BHP Billiton CEO Marius KloppersDANIEL MUNOZ
The head of BHP Billiton is warning Canada that a Chinese-led rival bid to his company's $38.6-billion (U.S.) hostile takeover offer for Potash Corp. would reduce government revenue by giving too much pricing influence to a major customer of the coveted crop nutrient.
Marius Kloppers, the chief executive officer of Australia's BHP, said that because China is among the world's largest consumers of potash, any Chinese state-owned enterprise allowed to purchase a major stake in Potash Corp. would seek to drive down the price of the commodity.
"Any situation where a consumer has insight into price formation, cost structures, and proprietary information, the more of that insight - the more your anxiety should be," Mr. Kloppers said in a wide-ranging interview with The Globe and Mail's editorial board.
BHP's statements on China underscore the growing discord between the mining giant and the Asian economic superpower over commodity markets and point to the high-stakes tactics being deployed in the battle for control of a Canadian resource crown jewel.
Chinese government officials are deeply concerned about the possibility of the world's largest mining company winning control of the world's largest potash producer. BHP has already succeeded in changing pricing structures for commodities such as iron ore and metallurgical coal from annual contracts to quarterly spot pricing.
Now, BHP hopes to do the same with potash, just as Chinese demand for the crop yield-enhancing mineral soars as China's 1.3 billion citizens add more meat to their diets.
"We bring a lot of experience in those markets," Mr. Kloppers said of emerging economies. "We have far higher shares of our sales into those markets. We have more experience there. And, we have experience of markets that change."
A Chinese-led consortium bid or the purchase of a major stake in Potash Corp. are considered to be the Saskatoon company's most likely defence to fend off BHP's unsolicited $130 (U.S.) per share offer, which Potash Corp. has rejected as too low. Potash Corp. advisers have held talks with Chinese companies, including Sinochem Group, and government officials in Beijing are now deciding whether to proceed with a bid. Sinochem has appointed Deutsche Bank and Citigroup to help it evaluate a potential bid, according to the Financial Times.
"I would have been extremely surprised if [the Chinese]hadn't taken a close look, but again, Canada will or may need to decide whether it really wants a consumer which is intrinsically misaligned to own these assets," Mr. Kloppers said.
Saskatchewan government officials, including Premier Brad Wall, have raised concerns with both a potential Chinese bid as well as with BHP's all-cash offer. BHP has said it eventually wants to sell its potash production directly to customers, a model that would bypass Canpotex, the cartel that currently markets all the potash produced in the province. Saskatchewan is concerned that if Canpotex is dismantled or weakened, the province's royalty revenues from potash mining would be reduced.
If successful in its bid, BHP intends to run Potash Corp.'s mines at full capacity, a tactic that could drive down prices in the short term. BHP, however, believes such production will lead to stable high prices over the long term as rival marginal high-cost production is deferred.
The Australian mining giant also expects to eventually sell its own production, as it believes that Canpotex's days are numbered as global trade agreements slowly eliminate such cartel-style organizations.
Saskatchewan has no direct power to quash a foreign takeover of Potash Corp., although Ottawa has said it will consider the province's position in making its own decision. Any takeover of Potash Corp. would have to win approval from Industry Canada through the Investment Canada Act, which stipulates that a foreign takeover must be a "net benefit" to the country.
Mr. Kloppers' China warnings come in the middle of a week-long Canadian tour in which BHP is trying to win backing for its bid. Executives visited Saskatoon on Monday, Toronto on Tuesday and on Wednesday will be in Ottawa, meeting with government and opposition members in hopes of gaining support and in making a pre-emptive strike against a potential Chinese bid.
"We are not consumers. We are aligned toward profit maximization. And so in stating the positive, you clearly draw out the differences," Mr. Kloppers said. If a Chinese bid is allowed to proceed, he warned, the assets of the world's largest potash producer would be put under the influence of a major customer.
A bid from a Chinese firm such as Sinochem would face scrutiny from Ottawa, which has more rigorous conditions for foreign state-owned enterprises than it does for private companies like BHP. However, foreign state-controlled companies have recently won approval for minority investments in Canadian resource companies and majority control of development projects.
State investment fund China Investment Corp. (CIC) paid $817-million (Canadian) earlier this year for a 45-per-cent stake in an Alberta oil sands project owned by Penn West Energy Trust, and $435-million for a 5-per-cent interest in the company.
Also this year, China's state-owned energy firm Sinopec paid $4.65-billion (U.S.) for a 9-per-cent stake in Syncrude Canada, one of the oil sands industry's top producers.
Last year, South Korea's Korea National Oil Company, or KNOC, agreed to pay $1.8-billion (Canadian) for Harvest Energy, in a cash deal whose hefty premium serves as another indication of the strong global interest in Canada's oil patch.
That deal came less than two months after PetroChina agreed to pay $1.9-billion for a majority share in two Athabasca Oil Sands Corp. projects.