Conference Board of Canada likes BHP bid

The following is an excerpt from the Conference Board of Canada’s report: “Saskatchewan in the spotlight: acquisition of Potash Corp. of Saskatchewan Inc. — risks and opportunities,” which relates to the prosposed bid for Potash Corp. of Saskatchewan by BHP Billiton. The full report can be found at www.conferenceboard.ca

Due to the nature of Potash Corp. of Saskatchewan (PCS) and the conditions under which it operates (unlike some other mining takeovers) the risk associated with acquisition is not related to the potential for PCS to be “hollowed out” through negative corporate takeover effects (CTEs). Our assessment of the impact of an acquisition of PCS on shareholders, governance, senior management, capital, employees, corporate donations, and community support is that the impact would be marginal. In the case of an acquisition, there are some prospects of positive impact on employment, both in production and head office jobs.

Both analyzed acquirers lack any current capacity in potash production and would look to Saskatchewan operations as the epicentre of potash production. As well, they both would have the wherewithal to continue to invest in the industry. As a result, the main risk emerging from acquisition relates to how the new acquirer will run the business, how their operational strategy for production and pricing would affect the potash market, and what that could mean for the province’s tax and royalty regime.

The impact of the consumer interest-led Sinochem alternative is highly speculative at this point. Yet, it has more incentive to pursue the high production scenario than does BHPB. Although that strategy would involve a higher level of employment, there is considerable potential tax loss for the province that would arise from a fall in potash prices globally through significant increases in supply and follow-the-leader pricing.

As a state-owned enterprise acting on behalf of consumers of potash, we assume that Sinochem has strong incentives for lower prices and that it will not be guided by the same market discipline and profit motive as commercial players. Obviously, the more Sinochem were to behave like a commercial owner, the less the risk would be for the province, and the better off the province would be. But the state-owned and consumer-led orientation of Sinochem makes this, in our view, a riskier scenario for the province.

Given everything we know about the BHPB bid, the prices in the high-production scenario do not appear to be a realistic option. Although the company will not say what its price assumptions are, to make this an economic use of capital involves long-term prices over $400/tonne. Therefore the base case scenario is likely much closer to what BHPB will work toward, in our view.

The opportunities for both acquirers are the same in terms of operations, employment and capital, but because BHPB needs to produce an economic return, the way BHPB would put capacity in place and run the operation is much more aligned to the province’s interests.