Potash Back In Vogue With BHP’s Bid For Athabasca Potash

BHP Billiton (BHP-N) is offering $341 million to snap up junior explorer Athabasca Potash’s (API-T) assets in Saskatchewan.

BHP has agreed to pay $8.35 per share in cash for Athabasca, a 25% premium to Athabasca’s closing price of $6.70 per share on Jan. 27 and a 37% premium based on its 60- day, volume-weighted average trading price.

Athabasca Potash’s Burr potash project is right next to BHP’s Jansen project, a proposed underground potash mine in east-central Saskatchewan that it acquired through its acquisition in July 2008 of Anglo Potash.

The news sent Athabasca Potash’s shares up 23.7% or $1.59 apiece to close at $8.29 per share. (Over the last year the junior has traded in a range of $1.44-$7.06 per share.)

“I can’t comment on whether it’s a good deal or not, but it’s a pure play on potash and BHP has made it clear for some time that this is an industry that it likes and that it would consider acquisitions. So it’s not massively surprising,” Tom Gidley- Kitchin, a mining analyst at Charles Stanley stockbrokers said in a telephone interview from London. “It’s not a very large deal for them and it may well not be the last in the sector.”

News of the deal came a day after Brazilian mining giant Vale (VALEN) VALEN) said it would pay US$3.8 billion to buy fertilizer assets in Brazil owned by Bunge (BG-N).

Potash, a crop nutrient, became a hot commodity a few years ago with prices above US$1,000 per tonne, up from US$150 earlier. On Jan. 28 prices were in the US$350-$400 a tonne range. BHP estimates that about 95% of potash is used as a fertilizer, and Saskatchewan has one of the best potash reserves in the world.

Graham Kerr, BHP’s president of diamonds and specialty products said in a statement that the acquisition “fits well” with the company’s other projects and properties in Saskatchewan.

Gidley-Kitchin of Charles Stanley notes that BHP is investing huge sums in developing its resource base in a variety of metals and has learned to be very careful in making acquisitions after it got stung buying Ravensthorpe, a nickel mine in Australia. BHP’s purchase of Ravensthorpe was a costly foray into specialty nickel mining. It closed the $2-billion project nine months after commissioning it.

“The history of their involvement with Ravensthorpe has made them determined to be very rigid in sticking to their acquisition parameters and so, on that basis, buying a pure potash business is clearly much lower risk,” he explains. At Ravensthorpe “there were various issues that they were aware of when they made the acquisition and they walked into it with their eyes open but they weren’t able to overcome them. [In the Athabasca Potash deal] there aren’t subsidiaries they have to sell off or, as far as I know, any technical problems or challenges that they have to overcome.”

Athabasca’s board has approved the proposed deal and major shareholders have entered into lock-up agreements, promising shares that account for about 40% of Athabasca’s outstanding stock in favour of the deal.

Athabasca Potash launched a strategic review of its operations in July 2009 and said the scope of transactions it might consider included potential mergers or acquisitions of all or a part of its business.

Looking ahead, BHP plans to invest $240 million to develop its Jansen project this year. The proposed underground potash development is 140 km east of Saskatoon and encompasses a project area of 780 sq. km.

In describing the Jansen project in a November 2008 report BHP said the potash deposits for the Jansen mine lie at depths of 850 metres to 1,100 metres, “similar to other producing mines in the region.”

Potash in southern Saskatchewan is hosted in the Prairie Evaporite formation, which forms part of the Elk Point basin. The potash deposits in the Prairie Evaporite formation are all sedimentary with the potash minerals representing the final stages of evaporation of a shallow inland sea.

BHP outlined a conceptual model where the Saskatchewan, Central Alberta and Northern Alberta sub-basins were cut off from the sea by the Presqu’ile barrier reef and periodic ruptures or overflowing of the reef caused by tectonic changes allowed seawater into the evaporating Elk Point basin.

“Similar barriers at the Peach River Arch and the Meadow Lake Escarpment further restricted the amounts of water passing through into the Central Alberta and Saskatchewan sub-basins so that by the time brines made it into Saskatchewan most of the salt had been deposited in Alberta and the brines were highly concentrated in potash and carnallitic salts,” the report outlined. “The potash salts are confined to the Saskatchewan sub-basin.”