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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