The
takeover drama unfolding over Potash Corp. of Saskatchewan Inc. has
drawn the attention of an unusual tire kicker – the manager of Canada’s
national pension plan.
Canada Pension Plan Investment Board
has looked at ways to get involved in a bid for Potash, which is
hunting for an alternative to a $38.6-billion hostile bid from BHP
Billiton. However, it’s a long shot that the pension manager will jump
in, sources said.
CPPIB’s
private equity arm isn’t the only buyout firm linked to Potash Corp.,
with China’s Hopu Investment Management Co. reportedly trying to rope
together a group to make an offer. Hopu is relatively small, but it has
powerful backers, including Singapore’s Temasek sovereign wealth fund.
While
it may be tough for any private equity buyer to outgun BHP, the mere
fact that funds are nosing around a $40-billion mining takeover battle
raises the question: Is this the long-awaited arrival of buyout funds
to the mining industry?
The
conventional wisdom is that there are a number of obstacles to private
equity getting involved with mining. Managers of private equity funds
(and their bankers) are wary of political risk from mines in countries
with dodgy regimes and of the risk that commodity prices could tank,
taking away the cash flow those funds need to pay back loans.
Despite that, as the commodity cycle and private equity boomed in 2007,
there were predictions that buyout funds would finally move much more
strongly into mining as other sectors became picked over. It never
happened. Commodity prices came crashing down as the world slid toward
recession, and the credit crisis made it nigh impossible to get loans
for any buyout, let alone a cyclical like a miner.
These days,
the action in commodities is not in the form of the big
headline-grabbing buyouts. Instead, the push has been to invest early in
the development cycle. Energy has been busy. Mining less so, but there
have been examples such as Inmet Mining Corp. getting $500-million
investment from Singapore’s Temasek earlier this year to help finance a
new copper mine in Panama.
With early-stage investments, the possible returns are much higher.
“You’re taking a bunch of development risk – capital expenditure,
permitting, execution – and so you can get into those at a deep
discount,” said Dan Barclay, head of Canadian mergers and acquisitions
at BMO Nesbitt Burns. “If you add leverage to that, you can start to see
your way to a really good return and a really robust exit scenario:
You develop a good mine and you sell it to a big miner.”
For private funds considering large buyouts of existing companies, it’s tougher.
First, there’s not enough access to loans that private equity firms use
to increase their returns through leverage. “You can’t get leverage on
mining assets like you can on other industrial assets,” Mr. Barclay
said. “If you’ve got a mine in the Congo no one is giving you eight
times EBITDA for leverage.”
On
top of that, it’s tough to compete with buyers who are already in the
mining industry and which trade at valuations that make them able to
pay more.
Even if it chooses to stay out of the Potash
Corp. race, CPPIB is betting that it can make private equity
investments in mining and energy work. The fund hired an executive with
a mining background who had spent time with BHP Billiton on strategy
and acquisitions. The executive, Jeff Donahue, is charged with finding
deals in mining and energy.
CPPIB
executives, through a spokesperson, declined to talk about the money
manager’s strategy in mining, but it’s clear that the pension fund
manager has some potential advantages over other buyout shops such as
Kohlberg Kravis & Roberts and Blackstone Group.
Those firms have to raise funds from investors and they are expected to
return it a few years later. That means selling the investments the
funds make, usually in seven years or so. That relatively tight time
frame can be risky in a cyclical business.
CPPIB doesn’t need
to sell because it has more money pouring in every day from
contributions made by Canadian workers. It can hold right through any
commodity cycle.
That long
hold period also means CPPIB doesn’t necessarily need to shoot for
home-run returns right away, so it can sometimes pay more.
Still, it’s unlikely that CPPIB can pay enough to get in on the Potash
Corp. bidding against BHP. And if and when CPPIB does show up in the
mining buyout game, there’s a good chance it will be the exception
rather than the rule.
DOW chart update:
http://stockmarket618.wordpress.com
Around 10 months ago, a friend told me that I MUST buy Potash, while he was buying hand-over-fist. Since he didn't offer any explanation or arguments, I declined.
Now I understand: it pays to be connected to lawyers...
The Chinesse are making deals with Iran for Oil
The US Navy better not mess with Iran
China and Iran have the " Sunburn Missle "
The Chinese involvement would make sense - and is in line with the Beijing strategy of ensuring nobody ever has the drop on them.
Anything with mining, gold and wheat in the title is of interest to them...
http://nbyslog.blogspot.com/2010/09/wheat-outlook-taster-of-how-food-wil...
they would if Marius went there
I predict the BHP bid won't go through at $130/share and there really aren't any rival bidders since Canada would never let one of their largest customers, China control the prices of their commodity. I'm skeptical enough I sold ITM calls on my POT to lock in the gain from all the idiot speculators looking to make a quick buck and who believe they will get $160/share from BHP. BHP shareholders would never approve such as steep premium.
I really doubt this company is 'for sale' for anything less than $100B.
$40B doesn't even cover the replacement cost of the mines themselves, nevermind the actual resources in the ground, or any of the proprietary processes/synergies in the PCS organization.
You are out of your mind. It had $9billion of peak revenues. Who would pay 11x revenues for any company?
This isn't your everyday, build-it-overnight-in-a-Stanford-dorm-room sort of asset. And the mines simply could not be replaced for anywhere near $40B. What does cash pay these days, 1%? 2%?
fertilizer, bitchez
there you have it - bullish news of the day
http://money.cnn.com/2010/09/02/news/economy/harrisburg_bond/index.htm?source=cnn_bin&hpt=Sbin
WPX.v... Bitches!
Western Potash Corp.
Over 860,000 acres of potash permits and applications in both Manitoba and Saskatchewan.
It's a 3 bagger so far.
Potash and Natural Gas
Snooze and you lose !
The great way to possibly play this scenario is to buy junior plays in the area that could/would be targeted.
POT rejected the bid.
The Chinese are poking around, talking to other big share holders and getting a feeling for the price. They have interest in some of these small mines.
Potash (POT) should not sell out. The other option the Chinese have is to buy some juniors.
It all depends.
There was plenty of publicity in the Canadian media about the Chinese coming to Saskatchewan looking and talking to WPX management when the share price was around $.43/.
Whoever buys POT (or not) would/could easily buy a property next door.
This is all hypothetical of course. But one needs a good hypothesis once in awhile.