The Great Saskatchewan Potash Debate

The comment pages of Saskatchewan’s newspapers have been abuzz with debate about potash royalties since my latest op-ed on the subject appeared in the Saskatoon StarPhoenix a couple of weeks ago.

Two days later, political columnist Murray Mandryk made the case that the province should demand higher royalties rather than just accepting a few more jobs and charitable donations from the Potash Corporation of Saskatchewan.

W.R. Turner subsequently wrote into The StarPhoenix, citing my op-ed in defence of a previous Mandryk column criticized by the Chamber of Commerce. By then, The StarPhoenix editorial board had concluded, “the government should commit to at least studying the resource tax structure to make certain that those who own the potash will receive a fair return.”

Regina’s Leader-Post has been a little less sympathetic to the forces of light. It’s financial editor, Bruce Johnstone, tried to dismiss my call for a royalty review with the expression, “If it ain’t broke, don’t fix it.” John McClement and I both responded with letters arguing that Saskatchewan’s potash royalties are indeed broken.

The Leader-Post’s editorial board rejected a royalty review because it “could dent [Saskatchewan’s] image as a place that’s good to do business.” But Mandryk replied with some good mockery of claims that “this would scare away business.” The provincial NDP leader responded to this editorial in yesterday’s Leader-Post.

Perhaps not coincidentally, PotashCorp recently ramped up its charitable contributions in Saskatchewan. Joe Hilbig had an aptly titled letter in yesterday’s StarPhoenix: “Keep charity, pay royalties.”

The debate so far has revealed some slight confusion about the numbers. Many have been comparing PotashCorp’s royalty payments with its overall earnings, which also reflect nitrogen and phosphate produced outside of the province. Trent Lalonde wrote into The StarPhoenix taking journalists to task for not asking “how much of the $1.8 billion profit came from Saskatchewan mines.”

The answer is that about two-thirds of PotashCorp earnings come from Saskatchewan mines. Because company-wide earnings are net of corporate income tax and other charges applied after royalty calculations, they do not necessarily overstate the gross profit generated from potash alone.

However, it is more appropriate to directly compare potash royalties with potash gross margin (the value of sales minus production and transport costs). PotashCorp’s own financial statements make this comparison.

Interestingly, its gross margin from potash was also $1.8 billion in 2010. But in other years, this metric differs from company-wide earnings.

On the royalty side of the ledger, some believe that there was a year in which PotashCorp had zero or negative royalties because the Saskatchewan government refunded royalty payments. In fact, the company made positive royalty payments in every calendar year.

The issue was that potash companies made large prepayments in the first quarter of 2009 based on overly optimistic forecasts for the rest of that calendar year. The government booked those prepayments as revenue in the 2008-09 fiscal year and therefore had to subtract them from revenue in 2009-10, when they were refunded. (For a good explanation, see pages 3 and 4.)

PotashCorp has perhaps contributed to the confusion by not making royalty figures easily available through its online DataTool, which seems to provide every other financial variable. (It’s almost as if the company would prefer to avoid public scrutiny of royalties.)

In researching my op-ed, I went through PotashCorp’s quarterly reports to compare potash royalties and gross margins. As a public service, here are the numbers:

PotashCorp’s Royalties and Gross Margin on Potash ($ millions)

Year	Royalties	Gross Margin	Royalty Rate
1998	$ 80.1	$ 316.3	25 %
1999	$ 77.1	$ 301.9	26 %
2000	$ 77.2	$ 304.0	25 %
2001	$ 70.0	$ 241.8	29 %
2002	$ 68.0	$ 218.0	31 %
2003	$ 57.0	$ 203.7	28 %
2004	$ 92.6	$ 422.8	22 %
2005	$137.2	$ 707.4	19 %
2006	$ 66.5	$ 561.1	12 %
2007	$135.4	$ 912.3	15 %
2008	$543.4	$3,055.5	18 %
2009	$ 29.0	$ 730.4	4 %
2010	$ 76.5	$1,796.0	4 %

The above table is consistent with PotashCorp’s own presentation of the numbers. But for the sake of fairness to the company, the following table excludes New Brunswick potash, which has ranged between 8% and 11% of the corporate total:

PotashCorp’s Royalties and Gross Margin on Saskatchewan Potash ($ millions)

Year	Royalties	Gross Margin	Royalty Rate
1998	$ 80.1	$ 281.0	29 %
1999	$ 77.1	$ 269.3	29 %
2000	$ 77.2	$ 270.0	29 %
2001	$ 70.0	$ 217.7	32 %
2002	$ 68.0	$ 197.7	34 %
2003	$ 57.0	$ 182.2	31 %
2004	$ 92.6	$ 381.1	24 %
2005	$137.2	$ 646.4	21 %
2006	$ 66.5	$ 501.9	13 %
2007	$135.4	$ 833.6	16 %
2008	$543.4	$2,774.4	20 %
2009	$ 29.0	$ 670.3	4 %
2010	$ 76.5	$1,652.6	5 %

For posterity, here is my measly letter:

Potash: Sask. gets ‘measly return’

By Erin Weir, The Leader-Post, February 17, 2011

Bruce Johnstone’s Feb. 12 column (If it ain’t broke, don’t fix it) attempts to dismiss calls from me and others for a review of Saskatchewan potash royalties.

However, the royalty regime is broken. PotashCorp’s last quarterly report indicates that it paid only a nickel in provincial royalties for every dollar of gross profit generated in 2010.

Royalties were equally low in 2009. The report projects that they will be again in 2011 ( “provincial mining and other taxes are expected to approximate 4-6 percent of total potash gross margin.”)

Johnstone endorses Energy and Resources Minister Bill Boyd’s claim that “Saskatchewan still has among the highest royalty rates on potash in the world” without any specific comparisons to other countries. Canada, Russia and Belarus account for two-thirds of global potash production.

If Saskatchewan raises its potash royalties, will PotashCorp CEO Bill Doyle sweep aside the oligarchs who control the potash industry of Russia and Belarus in order to invest there instead? The reality, as Johnstone acknowledges, is that “potash companies can’t take their mines with them to other jurisdictions.”

Johnstone argues that Saskatchewan mines are expanding because of royalty reductions. However, the province has the world’s richest potash reserves and it is much cheaper to expand existing mines than to build new mines elsewhere.

Potash prices tripled between 2004 and 2010. If royalty reductions were ever required to spur investment in Saskatchewan’s potash industry, they are certainly no longer needed today.

In rejecting BHP’s takeover bid for PotashCorp, Premier Brad Wall referred to “your revenue, the rent you should be getting for the resource that you own.” Months later, Saskatchewan people are still getting a measly return on the resource they own. A provincial review of potash royalties would be a good first step toward fixing a broken system.

Weir is a Saskatchewan expatriate working as senior economist with the International Trade Union Confederation in Brussels, Belgium.

UPDATE (February 24): Quoted by Steel This Week