BHP, RTP, VALE = POT, MOS, AGU (Potash Power Plays: Who’s Next?)
Potash Power Plays: Who’s Next?
August 23, 2010
A rebounding fertilizer industry and an eye-popping $39 billion dollar bid for Potash Corp. (POT) by the world’s largest mining company, BHP Billiton (BHP), are telling signals – ones that suggest that Canada’s tiny handful of potash producers and aspiring miners are ripe plums for the picking.
So say a number of investment industry analysts and money managers, who believe that more multinational metals miners may yet muscle-in on Canada’s highly lucrative potash mining business.
One senior Toronto-based financier for a major investment bank whose expertise is in the fertilizers and agricultural sectors told BNWnews.ca: “Our expectation is that this development will lead to a tightening up of the supply side for potash and will likely lead to other deals in the sector.”
“We could even see some earlier-stage companies become more attractive takeover candidates. These are development stage non-producers that could actually become producers in the relatively near future,” says the source, who is not authorized to speak to the media and asked not to be identified.
“I would anticipate that any acquisition deals might come from mid-cap to larger-cap mining companies. It’s interesting to see that large cap companies have already been picking up junior players, such as with BHP buying out Athabasca Potash earlier this year,” he adds.
Potash Corp. [TSX: POT](NYSE: POT) is arguably the flagship for the global potash industry as it is the world's largest and lowest cost producer. It also made over half a billion dollars in earnings in Q2 of this year, alone. And the company is on record suggesting that the future for potash sales is so bright that this initial offer from BHP (NYSE: BHP) isn’t worth taking seriously.
But BHP has very deep pockets and can always improve on its bid for Saskatchewan-based Potash Corp. in a deal that would give it 20% of the world’s potash market. A relative newcomer to the potash business, the diversified Australia-based mining giant laid down the gauntlet some time ago by declaring its mandate to become a "major" player in the potash industry within the next decade. And such a declaration is now proving to be much more than bravado.
Market analysts all agree that the biggest prospective corporate takeover in Canadian history would be a strategic coup for BHP. This is because the combination of a burgeoning global population and the shrinking of the world’s arable land mass are heightening the need for a significant boost in crop yields.
This is particularly the case in China, India, Brazil and other emerging major economies, where potash-based fertilizers are still being considerably under-utilized. In fact, the world faces a permanent food crisis and global instability unless countries act now by working towards doubling agricultural output by 2050. This is the conclusion of a report that was released in 2008 by government representatives of the Group of Eight (G8) nations.
Meanwhile, the renewed excitement in Canada’s potash sector is fueling speculation that its other two dominant potash producers – Agrium Inc. [TSX: AGU] (NYSE: AGU) and the Mosaic Company (NYSE: MOS) – may also become targets of other well-financed foreign mining companies. They include Brazil’s Vale SA (NYSE: VALE), which is the world’s second largest miner. It has already been moving aggressively into the global fertilizer business over the past couple of years.
But Vale is likely more interested in Canada’s two advanced-stage potash juniors than either Agrium or Mosaic, according to Raymond Goldie, PhD, a Toronto-based senior mining analyst and vice president for the investment bank Salman Partners.
“I think Vale is most interested in being a wholesaler of bulk commodities, and is not interested in the retailing of agricultural products, which is a growing part of Agrium’s business. So I think Vale is more likely to be interested – much like the Chinese – in a junior play, rather than Agrium,” he says.
Other big-league potential suitors include any number of cash-rich Chinese state-owned mining enterprises, all of which are looking to satisfy the new superpower’s voracious appetite for raw commodities. Some of them have already shown a keen interest in locking-in future Canadian potash supplies without being beholden to Canada’s potash cartel. Especially since Saskatchewan hosts the planet’s richest and most prolific potash fields.
Due to Canada’s wealth in this indispensible and irreplaceable agricultural nutrient: “China and India would seem to have an extra incentive to finance the development of greenfield potash projects,” says Salman Partners’ chemicals, fertilizers and agriculture investment analyst, Jaret Anderson.
BHP’s bold move to acquire Potash Corp. isn’t the company first foray into the Canadian potash sector. In a deal worth $341 million or $8.35 a share, BHP snapped up tiny Athabasca Potash Inc. earlier this year. (This now leaves only three remaining publicly traded potash exploration and development companies in Saskatchewan).
By gobbling up Athabasca Potash, BHP now owns the sizeable Burr deposit, which weighs in at 425 million tonnes in the measured and indicated category. BHP is also making headway elsewhere in Saskatchewan, where it is developing the world’s largest ever potash mine, the Jansen project, which is scheduled to be commercialized in 2013 or 2014.
Vale also already has a strategic foothold in Saskatchewan, where it has a solution-extraction potash mine-the-making near Regina. Vale’s vaulted ambition to compete with BHP as a future potash powerhouse also makes it another potential buyer for the two remaining advanced-stage potash juniors in Saskatchewan, Potash One [TSX: KCL] and Western Potash Corp. [TSX: WPX] [FSE: AHE].
The most obvious fit might be Western Potash as Vale’s potash project actually borders the junior mining company’s Milestone deposit. This is particularly encouraging for Western Potash, which believes that its own deposit exhibits similar geological features – ones that are also likely suitable for the realization of an energy-efficient and therefore cost-efficient solution-extraction mine.
The Milestone project is also located in close proximity to the largest solution-extraction potash mine in the world – Mosaic’s Belle Plaine mine. It has been in operation for over 40 years and is still going strong at around 2.8 million tonnes of output per annum.
But Western Potash is being coy about any possible buy-out interest from Vale, especially since the company’s president, Patricio Varas, is leading a delegation to China early next month for “advanced talks with potential strategic and/or financial partners,” according to company spokesperson John Costigan.
The low-capitalized mining junior is brimming with confidence, having just completed a scoping study (a very preliminary blueprint for a mine), as well as benefiting from a measured and indicated resource estimate of 174million tonnes of potash. All of which translates into a potential mine life of around 50 years, with an estimated output of about two million tonnes of potash per year, Costigan says.
Potash One’s Legacy deposit is similarly-sized to the Milestone project, at 189 million measured and indicated tonnes, and is undergoing a feasibility study to assess whether it has the makings of an economically viable mine. An investor relations spokesperson for Potash One declined to comment on whether the company has been made any formal takeover offers.
Jacob Bout, a fertilizer analyst for the Toronto-based investment banking heavyweight CIBC World Markets, also believes that these potash juniors are up for grabs.
“Companies involved solely in exploration of potash are likely take-out candidates, either by diversified mining companies seeking a way into the potash industry or by countries looking to lock-in supply,” he stated in a research report entitled ‘Global Potash Supply – A Focus on Saskatchewan Exploration.’