Takeover approach shakes up potash market

Shares in Potash Corp of Saskatchewan Inc. (TSX:POT)(NYSE:POT) enjoyed a nice bounce on Thursday after Germany's K+S said it had received a written takeover proposal from the Canadian giant.

The Saskatoon-based giant ended the day up 4.3% changing hands at $39.34 at the close on the Toronto Exchange in larger than usual volumes. Potashcorp is worth $33 billion today, but in 2008 when prices were three times current levels was briefly Canada's most valuable company.

K+S AG soared 12.8% in Frankfurt trading affording the company a €5.5 billion market valuation. The company said it's weighing its options following the approach. Both counters remain down for the 2015 amid a lacklustre potash market.

If successful, Potashcorp would not only establish itself as top European producer of potash, but also acquire a near-production asset in its back yard. Potashcorp production last year hit 8.73 million tonnes, but the company's nameplate capacity is almost 15 million tonnes. K+S capacity is in excess of 7 million tonnes.

K+S Potash Canada said last month it is on track to start production at its $4.1 billion Legacy solution mine in south Saskatchewan which it acquired in 2010. Legacy is expected to start production by the end of 2016, ramping up to two million tonnes per year in 2017 and reaching full capacity of 2.9 million tonnes by 2023.

Legacy, located approximately 50km north of the city of Moose Jaw, will be the first new potash mine built in the last 40 years in Saskatchewan, which by some estimates contains 50% of the world's potash reserves.

Volumes up, prices down

Forecasts of a substantially higher global potash price this year were dashed in March when top importer China and world number three producer Belaruskali inked a six-month deal at $315 per tonne, a mere $10 higher than the previous contract.

$315 a tonne is a long way away from the $950 touched in 2009 and the $400–$450 band enjoyed before Uralkali, the world's largest producer, exited its supply and marketing arrangement with Belaruskali in 2013.

Uralkali overnight turned the potash market from a cozy oligopoly to cost-based open market, betting that its costs – the lowest in the industry – would give it the edge over rivals.

Amid soft prices miners have been ramping up production with global potash shipments to climb to more than 60 million tonnes for the first time in 2015.

Uralkali plans to invest $4.5 billion over the next five years to raise production capacity by 30% after hitting  record output last year despite flooding at one of its largest mines in Siberia. The Russian firm plans to increase capacity to 14.4 million by 2020.

In 2010 the Canadian government's blocked a $40 billion hostile takeover bid for Potashcorp from Anglo-Australian giant BHP Billiton.

The world's top miner is pushing ahead with its Jansen project, also in Saskatchewan. Jansen has the potential to become the world's biggest potash mine and could cost as much as $16 billion to construct. The mine could bring an additional 8 million tonnes per year onto the market with an estimated 70-year mine life.

Switzerland's Eurochem could also bring substantial tonnage to the market before the end of the decade.

The company's mining arm headed by a former Potashcorp exec is developing a 8.3 million tonnes per year operation at two deposits in Russia which could come on stream by end 2017.

K&S Potash
K+S Canada's Legacy project nearing production