Weir vs. Wall on Potash Profits, Dividends and Royalties
Earlier this week, PotashCorp laid off 440 workers in Saskatchewan. Here are the closing paragraphs from today’s front-page story reporting a letter from Premier Brad Wall asking the company to consider reducing its dividend payments to shareholders in order to maintain jobs in Saskatchewan:
Regina economist and former NDP leadership candidate Erin Weir said if Wall truly wanted to transfer money from PotashCorp shareholders to Saskatchewan people, he would close loopholes in the provincial royalty and tax system.
The sternly-worded letter is “no substitute†for policy changes, Weir said.
Wall told reporters Thursday that the end result of any tax increases would be more layoffs.
This disagreement reflects different understandings of PotashCorp’s actions. Wall’s apparent premise is that the company is laying off workers because it cannot afford to pay them. If so, reducing the dividend would free up cash to keep paying Saskatchewan workers. He argues that higher provincial royalties would reduce the company’s cash flow, forcing further layoffs.
My premise is that PotashCorp has no shortage of cash. At the end of the third quarter, it had US$555 million of cash on its balance sheet, enough to keep paying the 440 workers for well over a decade.
Even in that quarter, which was a bad one for the company, its after-tax earnings were 41 cents per share, more than enough to cover its quarterly dividend of 35 cents per share. In the first two quarters of this year, it earned 63 and 73 cents per share.
So far this year, PotashCorp has generated a gross margin of $1.3 billion from its potash operations, accounting for most of the $1.6 billion in company-wide earnings. After paying all of its employees, the corporation had substantial profits left over, some of which it paid out as dividends.
PotashCorp is laying off workers not because of financial distress, but because it is cutting back potash production in response to weaker demand and perhaps additional supply from fractures in the Russia-Belarus potash cartel. The company replied to Wall today, providing the same explanation with more buzzwords: “If we reduced our dividend to zero, we still need to right-size our operations in order to protect the long term sustainability of our company.â€
As the dominant potash producer, PotashCorp is limiting supply to keep potash prices and profits high. The people of Saskatchewan could collect a larger share of those profits through the provincial royalty and tax system. The government could use the proceeds to compensate laid-off miners, create new jobs or serve any number of other social objectives.
If Wall were serious about wanting to help Saskatchewan workers at the expense of shareholders, he could do so through royalty and tax policy. But he is committed to keeping royalties and taxes low for PotashCorp. Making noise about its dividend policy serves his political interests without affecting the company’s financial interests.
UPDATE (Dec. 13): I have the following letter in today’s Saskatoon StarPhoenix:
In the column Wall right on PotashCorp profits (SP, Dec. 10), Murray Mandryk wrote: “From the political left came criticism that the premier was grandstanding, and instead should be severely hiking royalties to send PotashCorp a message.â€
The motivation for proposed royalty improvements is not “to send PotashCorp a message,†but to collect a better return on a resource that belongs to Saskatchewan people. The proceeds could be used to assist laid-off miners, create other jobs, fund needed public services and save for future generations.
To encourage mine expansions, the government is allowing potash companies to write off 120 per cent of their investments and giving them an endless holiday from the potash production tax on output above the 2001-02 average. PotashCorp now says it is laying off workers because it does not need recent expansions to meet demand.
Why would the province continue “massive incentives†for additional capacity as the industry complains about excess capacity? These giveaways are evidently not protecting jobs.
PotashCorp is making money at current levels of demand. For the first nine months of this year, it reported collecting a gross profit of $1.3 billion from potash mines while paying only $154 million through the potash production tax and resource surcharge. Saskatchewan deserves better.
Premier Brad Wall has mused about helping Saskatchewan workers at the expense of PotashCorp shareholders and about saving resource revenues in a futures fund. If he is serious about either idea, the first step would be to start collecting a fair share of resource revenues.
Erin Weir, Economist, United Steelworkers
UPDATE (Dec. 14): My letter is also in today’s Regina Leader-Post.
Mr. Weir,
An interesting topic, no doubt. First, I’d like to mention, as you did, that our potash industry belongs to a National and International group that colludes to manipulate supply and influences prices in their favour to achieve abnormal – and I mean that in the technical econ. sense – profits. While this certainly benefits potash producers in Saskatchewan, I am wondering what your sense is on these benefits accruing to the Saskatchewan people?
As we have seen recently, there are big rewards, but potentially big risks when industries collude. In light of recent discussions about the creation of a sovereign wealth fund (which I think is a great idea!), have we missed a big opportunity over the past 5 or so years? We heard out of the legislature recently that, while Wall seems to be warm to the idea, there is not enough resource revenues coming in this fiscal to contribute to a fund like this.
Obviously this also relates to the question of whether we, as a province, are collecting enough economic rent from the non renewable resources that we own. While there are no doubt disincentive effects of poor policy design (thinking back to the Crown Acquired oil and gas rights in the 1970s), surely there is a sweet spot that respects development and the fact that the SK citizen’s own these resources. How do you think we go about finding such a sweet spot?
I am not sure if Mr. Weir reads these so anyone feel free to respond!
Thanks for the comment. I do indeed believe that Saskatchewan has been giving away too much of the economic rent from its non-renewable resources. There are some important trade-offs in designing an optimal royalty system, but Saskatchewan could clearly collect far more resource revenue before reaching the “sweet spot†you describe.
Erin presumably it was unconsciousness on your part to omit *ownership* from the “he could do so list.”
“If Wall were serious about wanting to help Saskatchewan workers at the expense of shareholders, he could do so through royalty and tax policy.”