Saskatchewan’s Potash Corp

Examining the effects of a potential takeover of Saskatchewan's Potash Corp

“As you know, the last several weeks have been eventful for Potash Corp.” — Bill Doyle, President and Chief Executive Officer, in a statement to Potash Corp’s shareholders.

“Eventful” is the right word. If you were unfamiliar with Potash Corp, the Saskatchewan-based Potash producer, a hostile takeover bid from Australia’s mining giant BHP Billiton Ltd. has most likely changed that. In late August, BHP launched a $40-billion hostile takeover of the Canadian firm that has caught the attention of the media, the government and people of Saskatchewan. In response to the bid, Doyle stated that, “First and foremost, we are convinced that the BHP offer fails to reflect the company’s present and future value.”

The present and future value of Potash Corp is significant for a few reasons. Saskatchewan has the largest potash industry in the world, accounting for about 40 per cent of the world’s trade. Potash Corp is the world’s largest potash producer and the second and third largest producer of nitrogen and phosphate, three primary crop nutrients required for crop production.

Potash makes food grow. Without it, there would be a global agriculture deficit. Therein lies the inherent value of potash. In addition to its inherent value, global crop trends have converged to create an environment that makes Potash Corp a very attractive company. According to the Food and Agriculture Organization (FAO) of the United Nations, population growth and urbanization is increasing the global demand for meat products. To feed our growing population, The FAO has forecast that global annual meat production will expand from 228 million tonnes in 2009 to 463 million tonnes by 2050, with the cattle population estimated to grow from 1.5 billion to 2.6 billion. We need potash to feed those animals.

These long-term drivers of demand will provide an environment consistent for potash demand that will be somewhat immune from the vicissitudes of global market fluctuation. Global grain consumption remains high and grain inventory has steadied, allowing crop prices to rise and create supportive economic conditions for farmers in virtually every major growing region, according to the FAO. Prices for corn and wheat have risen by as much as 35 per cent since the beginning of the quarter. Consider that in this year alone, China is expected to import over 75 per cent of soy bean requirements, which equals out to one million tonnes per week of soya.

A rising demand for food across the board equals a growing demand for fertilizer. The global potash industry is expected to produce approximately 60 million tonnes in 2011 and analysts expect that to mean an operating rate of 90 per cent across the potash sector. With as much accuracy as can be predicted, this should see Potash Corp experience very profitable years.

BHP wants to take advantage of this ripe market and take control of Saskatchewan’s pivotal resource. A statement released by BHP implied that the acquisition will accelerate BHP Billiton’s entry into the fertilizer industry and is “consistent with the company’s strategy of becoming a leading global miner of potash.” The statement also added that BHP said the fertilizer industry was attractive because of increasing demand for food and a shift to higher protein diets.
What does this mean for Canada?

From the Canadian perspective, there are a few issues at stake, including the country’s ability to maintain sovereignty over its natural resources and its multi-billion dollar agribusiness and agricultural sectors.

In 2008, Potash brought in $7.4 billion in sales. The potash reserves in Saskatchewan are world class and even conservative estimates suggest there is enough of the resource to supply world demand at current levels for several centuries. Keeping the resource and revenues in the province is vital for the Saskatchewan economy, the second fastest growing economy in the country behind Newfoundland and Labrador.

Critics of the takeover have turned to Ottawa to block the deal on the grounds that the company, and the resource, should remain Canadian. In Saskatchewan, there are legitimate concerns that a takeover would mean job loss and a significant hit to government revenues. The Saskatchewan Government is concerned BHP’s move will drive down potash prices; that will mean lower revenues for the province, which collects royalties from the resource. BHP has said it plans to keep jobs and Potash Corp’s head office in Saskatchewan, but that it would sell potash itself, cutting Saskatchewan out of that process.

In early September, Canadian Prime Minister Stephen Harper increased the profile of the controversy, adding his voiced to concerns surrounding the possible foreign takeover. Harper told a news conference in Saskatoon that he is aware of the potential damage precipitated by the potential transaction. “I understand why those concerns exist, and I assure you that, should there be any such transaction, those concerns will be thoroughly analyzed,” he said.

On the first day of a new parliament session in Ottawa, Harper also said that he has spoken to Saskatchewan Premier Brad Wall, who is fighting to protect Potash Corp from any takeovers. Wall is hopeful that the federal government can provide some wiggle room for the company if it cites a law that prohibits a foreign takeover if it’s not a “net benefit” to Canada.

Awaken the giant

It seems that the potential takeover has caught the attention of Chinese mining companies, stirring them into also making a move for Potash Corp. Chinese companies are uneasy at the idea that a BHP Billiton takeover of Potash Corp might create a “potash monopoly” that would boost prices and hurt China, a major importer of the mineral used in fertilizer.

As far as Potash Corp is concerned, more interest will mean higher value for the company. In a statement from the company, Doyle said, “We believe BHP will not be the only bidder. In fact, the number of third parties have already expressed interest in alternative transaction, some who we approached and some who initiated contact on their own,” says Doyle. “BHP Billiton’s unsolicited US$130 per share offer is wholly inadequate and substantially undervalues our company.”

Going to court

On September 23, Potash Corp went to an American court to block BHP’s takeover on the grounds BHP has made “false statements and half-truths” in an attempt to undervalue the company.

Potash Corp has asked for a resolution before the November 18 deadline on BHP’s bid. The move is seen as a stalling tactic to try to find an alternative offer that will keep Potash Corp’s revenues in the province.

As the premier producer with unparalleled assets in its industry, and given its position in the market and the strengthening agriculture fundamentals, Potash Corp is a uniquely valuable asset. The future of Potash has significant consequences for Saskatchewan and Canada. The fight over Potash Corp is ongoing and will be watched very closely by the Canadian government and industry.

As events continue to unfold, potash value continues to increase. In the words of Doyle, Potash Corp and Canada expects that this process “will be more like a marathon than a sprint.” As of September 24, Potash Corp’s U.S.-listed shares ended at $146.33 on Wednesday, still trading well above BHP’s $130 offer.