M&A Watch: Rival bidders to BHP Billiton for Potashcorp likely hampered by strategy and lack of firepower

BHP Billiton's USD 40bn all-cash bid for Canada-based PotashCorp, the world leader in fertiliser raw materials (NPK, nitrogen, phosphate and potash), has fuelled all kinds of speculation as to the possibility of rival bidders. PotashCorp has flagrantly rejected the offer, the world’s biggest diversified resources group. Various news agencies, quoting unnamed sources, have cited possible rival bids from Brazilian supergroup Vale, the world’s No 2 miner by value, and also Rio Tinto, which ranks No 3. On Monday, Vale flatly rejected the speculation. For its part, Rio Tinto in early 2009 sold Vale its potash assets in Argentina and Canada, for USD 850m. Vale then continued to make acquisitions in the fertiliser sector, mainly in Brazil.

Prevailing speculation about which firm may do what next seemingly overlooks strategies, and perhaps more important, financial firepower. Rio Tinto not only sold off its interests in potash, but also continues to recover from its horribly expensive USD 38bn cash buy of Alcan in 2007. 

The collapse in commodity prices across 2008 saw Rio Tinto forced to let go of news on 12 February 2009, that following crippling debt of USD 38.6bn on 31 December 2008, it would seek to raise USD 12.3bn from smaller rival, unlisted Chinalco, by selling equity stakes in some of Rio Tinto’s most prized aluminium, copper and iron ore assets.

Chinalco holds 38.6% of listed Chalco, a big Chinese aluminium producer, and also 26.6% of listed Yunnan Copper.

 

Rio Tinto also wanted to sell convertibles worth USD 7.2bn to Chinalco; if the hybrid debt-equity instruments were indeed sold and one day converted, Chinalco’s stake in Rio Tinto would have increased to 18%. During 2009, Rio Tinto sold USD 3.5bn in bonds, at fairly expensive coupons over five and ten years.

Rio Tinto also embarked on heavy asset divestitures to raise cash, such as Jacobs Ranch, raising USD 761m; potash assets, as mentioned, for USD 850m, and certain iron ore assets for USD 750m. Facing a rising wall of well-documented discontent, Rio Tinto abandoned the Chinalco deal, which was replaced by the 5 June 2009 announcement of a general rights issue to raise the equivalent of USD 15.2bn, and also agreeing a monster joint venture with BHP Billiton over the two companies’ Pilbara, West Australian, iron ore assets.

There is now, naturally it would seem, speculation that Rio Tinto is going to team up with Chinalco to possibly bid for PotashCorp. A strange world it would be, indeed, if run by speculators. Rio Tinto’s balance sheet has improved hugely over the past 18 months, but would be strained in a bid for PotashCorp, even if assisted by a Chinese partner.

For its part, Vale operates the Bayóvar phosphate rock mine in Brazil, and Taquari-Vassouras, the only potash mine in the country. Rio Tinto previously described the Potasio Rio Colorado potash deposit in Argentina (now Vale’s) as “the largest potash discovery in South America”. Vale projects a potash mine with an initial annual production capacity of 2.4m tonnes of potash; start-up is planned for the second half of 2013, subject to approval from Vale's board.

 

In May 2010 Vale concluded USD 4.7bn worth of fertiliser asset acquisitions in Brazil, in buying 58.6% of Fosfertil for USD 3.0bn (72.6% of the common shares and 51.4% of the preferred shares); USD 1.7bn was attributable to buying phosphate assets from Bunge in Brazil. At the Carnalita project in Brazil, Vale was granted a preliminary license in April. This could see development of the biggest potash extraction facility in Brazil, with initial output of 1.2m tonnes a year, with possible start up in 2014. 

New mines of this size cost big money. Vale’s balance sheet generally has been increasingly stretched by a very heavy capital expenditure programme Vale has not yet even given the full green light for the build of Serra Sul, its proposed new iron ore mine in Brazil, currently budgeted at USD 11.3bn. There are equally pressing, and relatively new, demands from Simandou, in Guinea.

BHP Billiton’s interest in fertiliser has been in place for years; CEO Marius Kloppers last week told your correspondent that it can be dated to 2003. In June 2006, the group struck a joint venture agreement with Anglo Potash, giving BHP Billiton a 75% interest in a large land position in Saskatchewan. In July 2008, BHP Billiton acquired Anglo Potash for cash of USD 270m. Earlier this year, BHP Billiton announced a successful USD 320m cash bid for Athabasca Potash.

BHP Billiton currently holds exploration rights to a total of more than 14,000 square kilometers of prospective ground in the Saskatchewan potash basin. Kloppers also referred to his knowledge of potential corporate activity in and around the other major potash basin (outside Saskatchewan) where, in recent years, there has been talk of plans to possibly merge Uralkali and Silvinit, two big potash miners, along with Apatit, a phosphate miner, and also possibly also Acron, a major distributor. Uralkali and Silvinit combined would hold around 20% of global potash capacity, roughly equal to that held by PotashCorp.

Since its formation early in the decade, BHP Billiton has rarely been seen in the acquisitions field: Tier I acquisitions rarely come onto the market. When the group does move, it seems to prefer shut out bids. When it jumped on the biggest, to date, it was outright firepower that left Xstrata silent when BHP Billiton offered USD 7.2bn in cash for the take out of Australia’s WMC in 2005, mainly for Olympic Dam.

BHP Billiton is due to report full year results on Wednesday. The numbers are likely to confirm the status of the group’s balance sheet as “bomb proof”, and capable of safely taking on the debt obligations that would arise from buying PotashCorp. Already on 31 December 2009, BHP Billiton possessed a balance sheet of unusual strength. For now, the battle to win the hearts and minds of PotashCorp’s shareholders is fully underway.

PotashCorp, based in Saskatchewan, has presented convincing evidence that trend lines indicate a return to strength in fertiliser prices, and complains that BHP Billiton’s bid is too low. PotashCorp also holds attractive strategic investments, including 28% of Jordan’s Arab Potash, 10% of Israel’s ICL, 32% of Sociedad Química, all potash miners, and 20% of Sinofert, the biggest distributor of potash and other fertilizers in China. Timing may not be everything, but BHP Billiton’s bid for PotashCorp seems to be about as good as it gets.

 

This article was written by Barry Sergeant of Mineweb (Johannesbourg), the world's top mining and mining investment news website