Analysis: Uncertainty could hurt juniors after a Potash deal

By Euan Rocha

TORONTO (BestGrowthStock) – A rally in shares of potash explorers since BHP announced its $39 billion bid for No.1 Potash Corp could prove short-lived as the takeover battle raises fresh uncertainty about the fertilizer sector

A sweeping consolidation — led by the pending formation of an enlarged Russian producer and BHP’s bid to take over the global leader — could pull down prices for the agricultural input over the long term, analysts say.

That could make it more difficult for juniors to raise financing to develop their assets, while narrowing the field of prospective partners for exploration companies.

“There are both positive and negative implications, but on balance we think it is mildly negative for companies like Potash One and Western Potash,” said Wellington West analyst Robert Winslow, referring to two of the more prominent potash exploration companies.

Shares of Canadian-listed potash exploration companies have risen on average more than 20 percent in the last two months, as interest in the fertilizer sector has spiraled to levels reached in mid-2008, when share prices peaked at the height of the commodity boom.

Potash One has risen 31 percent in the last two months, while Magindustries, a smaller rival, has jumped 30 percent.

Even companies with early-stage projects, such as Western Potash, IC Potash, Encanto Potash and Allana Potash, have risen 17 percent, 13 percent, 20 percent and 16 percent, respectively.

If BHP is successful in its bid, the Anglo-Australian mining giant would likely rule out acquiring exploration companies anytime soon. It would make more sense for the BHP to expand Potash Corp’s existing assets than to develop new potash mines from scratch.

Earlier this year, BHP acquired Saskatchewan-focused potash explorer Athabasca Potash for C$341 million ($323 million), expanding its asset base in the potash-rich Prairie province.

Canadian-listed potash juniors that own assets both within Canada and in other parts of the world are hoping for a similar fate, but recent comments from BHP have raised concerns about the outlook for potash pricing, a key to any decision to buy more reserves.

BHP has indicated that it may seek to exit Canpotex — the joint marketing arm of Potash Corp, Mosaic Co and Agrium Inc — should it succeed in its bid. Its exit would destroy the current pricing oligopoly and increase price volatility for the crop nutrient.

“BHP may opt to utilize the strategy of maximizing capacity utilization, unlike Potash Corp, who as a swing producer tends to reel in production to meet demand,” said Winslow.


An uncertain outlook on pricing would make it much more difficult for both juniors and their likely suitors to raise the necessary funds to build new potash mines, which can cost billions of dollars to construct.

Soleil analyst Mark Gulley notes that the statements from BHP Chief Executive Marius Kloppers about its likely potash marketing strategy are a negative for not only juniors, but existing producers too.

“If I am one of the juniors, even if I think (Kloppers) will change his mind, that is not something I would want to hear,” said Gulley.

That said, it’s not all bad news for the juniors, the increased consolidation within the industry could raise fears among large potash buyers like China and India and motivate them to invest in juniors to secure future supplies.

Moreover, if BHP does acquire Potash Corp, it may put its plans to develop its massive Jansen potash project on hold. Given the sector’s operating capacity, the massive 8 million ton project in Saskatchewan would account for more than 10 percent of current global production capacity.

Either way, BMO Capital Markets analyst Joel Jackson said that the uncertainty now hanging over the industry will probably have to be resolved before strategic investors jump in to acquire exploration companies — especially those that are yet to complete feasibility studies on their projects.

“I think it is an urgency question,” Jackson said. “And I don’t feel the urgency is there.”

($1= $1.06 Canadian)

(Reporting by Euan Rocha; Editing by Frank McGurty)

Analysis: Uncertainty could hurt juniors after a Potash deal