Dig into the nitty-gritty of the potash business - if you dare - and you soon appreciate why investors are betting that the Potash Corp. bid will get sweeter one way or another.
Potash will, by 2015, have the capacity to churn out 17 million tonnes of potash a year. If that sounds like a lot of plant food, it is: The company is easily the biggest producer in the world.
In Saskatchewan, it costs about $1.4-billion to build a million tonnes of capacity. That doesn't include reserves or anything outside the plant gate - roads, rail, power lines etc.
Do the math and round the price up to include at least some of these extra costs and Potash's 17 million tonnes of nameplate capacity are worth, say, $30-billion. Potash also has some phosphate production, which, based on replacement costs, I roughly guess is worth about $8-billion (the phosphate business is a little more complex). It also has a little bit of nitrogen capacity and some strategic investments.
Impossible to Replicate
So on paper, the cost to replicate a Potash Corp. is probably at least $40-billion. The company's market capitalization is $46-billion. That's a big gap, but it doesn't account for a couple of things.
The first is a premium to take control of a collection of some of the finest potash mines in the world and a dominant share of the market at about 20 per cent. Phosphate and nitrogen are money makers but potash is the cream of the crop where fertilizer is concerned. It's typically far more profitable and is protected by bigger barriers to entry.
These are very rough numbers but it's safe to say that it would be extremely difficult and expensive, if not impossible, to replicate Potash Corp. of Saskatchewan Inc.
The second issue is that it takes about seven years to build a greenfield potash mine, about three or four for phosphate and nitrogen. That's a long time to wait if you're a BHP Billiton, itching to get into the business.
BMO Nesbitt Burns figures it will cost BHP almost $11-billion to build its eight-million-tonne Jansen mine, which would only start producing in 2015 or 2016. BHP clearly wants into the potash racket because it thinks it can earn high returns from it.
The time value of that kind of investment is worth an awful lot. So it's not surprising that investors are betting on another bet. It's pretty obvious now that $130 (U.S.) a share isn't going to come close. It's easier to buy than to build.
Rivals
But what about other players in the space? Mosaic is the No. 2 potash producer, with capacity of about 10 million annual tonnes and another 10 million tonnes of phosphate, according to its website. It also produces nitrogen and, analysts say, has similar, though smaller, potash production and growth plans as Potash.
That implies a value of (very) roughly $30-billion (Canadian), not counting a control premium, versus a market cap of around $27-billion. The stock has done well since BHP's bid, but if Potash Corp. disappears, you would think Mosaic's scarcity value would go up. It's no Potash Corp. but it's no slouch. And with Cargill owning two-thirds of the stock, it might have a motivated seller holding a lot of stock (or a buyer of the third it doesn't own).
The same, to some extent, can be said of other producers. In fact, not only are they scarcer, and therefore valuable, in the event Potash Corp. disappears, they will also benefit from what I can only presume will be higher prices.
Consolidation is upon the fertilizer market, and while BHP says it's happy to be a price taker and has no use of Canpotex, the marketing arm that controls a huge share of world potash sales, when resources concentrate into fewer hands, as happened with copper, oil, nickel and so on, prices tend to go up.