BHP expands its horizons
Resource Hotspot 302
BHP Billiton Chief Executive Officer Marius Kloppers is yet to stamp his mark on the company. Having failed in his efforts to takeover Rio Tinto, he is also struggling to get the Pilbara iron ore joint venture over the finish line. However, it was somewhat surprising that the third attempt at a flagship deal is a US$40 billion cash takeover offer for Potash Corp. of Saskatchewan Inc.
A closer examination of Potash Corp reveals the logic of the proposed acquisition – which appears consistent with BHP Billiton’s stated strategy of developing, owning and operating a diversified portfolio of large, low-cost, long-life, expandable, export-oriented, Tier 1 assets. It would also accelerate BHP’s push into the fertiliser business, which currently centres on development of the Jansen potash project in Saskatchewan.
Potash Corp is the world’s largest integrated fertiliser and related industrial and feed products company and the largest producer of potash worldwide by capacity. In 2009, its potash operations represented 11% of global production and 20% of global potash capacity. It owns and operates five potash mines in Saskatchewan and one in New Brunswick. It also holds mineral rights at the Esterhazy mine in Saskatchewan where potash is produced under a mining and processing agreement with a third party.
Source: BHP Billiton
In the year ended 31 December 2009, Potash Corp generated revenue of US$3,977 million (2008: US$9,447 million), EBITDA of US$1,504 million (2008: US$4,963 million) and profit before taxation of US$1,071 million (2008: US$4,572 million).
Key industry factors driving BHP’s strategy are:
- Attractive industry fundamentals
- Increasing demand for food
- Decreasing arable land per capita
- Shift to higher protein diets
- Need for more balanced fertilization to maximize yields
Source: BHP Billiton
- Common characteristics with other mining operations in which BHP Billiton is a leader
- Globally traded commodity
- Export orientated
- Large scale
- Leverages BHP Billiton’s global capability and experience in building, operating and expanding mining operations
The market has reacted negatively to the BHP announcement that it will make a hostile, all cash, on market offer, fearing that it may overpay to gain control – and the US$40 billion minimum price tag is a large number even for a company of BHP Billiton’s size and strength.
Commenting on the deal Kloppers stated “This is an exciting opportunity to acquire a portfolio of Tier 1 assets. It accelerates our stated strategy of becoming a leading global potash producer and further diversifies our portfolio by commodity, geography and customer.”
