For folks working underground in the mines of Potash Corp. of Saskatchewan Inc., the takeover pitch from Marius Kloppers of BHP Billiton PLC could be pretty enticing.
The key test for Mr. Kloppers to get approval from the Canadian government for his $38.6-billion bid for Potash Corp. is to show a net benefit to the country. By the simple measure of the bank balance of a Potash Corp. miner, it sounds a lot like the mining executive has a case.
Many of the Potash Corp. workers have spent a lot of the past couple of years on furlough as the company idled capacity to support prices for potash when world demand disappeared, part of the plan by the Canpotex cartel to manage the potash markets. They weren't alone, as miners at the other Canpotex members, Agrium Inc. and Mosaic Co., also were told to stop digging.
Mr. Kloppers, who recently visited The Globe and Mail to make his case, says he won't do that. There will be no more idle capacity at the company's five mines to keep prices high. The facilities will hum as fast as possible, which means a steady stream of paycheques for the almost 1,700 people employed at the sites and more cash flowing into the local economy.
BHP's contention is that it's perverse that Saskatchewan mines that have the lowest costs should be shut down, with their workers sent home, to keep prices up while higher-cost producers in other countries pump out fertilizer.
There's a lot of possible upside for employment. Using Potash Corp.'s own figures, over the past five years the company's five mines have run at an average of 53 per cent capacity through a historic boom and the bust that followed. There's also the extra money created by spinoff spending on supplies if those mines run closer to 100 per cent.
To back its case, BHP points to how it runs its diamond mine in the Northwest Territories, which operated at full capacity through the economic downturn even though diamond prices were slumping, while rivals cut jobs and output.
Even so, it's easy to understand why union leaders representing Potash Corp. miners, while not against extra work, are wary of BHP's talk of more production and employment without firm and enforceable commitments They are also concerned that BHP's increased production would drive down potash prices, hurting workers at Agrium and Mosaic mines in Saskatchewan.
Saskatchewan should be able to compete in a lower price environment, because it's among the cheapest places to mine potash, thanks to nature's gift - a nice, consistent, easy-to-find layer of the mineral underground.
By some industry estimates, once the already-planned expansions at Saskatchewan mines are done, costs in Saskatchewan will be 20 per cent lower than in Russia, where the mineral isn't as simple to access.
However, it's not the miners Mr. Kloppers has to convince; it's the government. Where his argument still shows serious cracks is when it comes to preserving the royalties of the Saskatchewan government. His position is that if BHP makes more money by cranking up the mines to increase profits, the government makes more money in the form of taxes.
That's not quite true for Saskatchewan, because the royalty for potash is much more sensitive to price levels than production levels. Were Mr. Kloppers to take output at Potash Corp. to the maximum, the government would get very little extra revenue, even if prices held up and BHP's profits soared. The government would end up with less cash if prices fell.
By far the biggest share of payments is based on per-tonne profit on the first 5.7 million tonnes of the mineral that Potash Corp. produces in a year, about half what Potash Corp. can produce. Any production above that is largely royalty-free. That wouldn't change if BHP were to buy the company.
For the free-market government of Saskatchewan Party Premier Brad Wall, the focus is on avoiding appearing unfriendly to business, while still ensuring the cash comes in.
The obvious answer is to change the royalty structure to preserve the government's take under the BHP model. Add that to firm commitments of higher production, spending and employment, and Mr. Kloppers really would have a compelling case for a net benefit.