go long where bhp short; a takeover scenario

ELM may not be able to start the production after proving a significant resource. It might be taken over by a major miner. This is the rule of the game if the game is about a high grade resource which will be in high demand in the near future (not necessarily today) as you all know. So we need to analyze the possibilities in case of a takeover.

Let's try to analyze who would be taking over ELM resources if ELM could prove significant resources which is slowly becoming a reality by the latest drilling results rather than remaining a dream in our minds.

The candidates are:

1) BHP
2) Vale of Brazil
3) Chinese State companies
4) Indian Company

Who would be more ambitious for a takeover?
Of course BHP

Vale of Brazil, Chinese and India would want the potash for their own use as their countries are the biggest buyers of potash with very little production. However BHP, which is the biggest miner of the world, would want it for selling to those Brazil, China and India. It has more market and more money than any of those companies in those countries.

What would attract BHP to the potash market? Why not more iron ore and coal but definitely potash? Let's have a look at the market fundamentals first.

BHP describes the potash business as a "large, long-life, low-cost, expandable and export-oriented"

BHP is pointing to the outlook for world agriculture -increasing demand for food, particularly protein, decreasing arable land per capita, and the obvious and growing need for fertilisers to increase yields. It also points to relatively low potash use per head in countries like China, Russia and India. What the company doesn't mention, but could say, is that there growing demand generated by biofuels

This same outlook is influencing BHP's rivals in the iron ore market, Vale and Rio Tinto. Brazil's Vale is about to go on a fertiliser buying spree and intends to capture a sizeable share of Brazil's huge and growing market for fertiliser, with potash also top of its agenda. Rio Tinto is contemplating investing in potash production in Russia.


Potash prices

Canadian potash exports to offshore markets are managed by Canpotex. Most of the products are sold on an annual contract basis. The annual contract price settlement with China is typically considered a benchmark price. Other than the contract prices there is not a spot price for potash sales at this level .(This is also the answer of question asked by poster deltango on 6th of Jan. Sorry for late reply deltango)

Global demand for potash collapsed in 2009. China, one of the largest potash importers and consumers, did not sign any new contracts to import potash until mid-December 2009 when it reached a settlement with Belarusian Potash Corp. for 1 Mt of Muriate of Potash (MOP) at US$350/t cfr for shipment in 2010. India, another major consumer and importer, only settled contracts with major suppliers in mid-July 2009 for the period July 2009 to March 2011. The contract price was US$460/t cfr, a decrease of US$165/t or 26%, when compared to the previous contract price of US$625/t cfr. The total volume of all contracts was about 4 Mt of MOP.

Current Potash Market

Potash Production and Demand

-------------- Demand (mt) ----- Production (mt)
Asia ............... 21.4 ............. 3.3

Sth.America ..... 9.4 .............. 1.3
Brazil (0.6)
Chile (0.7)

Nth.America ..... 9.1 ............ 18.2
(USA) (5.2) (1.2)

Europe ............. 7.1 .............. 6.2

FSU ................ 3.2 ............. 17.9
(Russia & Belarus)

Israel & Jordan .. 0.8 .............. 5.7

(Australia consumes only 0.2 mt/year)

The current potash market is estimated at 50 mt annually (in 2010) and is projected to grow at a rate of 3-4%. But this estimation needs to be amended (by increasing) due the recent food price crisis declared by UN. It will get worst but not better IMO.

Asian nations (only China) produce only 3.3 mt while consuming 21.4mt. Consumption in China and India remains critical to forecasting future potash demand. The demand for potash in both countries is largely driven by their governments' policy on increasing agricultural production and achieving higher yields, and improving farmers' income and living standards. China could potentially use 25 Mt of potash if it follows agronomists' recommended nutrient levels. The same applies to India, which could potentially use 10 Mt, and to Brazil, which could use 11 Mt in its agricultural sector.

The United States remains one of the largest net consumers producing only 1.2 mt/year while consuming 5.2 mt/year.

The primary driver for potash production is the demand for food.

Potash is a sector where demand is expected to grow strongly in the long term as rising standards of living and demand for higher-calorie foods in developing countries intersects with reductions in arable land, requiring greater use of fertilisers.

The world's population has been steadily increasing since the second half of the 20th century. This number is expected to reach 9 billion people by 2050.

In next 20 years (from 2010 to 2030) world's population will increase from 6 billion to 8 billion. An unprecedented 2 billion increase in 20 years. No one knows what will happen to the food prices during this time. The population increase in next 20 years (from 2030 to 2050) is going to be only 1 billion.

As a result of the population and income increase in developing countries, the food prices are rising significantly now. That will definitely give a boost to the potash prices very soon. More food production needs more agricultural products and that needs more potash as the planting will be made in the same current size of land.

Fertilizer demand will also be supported by a growing demand for crops for biofuel production, including ethanol and biodiesel.

Hence more potash production is needed.

Potash Production Problems

Potash is abundant, with sufficient reserves to last 1000 years. That makes it less susceptible to speculative price fluctuations. However, mining potash is a complex process requiring the ground to be frozen a kilometre down to reach the deposit. ,B.Because of the cost, no new mines have been developed in the last 40 years although that will change soon due to price increases over the last few years.

By the way, the state of potash producing infrastructure is in decline as about 85% of the world's facilities are more than 25 years old.

The potash sector is dominated by a relatively smaller number of big producers. (PotashCorp represents about 20 per cent of global production capacity). There are huge resources in Saskatchewan which is enough for the whole world for a thousand year, however there are very big barriers to entry and long lead times for getting a project into production. $3b Capex excluded infrastructure outside plant gate- and min. 7 years is needed to bring a low Opex cost conventional (underground) mining project into production in Saskatchewan. The Capex cost is about $2b for a solution potash mine with a shorter construction timeline but Opex is very high due to far more energy intensive compared to conventional mining. So, bringing a solution mining into production requires higher potash prices.


What would be BHP's perspective for potash market.
This is definitely not about China this time!
It is about the whole World.
My perspective: "Go long where BHP is Short"

Before analyzing BHP's perspective, I'll tell you my simple perspective; "Go long where China is short". I believe BHP has a similar perspective in general as well.

However this time in regards to potash business, BHP's perspective, potash is not only a opportunity to diversify into soft commodities but also provides geographical diversification and a diversification of its customer base.

So, my perspective is changed to ; "GO LONG WHERE BHP IS SHORT"

China actually is not too short for potash as it has its own production (1/3 of consumes) and another big project is in the pipeline which would provide another 1/3 of consumes. However China will need more potash and will be very short for it again in the long term. India and other Asian countries are totally short for potash.

Also the vast majority of PotashCorp's sales, are into North and South America, with very little share of its output devoted to China.

In the near to medium term, therefore, the acquisition would reduce BHP's heavy exposure to China. However China would become much more important in the longer term.

Potash as a commodity has a similar curve with iron ore production which was ignited by the relationship between rising per capita incomes and the intensity of steel usage in developing economies. However, potash has a significant lag; as the growth in demand for iron ore, manganese and metallurgical coal starts to taper, the demand for potash should start to soar.

Adding potash to the portfolio from BHP's perspective, is like taking out insurance to protect its future growth. According to some analyses, potash could eventually provide up to 20 per cent of BHP's earnings.

If we consider potash market is estimated at 55 mt annually (2011), and the price is $450 per tone, the total market value would be $25billion. If the price goes up to $900 per tone by the food price crisis in this and next year, the market value would be $50billion. 20% of this market would be around $10b. If we compare this with BHP's 9% share about $23 billion in $250billion iron ore market, the $10b sales volume would be very attractive in a diversified portfolio.

But, how BHP would enter the Potash Market. That would be not easy I would say.

All BHP want is "Less Competition"

If you wanted to get into the fertiliser market in a big way, buying PotashCorp would certainly achieve that. It is the world's largest supplier of potash and also one of the lowest-cost producers, according to BHP

BHP began investing in Canadian potash four years ago and now has exploration leases over 14,000 square kilometres. Preparations are still underway to bring three areas into production over the next decade. Buying PotashCorp would get BHP into the main game immediately and allow the new mines to come on stream as demand determines, with less competition.

However BHP could not buy PotashCorp.

BHP says now that it is refocusing on organic growth after failed PotashCorp attempt. But I don't believe this as PotasCorp CEO.

BHP has very strong monopoly policy as you know. They are showing off that they are trying to start the Jensen project nowadays but I don't believe that's their real intention. No one believes in this business either.

BHP still have to buy PotashCorp for less competiton; in 5 years or 10 years time.., this should happen.

But how this could happen?

BHP need a very low cost resource to develop it and start a price war against PotashCorp to weaken it, then try to buy it again in next 5-10 years. This could be a long term plan for BHP.

If ELM can prove a significant resources, BHP would be very eager to buy it. The Opex cost is very low in this area as you all know. They could create a potash province in Western Africa coast and export to everywhere, especially to North and South America, which are the biggest customers of PotashCorp.

So the result would be ;

1- BHP is the strongest miner in the World.

2- BHP definitely wants to involve in potash business as it will be the rising star of commodities in next 10 years.

3- BHP has to buy PotashCorp out, otherwise they can't be the biggest in this area.

4- BHP has to disturb and weaken PotashCorp by price competition and then buy it out.

5- BHP can't do that if they develop a high cost (Capex and Opex) in Saskatchewan.

6- BHP has to find a low cost mine out of Saskatchewan.

7- There is not any known potash resources in the world other than underexplored Congo-Gabon basin.

8- BHP can buy ELM and even MagIndustries to start the development quickly. They actually don't need huge reserves in this area if their strategic thinking would be weakening PotashCorp by competition. They would only need around 3-4mt year production to start price competition. And that needs a bit high grades which ELM would able to provide. MagIndustries project is ready to be developed and can provide high volumes on top of ELM's resources.

9- BHP could easily and very quickly start potash production in Congo basin. They only need 2-2.5 years to do that. Same thing would happen in 4-5 years in Canada. So, the price competition against PotashCorp would be started much earlier before the world demand for potash increased. (all new projects under development today will start production in 2014-2015, but potash demand would increase dramatically after then)

10- There you go, PotashCorp is weakened, sp is smashed down and BHP can bid on it again.

So we have a great chance of being taken over by BHP

Vale, Chinese and Indians can also be seen in the queue. I hope they would make a bidding fight for us. That would be fantastic.

Good luck.


PS: some small parts of above ideas are compiled from various articles.