Just one week after saying it would pump $240 million into potash mine development in Saskatchewan (GM Jan. 25, p. 1), mining giant BHP Billiton said Jan. 28 that it would buy Athabasca Potash Inc. (API), its second junior potash company – the first being Anglo Potash Inc. in 2006.
API’s Burr Project sits next door to BHP’s Jansen Project. Of all the many companies talking about potash mines in Saskatchewan, only BHP, API, and Potash One Inc. have actually applied for mining permits. API holds one of the largest exploration permit areas in the Saskatchewan basin, covering approximately 6,900 km2. The acquisition gives BHP access to a total of more than 14,000 km2.
BHP is paying C$8.35 cash per common share for a total equity value of C$341 million (US$320 million) on a fully diluted basis. The consideration represents a 105 percent premium to the closing market price of the common shares on July 15, 2009, the day preceding API’s announcement that it had expanded the scope of transactions being considered in its strategic review process to include potential mergers or acquisitions of all or a portion of API or its business. It represents a 25 percent premium over the closing price of the common shares on the Toronto Stock Exchange on Jan. 27, 2010, and a 37 percent premium based on the volume weighted average price of the common shares over the 60 trading days prior to Jan. 28, 2010.
API’s board of directors unanimously approved the transaction, which will be subject to the approval of 66-2/3 percent of the votes cast by API’s security holders and a simple majority of the votes cast by the shareholders. The vote will take place at a special meeting, which is currently anticipated to occur in March 2010. The acquisition will also require court approval. If API’s security holders approve the transaction and the requisite court approval is obtained, the closing is expected to take place later in March 2010. The information circular for the acquisition is expected to be mailed to API’s security holders by Feb. 12, 2010.
Dawn Zhou, API’s executive chairman, as well as all directors and certain other officers and major shareholders of API, have entered into lock-up agreements with BHP under which they will irrevocably vote common shares and options representing approximately 40 percent of API’s fully diluted outstanding common shares in favor of the transaction.
API has agreed not to solicit or initiate any discussion regarding any other business combination or sale of material assets. API has also granted BHP a right to match any superior proposal and will pay a termination fee of $12 million to BHP if the definitive agreement is terminated under certain circumstances, among them, API’s recommendation or approval of an acquisition proposal or its entry into an agreement with respect to a superior proposal.
“API’s board of directors has reviewed and explored a number of possible strategic options and it has concluded that BHP Billiton’s offer is in the best interests of API’s shareholders,” said Zhou. “API would like to thank all shareholders for their support. I am proud of what the API team has achieved and delighted to see such a successful outcome to the strategic review process we initiated last year.”
“Today’s announcement is consistent with BHP Billiton’s strategy of building a strong potash resource position,” said BHP Billiton Diamonds & Specialty Products President Graham Kerr. “We continue to pursue opportunities that fit within our portfolio and are aligned with our strategy of developing Tier 1, long life, low-cost, expandable assets. This acquisition fits well with our existing projects and land positions in the Saskatchewan potash basin.”
“I guess my comment on that would be that it gives everyone with a lottery ticket hope,” said PotashCorp President and CEO William Doyle, when asked about the BHP and API deal during an earnings teleconference last week. “All of us in the business scratch our heads with that one. But to talk about the big mining companies and Vale and BHP it’s pretty clear that a greenfield mine can not be justified economically by anyone at the current time.”
Doyle said that BHP has publicly said it would not make a final decision on a greenfield until November 2011. With that timing, the earliest BHP could be producing potash would be 2017.
Doyle said he believes that if BHP gets into potash it will not be just as a greenfield company, since the company is used to being among the top three in its commodity groups. He said a greenfield, even the BHP Jansen project at full production, would only put them at 8 million mt and make them the sixth or seventh largest player. He said he believes some of BHP’s recent public announcements have been designed to drive down the share prices of existing potash players to make the potential acquisition more attractive. “They’re not stupid, but neither are we.”
Doyle said the iron ore miners remind him a little of the oil industry’s movement into the fertilizer industry in the 1960s. “And they ended up losing billions of dollars, and they got out of the business just as fast as they got in. So a study of this history might be a worthwhile exercise for companies with no fertilizer expertise.
“And I guess my last comment would be that BHP doesn’t walk on water,” said Doyle. “They have to go through the same capital expenditures and time consuming route we would to bring out a greenfield property. At the end of the day, they’re going to have a much higher cost structure than we have. And I’m fully confident we will be able to compete against them or anyone else who decides they might want to enter the space. You know … no one should take us for granted. We can be very tough when we need to be.”