that's a key component of some of the first works that I have done is to truly understand and show it to you today what that flexibility really is. And we have a proven track record. I think, PotashCorp, and I stated as a newcomer -- I mean how it manages balance sheets over the years. We have low gearing. Arguably we could gear a bit more. Its 1.2, but we've got lots of potential with that. We return 85% of our cash after capital to our shareholders. We have a current dividend yield of 4%, one of the highest. And we completed a 5% repurchase program just this year. And when you put it in context, since 1999 we have taken $7.8 billion to repurchase our shares at an average of $27 and today we're somewhere around $34.

When I arrived, I mean that's what new CEOs do, I mean you start looking at the business and you're breaking it down into blocks and you say, okay, what's core, what should we look at. And so you undergo strategic reviews. You take management in and you put them in groups and you say these are the elements that we'll look at. And quite frankly, you're open-minded and part of the creativity say, everything is under review. Of course, there is elements that are core, that we will not question or second guess our potash business and we have strong feelings towards our nitrogen business, but the fundamental question is about, we are an integrated fertilizer nutrient supplier, so we have every component of the business. We're very synergistic. We're strategically well-located and so when we looked at these components, we said what are the big drivers that we use to deliver shareholder value to you and to our investors.

Well, number one is exactly that. It's the goal of maximizing long-term shareholder value, something that you would expect and quite generic. And then we look at our corporate priorities and those are the ones today, but those are the drivers going into the future. Deliver earnings growth, someone reminded me flipping through the chart and said, we like earnings a lot, but we like cash better. So I just want to point out this is somewhat synonymous. Obviously, in our sense, we really mean cash when we talk about earnings growth. We'd like to minimize volatility. Part of the cyclical business, and if you're a potash producer or a nitrogen producer and you're not integrated, you're more exposed to volatility, and so many investors ask at times, it's not a desirable situation, and our principle is to return capital to shareholders.

We have put significant expansion and we've had some great organic growth in nitrogen. We've got some opportunity there. But our principal driver is that as we maximize our growth, we would like to return any incremental capital back to our shareholders. And mechanisms and how we do that are more the mechanical part, but the big effort that we have gone through is to really look what is the cash going forward, what is the remaining capital that we'll see in the future. And given that we're at the end of a significant capital program, you should expect that those amounts will be growing and if you add global growth, meaning more volume and potently higher prices than that significant potential.

And as we do that by running our operations well, I mean that is the key driver, even though -- I mean, we look at it from an overarching perspective, but at the end of the day, the better we run our operation, the more efficient we run them, the more cash we'll generate from that perspective. That's the key driver. So we look at our operations and we pursue very disciplined growth. These expansions were massive. They went on for 10 years. Going forward, we will apply a discipline to ensure that everything is justified by return. We make assumptions. We made assumptions few years ago, but I think we have a better understanding how we march forward.

We will enhance and maintain, or I should put that in the other words, we'll maintain and enhance our operational flexibility. It is a key component in a business where supply demand is a big driver in profitability, no question. The flexibility that we have, which means that we can respond to any market situation, whatever that might be and we certainly have a certain desire where we like the market conditions to be, but we also understand that the things are out of our control and we must respond to them. So we will prepare for any possible market scenario that we can envisage.

And then we would like to create and enhance again. We already have what we think is an advantage, competitive advantage, but we'd like to expand on that. That means always focus on the lowest cost, have the best flexibility, make sure that we're strategically located. There is components of infrastructure of shipping, logistics that we can enhance, which improve that. And by establishing that, we'd like to be considered as again the prime nutrient company.

And to translate a bit in the physical exercise, though, these are obviously overarching objectives and it may not be much different than those of our competitors. But we have looked at two of our nutrients. I pointed out potash, but we also have looked at nitrogen. I'll speak more about that intensively. We actually have reviews with our Board on that one. We will have the same exercise on phosphates. So that we have not completed. And again, that's with the objective to find improvements and opportunities following these green boxes. We will review our investment and we're in the process of doing so.

I've been getting a lot of questions and I'll speak a bit more. Of course as we refer to the process, people might jump to conclusions. So I'd like to be just clear at a latest light at what state we're currently at. And the review of our capital allocation strategy, that's referring to incremental cash and we'll have a chart on that one. You'll see it's massive, and we'd like to be able to tell you exactly how we intend to return that to you.

Let me start just with the picture of the world's supply and demand. You'll see that in every presentation by a potash producing company and clearly the supply will look similar, because we all draw from the same data. I think the only data point that might be better in this light than anyone else's is our own production forecast, because we've got more or better information on that one, but we're also very public about it. So clearly that's a bit of a generic chart where the world thinks the potash supply and demand is heading.

And you'll see that operation capability, which is what producers think they can produce, it isn't necessarily what they want to produce, but what they can produce is the red line or the orange line and then demand is what we project. And we do that on an anticipated demand growth of 2.5% to 3%. Across the industry, 2% to 3% is what we've seen, and that's exactly what we extrapolate going forward.

And most of that are India and China and somewhat South America, Europe and the United States, North American flat. Operating rates are anticipated somewhere around 85%, 90%. That means that people are essentially with 15% or 10% spare capacity. And the majority, and I pointed it out, is beginning of incremental new capacity to respond to this growing green graph, which demonstrates growth in demand by 2.5% to 3% since we've been PotashCorp. And when you take Canpotex, which is the facility export arrangement in which we're member with Agrium and Mosaic, then it's 60% of the world's incremental capacity.

And what we also anticipate in this graph is that volatility, the swings ought to be reduced. We've seen one year in 2007/08 when things really fell off the wagon and circumstances of increased demand, some speculations, traders coming in, really go off prices at a level that create a volatility. And then in subsequent events, you saw the downturn. And overall, we anticipate less volatility in a more balanced scenario. And to the point that we can contribute to that in our own interest, that's the scenario that we'd like to be.

I like to point out one interesting factor, and this is an observation I made when I joined PotashCorp at the beginning and then I was intrigued by that, and I think you ought to be intrigued by that as well. The operation capability is the same data that you saw in the previous graph, but we pulled it out as a bar chart. The operation capability in 2014 was estimated to be north of 60 million tons. It's somewhere around 62 million tons. So all the producers thought if they crank up their mills today, they can produce 62 million tons. And that's the number that in the commodity business is there.

But the uniqueness is when you operate at 65% and you think you got 35% incremental capability, you're really not sure. It's like a machine that sits there, but when you start turning it on, you don't know whether it runs at the efficiency. When somewhere in the middle of this year of 2014 that producers realized that the demand is somewhat better than what they had anticipated, because the original projections were way below 58 million tons, and all of a sudden it turned out to be, well, there is about 59 million tons, maybe even more of potash demand in the market, people were trying to really meet that demand.

Now no one would have taken the position, well, we're not going to deliver into it. But at the end of the year and we're almost there, we're a month short, the reality is that we're probably looking at a production of 58 million tons, at the sales of 59 million tons, at a market that may have been able to take 60 million tons.

So the big question mark is what happened to that 62 million tons, why is that not there. And you would not have seen that situation before. There was one year where the operations were pushed, but that wasn't operation. That was the infamous 2007 year. But prior to that, over 25, 30 years, that scenario didn't exist. So it's an interesting outcome. We, PotashCorp, were in the same boat. I mean we were sitting there somewhere in the third quarter of the year and we said, well, we'd like to push a little more, because the market seems to take it, prices were quite stable. But we had, similar to our colleagues, some challenges to do so.

So as a data point, in 2015 and the coming year, I think it will be an important calibration and the calibration in the sense we'll understand better what the world's capacity really is. Now one interesting spot, which I'm sure will come up in the questions and has come up before is what happened in Russia. The events at Uralkali mine will certainly add to that challenge of delivering. Whether it's 1 million tons, whether it's 2 million tons, whatever the number might be at the end of the day, but it's certainly an exacerbating factor to the real capacity.

As a mining engineer, I'm not surprised. I can tell you every time you crank up your operations to a higher limit, you will encounter issues whether it's a breakdown in equipment, whether it's technical failure. This is what we live by and that's what we have to have management systems placed to prevent it. We at PotashCorp try very hard that these events don't occur, that we have our capability. And part of my assessment and the assessment with my team in the first five months was to have a really good look at that. I like to know, we like to know and I'd like to be able to tell you what our operating capacity really is, how reliable it is, what needs to be done to get to that point, so that we have certainly, high likelihood of understanding. We like to be able to respond to the market. We just like to be stable. We like to be able to do that.

So when you go forth in 2019 with just a projection, which is the addition of the second orange bar, we think the operational capability in 2019 will be somewhere around 70 million tons, which in 2020 actually matches pretty much what we anticipate demand to be on the 2.5% to 3% growth. So somewhat as a projection. And again, 40% of that is ours in terms of that increment.

When we look at the cost profile, the other component, the flip side of quantity, and this is PotashCorp, our own priority, we see a decrease in cost. We've already made good gains in reducing our operating cost. And you can see that our target, which is the cost in 2016, is somewhere around $90 of production cost. This is the cost before depreciation, amortization and this cost does not include freight and distribution. So that's pure operating cost at the mine. And the reduction is mostly the result of running our mines more efficiently. And the biggest factor in our operations is approximately 40% labor. So the distribution of labor across our operations has the biggest impact.

And when you look at the final number in 2016, which is an objective not yet achieved, two biggest impacts on reducing the cost to that level are, number one, getting our Rocanville mine up to full capacity. It'll run at 5.7 million tons. It will be commissioned. The new shaft will be operated in 2016 and the mine will then run at 5.7 million tons. So our operating cost is lower. And the second component is decommissioning our Penobsquis mine in New Brunswick, which is a high-cost mine, and it'll switch over to our mine Picadilly, New Brunswick, which is a much lower cost mine. Those are the two factors that bring it down to those levels.

And with that, we have the opportunity to optimize our production portfolio. And people say, well, how do you choose, how do you mix? Well, the factors are pretty straightforward. We choose a subset of operating capacity by operating cost, by the impact on social issues like labor and we're very mindful of that, very respectful with our unions, and then certainly maintaining flexibility. What you should ask today, you can turn on to more, but three months later it's different. So we look at that, what can we pick and how quickly can we return it. And that's an optimization exercise that we then go with quite frequently.

And then when we look at this chart here, you can see what we come out in terms of total production and what we see our elements kicking in. For next year, 2015, we add 2 million tons to our capacity. So this year in 2014, the year that I was describing as a surprise and not having our capacity 62 million tons, we were at 9.2 million tons. The 2 million tons for next year are by the addition of people in two of our operations, actually three of our operations. So we added people. We made that decision. And with that, we believe we will run at 10.9 million tons in 2015.

Then we have our two operations coming online, New Brunswick and Rocanville and we have the opportunity to add 2 million more tons at two of our operations. So two are commissioning and two are by adding more people to existing operations. And if add that all together, we have the potential of 17.6 million tons by the year of 2017. And you can see some of it is eminent. Some of it requires a decision on some lead time. But we are quite certain that we can bring it online if needed, but we also maintained a flexibility to respond to any market condition.

How does that translate into profitability, and the big question that you might have is, well, we see that in this chart, and you can see that right now we are at $1.5 billion, which are estimated for 2014. And you can see how our cash flow can change depending on margin, which is really a function of prices, volume growth opportunity and at the cost that we anticipate. So that really translates into the opportunity and the potential that we have at PotashCorp, and that translates into our cash flow opportunities.

So that's the world of potash, our prime driver, that's how we see the world evolving, and that's the focus that we spend. A quick look at our investments, there's four of them. We have minority investments in Arab Potash; in ICL, Israel Chemicals; Sinofert, the Chinese company, the biggest fertilizer distributor; in SQM, Chilean chemical company. There might be some questions, what will you do with them.

The strategic objective is to obtain some control of participation in those companies. That was the strategic objective from day one. To the extent that we achieved that in APC and in Sinofert, we're content, we think we're in a good spot. To the extent that we have not, we're looking at them. We have not made any decision. We have not decided on what direction we might go. We have not decided on timing. And we certainly would not take any auctions without cooperating with those investments. I mean they're all our partners, we're their partners. And anything we do would be in conjunction.

The point is that we're look at them. We see them as opportunity, but we're also mindful that we can't just be minority investments for ever unless we have a plan going forward. So that's the process we go through and will communicate in time what direction we might go.

Quickly on nitrogen, our second pillar, we did have a nitrogen review. We determine nitrogen as core. That's our conclusion. So any question, well, what are you going to do with nitrogen, I can definitely answer it is core. We see a future in nitrogen. We love the business. It's a great hedge. The key factor here is we think US will remain a net importer for the foreseeable future, fracking influence, gas prices are here to stay, they won't change. So it's a good place to be, but it'll take time for anyone building ammonia capacity in United States.

So therefore for us, it's a good environment to be in. You can see that even in 2019 in our projection, operation capabilities are quite a bit below demand, which should be reflective of the prices. We understand prices are high. They peaked. They've been high for the last five years, but we don't necessarily see that as being topped. And looking in the future, whether it's somewhat modest decline or whatever, but the fundamentals are good, and that's enough for us to say this is a good core business.

When you look at that from a point of cost, I mean this really tells it all. You've probably seen that. But the US Midwest producers, we're part of them, are in the best position you possibly can be. I mean our production costs are lowest because of gas. And then when you look at freight and other cost associated with that, it's just not competitive.

Our assets are also well positioned regionally. We're in places where we can deliver and service markets that are in the surrounding and we have few competitors in that area. And we see synergies in our business. We are an integrated nutrient provider more than anyone else, and from the sales perspective, from a customer perspective, that's a big plus. It's helped us in the past. And as I said before, we'd like to stabilize our earnings, and that's one way of doing it. Right now, nitrogen is almost a third of our business. It's significant and therefore core.

Just looking at the priorities as a result of our strategic review, we're not looking in nitrogen a big bang transaction. So we're not out to say, we want a significant increase in nitrogen. Those who are familiar with the company realize that we receive a premium as potash producer. We'll maintain that focus. However, we do see opportunity on organic growth.

When you look at Lima, an expansion that we have already started, that will be completed in 2016. There is potential in Trinidad and hopefully gas there will be more reliable and improved. Those are opportunities. And we've just finished up some expansions in Geismar. And going forward, there's some possibility of further organic growth, which would get us to our objective, not significant, not material, but good rate of returns on these already existing brownfields.

And the Trinidad gas situation is one that we're going to take. We lose about 240,000 tons of ammonia a year by gas procurement. We're in company of the other nitrogen producers, but we're at the mercy of the government. We're very proactive from that one. We're trying to solve for that, but time will tell. In next couple of years, we're not projecting any significant improvement on that one.

And finally, a comment on phosphate, our third leg, we're looking at phosphate. We have not undertaken a review similar to potash and nitrogen. We are somewhat high cost producer. It's a more challenging environment. We had operational challenges, the environment challenges in the US. Jurisdiction, we've been dealing with them. I think we've turned a corner on that one going forward. We've settled on a number of issues. We have operational programs in place to improve. And our biggest advantage really is that we deliver into the industrial market quite a bit. We are in the feed market. We are in the industrial products. And it gives us a higher margin and that makes our business in phosphate quite impressive.

And to be really successful in phosphate, you need to be integrated. You need to have rock supply. It's very difficult to buy rocks. We are integrated. We have two mines at White Sprint and Aurora. So this pillar of our business is on improvement. And in the next few months, we'll do a strategic review of that and we'll where we take it from there.

Final comment I'd like to make is really on cash allocation. We just came off, as you can see in 2014, a significant capital program. And that frees up a lot of cash. We anticipate going down to a level of approximately $600 million. That's our sustaining capital base. The next year on capital should be about $1.2 billion. And then as we come down to $600 million, which is mostly sustaining capital, will also reserve a bit for opportunity in capital and good return.

Now we're adding almost $600 million to occur in cash flow that is available for distribution. So if nothing were to change in volume and price in potash and other nutrients, we're already paying out $1.2 billion in dividends. So you can add that to it and you can see what the opportunity is going forward. If you add incremental volumes and different prices, that opportunity obviously goes up significantly. Remember the chart, the matrix of different margins.

And the history of capital allocation, just to show you, our intention has always been similar. We've given money back in dividends, share repurchases and organic growth and those opportunity projects have taken a majority of it. But going forward, this will change. And you see more possibilities of share repurchase, of dividends. And then we'll always leave room for acquisitions if opportunistically there.

And our balance sheet is modest delevered. We've got room in our balance sheet. So if an opportunity on the M&A front came about, we can certainly lever our balance sheet more to take advantage of that.

We will make those determinations sometime next year. So in question, how will you bring the capital back to shareholders, will it be in the form of dividend, share buybacks, we're in the process of looking at that. Right now we're keen on establishing the number of free cash. Once we've established that, we'll let you know what our program is. And I think you would find it attractive.

That's PotashCorp and my five months. So thank you for your time and I'll take any questions you may have.

Question-and-Answer Session

Q - Unidentified Analyst

I think you mentioned it, but could you just clarify for me the logistical or what the problem is in Trinidad? Is it political or geological with the supply, I guess down there?

Jochen Tilk

Yes. The situation in Trinidad is that we receive natural gas through Trinidad, and its essentially distributed a government authority and some of it goes into LNG, some of it goes into power generation, some of it goes to the ammonia producers, which are very natural gas intensive. And over time expiration, production of gas in Trinidad has gone down, that's a factor of the overall business and the incentives, the tax environment and all of that.

So national companies have pulled back. And so the overall gas production has been reduced. And what the government does, it distributes the gas that's available. And if less is available, it doesn't add up for everyone's demand, then everyone gets curtailed. And it curtails somewhat across the board. So everyone is affected by it. It's been about 20%, but not on average. You get a call tomorrow, there's no gas, and that might last for a couple of days, and the gas will come back.

And you can imagine it's operationally difficult, because you have to respond to renew your plans. What the prospect is going forward, every year the government suggests, well, we're bringing the explorers back, the companies are exploring more, there's gas to be developed, we'll be back up to a higher number. But it hasn't happened. And we encouraged the government. We said, well, we can't operate like that and we wish that you think how we can resolve that. So that's the situation.

And we lobby, we communicate, but it's really up to the government to change that scheme. And it's up to the gas producers to come in and pick up the exploration.

PJ Juvekar - Citigroup

So how do you think about application of [ph] P&K next year, given that farmer incomes are down? Do you think there is any potential that they can cut back on applications?

Jochen Tilk

We don't think that there'll be a material change, but we also recognize there's potential for pullback. So we actually look at a modest pullback. This year, as you know, the United States had a wonderful crop, but it was also the highest application that I believe was 10 million tons of MOP, which then translates into and get the other nutrients as well.

And the reason for that was that fertilizers were affordable, potash in particular, favorable corn prices obviously that have started higher, have come off. They're back up now. And the amount of land, when you look at it, it was over 90 million acres for corn, over 80 million acres for soybeans. So clearly, the acreage, affordability of fertilizers, general economy and the prices of ag. Some of the factors have changed, but we don't see a massive pullback in acreage. We think affordability is still there. We also think that corn prices are actually decent. They're not from a point of cash return for the farmers. So we don't see a massive pullback for next year. But we're more conservative and more modest in our expectations.

PJ Juvekar - Citigroup

Can you talk potash inventories at the retail level? It seems like they were low going into the fall and everybody was trying to catch up. Can you just walk us through that?

Jochen Tilk

From all we know, we've got good transparency in United States. We got good transparency pretty much across the world. China is a little bit more enigmatic. But overall inventories are extremely low. Now there's been a shift in behavior. Distributors are not taking inventory, because they have to carry their working capital. It's a challenging business. You have to finance it. So a lot of fertilizer deliveries are going right through. We bring it in by train. It goes to the hubs. We have a lot of hubs, distribution stations that we own. And then farmers and corps will pick it up from that point.

But there's nothing in our own inventories, in our own storage. It's pretty much empty, because we delivered everything and there's not much, if anything at all, at the end. So inventories are extremely low. I can tell you at our mines, at our operations, they're extremely low. In the intermittent storage, they're extremely low. So we're starting 2015 with very low inventories in the United States.

PJ Juvekar - Citigroup

There was an unfortunate incidence at Uralkali with the sinkhole. What is your intelligence on that and how do you see that impacting the market?

Jochen Tilk

My intelligence is the same as yours. I know what I read in the publications, what you read. So just to repeat what you probably have heard a few times and what you write yourself is that from a statement perspective, the company suggested that number two might be lost. And whether or not they can recoup some of the operations is questionable. They have to make their own assessment.

The only thing I'd like to add subjectively or personally is when you have an incident of that severity, it takes time to assess. I mean there's nothing you can do to make a decision quickly. You need your technical assessments. You need to be sure if people can go back safely. And before you can make any definitive statement about the possibility of regaining some production, it takes time. You're talking months, if not beyond that.

So I would think it takes a long time for them to really assess unless the mine is lost. What possibly could be regained and then if there's a lot of work to do so. So I think for the time being on a short term, I wouldn't expect any production from number two.

Unidentified Analyst

The $90 a ton cash cost that you mentioned in 2016, it wasn't clear if that implies a higher operating rate for you than what you run at today. Or maybe you could elaborate a bit on how you think about price versus volume a couple of years out under different demand scenarios.

Jochen Tilk

The $90 assumed an operating scenario that had the volumes or the production that we were showing. So it showed Rocanville and then it would show Piccadily. Having said that, if you take any subset that includes Rocanville, you're getting fairly close. I mean number will be somewhat higher. If you take a subset from the best operating efficiency, your operating cost will go up somewhat.

But because of Rocanville and because of the efficiencies we've created, it's not material up to a certain point. When you go below that point, then of course you've got inefficiencies which translate in high operating cost. So yes, $90 assumes that we operate.

In terms of your strategy going forward, I imply that our interest, that of PotashCorp, is to create stability and to have prices in the range of affordability for farmers, but yet, prices at a level that we like to see for profitability. So it's a balance of that, and that's very consistent with the strategy that we adhered to for quite some time.

So that is our interest. There are factors that are out of our control that we don't know how they evolve. And we will be ready for any scenario. So whatever happens, we set up our company to be responsible, to be flexible enough. But our self-interest is really to create stability and manage our production as we have in the past.

Unidentified Analyst

Can you shed some light to the extent you can on what the outlook for the Chinese negotiations are likely to be, at least the framework around whatever detail you can give? And secondly on the phosphate side, what are the key factors in your mind that will determine your commitment or otherwise to that business?

Jochen Tilk

To your first question, I'm a bit speculating as you do on the Chinese contracts, because I'm not personally part of that. We are part to Canpotex. Canpotex is on a table negotiating. And the way these negotiations work is that the Chinese brewer that is occupied with that, the negotiations goes back and forth between the very supplies. And you know that Urakali, BPC, Canpotex are big players in this. And then some point in time, somebody will settle at a certain price. And we don't know when that is. I really couldn't tell you. There were some expectations at some stage that maybe by the end of the year, I really don't know.

And we certainly don't know at what prices. We have certain expectations. We think there is upward pressure and we like that to be realized in the outcome, and that's been our position. We don't know whether others, Urakali or BPC have the same view.

What is interesting is that no settlement has happened on it. So in the anticipation, nothing has happened. That means that parties have not agreed to what the Chinese has been suggesting, which was a modest uptick. That indicates that there isn't expectation on the producers' side. And I can only speak for PotashCorp that prices should go up.

The incident, what happened, whether or not that will have an effect on negotiation, whether that has an impact, I really don't know. But if it's true and if it's real that Urakali may have lost some of its production for next year, they may take a more conservative position. So I think that's all I can say. Don't know about the timing. I think there's upward pressure. Our position is pretty obvious, and I cannot speak for anyone else.

As to your question on phosphate, to be very careful and I appreciate the way you framed it, because you really said, we haven't looked at it. Right now, phosphate is core for us. We love our operations from a point of being integrated, being logistically well located. We recognize it's been a challenging year for us and we recognize that our returns haven't been where we'd like them to be and we like them to be better.

So our primary objective is to improve the returns from our phosphate business. That is our number one objective. And that's why having dealt with all the environmental issues, having really captured them and settled on those matters, that's behind us. Making some changes in the operations, which is something that we've done, and then in 2015, capture on that. And that's really again a year where we need to see those results coming through.

In terms of a broader strategic result, whether or not phosphate is core it isn't, which may have been part of a question, we haven't resolved that at all. There is some clear indications. It's very synergetic to our business. It goes to the point that we're integrated producer. But we also recognize that growth in phosphate for us is more challenging, certainly more challenging than in nitrogen and in potash. And so we look at that very carefully.

But there are many aspects of that. There's many ways that we can capture the value without divesting. And I want to be clear on that one, because there's opportunities that go beyond just saying this is not part of our business. There will always be core and always be part of the business. It's just the way we frame to be sure that it's the best return we can get from that point.

Unidentified Analyst

What gives you the confidence that supply and demand is going to become more balanced for potash moving forward? And I guess it comes to your point, you don't really know what you can produce until you've produced it. There's always new capacity coming online. So how do you think about that?

Jochen Tilk

The confidence, to be frank, is that I see is really self-interest. And I realize that it assumes that everyone finds self-interest in the same way. And that's not necessarily the case. I recognize that. But we have a clear definition of what self-interest means. It means stability. It means earnings growth and cash growth. It means reliability. And when you put all of that in there, you really come out in one operating scenario.

I think events of almost two years ago, a year-and-a-half ago have demonstrated how devastating things can be. And when you add in the mine incident, which I wouldn't wish on anyone, and it could happen to us, so I'm very mindful and humble about that, I think the definition of self-interest is pretty clear. And I fully expect people to act on that. And so that's where I gain confidence.

Your second element of operating reliability, people are mindful of that. We are and I know colleagues I've spoken to when we shared operational challenges in terms of just from a technical basis, are very mindful of that. And they play role in how you define self-interest going forward.

Unidentified Analyst

Two quick questions on cash costs. You said your expectation to go down to $90 is based on the assumption of capital utilization. Can you give us a sense for if utilization is 10% lower than what you would expect, how much higher will your cash cost be? And then second question is you just came through a big refresh of your mines and new opening which will lower the cash cost. If you were to not invest for a few years, how much incremental cash cost should we think about every year as it gets harder and harder to mine?

Jochen Tilk

10% would be fairly marginal. And just doing the math in my head, because we run a 10%, we run all conveyer at full capacity. Now we'll have such a big impact on the overall cost, so it won't be huge. You get to a point where you have to make decisions about running all operations, running some of all operations. And when you make a decision of, say, okay, we're running a subset of operations versus operations across the board, then that has an impact. We haven't made those decisions. But that would be a big factor. And then it becomes would we like to have more flexibility and accept higher operating cost or do we bring it down to a lower operating cost. But we do some flexibility, because some changes are a lot more difficult to reverse and they take more time. And at some stage, quite frankly it becomes impossible. You lose that flexibility.

On your question about if we don't make investments going forward, how much more will we have to pay, same kind of answer. That's exactly what we're trying to reduce. We're trying to maintain as much flexibility, being very mindful of not losing that dynamic. I said once before the flexibility you have today is not the same when you have a year later and it's not the same when you have two years. I mean you have to work really hard and spend capital to maintain that. And our objective right now, because ultimately we see the world demand being such that we can deliver into it, we'll maintain that flexibility.

I think the costs are relatively small for one, and then they become bigger. But in our anticipation, world demand will catch up eventually and I wish it would be fine.

Jochen Tilk

Thank you so much. I appreciate.

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