Bid Success Would Vault BHP to Top Potash Spot

We believe BHP Billiton will need to increase its offer before PotashCorp seriously considers any tie-up

Elizabeth Collins, CFA 18 August, 2010 | 9:20AM

On Tuesday, PotashCorp announced its rejection of a $130 per share unsolicited bid from BHP Billiton. The Anglo-Australian mining giant has made no secret of its desire to enter the potash mining industry and has begun investing in greenfield potash projects in Saskatchewan. Greenfield projects take several years to develop, and it seems that BHP has grown impatient. The acquisition of PotashCorp would immediately vault BHP into the position of the world's largest producer of potash and further solidify its status as the global mining giant.

The timing of the attempted deal reflects where we are in the cycle. After a run-up in potash demand and prices in early 2008, fertilizer markets came to a virtual standstill and languished for most of 2009. Falling crop prices, tight credit conditions, reduced applications, and destocking all contributed to anaemic demand for potash. As the global leader, PotashCorp accepted the burden of reducing production to keep supply and demand in balance as much as possible. Now, we have achieved price discovery between producers and consumers, crop prices are strengthening, and growers are returning to applying more-normal levels of fertilizer.

PotashCorp is vehemently arguing that BHP's bid prevents PotashCorp shareholders from participating in the potential upside of further growth in potash demand, pricing, and production. That is fair; if we assume that potash markets return to the frenzy we saw in early 2008--and that such robust levels of demand and pricing are sustainable--then PotashCorp is arguably undervalued today. We must mention, however, the flip-side scenario. There are plenty of potash production expansion projects on the drawing board, and a situation of long-term oversupply is not hard to imagine, especially if demand growth doesn't cooperate. Still, it seems fair that PotashCorp shareholders demand at least a premium for control.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BHP Group PLC2,269.50 GBX-3.43

About Author

Elizabeth Collins, CFA  is an associate director of equity research with Morningstar.

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites
© Copyright 2021 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies