Birth Of A Behemoth

Commentary, Crown Corporations, Frontier Centre, Local Government, Role of Government, Worth A Look

As the man who turned Potash Corp. of Saskatchewan Inc. from a nationalized basket case into a corporate powerhouse, Chuck Childers has no trouble conjuring up the moral of the story.

“I think history has shown that governments ought to govern and not try to be in business,” says Mr. Childers, 75, from his home in Denver.

But in the strange case of Potash Corp., the opposite is also true: The company would not be as strong as it is without extreme government intervention.

The Saskatchewan NDP government that created Potash Corp. in 1975 as a Crown corporation never fathomed that it would one day be a $60billion investor darling.

But Mr. Childers, who took over as chief executive of the company in 1987, knew the day would come when world demand for fertilizer would shoot through the roof. With that in mind, he built Potash Corp. into the undisputed giant of the sector. His successor, Bill Doyle, is now reaping the benefits of that strategy.

Potash was discovered in Saskatchewan in 1943, and the first serious attempts to mine it began in the 1950s. By the 1960s, the mines began to produce. The early companies on the scene included Potash Corp. of America, International Minerals & Chemicals Corp. (IMC) and Duval Sulphur & Potash Co.

The provincial NDP government, led by Allan Blakeney, saw the potential of the mines and decided to nationalize the best ones into what would become Potash Corp. of Saskatchewan. According to Mr. Childers, the negotiations were done in a way that gave the firms little choice but to sell.

“The [government] gave them what they said was a fair price. Depending what you call ‘fair,’ it might have been. But the fact is that those people were not looking to sell their properties,” Mr. Childers says.

Things went badly. The government ran the mines at full capacity, bringing far too much supply into the world market and holding prices down. A key problem was that the NDP was backed by trade unions and had to be careful about laying anyone off. The losses started to pile up.

But a turning point came when Grant Devine’s Progressive Conservatives came into power in 1982 and decided to privatize Potash Corp.

Mr. Devine, an economist by training, spent his formative years in Alberta, Ontario and the United States, where he saw the benefits of foreign investment first-hand. When he returned to Saskatchewan and got into politics, he felt the province was in a “slump.”

“Once we won and were in power, we realized that when the NDP had nationalized some of these industries it was just a huge negative signal to the rest of the world for investment,” he says. “So, to make a long story short, we said we’re open for business.”

He overhauled the province’s economy, with one of the key measures being to privatize Crown corporations, including Potash Corp.

When it came to deciding who should lead the enterprise out of the government’s shadow, Mr. Childers was an obvious choice.

The Conservatives knew him well from their days in opposition in the 1970s. Mr. Childers was running mines for IMC at the time and fighting a costly legal battle to keep the NDP from nationalizing the company’s holdings. (It eventually compromised by giving the government rights over a sales contract.) He was also an industry lobbyist, trying to convince the government that it needed to cut back production for the industry to make a profit.

The government liked his vision and named him CEO in 1987, two years before the company went public.

The results were immediate. In 1986, Potash Corp. had lost about $100-million. In 1988, one year after privatizing, it made $100-million.

“About half that turnaround was cutting operating expenses, where we laid people off and quit running mines if there was no room [on the market] for tonnage. And the other half of the turnaround was getting prices up,” Mr. Childers says.

Cutting back production quickly made the company profitable again. But in Mr. Childers’ mind, that was just the beginning. In the 1980s, fertilizer was used mainly by developed countries in North America and Europe, but he says he knew that growing populations in emerging countries would eventually want to add protein to their diets. That would require a lot more grain, hence more fertilizer.

“It seemed so obvious to me that I couldn’t believe some people didn’t get it. But there are certain investors that are only interested in what you’re doing in the next six months and not in the long term,” Mr. Childers says.

With that in mind, Potash Corp. went on an acquisition spree to consolidate as much of the North American industry as possible. Besides adding potash mines, it also became one of the world’s biggest nitrogen and phosphate producers.

The company also held back tonnage from the market wherever necessary to keep itself in a position to supply it when the demand picture improved. Its competitors, for the most part, produced all-out.

Today, Potash Corp. is the only fertilizer company in the world that can increase its capacity significantly over the next few years, when the world needs it most. That puts it in a dominant position, unmatched in market capitalization by any Canadian company (with the possible exception of Research in Motion Ltd.).

“We’re a 20-year overnight sensation,” says Mr. Doyle, who was brought in by Mr. Childers and took over as CEO in 1999. “We put this strategy in place in 1987. It took us a while to get here. But believe me, we put it in place and stuck with it every day.”

Investors eventually caught on. In early 2006, Potash Corp. shares began their meteoric rise from about $30 to more than $200. They closely tracked potash prices, which analysts say are averaging around US$600 a tonne. Mr. Doyle believes US$1,000 a tonne is not far away as grain stockpiles shrink and the food crisis makes headlines around the world.

Put another way, the company expects be very profitable for a very long time.

That makes two of Potash Corp.’s key architects, Mr. Devine and Mr. Childers, very proud. Events of the past couple of years proved their ideas from two decades ago were the right ones.

“It was one of my major accomplishments because, philosophically, it was in tune with what I saw in other parts of the world, and secondly, it’s turned out to be extremely profitable,” Mr. Devine says. “People have made literally millions. It’s just a great story.”