BHP’s Potash Corp. bid jumps another hurdle

The hostile US$40-billion takeover bid by BHP Billiton for Potash Corp. of Saskatchewan took another big step forward on Oct. 1 with the release of a report on the bid by the Conference Board of Canada.

• Prepared for the Saskatchewan government, the report broadly favours the bid and it indirectly helps BHP by warning provincial leaders of the danger of a foreign state-controlled enterprise (such as Sinochem) buying Saskatchewan’s flagship private-sector company.

At the same time, the report notes that all the recent large foreign takeovers of Canadian mining companies (i. e. Xstrata buying Falconbridge, Vale buying Inco, and Rio Tinto scooping up Alcan) were government-approved even though the deals were more damaging to Canadian interests on the face of them, with such immediate negative effects as jobs lost at head offices.

In terms of employment in the province’s potash sector, the Conference Board reckons the bid will have little effect one way or the other, and that the wider business environment may in fact be helped by a successful bid in that it further advertises that Saskatchewan is a pro-mining and pro-business environment for high-quality, out-of-province investors.

The biggest downer for the Saskatchewan government with this bid, the Conference Board points out, is that it could lose about $2 billion in corporate tax revenue from the combined company owing to BHP writing off profits gained from existing mines in the province against the cost of building its new $12-billion greenfield Jansen potash mining and processing complex in the province.

Perhaps this means the provincial government and BHP will need to strike a new mine-by-mine corporate tax regime in the province to set aside this issue if it proves to be the last one standing between BHP and Potash Corp. shareholders sealing their deal.

With this generally positive and influential report now out there and apparently well-received by provincial legislators in Regina, BHP is in a stronger position to move forward with a sweetening of its original US$130-per-share all-cash bid to sway the holdouts among the Potash Corp. shareholders. With Potash Corp. shares holding well above US$140 since the bid was launched on Aug. 18, that’s obviously a widely held view.

For its part, Potash Corp. of Saskatchewan management says its views were “ignored” in the Conference Board report and wants all interested parties to commit to the following three positions, so that provincial resources revenues don’t take an unnecessary hit: “support the sale of offshore potash through Canpotex; buy potash on an arms-length basis, for their own needs as a consumer; and support the continued profit maximization strategies employed by Potash Corp.’s existing management, as well as the company’s ongoing capital expenditures for future potash expansions.”

• Spot gold prices, which at presstime have been sustaining all-time nominal record levels above US$1,300 per oz. for days, are now becoming more widely talked about in the mainstream media than they’ve been since the 1980 price spike, signaling that the secular gold market continues to shift into another, higher gear that involves the general public.

However, retail investor attendance and enthusiasm at junior resource shows such as the recent Cambridge one in Toronto are still muted, indicating the gold bull market has a ways to go before we’re in bubble territory.

One surprising theme of recent investment shows has been the renewed interest in base metals juniors after two long years of quiet. Judging by copper’s price strength, it looks like fears of a double-dip global recession are subsiding, even if the U.S. goes the double-dip route. A side beneficiary to investors’ cautiously positive attitude is a surging interest in lithium and rare earth elements juniors, which depend a great deal on new technologies such as electric cars being adopted on large scales by developing countries.

• Amidst all the gloom these days in the U.S., one bit of good news for investors there has been the surprising and complete abandonment by Democrats in Washington, D.C., of their oft-repeated goal of letting the George W. Bush-era tax cuts expire at year’s end. It’s difficult to predict for certain what happens in the “lame-duck” sessions later this year, but it looks like current capital gains and dividend taxes will stay the same for at least one more year. At least U.S. gold investors can benefit here.