The Kremlin is thinking of bidding against Australia’s BHP Billiton (BHP) for control of Canada’s leading potash producer, Potash Corporation. But those promoting the bid in Moscow won’t say why they believe the Canadian government should agree to a takeover which the Russians admit they would ask Russia’s Control Commission for Foreign Investment to refuse, if the positions were reversed.
The news was disclosed in Moscow last week as the Canadian government told BHP it has 30 days in which to improve its US$39 billion offer. Since the start of BHP’s takeover campaign in August, Potash Corp has risen to a current market capitalisation of US$43 billion:
Tony Clement, Canada’s Industry Minister, announced that Ottawa will not allow BHP’s bid to proceed without changes and fresh undertakings. “I am not satisfied that the proposed transaction is likely to be of net benefit to Canada,” Clement said in the first show of Canadian nationalism since September 28, 2000 – that’s when former Canadian prime minister Pierre Trudeau died.
There are fears in Canada that BHP would not build a new 8-million tonne per annum potash mine at Jansen, Saskatchewan, if the takeover goes through. In addition, Canadian analysts say that BHP might operate at full capacity and sell potash below the levels already managed by the two dominant international potash traders, Canpotex representing the North Americans, and Belarusian Potash Corporation (BPC), representing Russia’s Uralkali and Belaruskali. Canadian analysts are also claiming that if BHP changes marketing and pricing strategy at Potash Corp’s mines, it could undercut the current price of potash – set mainly in contracts between the producers and China, India, and Brazil, the main consumers and importers – by up to $100 per tonne. The third-quarter price of potash in international trade was $306 per tonne, and for the time being it is rising. BPC is currently claiming it has raised the price of its standard product to Asian buyers to the $400 per tonne level on a free-on-board (fob) basis, good to the end of next March. The target price for the international trade next year is $430/tonne fob Vancouver.
Another of the Canadian fears is that falling prices for potash would mean lower revenue royalties for Saskatchewan province. In the financial year 2008-2009, the province took in C$1.4 billion (US$1.3 billion) in potash royalties, which comprised one-tenth of its budget.
Potash Corp, the world’s largest fertiliser by capacity, produces all three farm nutrients – potash, phosphates, and nitrogen. But it says in a recent website report “we believe the greatest opportunity lies in potash, which is the primary focus of our company.” The company reported nine-month results on October 28. These indicate shipments of potash of 3.7 million tonnes, substantially above last year’s levels. Revenues came to C$4.7 billion for the 9-month period, up 64% on 2009; net income was C$1.3 billion, up 79%. Potash comprises 46% of the consolidated sales total; but it is far more profitable for the company than either phosphates or nitrogen, making more than two-thirds of the reported operating profit.
Russia, Canada and Belarus control the world’s mineable potash, and the Russian government has recently consolidated its two leading producers Uralkali and Silvinit into a single, state-controlled holding company. The final form of the new company has yet to be decided, and its current shareholders are expected to give way (sell out profitably) to a new shareholding structure, once Deputy Prime Minister Igor Sechin, in charge of the mining sector, decides what that will be.
Phosagro is not part of this consolidation plan. But it appears to have been accepted by Sechin as the stalking-horse for the Canadian takeover because the new Russian potash company is too close to being a country monopoly to be allowed by European and North American anti-trust regulators to absorb Potash Corp, their competitor. The fig-leaf, I mean maple leaf in this transaction looks to be Russian, not Canadian.
The obvious question is why the Canadian shareholders of Potash Corp or the government in Ottawa have any reason to believe the credibility of Russian promises, compared to Australian ones. The record Russians have established in Canadian shareholding markets is so far one of indifference to transparency and disclosure requirements, and rapacity towards minority stakeholders. The stories of Toronto-listed Archangel Diamond Corporation and High River Gold are fresh in Canadian investors’ memories. Canada’s leading goldminers, Kinross and Barrick Gold, have their own stories to tell of Russian corruption, asset raiding, and other abusive practices, although they rarely tell them to the local stock exchange or their shareholders. The special relationship between Canadian oligarch Peter Monk and Russian oligarchs in the sector makes the exception that proves the rule.
The Russian move to substitute for BHP in taking Potash Corp has been initiated, at least publicly, by Phosagro board chairman, Vladimir Litvinenko. Phosagro is a multi-mineral fertiliser producer, primarily mining and selling phosphates, and in the potash game, it is a relatively new and small player. Its biggest recent success, politically and administratively, was its defeat of rival Dmitry Mazepin’s Eurochem initial public offering attempt in London in April. Phosagro doesn’t publish audited financial results for the consolidated group, so its current debts and borrowing capacity for the Potash Corp bid cannot be calculated. Its enterprise value is currently estimated to be between $3 billion and $7 billion – the size of the spread indicates how poorly its financial condition is known in the Moscow market.
Litvinenko has the reputation of being close to Putin. This comes from the days when he supervised a doctoral thesis on natural resource policy which Putin composed several years ago in St. Petersburg. Litvinenko played that role as Rector of the St. Petersburg Mining Institute, an academic post he still holds. Litvinenko is well-known to international mining companies, and he has been especially friendly to De Beers and BHP.
But his influence as a decision-maker in the resource sector has been limited. He has repeatedly failed to get his nominees appointed as the federal minister of natural resources; he was opposed to the current incumbent, Yury Trutnev, but LUKoil and potash miners of Perm region combined to push him into the position, and keep him there.
Until now, Litvinenko has also been an exponent of Russian resource nationalism. Over the years, he has lobbied for Kremlin decisions to exclude foreign companies from several of Russia’s largest unmined deposits – Udokan copper, Sukhoi Log gold, and Shtokman oil and gas.
Deputy Prime Minister Sechin is supervising the bid plan for Potash Corp. Phosagro has confirmed Sechin’s supervisory role, and told the press it has a preliminary financing agreement with Canadian banks. The company adds that it is now looking for Russia’s state banks to participate in a deal that will offer Potash Corp shareholders a premium on the BHP bid.
Litvinenko is no expert on mine financing; and Sechin is better placed to discuss the Russian bid with VEB, VTB, and Sberbank, and see whether they agree they should also be joined by Chinese fertiliser interests. The Chinese have been interested in the outcome of the BHP bid, but not prepared to put up enough money to pursue Potash Corp on their own. An earlier report on Chinese interest in buying a stake in Belaruskali and the BPC potash trading system can be found here. So far, nothing has eventuated for the Chinese in Belarus.
Potash is a “super liquid asset,” Litvinenko told Sechin in his proposal, according to the Russian press version. The purchase of Potash Corp would allow Russia “to control more than 70% of world trade in potash and be serious geopolitical tool to guide the country,” he added. Litvinenko noted that a Russian state-assisted bid for Potash Corp could not be made by Uralkali and Silvinit for anti-trust reasons.
As a concept, the Russian scheme to take over Potash Corp has made a big noise, but the Russians involved turn out to be shy on disclosing the details, if there are any. Litvinenko’s institute telephone rings without answer, and so he was asked through his assistant, Sergei Shama, to say why Phosagro, a phosphate specialist, has made such a public statement of intent to acquire the Canadian potash producer? Why he thinks a Russian bid would be better for Canada than an Australian one? And why the Canadian government should allow a foreign takeover when Litvinenko himself has argued that strategic mine resources in Russia should be restricted by the government to domestic companies? Litvinenko did not respond.
Phosagro’s press office was asked the same questions. It replied: “PhosAgro is considering the opportunity to participate in the purchase of shares of the company PotashCorp (Potash Corporation of Saskatchewan Inc.). Currently PhosAgro is engaged in intense consultations with the Russian government, Russian and foreign banks on the possible deal. PhosAgro intends to announce its further actions after November 15, 2010.”
Sechin was asked a similar set of questions, including these two: what does Mr Sechin view as the Russian state interest in pursuing Potash Corporation? Why does Mr Sechin, as a member of the Control Commission for Foreign Investment, believe that Canada should allow the Phosagro takeover of Potash Corp when he himself would argue that the Control Commission should oppose a takeover of Russian potash companies by BHP or other foreign miners? There has been no response by print time.