Thursday, October 27, 2011

Mountains and Molehills

Since the election campaign began in Saskatchewan, the election has been framed mostly around the NDP's commitment to review potash royalties to increase the return for the people of Saskatchewan. The SK Party has condemned this idea, and gone as far as to suggest that Saskatchewan's potash companies would jump ship if such a review took place.

Lingenfelter countered this argument with the idea that no company would walk away from a $2 billion dollar arrangement simply because they weren't making $3 billion. Which, is a pretty good argument. But, allow me to add a few more arguments.

Let's start with an exploration of other potash options.

It's a well known fact that Saskatchewan has an incredible amount of potash; and some would argue that Saskatchewan's potash is among the finest (if not the finest) in the world. As such, a company turning their back on mining a higher quality potash because of a five-cent increase in royalties is a bad argument. That would be like an oil company closing down derricks that produce regular crude in favour of only harvesting 'sour crude' deposits.

Then we come to the longevity argument. As mentioned above, Saskatchewan has a ridiculous amount of potash. For example, the K-1 and K-2 mines in Esterhazy have been in operation for almost 50 years. Now, that is a remarkable amount of time for a mining operation to be open. Obviously, it is in a mining company's best interest to open a mine where there is a great supply to be mined.

If potash companies were to leave Saskatchewan, there are other options and places for them to go...But will those areas grant the same kind of longevity to the mines found in Saskatchewan? If a mining company has an option between opening a mine that would last 50 years (but where the government takes a higher royalty rate) VS opening a mine that would last 10 years with a lower royalty rate; it's a no-brainer.

Cost effectiveness says that it is cheaper in the long run to establish the longer running mine, than it would be to open a mine for a few years, tap local resources, and then be forced to develop ANOTHER mine. As such, the issue of longevity seems to favour Saskatchewan heavily. As a world supplier of potash, and a major supplier at that, Saskatchewan is the best option for potash investment; regardless of the royalty rate.

As such, it is doubtful that any mining company would turn their back on Saskatchewan simply because royalty rates went up to a ten cents on a dollar. I'm sure there's more reasons than the ones I've listed above, but those are the two major ones that I can think of.

And that brings us to a bit of fortuitous timing.

Today, PotashCorp's third-quarter earnings were released for all of Saskatchewan to hear. The company posted an incredible $826 million dollars in profits. Now, if my math is correct (it probably isn't, since math isn't one of my strong suits) that means Saskatchewan received $41,300,000 in potash royalties from the company.

That means PotashCorp made $784,700,000 in profit. Brad Wall suggests that PotashCorp reinvested $590,000,000 in infrastructure and expansions. If that's true, PotashCorp still cleared  $194,000,000.

(Simplified process:
Total PotashCorp profit [826,000,000] MULTIPLIED by Government Royalty Rate [.05] = government profit

Total PotashCorp profit [826,000,000] MINUS Government Profit [41,300,000] = PotashCorp Profit

PotashCorp profit [784,700,000] MINUS expansion cost [590,000,000] = final PotashCorp profits) 

That's a fair chunk of change. So, let's see what would have happened if the royalty review had been in effect.

Under this increased royalty, the Saskatchewan Government would have made $82,600,000. That means PotashCorp would have made $743,400,000. Take away the expansion cost of $590,000,000 and PotashCorp has a final profit of $153,400,000.

(Simplified process:
Total PotashCorp profit [826,000,000] MULTIPLIED by Government Royalty Rate [.10] = government profit

Total PotashCorp profit [826,000,000] MINUS Government profit [82,600,000] = PotashCorp profit

PotashCorp profit [743,400,000] MINUS expansion cost [590,000,000] = PotashCorp final profit)

That makes a total difference of profit of $41,300,000 under the potash review. Let's face it, $41,300,000 is a drop in the bucket when your company is making $826,000,000 a year. And even if they did spend $590,000,000 in expansions, then a profit of $153,400,00 FOR ONE QUARTER of operating is a damned fine impressive profit.

As such, from a mathematical standpoint the overall loss to PotashCorp is not as bad as Brad Wall is making it sound. And if a company is going to leave because they're making $41,300,000 less than they were before, but still made $743,400,000 (after the government's cut) then they need to readjust their priorities...

Now, with all that headache inducing math out of the way, we can move on to the molehill part of this post.

I mentioned when we talked about the leader's debate that Brad Wall brought no real substance forward when compared to Lingenfelter and the NDP Platform. Well, Wall made his own major announcement today and it fizzled almost immediately after he spoke it.

I am talking of course about Wall's idea to move the school calendar forward to make K - 12 start after Labour Day, as opposed to the way it current works in which there is a small break a week after the school season starts.

While some have said it's a good idea; many others have come out to condemn the idea. Namely, school boards and teachers have condemned the move since Wall has proposed the idea without any consultation with them. Furthermore, the idea of what happens with those lost days begins to rear its head. Some have suggested that in order to make up for the lost week, the government will be forced to rob students (and therefore teachers, and parents) of another break somewhere down the line; with many suggesting that the week long February Break could be on the chopping board as a means of balancing the times table.

Now, why do I mention this in the same post as potash figures?

I mention it because it is the perfect contrast between the SK Party and the NDP in this campaign. The NDP is proposing bold new ideas that will have a major impact on the lives of people in Saskatchewan. While the SK Party is proposing ideas that barely register on the political radar...I mean, seriously, did anyone suspect that moving the school calendar by a week would become an election issue?

Yet another example of how the NDP is planning a long term strategy to move our province forward, while the SK Party meanders and hems and haws at actual ideas and strategies that will REALLY move Saskatchewan forward.

1 comment:

JFromm said...

Scott, I must admit I'm very impressed with the statements you've made with this article. I'll admit politics aren't my strong suit (just as math isn't yours) but with the election looming I've been trying to figure out the party platforms, and you've portrayed the potash vs education argument quite well.

Lingenfelter is looking at issues that can make a big difference in our province, where as Wall has been toying with notions that while will make a difference in the future, they're nowhere near as influential to the populace of Saskatchewan while trying try scare the same people they're supposed to be helping. Once you do look at the math whether it's 100% correct or not (I haven't checked), it's still not going to be out by that much to be a noticable difference, and if the mining companies are willing to walk away for that small of an impact to their profit lines, I guarantee another company would gladly jump in to make those profits. Thank you for your clarification on the issue.