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Hostile Potash bid threatens Canada's grip on export price

Mill manager Josh Wheeler examines processed potash at the Mosaic Potash Colonsay mine storage facility in Colonsay, Saskatchewan


Australian mining company BHP Billiton Ltd. says it intends to pull out of the powerful group that controls overseas exports of Canadian potash if it succeeds in buying the country's largest producer, a move that would change the economics of one of the West's most important natural resources.

Executives at BHP, which formally launched its $38.6-billion hostile takeover attempt of Potash Corp. of Saskatchewan on Wednesday, told investors that the company plans to handle its own negotiations with buyers of potash. That pledge poses a threat to Canpotex, the global marketing arm of Canada's major potash companies, which plays a major role in controlling the supply and the price of a commodity that is a key ingredient in the fertilizer that farmers use around the world to grow their crops.

Canpotex, which represents Potash Corp., Agrium Inc. and Mosaic Co. in selling potash produced in Saskatchewan, accounts for an estimated 40 per cent of the commodity's global trade. If BHP were to succeed in its takeover quest and follow through on its plan, analysts say that could result in even greater price swings for an already-volatile commodity. That, in turn, could have negative implications for smaller or higher-cost potash companies in Canada and possibly for the Saskatchewan government, which makes sizable royalties from the potash business.

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Provincial leaders have so far given no indication that they would try to block BHP's bold move on Potash, the largest company in Saskatchewan and the sixth-largest public company in Canada by stock market value. But Saskatchewan Energy Minister Bill Boyd warned in an interview that his government would want to be involved in any major changes, including any decision that weakens or dissolves the export monopoly.

"That [Canpotex]model has worked well for Saskatchewan in the past," Mr. Boyd said in an interview. "We want to make sure naturally that the resources, potash itself, that we maximize on the resource for the taxpayers of our province. Of course we would want to talk about any changes to that structure and it may impact upon other decisions we would make."

The province would have to review any impact a breakup of Canpotex would have on provincial revenues, which benefit from higher potash sales through taxes and royalties, Mr. Boyd said.

The battle over the future of Potash Corp. highlights the growing importance of Prairie potash reserves in the effort to increase crop yields and raise the global food supply to meet higher demand, particularly from ever-wealthier consumers in Asia. Canada has 53 per cent of the world's potash, and Potash Corp. is the largest potash miner, with about one-fifth of global production.

Though most potash production is ultimately controlled by just two groups - Canpotex and a marketing group that represents primarily Russian potash suppliers - the nutrient has still seen wild changes in price, ranging from $200 to $1,000 a tonne over the past three years. The price was driven higher by fears of world food shortages, then pushed down by the recession as farmers bought less of the expensive fertilizer.

But Potash prices are rebounding, sitting around $375 today, lifted by rising prices for crops such as wheat and corn after extreme weather conditions curbed production in Canada and Russia.

BHP chief executive officer Marius Kloppers said the company's philosophy is to take as much out of its mines as it can and then sell the goods directly to its customers, rather than trying to control supply and collaborating with competitors to squeeze out higher prices, as Potash Corp. has done. "Our baseline demeanour, which is unchanged by this transaction ... is to market our product ourselves, stand in front of our customers ourselves, run our assets at full capacity and take the market prices," Mr. Kloppers said.

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Could Potash mark the biggest takeover in Canada? Our Investor Roundtable team takes stock of BHP's bid for the fertilizer company

Although the Australian mining giant prefers to sell its own goods, Mr. Kloppers vowed to honour commitments among the partners in the Canpotex group if the Potash Corp. takeover is approved. The specifics of those commitments aren't known, but some analysts are speculating that it could mean the death of the marketing arm.

"If BHP is successful in acquiring Potash Corp., this likely spells the end for Canpotex as it would lose its largest member," said CIBC World Markets analyst Jacob Bout.

Canpotex sells eight to nine million tonnes of potash each year. Potash Corp. accounts for 54 per cent of Canpotex's volumes, followed by 37 per cent from Mosaic and 9 per cent from Agrium.

Canpotex sells potash to private companies and government agencies, based on contract and spot prices. It sells to jurisdictions outside of Canada and the United States. In 2009, Canpotex sold 49 per cent of its potash to Asia, 32 per cent to India, 13 per cent to Latin America and 6 per cent to other countries.

To read the approach from BHP click here (pdf)

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In the event of a takeover of Potash Corp., BHP would use its own powerful marketing capabilities and eventually become the largest single player in the market, analysts said.

<iframe width="600" height="350" frameborder="0" scrolling="no" marginheight="0" marginwidth="0" src=",-80.507812&spn=49.505415,105.46875&z=3&output=embed"></iframe><br /><small>View <a href=",-80.507812&spn=49.505415,105.46875&z=3&source=embed" style="color:#0000FF;text-align:left">Potash Corp's potash, phosphate and nitrogen facilities</a> in a larger map</small>

Officials within Canpotex refused to comment on the fate of the organization, given that BHP's takeover attempt is far from complete.

Potash Corp. CEO Bill Doyle has flatly rejected BHP's $130 (U.S.) per share offer, calling it undervalued and "opportunistic." As a result, BHP has decided to take the bid directly to Potash Corp. shareholders, arguing the offer is "full and fair" and will "provide certainty" in a volatile industry.

Potash Corp. shares closed at $147.93, up another 3 per cent on the New York Stock Exchange Wednesday. They shot up 28 per cent on Tuesday, the day the BHP approach was first unveiled by Potash Corp. The higher market price suggests investors believe BHP will come back with a larger price or that a rival could jump in and offer more.

<iframe width="600" height="350" frameborder="0" scrolling="no" marginheight="0" marginwidth="0" src=",-0.703125&spn=153.26474,61.875&z=1&output=embed"></iframe><br /><small>View <a href=",-0.703125&spn=153.26474,61.875&z=1&source=embed" style="color:#0000FF;text-align:left">Potash Corp.'s key markets and investments</a> in a larger map</small>

<iframe src="" scrolling="no" height="650px" width="600px" frameBorder ="0" allowTransparency="true" ><a href="" >Your questions on BHP's bid for Potash and foreign takeovers in Canada</a></iframe>

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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