Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Miners are looking to enter the potash business, or expand existing operations, as they look for increased demand from developing nations such as China, India and Brazil.
BHP Billiton – In the spring of 1869 a German Chemist named Charles Rasp immigrated to Australia for his health. Unable to find work in his chosen trade Charles learned to ride a horse and began wrangling sheep. One day, while out riding his horse at Broken Hill, he discovered mineralized rock. He took out a mining lease, punched holes in the ground and eventually found rich veins of silver. The Broken Hill Proprietary Company – BHP – was incorporated in 1885 while mining silver and lead at Broken Hill in western New South Wales.
Billiton was a mining company that got its start in September 1860 when the articles of association were approved by a meeting of shareholders in the Groot Keizerhof Hotel in The Hague, Netherlands. Shortly afterwards the company acquired the mineral rights to the tin-rich islands of Banka and Billiton off the eastern coast of Sumatra.
BHP Billiton – also known by the nickname “the Big Australian” – is the world’s largest mining company. It was created in 2001 by the merger of Australia’s Broken Hill Proprietary Company and Anglo-Dutch Billiton. Today BHP produces – oil, natural gas, bauxite, aluminum, copper, silver, lead, zinc, uranium, diamonds, coal, titanium, well, you get the idea, they’re miners, they pull “stuff” out of the ground and sell it.
BHP, seeking to benefit from surging demand for fertilizer made a $40 billion hostile bid for Potash Corp. of Saskatchewan Inc. Yielding to political pressure, Canada’s Federal government nixed the deal.
BHP paid $341 million, C$8.35/share, to acquire Saskatoon’s Athabasca Potash (TSX: API). This acquisition will give BHP Athabasca’s Burr Project, which is located next to BHP’s Jansen Project.
BHP Billiton announced on 24th June 2011, a further investment of US$488 million to support development at its Jansen Potash Project. This piece of additional capital will fund site preparation and the procurement of long lead time items during the project’s feasibility study. This funding will also enable BHP to develop the first 350 meters of the production and service shafts.
The announcement takes BHP Billiton’s investment in Jansen to, so far, $1.2 billion.
BHP likes big stories, the unfolding potash story is one of the biggest and in this author’s opinion it can only get bigger.
Vale S.A. – Formerly known as Companhia Vale do Rio Doce (CVRD) was founded by the Brazilian Federal Government in June 1942. The company was privatized in 1997 when the Brazil Consortium bought just over 40% of the Federal Government’s stock.
Even though Vale has operations in the energy and logistics sectors both sectors combined contribute less than ten percent to Vales total revenues. Vale is a miner and controls the Brazilian iron ore industry owning all Brazilian iron ore exporters.
In recent years, in an attempt to diversify its operations, Vale has made a string of purchases getting into copper, kaolin, nickel and coal. In October 2006 Vale bought Canada’s second largest mining company, Inco, for $18.9 billion. Vale also produces manganese, ferroalloys, bauxite, potash (Sergipe mine in Brazil), alumina and aluminum.
Vale S.A. has moved into the fertilizer business in a big way:
In January of 2009 Vale bought Rio Tinto’s potash assets in Argentina and Saskatchewan Canada for US$850.
In January 2010 Vale announced it would acquire all the shares of Bunge Participacoes e Investimentos S.A. (BPI). Vale will pay $1.65 billion US for BPI – for its wholly owned phosphate mining operations in Brazil – and another $ 2.15 billion US for its 42.3 percent in Fertilizantes Fosfatados S.A. (Fosfertil) – a leading Brazilian fertilizer company.
Engineering work has started at Vales Rio Colorado solution mining potash project in Mendoza, Argentina. Estimated start-up is for the second half of 2014 with a nominal capacity of 4.3 Mtpy year of potash.
Vale said it’s planning to consolidate its position in the potash industry by taking its fertilizer unit private. The change would give the Brazilian-based miner more control over the business that now represents about 2 per cent of global potash production. Vale is planning to build a $3 billion potash project in Saskatchewan, and has other potash projects in its pipeline.
Rio Tinto – A site along the Rio Tinto river in the Andalusian Province of Huelva, Spain has been mined for copper, silver, gold, and other minerals since 3000 BC.
After being lost for centuries the mines were rediscovered in 1556, the Spanish government began operating them in 1724 but sold them in 1873
to Matheson and Co. Hugh Matheson formed a syndicate consisting of Deutsche Bank (56% ownership), Matheson (24%), and railway firm Clark, Punchard and Company (20%). The syndicate registered the Rio Tinto Company on 29 March 1873. The Rothschild family had control by the end of the 1880s.
After selling its South American and Saskatchewan, Canada potash assets in 2009 to cut debt Rio has re-entered the potash business. The company is teaming up with North Atlantic Potash Inc. – the Canadian subsidiary of Russia’s JSC Acron, a fertilizer producer – to hunt for potash in Saskatchewan.
A joint venture between Aluminum Corp. of China (Chinalco) and Rio Tinto has received approval for exploration in China. The JV will initially focus on exploring for copper in China but has plans to expand into coal and potash.
“This is a solid business and the big mining companies agree. If they can find a way to participate in it, they will.” Mark Connelly, New York brokerage Sterne Agee.
As I’ve just shown you, three of the world’s biggest miners are moving into fertilizer in a big way.
Consider this plus $3.6 billion investment into potash…
K+S AG – Bought Canada’s Potash One, the previous owners of Legacy, in a 2010 deal worth $434 million. Potash prices at the time were 40% lower than today.
After saying on March 8th 2011 that it expects global demand for potash to rise 3-5 percent per annum, Europe’s largest, and the worlds fourth largest potash producer, Germany’s K+S AG said on November 29th 2011 that it will move forward with construction of its $3.2 billion Legacy project in Saskatchewan.
The reality is the potash story is just starting. Unlike other resource plays there is no cycle, demand is always going to be there and its rising year over year making potash an excellent play in what will be a long term agricultural commodities bull market.
“Just when we need more soil to feed the 10 billion people of the future, we’ll actually have less—only a quarter of an acre of cropland per person in 2050, versus the half-acre we use today on the most efficient farms.” David Montgomery, author of the 2007 book Dirt: The Erosion of Civilizations
Fertilizers are going to become increasingly important for many reasons:
Conclusion
Two junior potash players who are trying to become independent producers are on this authors radar screen. Both could threaten the industry dominance of the two main potash marketing companies.
Canpotex Ltd. and Belarusian Potash Co. control two-thirds of the global market – Canpotex markets potash produced in Saskatchewan by Potash Corp., Mosaic Co. and Agrium Inc. while BPC is an arm of Belaruskali and Russia’s Uralkali.
China produces just 10% of the potash it utilizes, India’s economy is 60% agricultural based and the country produces very little potash. Brazil is one of the worlds breadbaskets and imports most of its potash. Both the Chinese and Indians have groups given government mandates to secure potash assets. Brazil’s government is also very active in regards to its agricultural sector.
There’s a global macro theme – “Feeding the World” – and certainly longevity to the potash story.
Potash should be on every investors radar screen. Is it on yours?
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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.
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