Potash now the talk of mining

Staid and steady potash may be one of the least romantic members of the mining family, but when large bags of money get thrown around, ears perk up and people start taking a second look.

Aussie behemoth BHP Billiton has landed a spectacular cannonball into the comfortable wading pool of Canada’s prairie potash producers with its audacious, US$130-per-share, all-cash hostile bid for Potash Corp. of Saskatchewan, or a 20% premium to earlier trading.

BHP’s offer was made official on August 18, and the Potash board rejected it on August 23.

The bid values Potash Corp. at just under US$40 billion, or C$42.5 billion. If the deal goes through at the current offer price, that would make it the second-largest corporate takeover in Canadian history in nominal terms, after the US$43-billion acquisition of Alcan by the U.K.’s Rio Tinto at the top of the market three years ago.

But, of course, this offer looks to be only the opening volley, as Potash Corp. shares quickly jumped to US$146.68 at presstime, giving the company a market capitalization of US$43.5 billion or C$46.3 billion. For the moment, that ties Potash Corp. with Barrick Gold as Canada’s largest mining company by market cap, a title Potash Corp. held uniquely in mid-2008 when its shares traded well above US$220 before tumbling below US$60 in late 2008 with the onset of the global recession.

Boasting a strong operating record in Canada, BHP is an excellent mining company in all respects, and the corporate culture is a very good fit with Potash Corp. So, for the Potash directors this is all about getting an improved price out of BHP.

Potash Corp. execs stand to gain a substantial windfall with any termination related to a change in control. Saskatoon’s StarPhoenix reports that long-time president and CEO Bill Doyle would receive $28 million, while executive vice-president and CFO Wayne Brownlee would rake in $8.3 million, senior vice-president of administration Barbara Jane Irwin would receive $2.9 million, and COO David Delaney would get $2.6 million.

Remarkably for the American Doyle, those sums are the tip of the iceberg, as he would stand to receive US$445 million in total from the current offer, as he held 3.43 million shares and options as of Feb. 19, according to Bloomberg’s review of company filings.

With Potash Corp. having been a provincially owned company until it went public on the Toronto Stock Exchange in 1989, this is exactly the kind of stuff that fires up Prairie populists and economic nationalists.

To stir the pot, Potash Corp. executives are rumoured to be soliciting rival bids from major players such as Brazil’s Vale and China’s SinoChem.

But any potential bidding war will be limited by the potash industry’s epically large scale. With maze-like mining complexes that stretch many kilometres underground and the necessity of building and maintaining multi-billion-dollar processing plants and supporting infrastructure at surface, potash isn’t an industry you can dabble in, as some mining companies do with gold or diamonds.

Also at stake is the very existence of Canpotex, the potash marketing arm of the three prairie potash producers Potash Corp., Agrium and Mosaic, that sells roughly half of the three amigos’ total potash output. Specifically, Canpotex sells all the potash produced from Saskatchewan mines that is sold overseas, and the cartel demonstrated its power during the early days of the recent recession when the partners quickly slashed production at Saskatchewan mines to support potash prices.

BHP, which is simultaneously advancing its own Jansen potash mega-mine project in Saskatchewan, has implied that it would pull Potash Corp. out of Canpotex and become the world’s biggest marketer of potash on its own.

The possible demise of Canpotex has reverberated through the halls of power in Saskatoon, with Premier Brad Wall telling reporters that it is a “strength of Saskatchewan that these companies work together to market the potash and we want to find out what the implications of all this are for Canpotex.”

The other big aspect to the Potash Corp. story is the continued hand-wringing it has caused in Canada in that it is yet another prized resource asset that will soon be in the hands of foreigners after the high-profile take outs of Inco, Falconbridge and Alcan in recent years, all on top of the incredible flurry of buyouts in Canada’s oil patch over the past decade. If you’re looking for one defining characteristic of Canadians from coast to coast, it’s that we’re quick to sell out.