THE UNIVERSITY OF SASKATCHEWAN’S MAIN CAMPUS IS SITUATED ON TREATY 6 TERRITORY AND THE HOMELAND OF THE MÉTIS.
THE UNIVERSITY OF SASKATCHEWAN’S MAIN CAMPUS IS SITUATED ON TREATY 6 TERRITORY AND THE HOMELAND OF THE MÉTIS.
KEVIN MENZ
Associate News Editor
BHP Billiton is the favoured bidder for Potash Corporation of Saskatchewan, the world’s largest potash producer, but a Chinese state-owned company, Sinochem, is making their interest known.
A report on behalf of the government of Saskatchewan by the Conference Board of Canada favours a BHP takeover over one by Sinochem, but PotashCorp has rejected the BHP bid.
Two years ago PotashCorp was valued at $63 billion and their stocks have since slightly improved. British and Australian based BHP Billiton, the world’s largest mining company, offered $38.6 billion U.S. ($130 per share) for PotashCorp.
BHP, believing it is the only serious bidder for the company, is attempting a hostile takeover. They continue to pursue ownership despite the fact that PotashCorp’s board of directors unanimously rejected the offer and encouraged their shareholders to do the same.
PotashCorp CEO Bill Doyle was quick to state his frustration with the hostile bid.
“I am not saying that we are opposed to a sale, but what I am saying is we are opposed to a steal of the company,” he said. “Two years ago we hit $240 (per share) and when we think about our plant as a stand-alone company, we will blow right through the $240 share price, there’s no doubt about it in our mind. Our earnings are going to be just extraordinarily explosive over the next one to three years.”
While many in the company believe the offer is inadequate and unfair to shareholders, some shareholders are interested in the $130 per share offer and have filed a class-action lawsuit against PotashCorp because they were too quick to reject the offer.
The conference board’s report — although concluding BHP will be better than Sinochem for the province— pointed out that a BHP takeover will result in huge losses to the provincial government’s annual revenue.
A sale to BHP would alter the amount of royalties and taxes the provincial government receives for the mining of potash and could result in the loss of $200 million dollars a year — two per cent of the government’s total revenue.
BHP is focusing on building a $12 billion potash mine in Jansen Lake, Sask. This project is not associated with PotashCorp but if BHP obtains PotashCorp, tax write-offs based on capital expenses for the Jansen mine will affect provincial revenue.
The government has also noted that it will not change its potash tax and royalty methods due to fear of a loss of investors.
BHP countered these concerns, saying that the province’s revenue will not be hurt if they buy PotashCorp and that, in fact, the province will receive more tax revenue once the Jansen project is up and running. They expect to pay $90 billion in royalties and taxes over the project’s lifetime and feel that the economic benefits of the project will counter any tax revenue initially lost. They estimate the mine will generate 2,900 full-time jobs and that these new employees — along with potential new companies — will pay $280 million a year in taxes.
After talking with representatives from BHP, Michael Grant — the author of the conference board’s report — agreed that the loss of tax revenues only referred to initial deferral and that the government would likely not lose tax revenue in the long term.
The low bid by BHP slowed the process of PotashCorp’s sale and allowed rival companies — specifically Sinochem — to let their interest be known.
Sinochem have asked the Prime Minister’s Office whether a bid for PotashCorp would be taken seriously. If the PMO says it would be, Sinochem will likely push forward with a bid.
Sinochem is owned by the Chinese government. Typically, the Investment Canada Act discourages selling Canadian companies to companies directly backed by foreign governments.
The Conference Board Report expressed major concerns with Sinochem gaining control of PotashCorp, stating that the Chinese company would likely run the mines at high-production in order to lower the global price of potash. These low prices would lead to an even greater loss of potash taxes and royalties for the province, as compared to the predicted $200 million a year loss with BHP.
Sinochem, however, understands these concerns and is offering numerous concessions to federal and provincial governments.
Most significantly, they propose a “golden share” in PotashCorp, which would allow the Canadian government to veto corporate and operational changes to the company. Also, they have committed to selling potash through the world’s largest exporter of potash, the Canpotex marketing arm of PotashCorp.
BHP, by contrast, has proposed to dismantle Canpotex and sell potash independently. Canpotex shareholders would likely prevent this happening, however.
Given these concessions by Sinochem, the Canadian government will likely be able to force Sinochem to base their PotashCorp offices in Saskatoon — BHP has already offered to base their offices in Saskatoon and has even proposed moving all of the PotashCorp offices currently in Chicago to the city. These office bases would answer any complaints citizens have about either company disrupting Saskatchewan’s identity as a leader in global potash mining.
It should also be noted that a Sinochem bid will likely require outside investors.
The Economic Times of India reported that Sinochem has approached the world’s highest capacity fertilizer company, NMDC, to make a joint bid on PotashCorp.
The move could strengthen the Sinochem bid by dispelling the Canadian government’s distaste for a foreign-government owned buyer for the potash company. Sinochem also hired banks Citigroup and Deutshe Bank to fund its possible $39 million bid.
While Sinochem has yet to make an official bid, PotashCorp’s Doyle is not ruling out the option of a foreign state-owned company.
He argues that as a business Sinochem are more concerned with profitably running PotashCorp, not lowering potash prices.
“You don’t buy a company to destroy the value of the company,” said Doyle. “People think they [Sinochem] want low potash prices so therefore they are going to drive the company into the ground.”
He is encouraging the PMO to consider a bid from the company.
A Sinochem takeover is appealing in that it would challenge BHP’s seemingly inevitable monopoly of the world’s mined resources, but competitive capitalism brings into question Sinochem’s ability to uphold their concessions with the government.
China is a huge market for fuel and the more competitive the world’s mining becomes, the more competitively Sinochem will have to price their product. This could force them to break concessions and operate at high-production, leading to tensions with the provincial and federal governments.
If a Sinochem motion to bid is approved by the federal government, PotashCorp shareholders will be stuck choosing between one solution, BHP, which might benefit Saskatchewan and another, Sinochem, that aims to keep the world’s mining markets competitive.
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image: Flickr
This may not be a problem, however, because PotashCorp is considering breaking up its company by selling certain operations.
While BHP Billiton remains the only official bidder on the potash giant and Sinochem is regarded as its greatest potential competition, another group has displayed interest.
A British group, the Ontario Teachers Pension Plan, approached a Singapore investment fund Temasek to launch a bid. A Canadian mining company, Teck Resources, may join these two in order to offer a joint bid.
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image: Flickr
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