In terms of sheer dollar value the deal, as presently contemplated, wouldn’t even rank in the top 10 consummated in the 2000s. But BHP Billiton (TSX: BHP, NYSE: BHP), the world’s largest miner, has offered USD130 per share, or USD39 billion, for Potash Corp of Saskatchewan (TSX: POT, NYSE: POT), the world’s largest producer of one of agriculture’s key inputs. And that has government officials from West to East stewed up over food security.
The skirmish–for now–over Potash Corp now involves at least one multinational company, one of the world’s largest pension fund, and at least three government bodies. Potash Corp, which was created by the government of Saskatchewan in 1975, still pays royalties under a structure that means the province must defend a high potash price, while BHP and other potential state actors are interested in mass production with lower prices.
China, meanwhile, must appreciate the strategic and economic confluence: It needs the compound to feed its people, yet its professional money managers must also see the long-term investment benefit of controlling such an in-demand commodity. Potash isn’t traded on the open market; prices are set by negotiations between cartels and major buyers such as China, India and Brazil. China, for one, is likely to use at least one instrument of state to either gain control of the company or at least influence whoever does.
In short, the battle for potash highlights another aspect of rising government influence in what were, until recently, thought of, at least in the West, as primarily private matters. I and my co-authors Elliott Gue and Yiannis Mostrous go into extensive detail about these issues in our book The Rise of the State: Profitable Investing and Geopolitics in the 21st Century and provide roadmap for individual investors trying to understand the role of government in a rapidly evolving global economy.
Potash is one of three major ingredients in fertilizer. Proper fertilization leads to better crop yields. Maximizing yields from minimal arable land is one way to combat shortages of wheat, grains, and other agriculture products. In other words, potash is vital to food security, a complex issue at the intersection of many academic disciplines.
But, simply stated, man’s got to eat. And emerging market appetites are increasing by the day, adding pressure to a system already strained by developed-world demand and stressed by concurrent scarcity of energy, water and arable land. There’s opportunity for miners such as BHP to expand product offerings, there’s opportunity for countries such as Canada to enjoy the benefits of their natural resources, there’s opportunity for emerging nations like China to gain some level of food security. These interests can and will collide.
When it first announced its takeover plan BHP indicated that it, if successful, it would pull Potash Corp out of the Canpotex consortium, which also includes Agrium (TSX: AGU, NYSE: AGU) and Mosaic Company (NYSE: MOS). For nearly four decades Canpotex has negotiated on behalf of its owners, a combination that conveyed a lot of pricing strength to North America’s potash giants.
Saskatchewan’s provincial government, to which Potash Corp owes a significant royalty on its potash sales, favors the present system. Canpotex is one of a few entities that control price-setting in the potash market. Preserving this status means maximizing Saskatchewan’s revenue.
Potash producers–and those with aligned interests–are feeling quite confident in their positions right now. Demand for potash cratered during the economic downturn, as farmers cut costs by skipping costly fertilizer applications that wouldn’t irreparably harm short-term production but could have long-term deleterious effects. But the hint of recovery and the relative strength of emerging economies in the aftermath of the Great Recession set the stage for another mini-mania surrounding the critical compound.
For example, Belarusian Potash Company (BPC), which controls approximately 29 percent of the market, will seek 8 percent increases on product sold to Asia and Brazil for immediate delivery. BPC’s so-called spot price for shipments to Asia will be USD405 to USD420 per metric ton, to Brazil USD410 to USD420. It’s important to note that two previous BPC attempts at unilateral price-hikes have failed this year.
And Saskatchewan Premier Brad Wall, apparently backing off his Saskatchewan Party’s hard-and-fast commitment to free markets, signaled his government would resist any new ownership efforts to overproduce to drive down potash prices–which would ultimately reduce provincial royalties. Talking with the Regina Leader-Post last week, Mr. Wall noted potash’s “strategic importance as a provincial resource that the rest of the world wants.”
Mr. Wall said that former Alberta Premier Peter Lougheed told him “the resource belongs to the people” and that “there’s absolutely nothing wrong with any government of any stripe putting conditions on the development of its resources.”
The bilateral relationship between BHP and Potash Corp had already gone hostile, with managers of the Saskatchewan-based target accusing marketing pros from the Australia-based hunter of unethically reaching out to Potash Corp customers. It comes as little surprise, then, that a potential domestic White Knight has emerged in this drama.
In a curious turn given its investment history, the private equity arm of the Canadian Pension Plan Investment Board (CPPIB), the Great White North’s largest pension fund, kicked the tires at Potash Corp for what would be its initial mining investment. The CPPIB took a look at the company as a courtesy to countrymen interested in keeping Potash Corp ownership within Canada; the pension fund is unlikely to make an offer, as the asset will likely be too pricey.
Perhaps no other country–as is so often the case these days, in so many contexts–illustrates the long-term supply-demand case for potash better than China. China is home to 22 percent of the world’s population, but only 11 percent of the world’s arable land. The communist government is faced with a daunting problem.
The Wall Street Journal’s Dealbook blog reported Wednesday afternoon that Sinochem (Shanghai: 600500), a joint stock company since 2009 that was once directly owned by the Chinese government, has retained HSBC (NYSE: HBC) to advise it on “options regarding” Potash Corp.
An acquisition of Potash Corp via Sinochem would certainly be a convenient way for Beijing to guarantee food security, as Potash Corp already owns 22 percent of Sinochem’s fertilizer unit, Sinofert Holdings. Sinochem will await word from Beijing before initiating a bid.
Another Chinese entity, private equity fund Hopu Investment Management, is reported to be soliciting interest in a consortium that would make an offer; this effort would include another, unnamed Chinese company and potential investors from Canada, the US and Asia.
Canadian involvement may be a sine qua non for any potential acquirer in light of recent rhetoric from provincial and federal politicians. Hopu is relatively small, but it has powerful backers, including Singaporean sovereign wealth fund Temasek Holdings.
The Chinese government has also threatened to launch an “anti-monopoly” investigation of BHP if its bid for Potash Corp succeeds.
We don’t hold ourselves out as long-distance mind-readers. There’s no telling for sure whether BHP does indeed have the will and the wherewithal to push its bid to USD180 per share. Potash Corp has soared well past its Canadian Edge How They Rate buy target; for conservative, income-oriented investors it’s probably time to lock in a substantial capital gain.
These types of winners come few and far between; better to build wealth over the long term by building a collection of solid, sustainable dividend-payers back by strong businesses. We can, however, make a few observations about Potash Corp, Canada and the position its resource strength puts it in relative to the rest of the world.
The signals of “resource nationalism” emitting from Saskatchewan’s prime minister in recent days must be understood in the context of a Canadian model that recognizes the ownership rights of the people when it comes to natural resources. Royalty regimes, meanwhile, have been generally favorable toward exploiting companies.
Relations between private business and public regulators have traditionally been cooperative, yet another factor that separates Canada from other similarly gifted countries, resource-wise, that haven’t been able to establish the political infrastructure to support successful, economically healthy commodity production.
Canada–at the federal level as well as in Saskatchewan–has mechanisms in place to process and review potential foreign ownership of domestic firms. Some provincial legislators have already threatened to “rework” or “introduce” legislation to prevent certain actions, such as removing the corporate headquarters of Potash Corp from Saskatchewan.
Saskatchewan can’t stop a deal between Potash Corp and an outside buyer. It can, however, attempt to influence federal officials in Ottawa on whether or not to approve a takeover. BHP has already visited the province to try to reassure politicians about its intentions with regard to jobs and facilities.
Saskatchewan will continue to compete, however, to get the best possible potash prices for its citizens. China–and India, the world’s number three agriculture producer in dollar terms–will continue to compete to guarantee food security for its people.
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