Mosaic Deal Hopes Fade as BHP Bets on Own Mine: Real M&A

Mosaic Co.’s takeover prospects are diminishing after BHP Billiton Ltd. renewed a commitment to building its own potash mine.

BHP this week said it plans to see the Jansen potash project through to production as it invests $2.6 billion and seeks partners, damping speculation that the world’s biggest mining company may still consider a purchase of fertilizer maker Mosaic. Mosaic’s enterprise value has fallen to $14.8 billion, about the same as the estimated cost of constructing Jansen, its first potash mine.

Buying Mosaic would have been a logical alternative to building Jansen, which may not begin producing fertilizer until 2020, Sanford C. Bernstein & Co. said. Mosaic became a cheaper target this month as it dropped to its lowest price relative to book value on concern that the breakup of a Russian-led export venture will flood the market with supply and suppress potash prices. Even as hurdles to a sale of Mosaic were lifted this year, potential buyers are scarce, especially as BHP’s new project promises even more supply to come.

“The additional spending shows BHP wants to go ahead with Jansen,” Paul McTaggart, a Sydney-based analyst at Credit Suisse Group AG, said in a phone interview. “There’s now no turning back.”

A Mosaic takeover is “wishful thinking” on the part of Mosaic shareholders, he said.

Plymouth, Minnesota-based Mosaic doesn’t comment on speculation, said spokesman Rob Litt, when asked about the potential for a sale.

Less Risky

BHP, based in Melbourne, declined to comment on a potential acquisition of Mosaic. Completing the Jansen project and eventually starting production at the mine “is indeed my intention,” BHP Chief Executive Officer Andrew Mackenzie said Aug. 20 on a call with reporters.

BHP is cautiously entering a new market “in a very flexible way,” he said. That approach is less risky than “paying a huge sum of money up front into something where you’re in or you’re out.”

Since its $40 billion hostile bid for Potash Corp. of Saskatchewan Inc. was blocked by Canada in 2010, BHP has focused on Jansen in the same province. If completed, Jansen will be the largest single source of the potassium-based mineral, with a projected production capacity of 10 million metric tons a year. Potash is a vital nutrient for corn and soybeans.

BHP’s total commitment to the project is about $3.8 billion so far, the company said this week. Jansen may end up costing BHP a total of about $16 billion, according to Citigroup Inc.

Potash Market

The price of the crop nutrient is predicted to slide after Russia’s OAO Uralkali, the largest producer, said in a surprise announcement July 30 that it decided to quit a marketing venture that controlled about 43 percent of global exports and to end output restrictions that underpinned prices. Uralkali said potash may tumble to less than $300 a ton from about $400 currently.

If the price of the fertilizer falls to $300 a ton, Jansen may not generate an “appropriate” return for BHP, Bank of America Corp. wrote in a note Aug. 5. Citigroup also has said the project isn’t viable if prices drop that low.

“Mosaic could be an interesting alternative to building Jansen,” according to the Bank of America note. Mosaic “is a scale asset capable of producing similar potash volumes to Jansen.”

An acquisition of Mosaic would instantly give BHP control of the world’s second-largest potash producer by market value, as well as a phosphate business that had $6.5 billion of revenue in the last year, according to data compiled by Bloomberg. Mosaic has annual potash capacity of more than 10 million tons.

Hurdles Removed

Hurdles to a Mosaic takeover were recently lifted. May marked the two-year anniversary of Mosaic’s tax-free split from Cargill Inc., meaning a suitor won’t bear tax liabilities it could have faced buying the company before that milestone. Charitable trusts associated with Cargill’s founding family can also begin the process of selling restricted Mosaic shares, though they’ve chosen not to yet.

Mosaic’s stock has also gotten cheaper. On Aug. 6, about a week after Uralkali’s announcement, Mosaic’s equity sank to just 1.29 times the company’s book value, a record low, data compiled by Bloomberg show. Its price-to-book ratio was still hovering near that level yesterday, after the stock closed at $40.97.

“An acquisition is much more attractive at these kinds of prices,” Paul Gait, a London-based analyst at Bernstein, said in a phone interview. Projects as large as Jansen are usually “delayed and over budget. With Mosaic, you know what you’re getting.”

Today, Mosaic shares rose 1.4 percent to $41.54 at 10:10 a.m. New York time. BHP fell 1 percent to A$35.37.

Resisting Sale

Mosaic isn’t planning any specific actions following Uralkali’s move, Chief Financial Officer Larry Stranghoener said in a July 30 phone interview.

“We’re ready for anything,” Stranghoener said. “We’ve got the strongest balance sheet in the industry and it’s a great time to have a strong balance sheet when you’re going through something like this. We have a very strong and vibrant phosphate business which is not affected by what’s going on in the potash business today.”

Mosaic had $3.7 billion in cash and $1.1 billion of debt as of May 31.

Mosaic probably doesn’t want to sell at such a low valuation, said Tim Beranek, a money manager at Denver-based Cambiar Investors LLC, which oversees about $8.8 billion and owns the stock. He said a takeover bid may need to top $70 a share, 71 percent more than its price yesterday.

No Suitors

BHP’s Mackenzie said this week Jansen may not start producing until as early as 2020, later than prior estimates of 2017.

BHP could have used Jansen as a bargaining chip to persuade Mosaic to sell itself because the project will introduce more competition and supply, Gait said. A deal is less likely now that BHP is investing more in Jansen, and there probably won’t be other suitors for Mosaic in the near future, he said.

Glencore Xstrata Plc and Rio Tinto Group don’t “have the balance sheet for it,” Gait said.

Glencore Xstrata already had $53 billion in debt and only $3.6 billion in cash and equivalents as of June 30, data compiled by Bloomberg show. This week the company wrote down the value of assets gained in its $29 billion takeover of Xstrata Plc by $7.7 billion. Rio Tinto has $30 billion of debt and $7.8 billion in cash and equivalents.

‘Formidable Strategy’

Charles Watenphul, a spokesman for Glencore Xstrata, said the company doesn’t comment on speculation, when asked about its appetite for large acquisitions such as Mosaic.

Illtud Harri, a spokesman at London-based Rio Tinto, also declined to comment. Rio Tinto CEO Sam Walsh took over in January after his predecessor stepped down following about $14 billion of writedowns for failed deals.

BHP had a market value yesterday of A$184 billion ($165 billion), dwarfing Glencore at $63 billion and Rio Tinto’s $89 billion.

BHP’s potash plans will probably stretch beyond just the Jansen project because the world’s biggest mining company won’t settle for being a small participant in the industry, Steve Hansen, a Vancouver-based analyst with Raymond James Financial Inc., wrote in a report Aug. 21.

“Jansen, on a standalone basis, lands far from being a prudent and logical potash ‘strategy,’” Hansen wrote. “Tying Jansen together with a leading set of potash assets, for instance, would indeed be a formidable strategy.”

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