PotashCorp’s Fuzzy Math

In a couple of recent posts, I threw down the gauntlet for PotashCorp to disclose how much corporate income tax and Crown royalties it paid to the Government of Saskatchewan.

As Bruce Johnstone reports, it has finally done so:

While PotashCorp paid $77 million in resource surcharges in 2010, it also paid $82 million in corporate income taxes and $70 million in Crown royalties. In total, PotashCorp paid about $230 million in royalties and taxes to the province in 2010.

So, I was correct in suggesting that it paid less corporate income tax to Saskatchewan than to Trinidad ($82 million versus $113 million). PotashCorp paid Trinidadian tax on a manufacturing facility, not for extracting the island’s natural resources.

That is the fundamental difference between corporate income taxes and resource royalties. All industries are subject to corporate tax. Royalties are separate fees for the extraction of publicly-owned natural resources.

It is inappropriate to add up PotashCorp’s puny corporate tax payment and puny royalty payments to produce a seemingly respectable total. It is appropriate to combine the resource surcharge with Crown royalties for total resource royalties of $147 million in 2010.

That year, the company sold $2.8 billion of Saskatchewan potash. (It sold $3 billion in total, but 8% of its potash production was from New Brunswick.)

The surcharge is set at 3% of potash sales and Crown royalties range from 2.1% to 4.5% of potash produced from Crown lands. The $147-million total amounts to 5% of $2.8 billion – a nickel for every dollar of potash sold.

PotashCorp’s fourth-quarter reports compare royalties to potash gross margin, upon which the Potash Production Tax (that it did not pay in 2010) is based. The company generated a gross margin of $1.6 billion from Saskatchewan potash in 2010 ($1.8 billion minus New Brunswick). So, it paid a whopping nine cents per dollar of potash gross margin.

PotashCorp is now trying to argue that the appropriate base of comparison is neither sales nor gross margin but earnings: “If you just take a look at our net earnings after tax, yes, it was $1.8 billion (in 2010),” [CFO Wayne] Brownlee said. “But from Saskatchewan, it was $1 billion.”

Of course, earnings are money left over after royalties have been paid, so they cannot be the base from which royalties are paid. Earnings are also net of corporate income tax and other charges that apply after royalty calculations.

But then Brownlee goes even further off the deep end:

Based on potash prices of $550 US per tonne and 14 million tonnes per year of production, PotashCorp projects it would pay about $1.75 billion annually to the province, including about $500 million in corporate income tax and about $750 million in potash production tax.

The story does not specify whether he means tonnes of KCl or K2O, but we have to assume KCl because that is PotashCorp’s usual metric. To put these projections in perspective, PotashCorp produced 7.4 million tonnes in Saskatchewan and received an average price of $316 per tonne in 2010.

So, if PotashCorp sells twice as much potash at nearly double the price, it will pay substantial royalties and taxes. I hope so.

I am by no means pessimistic about the potash industry’s future. But given that PotashCorp has kept prices high by limiting supply, projections based on doubling both prices and supply should be taken with a grain of salt (or some other salt-like mineral.)

PotashCorp’s disclosure of Saskatchewan-specific royalty and tax figures advances the debate. However, it does not change the conclusion that royalties are far too low.