This page has been archived and commenting is disabled.
BHP Billiton Develops an Appetite for Potash
BHP Billiton’s (BHP) low key, South African CEO, Marius Kloppers, has announced that he is making a hostile takeover bid for Potash (POT) for $39 billion, or $130 a share, a multiple of a mere 13 times earnings. POT immediately shot up to $147, a 32% premium to yesterday’s close. POT’s CEO described the bid as grossly inadequate, which it obviously is, and said he would take whatever measure necessary to deflect the bear bug.
BHP follows Vale (VALE) as the world’s second largest iron ore producer, and is attempting to use a cash mountain earned from its massive and hugely profitably sales to China. Why not buy another product that the Chinese are voracious consumers for? POT is the world’s largest fertilizer producer, and with the global population expected to grow from 7 billion to 9 billion over the next 40 years, they decided this would be a great area to diversify into.
BHP is no doubt attempting to position itself for the secular long term bull market in food which I have been detailing at great length in these pages (click here for “The Bull Market in Food is Only Just Beginning” at http://www.madhedgefundtrader.com/page/2 ). The recent doubling of the price of wheat in a mere eight weeks has been a shot across the bow of investors everywhere that it is time to get on the train before it leaves the station (click here for “Going Back Into the Ags” at http://www.madhedgefundtrader.com/june-24-2010.html and the follow up piece “The Best Trade of the Year” at http://www.madhedgefundtrader.com/august-10-2010.html ).
During economic downturns, people don’t need to buy steel, but they still have to eat. BHP actually explored setting up its own potash operation in Saskatchewan next door to POT, but decided that buying the Canadian company was the cheaper and faster route. At the height of the last commodity boom, POT peaked at $240.
I have mixed feelings about the deal. I have been recommending POT since the inception of this letter, and it’s always nice for the old P&L to get a shot in the arm in an otherwise dull summer. On the other hand, it means that BHP is going to make all the money going forward, robbing me of a core holding. POT is probably going to be worth $1,000/share someday.
BHP’s move suddenly makes other ag companies I have been recommending takeover bait, like Mosaic (MOS) and Agrium (AGU), which have both seen serious pops today. Expect BHP to raise their bid, and everyone else to raise their exposure to this key sector. Hey, Marius, why don’t we split the difference and pay to $185 for my POT shares?
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
- advertisements -
WPX. Last of the undervalued potash up and comers...
Do I live in a time warp or is this old news...like last week?
Tyler: I know you are busy chasing Helicopter Ben's verbal entrails but adding this crap to your site for filler is ridiculous.
Its more than a week old.May I provide an update?
http://www.bnn.ca/news/19963.html
BHP develops an appetite for POT would be a better headline. Once again, m&a deals are always feverish before an imminent market clusterf**k. "Nobody saw it coming!", they will cry.
There are Potash substitutes (though those involve oil based products so that out the pan and into the fire) and there is no shortage of ag. capacity assuming that the swathes of African delta being bought up by the chinese and Arabs (as well as the ukranian and Argentinian famland being bought up by investors) are brought to higher productivity.
Potash cycles are liable to hand you your ass on a tray occasionally and so far the cartel like pricing has helped shield investors from the worst of it. if Kloppers goes for volume, expect more painful cycles.
A few comments:
a) Infrastructure in Saskatchewan is extremely limited insofar as being able to set up a new mine. The electrical grid, for instance, is chronically overloaded. Think 5-10 years to build a new mine, *and* $8-$10B (if not more, because certainly, the implied rate on financing will be >10%/annum over those 5-10 years before the thing even gets into production, in a financing/stock market environment which is notoriously unfriendly to the mining industry!)
b) This offer severely undervalues PotashCorp. 13X earnings, in a severe depression in potash prices, is basically giving the company away.
c) The bid is under the replacement cost for just the mines and infrastructure itself, nevermind the actual mineral reserves.
In a world where Google can trade with a market cap of $200B, and banks which are, on a mark-to-market basis, insolvent, can trade at $100B market caps (ie: Shittygroup), this asset is worth several times the lowball bid.
Of course, in this era with the stock market being manipulated so far down by all the hedgies, HFTs, and even dumber-than-dung retail investors selling and shorting, who knows, they might actually get this crown jewel asset for a fraction of its potential.
This is confused thinking. Firstly, the stock trades at 20x next years earnings, not 13. The stock has a market cap of 43billion. You think it's worth 85 or 120 billion? Their sales are about $8billion. The author states is would be worth $1,000/share one day. A $300billion market cap. That's Exxon territory. Crazy talk.
The article says the offer is 13 earnings @ $130.
As I said earlier, the industry, for the past couple of years, has been in a depression. I drive by a few of the mines personally every few months, and production has basically been at a standstill. That's why the prices are severely depressed.
A $300B market cap doesn't seem unrealistic if GOOG can command $200B and insolvent banks can demand $100B market capitalization.
Exxon would appear to be quite undervalued as well, although their heavy exposure to downstream and not upstream, limits their upside.