BHP Billiton’s proposed takeover of PotashCorp could reduce provincial revenues by at least C$2 billion over the next 10 years while having little or no net effect on employment in the industry, according to a report from The Conference Board of Canada, which was asked to do the study by the Province of Saskatchewan. The report, released Oct. 4, highlights a potentially positive impact from the repatriation of some PotashCorp head office jobs that have moved to Chicago.

After the report was released, Saskatchewan Energy and Resources Minister Bill Boyd said the potential revenue loss is concerning because changes to the royalty structure to mitigate the loss could have negative effects on the Saskatchewan industry and other potash companies. Boyd said the government would consider its findings in the coming days as the province prepares its views on the proposed transaction, to be provided to the federal government. “There are both pluses and minuses to this BHP bid,” Boyd said. “This report will help to inform our view of whether an ownership change represents a ‘net benefit’ to Canada and to the people of Saskatchewan.”

Regardless, Boyd has been quoted in the Canadian press that he believes there is no “net benefit” to Saskatchewan from the BHP acquisition.

Boyd restated the government’s position that no matter who owns the potash mines, the people of Saskatchewan own the potash. “From the outset, Premier Wall has said our government will protect the interests of Saskatchewan people,” Boyd said. “That will be our guiding principle as we deal with this matter in the days ahead.”

Sinochem larger concern than BHP, says report

The Conference Board report said Sinochem as a purchaser of PotashCorp is more of a concern than BHP Billiton. The report says Sinochem, a state-owned, consumer-driven entity, has a stronger incentive for lower potash prices than does BHP, which would be expected to seek an economic return.

PotashCorp responds to Conference Board report

PotashCorp responded to The Conference Board’s assessments of a possible BHP Billiton takeover of PotashCorp, saying the Board’s assumption of a C$2 billion loss of revenues for the Province of Saskatchewan over a ten-year period is understated. PotashCorp said the report chose to assume that BHP would not operate full out – in direct contradiction of previous BHP public statements – and that the revenue loss is unique to the BHP bid because of the company’s involvement in the Jansen Lake Greenfield project.

“The Board of Directors of PotashCorp would encourage the Government of Saskatchewan to continue to remain open to reviewing alternative bids on a fact-based approach, rather than the speculative approach taken by The Conference Board of Canada’s report,” said PotashCorp.

PotashCorp has told The Conference Board of Canada that the position it has taken is that all potential interested parties should commit to the following as a starting point, so that prospective Provincial resource revenues are not negatively impacted: support the sale of offshore potash through Canpotex; purchase potash on an arms-length basis for their own needs as a consumer; and support the continued profit maximization strategies employed by PotashCorp’s existing management, as well as the company’s ongoing capital expenditures for future potash expansions.

PotashCorp said that The Conference Board chose to ignore PotashCorp’s position in its report.

PotashCorp said it looks forward to Investment Canada’s review, which was extended Oct. 5 and will assess whether an acquisition of PotashCorp by BHP Billiton would comply with applicable Canadian law and federal government policies, including the requirements of the Investment Canada Act.

BHP touts Jansen jobs as it reacts to report

BHP also responded to the Conference Board report, issuing information that it said was not available in time for the report regarding BHP’s Jansen potash project. Taken from its environmental impact statement, BHP says Jansen’s construction phase will have a peak workforce of 4,200. On average during construction, the equivalent of 2,900 full-time jobs will be created in Saskatchewan from direct, indirect, and spin-off employment. BHP said these employees, and the companies that work with BHP, are likely to pay an average of C$280 million per year in federal and provincial taxes over the project’s construction phase.

Over the multi-decade operating life of Jansen, BHP expects to pay approximately C$90 billion in royalties and taxes to the municipal, provincial, and federal governments. Approximately 65 percent of such payments will be to the Government of Saskatchewan.

While The Conference Board notes that provincial tax receipts could fall initially as payments would be deferred while BHP offsets certain tax deductions related to the construction of Jansen against PotashCorp revenue, BHP notes that in future years when Jansen starts to operate and such deductions have been utilized, the reverse occurs and the Province will receive more taxes than it would have otherwise.

In addition, BHP believes that the additional corporate, income, and sales taxes paid by those building Saskatchewan’s first new potash mine in 40 years are likely to offset the deferred payments. The transfer of a large number of highly paid management jobs from Illinois to Saskatchewan is also likely to materially increase the Province’s tax receipts.

BHP files to dismiss PotashCorp lawsuit

As it promised earlier, BHP Billiton on Oct. 1 filed a motion to dismiss PotashCorp’s lawsuit, which seeks an injunction in BHP’s hostile takeover attempt. BHP rejects PotashCorp assertions that BHP has supplied PotashCorp shareholders with misleading statements and material omissions.

BHP said PotashCorp has only offered implausible, uncorroborated, and largely irrelevant speculation drawn from material in the public record, which shareholders are equally able to review in order to draw their own conclusions. BHP said it is only required to disclose material facts and to confess true motives.

It noted that PotashCorp has been telling shareholders there would be a competing bid for the company, but such has not been forthcoming.

As for PotashCorp assertions that BHP has been trying to depress PotashCorp stock prices, BHP said it did not pretend to enter the potash market, and that it spent some $1 billion to do so. BHP said this was not an elaborate ruse to depress the value of PotashCorp stock. It said there is no evidence that BHP will abandon its Jansen potash project, and that PotashCorp has only given the personal opinions of two analysts for this proposition.

As for what will ultimately happen to PotashCorp’s nitrogen and phosphate businesses under BHP, the company said that it is not required to disclose plans that are contingent or indefinite.

While BHP concedes that it would like to market its potash independently, it said again that this is another item that is not definite, citing Saskatchewan’s seeking of independent advice, as well as BHP having other partners in Canpotex.

BHP said PotashCorp is free to debate the status of arbitrageurs with fast money involved with PotashCorp versus the status of long-term shareholders. It noted that PotashCorp more than anyone should have knowledge of its shareholders. BHP noted that the article in which PotashCorp drew this concern itself said fast money involvement was limited. Regardless, said BHP, this matter should be left up to shareholders, not a federal judge.

Class action suit filed against PotashCorp

Three small PotashCorp shareholders filed suit against the company and its board of directors in the U.S. District Court for the North District of Illinois on Oct. 6 seeking injunctive and other relief, citing PotashCorp for materially false and misleading information in its recommendation statement against the BHP tender offer. The suit said defendants misled or omitted information pertaining to the poison pill, analysis of the offer, analysis by PotashCorp of strategic alternatives, financial analysis by financial advisors, and the standards used to conclude that the offer was inadequate.

Shareholder plaintiffs Richard and Susan Painter own 50 shares of PotashCorp stock, which they purchased when it was $194.08, while plaintiff Herbert Francl bought his 50 shares at $208.30.

Doyle makes case to continue as standalone entity

PotashCorp CEO Bill Doyle was quoted in The Globe & Mail Oct. 7 as saying PotashCorp should receive a price far exceeding $170 per share. “I can make a very, very strong case that the best choice that could be made will be that the company is a standalone entity because we are going to blow the doors off the $240 share price.” PotashCorp posted a price of $239.50 in June 2008 before the onslaught of the global economic crisis. He told the paper that PotashCorp is positioned for growth like no other company in the world.

Former PotashCorp Executive Vice President and Chief Operating Officer James Dietz apparently did not wait for Doyle’s higher prices. Bloomberg, citing data collection firm Washington Service, has reported that Dietz, who retired June 30, sold 210,000 shares of PotashCorp Sept. 1 at an average of $145.95, and another 168,756 shares Sept. 3 at around $148.00. These sales would have brought in approximately $55.6 million. Dietz also sold 50,000 shares prior to the BHP bid on Aug. 6 at an average of $102.00.

The Mosaic Co. reported net earnings of $297.7 million ($.67 per diluted share) for the first quarter ending Aug. 31, 2010, nearly triple those for the year-ago quarter of $100.6 million ($.23 per share). Sales were up 50 percent, to $2.19 billion from the year-ago $1.46 billion.

Phosphate operating earnings were $178 million on sales of $1.58 billion, up from the year-ago earnings of $46.5 million on sales of $1.19 billion. Total phosphate tons sold rose to 3 million from the year-ago 2.89 million. While phosphate crop nutrients shipments were up in North America by 25 percent to 854,000 mt from 683,000 mt, they were off 7 percent to the international market, to 1.08 million mt from 1.16 million mt. The average DAP price was $431/mt for the quarter, up from the year-ago $278/mt. Raw materials costs were up, with ammonia at $391/mt versus the year-ago $261/mt, and sulfur at $152/lt, up from $30/lt a year ago.

Phosphate crop nutrient blends were off 3 percent, to 699,000 mt from 702,000 mt a year ago, and the average price for this product was up slightly, at $408/mt from $401/mt.

Feed phosphate volumes were down 29 percent, to 121,000 mt from the year-ago 150,000 mt. Other products, which included SSP, urea, and potash sold primarily outside of North America, saw an uptick at 305,000 mt from 194,000 mt.

Potash operating earnings were $218 million on sales of $621.9 million, up from the year-ago $99.3 million on sales of $333.3 million. Total tons sold moved up to 1.68 million mt from 795,000 mt. Of these, North American potash shipments were up 521 percent at 677,000 mt, up from 109,000 mt a year ago, while international shipments were also stronger at 850,000 mt from 508,000 mt. Non-agricultural shipments were down, at 151,000 mt from 178,000 mt.

Mosaic said the average muriate of potash selling price was $331/mt, down from the year-ago $354/mt.

For the second quarter, Mosaic expects phosphate sales volumes to range from 3.3 to 3.6 million mt, with the realized DAP price, FOB plant, estimated to be $430-$460/mt. As for raw materials costs, Mosaic told analysts that it is still negotiating sulfur contracts, but it expects prices will increase to a level close to current spot values. The company noted that ammonia prices have gone up to $465/mt Tampa DEL for October, and it expects them to remain at high levels for the next couple of months.

Mosaic added that one of its new phosphate products, MicroEssentials, a premium product that includes sulfur and micronutrients, is expected to see sales top 1 million mt this fiscal year – more than double from two years ago.

Second-quarter sales volumes for the potash segment are expected to range from 1.6-1.9 million mt, with a realized MOP price of $310-$340/mt. Mosaic said the recent upward momentum in potash prices will begin to be realized in fiscal third-quarter results. Mosaic noted that a new shaft at the Esterhazy mine will add up to 1 million mt of capacity, bringing the total Esterhazy capacity up to 7 million mt. In other Esterhazy news, Mosaic said a lawsuit (GM Aug. 17, 2009) between PotashCorp and Mosaic over PotashCorp tolling tons from Esterhazy is not expected to go to trial until September 2011. Mosaic said it expects to spend $120-$130 million this year to mitigate brine inflow at Esterhazy. This cost was $37 million in the first quarter, up from $25 million in the prior quarter, but the company says nothing should be read into that, as the figure varies from quarter to quarter.

“We expect the market momentum of the past several quarters to continue as distributors replenish depleted inventories and farmers invest in crop nutrients to rebuild phosphate and potash levels in their soils,” said Jim Prokopanko, Mosaic president and CEO. “Global shipments of finished phosphate products are projected to surge to a record-shattering level this year and increase further in 2011.”

Mosaic expects global phosphate shipments to climb to record levels of 56-57 million mt in calendar year 2010 and to 57-59 million mt in 2011. It expects potash to climb to 48-49 million mt in calendar year 2010 and to 52-55 million mt in 2011.

Mosaic expects the operating rate at its North American phosphate operations to range between 85-90 percent for the second quarter. Phosphate rock production will remain low until the South Fort Meade, Fla. mine resumes production. The company does not expect any impact on finished phosphate production in the second quarter due to lower phosphate rock production. The second-quarter operating rate in the potash segment is expected to range between 80-85 percent.

“It is a great time to be the leading producer of phosphate and potash in the world,” said Prokopanko. “Agricultural commodity markets have tightened, bolstering prices and farm economics worldwide. This is driving strong demand for crop nutrients at a time when producer inventories are low and concerns are growing about crop nutrient supplies, creating a positive outlook for Mosaic.”

Mosaic Vice President, Market and Strategic Analysis Dr. Michael Rahm noted that the U.S. Department of Agriculture lowered its estimate of corn bushels per acre to 162.5 in September, and that most analysts expect another downward adjustment from USDA Oct. 8. He said stocks could drop to about 1.1 billion bushels at the end of the 2010-11 crop year. “We estimate that the corn market will need to bid for more than 90 million aces of corn next year in order to keep inventories at secure levels.”

Rahm noted that the commodity rally extends beyond wheat, corn, and soybeans to several other products, such as cocoa, coffee, cotton, palm oil, and sugar, with some of those seeing their highest levels in more than 10 years.

He also noted that net cash farm income is projected to rebound 23 percent to more than $85 billion in 2010, the third highest on record. Rahm said that farm incomes in China and India are also at record or near-record levels.

Mosaic now downplays impact of mine outage

Earlier, Mosaic estimated that the outage at the South Fort Meade mine could lead to its losing some 1 million mt of finished phosphate products in the second half of fiscal year 2011 (GM Aug. 9, p. 15), with a $250-$300 million impact to operating income. The company now says it can mitigate the loss using existing rock inventories; purchasing rock from third parties, including rock from Peru and Morocco; maximizing production at other existing mines, and drawing down finished goods inventories.

“Assuming successful mitigation efforts … we believe there will be no material impact to finished product sales in fiscal 2011,” said Prokopanko. “However, our margins will be negatively impacted by using purchased phosphate rock.” Cost of purchased rock is put at $100-$120/mt FOB.

Mosaic did say that the closure of the mine cost it $30 million in the first quarter, and it expects the cost to be $20 million per quarter going forward.

No update on mediation

Mosaic said last week there was nothing new to report on its court-ordered mediation with the Sierra Club over the outage at the South Fort Meade mine.

Mosaic is still hoping for a positive ruling from the U.S. District Court for the Middle District of Florida that will allow it to mine in Hardee County for four-to-six months on land where the wetlands have already been disturbed. This would be while the U.S. Court of Appeals for the Eleventh Circuit hears Mosaic’s appeal of the preliminary injunction against the mining. Mosaic noted that the appellate court has agreed to an expedited appeal. Mosaic is hoping oral arguments will occur by the end of the calendar year, and that it will receive an expedited ruling shortly thereafter.

Five factors overhanging phosphate market

Dr. Rahm detailed five factors currently overhanging the global phosphate market.

• Anticipated startup of the Ma’aden facility in Saudi Arabia, with the market trying to figure out how much this facility will produce in 2011 and 2012.
• A loss of up to 750,000 mt of phosphate when the Agrifos facility stops producing in 2011.
• Uncertainty regarding the availability of purchased raw materials, particularly sulfur. Rahm said U.S. phosphate producers likely will scramble in order to find enough sulfur to keep plants operating at consistently high rates during the next several months.
• Uncertainty over Chinese exports. He noted that the Chinese exported record-shattering volumes of DAP and MAP in July and August, leaving their domestic market short of product. “We believe officials will take whatever measures are necessary, including more restrictive export policies, to ensure adequate supplies of competitively priced phosphate for domestic farmers,” added Rahm.
• Uncertainty regarding how long Mosaic’s South Fort Meade mine will remain idled.