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BHP Quickly Expanding

Latest Move Should Improve Economics of Potash Project.

There are moments in life that we have to sit back and just laugh at the irony of certain events.  Last week we gave an interview to a reporter at Kiplinger’s where we stated we were not sure of the economics of BHP’s Jansen Project, which was acquired through BHP’s purchase of Anglo Potash, as we had not seen the latest figures.  We wondered how they would make the Jansen Project economical enough to take on the establishment represented by Canpotex Ltd.  BHP likes to have low cost mines that they can run at 100% capacity in good times and bad and we were not sure how they could do that with Jansen. 

Enter the news announced on Thursday, when Athabasca Potash announced that they would be purchased by BHP Billiton for C$341 million, or C$8.35/share.  The acquisition will give BHP the Burr Project, which is located next to their Jansen Project.  This changes the economics of the whole project as only one actual production plant will need to be built, although now a bit larger than they had at first anticipated. 

A few things popped out at us regarding this acquisition which we thought very interesting. First, it has the potential to make BHP a big player in potash.  It has been rumored that they wanted to buy a current producer (such as Potash Corp. of Saskatchewan and The Mosaic Company which have had rumors circulating about them on and off the past year regarding BHP) which was quite logical thinking.  By doing so, BHP would have bought the right to market their potash production through Canpotex Ltd., one of the most powerful resource cartels in the world which would have connected BHP instantly with customers around the world.  With this latest purchase and BHP’s obvious intent to develop their potash assets, it seems that Canpotex now has no other choice but to invite BHP to sell their output along with the ‘Big Three’.  BHP would have to give up some autonomy, but it would be the most logical choice at this point rather than battle it out with the established producers.  After all, BHP wants to market their output of iron ore from Australia with Rio Tinto supposedly to cut costs, so would it not make sense to market their future potash production from Canada with Canpotex should they be invited?  We think so.

This acquisition also should be a boost for some of the juniors looking for capital to build their projects.  This takes one more junior out of the running for the investment dollars from China and India and brings an increased probability that they receive these investment dollars from those requiring vast quantities of potash in the future.  Our guess is that Brazil stays away with the development of their potash assets and India will not be an eager investor at this time.  Leaving China, who we have already seen enter tentatively into a few deals already (although the closing of those deals has not always taken place).  We see China as the most likely suitor, so BHP’s move to invest lower down the food chain so to speak increases demand relative to supply of potash juniors with projects ready for development.

We published an article two weeks ago arguing that potash prices had hit a bottom, this is another indicator that quite possibly they have.  BHP is aggressively making a move, which should demonstrate to investors that KCl at $350/tonne is a very good price when considered in a historical perspective rather than just looking at the past two or three years’ prices per tonne.  This news should bode well for all potash stocks, as it has pushed some of the juniors higher and we guess will eventually bring investors back to the ‘Big Three’ once they get a realistic grasp on the price structure in the industry.  One could argue that BHP is an outlier in the industry with their aggressive fertilizer plans, however in the same week the market received news that Vale was buying Bunge’s Brazilian fertilizer assets.  Two big boys buying into the industry is not an anomaly, but rather a trend and investors would be wise to heed what the market is telling us.  Long-term fertilizer will yield healthy returns, especially if world GDP growth can continue in the years to come without any hiccups or worse, a dip such as that which the market is still recovering from.

Fertilizer stocks are at a level where they offer intriguing entry points for investors, and special situations now exist with some of the explorers developing projects around the world, especially those with projects near the world’s breadbaskets.  Investors need to keep an eye on the industry and any future contracts to see how the producers’ bargaining power fluctuates, for the record we believe that it will increase but this will be over time, of course.  Our key to watch is which party (whether the customer or the producer) is paying the freight fees, it is a truly bullish market when the customer is willing to pay all costs to get their hands on the end product. 

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