potash bid, page-53

I think alot of people are missing the plot on this takeover, on the surface the price paid looks expensive but there are several very compelling aspects to the bid,

Potash Corp

The market leader in the potash with low cost, long life, large scale tier 1 projects that fits in perfectly with BHP's business model. Potash Corp is basically to potash what BHP/RIO's pilbara operations are to iron ore.

The company also have a huge amount of capacity coming on in the next 5 years that will see it dramatically increase production. And since its an all cash offer by the looks of things shareholders arn't going to be diluted down and will benefit from all the upside the growth the assets offer.

BHP's Operations

BHP's own potash operations are still 5 years+ from production and near a decade from full production. You can argue that there are no synergies to be had but your simply ignoring the scale of these operations.

Additionally BHP is acquiring more than just the assets of potash but the expertise and experience that comes with it. This will be invaluable when BHP begins its own project development and will undoubtedly help reduce costs and time frames associated with the development. Remember BHP expansion is estimated at 10-12 billion dollars.

Industry

David25 you may think china is loosing steam but try telling that to the factory workers over there that are getting 20-30%+ annual pay rises. Granted its off a low base but a big chunk of these pay rises are going straight to staples.

Considering the timing of potash and BHPs expansions we are talking about 5-10 years from now, right now if you look at the charts for Potash Corp you will notice its still a long way off its highs, so when your thinking in terms of 10 years+ buying on this short term weakness is not a silly idea.

Also I have no doubts that China's (and much of South-east Asia for that matter) GDP per capita and average incomes will have risen quite a bit in 5-10 years time and with alot of that extra money flowing to food its gonna put the pressure on agriculture sector to dramatically improve productivity and fertilizers are the obvious solution.

Conclusion

BHP needed an outlet for its huge cashflows, it either needed to do a huge share buyback or find an acquisition that made sense. In Potash its not just found a company that fits in with its business model of being at the bottom of the cost curve of the industries its in but found an industry still making its way out of the GFC. Not to mention at the same time its further diversifying its operations which is one of the keys to why it was able to weather the GFC so well.

Im not currently a shareholder but like the overall tone of the deal and while I suspect there could be some further weakness in the share price to come I will be looking for an entry now that BHP has shown its hand.