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Posts Tagged ‘PotashCorp’

Mining Week 01/’12: New year – Same fear

January 7, 2012 Comments off

Top Stories of the Week:

  • Alcoa cuts aluminium production in fear of lower demand
    • Alcoa announced shutdown of 532,000 tonnes of smelting capacity at the top of the cost curve to lower production costs and improve competitiveness. The 12% reduction of capacity mainly hits operations in the USA.
    • Sources: Financial Times; Wall Street Journal; Alcoa news release
  • Potashcorp temporarily closes a third mine because of low demand
    • After recently temporarily closing down Lanigan and Rocanville mines, PotashCorp now decided to temporarily close Allan mine to because of lack of demand for fertilizer. The combined shutdown of the three mines results in approx. 1 million tonnes of potash, or some 10% of the company’s annual production.
    • Sources: Wall Street Journal; PotashCorp Q4 market analysis report; text
  • Unions in Canada and Zambia make their case for wage increases
    • A union representing copper mine workers in Zambia signaled the foreign miners will have to agree to higher salary increases than the average offer of 11% to prevent widespread strikes. At the same time Rio Tinto Alcan and Caterpillar are taking a strong position against unions in Canada by locking out union workers after expiry of the negotiation periods.
    • Sources: Wall Street Journal on Zambia; Wall Street Journal on Canada

Trends & Implications:

    The mining industry for the last 2 years has been and continues to be gripped by 2 paradoxical fears:

  • The fear for slowing demand due to the lack of recovery after the financial crisis – With the financial crisis over 4 years old already the typical macro-economic cycle of 6-9 years has clearly been disrupted. Governments and companies are still operating in ‘crisis fighting’-mode because demand does not pick up like after a regular economic downturn. Large investments are still undertaken because the belief in the long term demand driven by population growth and growth of average GDP/capita is unchanged, but at the same time companies are trying to manage short term lack of demand by scaling down or temporarily closing operations.
  • The fear for strikes and civil unrest resulting from struggling individuals facing mining companies that continue to realize high profits – Despite the financial volatility the commodity prices generally have remained high, making mining companies among the few companies in the world that continue to generate high profits. With people around the world facing the economic crisis and feeling its impact, friction develops between the rich companies and the less well off workers and neighbours.

©2012 | Wilfred Visser | thebusinessofmining.com

Technological Risk in Mining: Biotech replacing Potash?

December 3, 2010 Comments off

“Researchers conducting tests in the harsh environment of Mono Lake in California have discovered the first known microorganism on Earth able to thrive and reproduce using the toxic chemical arsenic. The microorganism substitutes arsenic for phosphorus in its cell components.”

“If this bacterium can exist without phosphorus, it’s possible we could create new kinds of fertilizers as phosphorus continues to run out on this planet. Scientists have been searching for a synthetic alternative to phosphorus-based fertilizer, the basis for modern agriculture, so far with little luck. It’s also possible that we now have a new tool to battle toxic arsenic dumps: new organisms that could incorporate all that poison into their genetic structure. Pretty clever creatures, all and all.”

Source: NASA; TBD.com, December 3 2010

Observations:

  • A new type of bacteria found by NASA is said to open new areas of research that could potentially lead to alternative forms of (biotechnological) fertilizer. However, during the press conference the scientists stressed that these potential applications should be regarded as long term opportunities.
  • During the press conference by NASA in which the discovery and the potential applications were revealed the shareprice of PotashCorp of Saskatchewan, supplier of raw material to the fertilizer industry, dropped by over 1%.
  • Drop of PotashCorp share price during NASA's press conference

Implications:

  • This invention is a good example of the technological risk the mining industry is facing. Technological innovations could either result in completely new methods of production or make the mining of certain minerals redundant (e.g. by providing other sources of fertilizer, replacing applications of aluminium by polymers).
  • PotashCorp did not mention any risk in this area in its annual report. It is hard to believe for most people in the conservative mining industry that anything might radically change the business environment.
  • In some cases the mining industry will have to redefine the purpose of the business. Is PotashCorp mining potash, or is it providing the world with fertilizer? What business are they in? And will it be possible to shift to radically new technologies? The oil business is facing similar questions regarding renewable energy technologies.

©2010 | Wilfred Visser | thebusinessofmining.com

Canada rejects BHP bid for Potash

November 4, 2010 Comments off

“Canada has rejected BHP Billiton’s $39bn bid for PotashCorp, dealing a potentially fatal blow to the Australian miner’s 10-week pursuit of the Saskatchewan-based fertiliser producer.”

Source: Financial Times, November 4 2010

Observations:

  • The acquisition has been rejected because of unclear benefit to the country. BHP has 30 days convince the government of the net benefit for Canada of the transaction.
  • The main issue for the Canadian provinces is the prospect of reduced tax revenues. Additionally, the government will require additional certainty about the security of jobs.

Implications:

  • The rejection should not be interpreted as a final decision, but rather as a logical way of pressuring BHP Billiton to be more generous to the Canadian government in conceding securities. The company will most likely come with a counteroffer that is hard to reject with the argument of negative ‘net benefit’.
  • If the company manages to convince the government, it still has to persuade shareholders to sell the shares. Most likely it will have to increase the price by approx. 10 percent to gain enough support. However, the actions of other parties like Sinochem and Phosagro might force the company to back off, as a bid above $150 could not be explained to BHP’s shareholders.

©2010 | Wilfred Visser | thebusinessofmining.com

Canada Splits on Foreign Bid for Potash

November 2, 2010 Comments off

“Canada’s impending decision on the fate of Potash Corp. of Saskatchewan has ignited a fierce national debate in a country known for its championship of free trade and laissez-faire attitude toward foreign takeovers.

Politicians from a wide spectrum are saying the government should not only veto the proposed sale of Potash to Anglo-Australian miner BHP Billiton, but also re-examine how Canada handles natural resources and foreign investment generally.

Some observers say that in its broadest sense, the debate reflects a much-needed discussion on how Canada should oversee the natural resources—such as oil and uranium—on which its economy is so dependent. Others say the disagreement highlights a dangerous wave of protectionism and nationalism fed by the global economic downturn.”

Source: Wall Street Journal, November 1 2010

Observations:

  • The main reason for the provinces to resist the acquisition is the loss of tax revenue, estimated to be $5bln over the next 10 years.

Implications:

  • A secondary argument used by the provinces is that BHP Billiton would gain a too large share of the market by the acquisition. However, as BHP doesn’t currently own a significant fertilizer business, this argument doesn’t hold for regulators. Furthermore, the potential changes to the pricing system that BHP would like to introduce would promote free trade rather than keep the current cartel system (from which the provinces are benefiting) in place.
  • Rumors of an increase of the bid by 10% in order to win over the required threshold of investors were smothered by other rumors that BHP would not increase its bid before the Canadian government would give its approval to the deal. In this way BHP manages to increase the pressure on the government via the shareholders of PotashCorp, that would get a good deal.
  • Most likely Harper will try to find a compromise by giving a conditional approval, with conditions including job security and arrangements to secure income for the provinces. In this way he will be able to defend the acquisition to the political audience while not setting international markets up against Canada.

©2010 | Wilfred Visser | thebusinessofmining.com

Canadian province casts doubt on BHP move

October 20, 2010 Comments off

“The Canadian province of Saskatchewan is at odds with BHP Billiton over the Australian miner’s $39bn hostile offer for PotashCorp, raising the prospect that the deal might be rejected by the federal government.

A person familiar with the deal said on Tuesday that BHP had offered extra elements valued at about C$370m (US$359m) to demonstrate that the deal would be of “net benefit” to Canada, as required under the Investment Canada Act.

However, the province is holding out for more, specifically a one-off levy to go some way to make up for lost tax revenues that would result from the deal.”

Source: Financial Times, October 20 2010

Observations:

  • Although the province does not have the power to veto the acquisition, the opinion of the local government will influence the national regulator and government when they decide about the deal’s ‘net benefit to Canada’.
  • BHP has announced it is willing to locate the global headquarters for potash in Canada; a logical move, as the acquired assets would be much larger than anything BHP already owns in the business.

Implications:

  • Losses to the Canadian government are reduced tax revenues and the potential loss of managerial jobs (which is covered by BHP’s intent to establish a potash HQ). Benefit to the country would be higher stability of operational jobs and increasing investment power in the national potash industry, which could increase tax revenues in the long term.
  • It is unlikely that the national government will support Saskatchewan’s opinion, as the tax loss on which the opinion is based is only a relatively small and one-off temporary loss. The national government might decide to compensate the province for the reduced tax income.

©2010 | Wilfred Visser | thebusinessofmining.com

Sinochem struggles to mount Potash bid

October 1, 2010 1 comment

“Sinochem of China is struggling to find partners to mount a counterbid for PotashCorp and derail BHP Billiton’s $39bn hostile takeover following the collapse of talks with a potential Russian partner.

The failure of talks with UralKali, the Russian fertiliser group, is the latest setback for the state-owned Chinese chemical group after earlier approaches to a Canadian public pension fund, and Temasek, the Singapore’s investment agency.

Bankers believe Sinochem needs several partners, including non-Chinese companies, to mount a serious rival bid to BHP Billiton and assuage fears in Ottawa about the sale of PotashCorp to a Chinese state enterprise. PotashCorp is the largest global producer of mineral fertiliser, demand for which is soaring in China, India and other emerging economies.”

Source: Financial Times, September 29, 2010

Observations:

  • The deadline of BHP Billiton’s bid for PotashCorp is November 18th. The company hopes to convince shareholders to sell over 2/3 of the shares at a price of $130/share.
  • China imports approx. 4 million tonnes of potash per year, growing at a high rate. The Chinese government is afraid a takeover of PotashCorp by BHP and the resulting potential change in pricing mechanism will reduce stability in the market.

Implications:

  • PotashCorp has built up a shareholder plan that makes it difficult for a foreign company to assume control. The plan is mainly targeted against BHP, but makes it harder for other foreign firms to prevent the merger from taking place as well. Many Canadian officials will not be glad if PotashCorp falls in Chinese hands, therefore the Chinese government, via Sinochem, is looking for other partners.
  • The probability of a competing bid surfacing is rather low, as it would have been in the interest of a competing party to announce the counterbid as early as possible. The most likely remaining alternative is a partnership between a major minor and a trading house, many of which hold strong positions in the agricultural sector.

©2010 | Wilfred Visser | thebusinessofmining.com

Sinochem in push to foil BHP’s Potash plan

September 9, 2010 Comments off

“Sinochem, the Chinese state-owned chemicals group, is trying to recruit at least one sovereign wealth fund and a Canadian pension fund for a consortium to block BHP Billiton’s $39bn hostile takeover of PotashCorp of Canada.

People familiar with the discussions said Temasek, the Singapore state investment agency, had been approached to join the consortium, along with several Canadian pension funds, including Alberta Investment Management, a pension fund with $66bn under management.”

Source: Financial Times, September 8, 2010

Observations:

  • Sinochem is reported to try to form a consortium to buy a strategic stake of PotashCorp to prevent BHP Billiton from acquiring the company. The Chinese company, backed by the Chinese government, is said to be afraid the targeted position of BHP would decrease stability of the fertilizer supply to China, which is crucial for the food security in the country.

Implications:

  • Chinese firms appear to use the strategy of buying 10-20% stakes of companies that are about to be acquired in order to prevent the acquisition in case the deal is thought to be harmful to Chinese interests. Using this “divide and conquer”-strategy, Chinese firms try to limit the negotiation power of their suppliers.
  • The advantage of state-controlled Chinese firms is the availability of large amounts of cash and the support of development banks, which helps companies like Chinalco and Sinochem to buy strategic stakes in suppliers. Clearly, the pockets of Sinochem are not deep enough to prevent the acquisition without help from other parties.

©2010 | Wilfred Visser | thebusinessofmining.com

Top 10 Priorities of Vale’s CEO Roger Agnelli

September 2, 2010 2 comments

Roger Agnelli

What are the things the CEO of the world’s second largest mining company is worried about? What is Vale’s CEO Roger Agnelli doing to catch up with BHP Billiton? What is on top of his “To Do”-list?

An analysis of Vale’s latest annual and financial reports, investor presentations and the news about the company in the last months yields a list of 10 issues that are likely to be at the top of Agnelli’ list of priorities.

The list holds strategic, operational, financial and relational activities, each of which are scored in terms of importance and urgency. Priority 1 on the list is trying to prevent BHP’s acquisition of PotashCorp. Priority 10 is managing breakthrough innovation of copper processing in Carajás. Read on for the full list of priorities.

1. Assess opportunities to prevent BHP Billiton’s PotashCorp acquisition

BHP Billiton has made a hostile $39bln acquisition offer for PotashCorp, thus following Vale’s move of entering the potash business as a diversified miner. However, the potential changes to the market and to potash pricing (currently controlled by regional cartels) are likely to make Vale’s potash assets uncompetitive. Although the company has denied being in talks with PotashCorp to find alternatives, Agnelli will certainly devote a large portion of his time to finding a response to BHP’s offer.

2. Manage integration programs to reduce costs

Vale has grown rapidly partly because of a large number of acquisitions. Insiders comment that many of the acquired companies have never been integrated completely, creating operational inefficiencies and a lack of corporate culture. To sustain growth, Agnelli will be working hard on realizing the synergies from acquisitions by building global businesses. Part of this assignment is the carve-out of the aluminium business, which has been sold to Norsk Hydro this year.

3. Anticipate on Brazilian election results

Brazil will elect a new president, senate and governors on October 3rd 2010. Both economic policy and environmental policy on federal and state level could be impacted significantly by election results. Agnelli is certainly developing scenarios to react on post-election regulatory changes.

4. Study increase of gearing in order to accelerate growth

The company has traditionally grown by M&A, but is currently guarding its gearing carefully. However, in order to enable further acquisitions, Agnelli will be discussing increasing the gearing and accessing debt with the new CFO Cavalcanti, who took over from Fabio Barbosa at the end of June, and banking partners.

5. Compete for position in China

Compared to BHP Billiton and Rio Tinto, transportation distance poses a disadvantage to Vale in supplying iron ore to China. While Rio Tinto is creating strong ties with Chinese government via its partnerships with Chinalco, Vale will need to find alternative ways to improve relationships with clients and government in the country that is responsible for most of the growth in demand of its products.

6. Manage development of Guinean iron ore deposits

An important part of the growth of the iron ore production in the next decade should be coming from Guinea, where Vale will develop the Simandou South deposit. Vale will need to get infrastructure in place and start development soon in order to please the government, which recently took development rights away from Rio Tinto because the company was not proceeding fast enough.

7. Reduce iron dependence

Growing the copper business unit and building a fertilizer business are two of the ways in which Vale tries to reduce its dependence on iron ore. Although the iron ore business is a star business with solid growth perspectives, the volatility caused by the dependence on one single commodity will worry Agnelli. Diversification into other business units is crucial for the long-term stability of the company.

8. Gain access to coal in Latin America

Although a lot of iron ore is shipped to China, Brazil is booming too. In order to produce steel for the domestic market, Vale needs to develop coal capacity in Latin America, which will require strategic acquisitions and targeted exploration.

9. Manage employee relations after Vale Inco strike

The board will need to prevent repetition of strikes like they experienced at Vale Inco during the last two years in Canada. Reviewing and improving international employee relations is both crucial for the company’s productivity and to improve the image in labor market, where Vale still has difficulties to attract international management talent.

10. Manage technological processing innovation for copper in Carajás

The company is trying to scale hydrometallurgical copper processing technology to commercial level in the Carajás UHC plant. Success in this project would have significant profit impact and would position Vale with the current deposits in development as one of the most competitive copper producers globally.

Sources: Vale annual report 2009, Vale summary review 2009, Vale investor presentation February 2010

PotashCorp calls BHP’s behaviour ‘unethical’

September 1, 2010 Comments off

“The hostilities between PotashCorp and its suitor BHP Billiton escalated on Tuesday when the Canadian fertiliser producer accused the multinational miner of “highly unethical” behaviour.

Potash said that BHP had made unsolicited contact with its customers as part of BHP’s $39bn hostile bid for the Canadian company.

Stephen Dowdle, PotashCorp’s sales chief, said in a letter to customers that the company had learnt that BHP had ‘begun to cold call many of you’.”

Source: Financial Times, September 1, 2010

Observations:

  • PotashCorp complains about BHP Billiton calling the key customers of the company, trying to convince them about the value of the deal.
  • BHP has launched a campaign to win over stakeholders to sell their shares at $130. Marketing to other stakeholders like government, suppliers and customers is obviously part of the strategy to achieve a positive public opinion to the deal.

Implications:

  • BHP’s move to discuss the results of the acquisition with PotashCorp’s clients & suppliers is not strange in itself. Paying $39bln for the company without knowing the thoughts of key stakeholders would be rather naive. However, the ‘marketing objective’ of calling the stakeholders at this stage is obvious.
  • PotashCorp itself is not fully innocent of dubious practices either. When publishing the brochure to convince shareholders not to sell to BHP Billiton, the company announced talks were ongoing with various parties that could lead to other deals. This has been one of the main reasons for the share price to increase to $150, making a quick deal for BHP Billiton unlikely.
  • Most likely BHP will have to make a new offer around $145-$150 per share to get the required two thirds of the shares. This will cost the company an additional $4.5-5.0bln.

©2010 | Wilfred Visser | thebusinessofmining.com

BHP faces potash cartel backlash

August 27, 2010 Comments off

“Mosaic and Agrium, the partners of PotashCorp in Canada’s fertiliser cartel, have launched a campaign defending the industry’s pricing and marketing arrangements in a move that could impede BHP Billiton’s $39bn takeover bid for PotashCorp.

BHP has signalled it plans to use infrastructure such as port and rail facilities that belong to Canpotex, the cartel that comprises PotashCorp, US-based Mosaic and Agrium of Canada. “

Source: Financial Times, August 26, 2010

Observations:

  • The fertiliser cartel, which controls 70% of the global market in cooperation with the Russian cartel and PhosChem, is currently regulating supply in order to keep stable, high prices.
  • BHP is planning to operate PotashCorp’s mines at full capacity and has also indicated it wants to move the fertiliser market to a day-based pricing system.

Implications:

  • BHP will have to play according to the rules of the cartel at least in the first years after the acquisition (if it succeeds). The cartel shares logistical assets that are crucial for the Saskatchewan operations to operate at low costs. Breaking the rules of the game would seriously impede BHP’s access to these assets.
  • BHP’s incentive to break the rules of the game are grounded in the production cost curve. Lowering the global price would force many small operators (including Vale) out of business.
  • The move of BHP into the phosphate business will force the high cost suppliers to lower cost. This is the main reason various players are trying to prevent the acquisition from happening.

©2010 | Wilfred Visser | thebusinessofmining.com