BHP Billiton (BHP) poised to take $1 billion stake in Potash Corp. (T.POT): Scotia Capital

Peter Kennedy Peter Kennedy, Stockhouse
0 Comments| April 16, 2014

Speculation is heating up that BHP Billiton Ltd. (NYSE: BHP, Stock Forum) may take another run at Potash Corp. (TSX: T.POT, Stock Forum) (NYSE: POT, Stock Forum), a move that may be driven by the development of the world’s largest potash mine in Saskatchewan, a new report says.

One scenario being mentioned is the possibility that BHP could take a 3% equity stake in Potash Corp., the world’s leading producer, for about $1 billion. (more about that later).

Four years ago, BHP Billiton withdrew a $38.6 billion takeover bid for Potash Corp. after the Canadian government ruled that a takeover would not offer a “net benefit” to Canada, a key test that was required under the Investment Canada Act.

However, one of the reasons cited for a possible new bid is the shifting landscape in Saskatchewan, where BHP is moving ahead with construction of the Jansen project.

BHP says Jansen is in the feasibility stage and has the potential to be both the world’s premier potash mine and a platform for a significant and scalable potash business for BHP Billiton.

In a research note, analysts at Scotia Capital said BHP is seeking a partner for the 10 million-tonne Jansen project to potentially sell down 40%. “We think Potash is an optimal candidate to partner BHP at Jansen. Mosaic Co. (NYSE: MOS, Stock Forum) is also interesting.’’

Scotia says a Jansen joint venture with Potash would offer BHP several benefits, including:
  • A well-capitalized Canadian partner.
  • Potash mine experience.
  • Market and customer experience.
  • Strong influence with the Saskatchewan government
  • A clearer path to BHP to eventually becoming the world’s number one in potash within a decade, assuming a Potash Corp payment for its Jansen stake instead of cash.

Scotia says a Jansen joint venture with BHP would offer Potash Corp. several benefits, including:
  • The elimination of the Jansen overhang, through a mutual agreement to defer the capacity until it is needed;
  • Conceptually higher realized prices across Potash’s entire system, including its equity interests;
  • Shareholder value creation through the use of Jansen capital expendituresto minimize Potash taxes and/or royalties.

“Some shareholders will correctly criticize such a thesis by pointing out that Potash Corp. has spent billions on temporarily unnecessary capacity, and, therefore, spending on Jansen would be “more of the same,’ or possibly even a ransom payment to BHP,’’ said Scotia analyst Ben Isaacson.

“While both points are fair, if long-term value creation is what we seek, then transferring Jansen into Potash Corp.’s managed hands could be in the best interests of committed Potash Corp shareholders,’’ he said.

Isaacson went on to say that to compensate BHP for (1) the interest in the $2 billion already spent on Jansen, and (2) the agreement to defer Jansen’s tonnes until they are actually needed, he thinks Potash Corp would need to give BHP an equity interest in Potash Corp. Why?

Icaacson said that if BHP were to agree to defer Jansen, he believes it would want to participate in any recovery of the potash market. If we take 40% of the $2 billion spent, and generously add a premium, Potash Corp. could give BHP a 3% equity stake in the company – for about $1 billion.

“Some could argue that BHP holding a 3% stake in Potash Corp would prevent other acquirers from making a move,’’ the Scotia analyst wrote. “We don’t think this would be the case for such a small position.’’

According to Scotia, the alternative could be that BHP partners with the Chinese or India, leaving former Soviet Union producers to move aggressively into all other regions of the world, and potentially destroying Canpotex market share. 

Canpotex is the global marketing arm for Saskatchewan potash production, and is owned by the Mosiac Co., Agrium Inc. (TSX: T.AGU, Stock Forum), and Potash Corp.

Potash Corp. shares were up 0.43% to $38.46 Wednesday, leaving a market cap of $32.8 billion, based on 856.6 million shares outstanding. The 52-week range is $45.13 and $29.67.

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