Roman Pysznyj, a hoist man at the BHP Jansen mine in Saskatchewan. For about $15-billion more than the cost of building the Jansen potash mine, BHP could own the world’s biggest potash supplier.DAVID STOBBE/The Globe and Mail
A window is opening for BHP Billiton Ltd. to once again try a takeover of Potash Corp. of Saskatchewan.
Speculation is intense in the fertilizer industry that BHP may mount another campaign to win over Saskatoon-based Potash Corp. after being shot down in 2010. It failed the federal government's murky "net benefit test" after a strong push from a Saskatchewan government that opposed the transaction.
Bankers, executives and advisers on the political side agree that BHP would be crazy not to look again. To be clear, there is no sign that any potential deal is under way. But there are numerous reasons that people are talking about the possibility.
The numbers work. The personalities are closer to working. Even the politics are not insurmountable because the landscape has shifted, especially in Saskatchewan. Finally, what was true in 2010 remains true now: Owning Potash Corp. is the best way to get into the potash business.
These days, BHP refers to potash as a "potential fifth" pillar, in addition to the four it is now concentrating on – major iron ore, copper, coal and petroleum assets. However, the company's actions signal more than that. The company is pushing ahead with construction of the world's biggest potash mine, its Jansen project in Saskatchewan.
First, the math. Jansen is going to cost something like $15-billion (U.S.). That's more than half the market capitalization of Potash Corp., which stands at $29-billion.
Throw on a healthy premium to ensure an offer is popular with management and shareholders, and the value would be more like $40-billion. The real cost would be much less.
Perhaps $10-billion of that could be paid for by selling off Potash Corp.'s operations in phosphate and nitrogen, which BHP has not expressed interest in, as well as Potash Corp.'s stakes in international fertilizer producers. Mothballing Jansen, which can be done once the main shaft is complete, could save another $10-billion, and provide the side benefits of reducing future supply and being bullish for potash prices.
Potash Corp. also produces free cash flow that could be used to defray the costs, especially as potash prices rebound and as the company's big expansion projects come to a close. JPMorgan expects the company to have a free cash flow yield of 4.7 per cent this year and 6.5 per cent next year.
So for roughly $15-billion more than building Jansen, BHP could own the world's biggest potash supplier and its six mines.
Key personalities have changed. Marius Kloppers, the BHP chief executive officer who rubbed Saskatchewan Premier Brad Wall the wrong way, is gone. He has been replaced by Andrew Mackenzie, who was charged with smoothing over the issues created by Mr. Kloppers. On the other side, the face of the anti-takeover campaign, Potash CEO Bill Doyle, is retiring this summer.
On the political front, where once BHP was the bad guy and Potash Corp. the local hero, it's now more ambiguous.
BHP is now a well-known corporate citizen in Saskatchewan. The company built one of the biggest new office buildings in Saskatoon in years, and moved its diamonds and potash business headquarters there even after losing out on Potash Corp. It is pouring billions of dollars into Jansen even as analysts have urged it to stop.
Potash Corp., on the other hand, drew the ire of Mr. Wall late last year for letting go 440 workers in the province while Mr. Doyle was saying that the company's dividend was "sacrosanct."
Mr. Wall would still have to figure out a way to say that potash under Saskatchewan is somehow less strategic now, but politicians can find ways.
The same is true in Ottawa. The net benefit test is opaque for a reason. Stephen Harper is very close to new Australian Prime Minister Tony Abbott, so much so that Mr. Harper coaches his Australian counterpart, and Mr. Abbott recently said in a speech that he and his party "recognize how much we have learned" from the Harper Conservatives.
It's not a sure thing, but politically connected people on the mining file say it could be done. Given the cost of Jansen, BHP might well want to try.