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Juniors may not get a ride on potash deal

A carved out shaft deep in Potash Corp.'s Rocanville potash mine in Saskatchewan

TROY FLEECE/Troy Fleece/ The Canadian Press

A potential deal by BHP Billiton for Potash Corp. must be nothing but good news for Canada's junior potash miners. After all, the shares of two small players are up more than 15 per cent in the last week.

Or, perhaps not, say some analysts who cover the companies.

The skepticism is led by Robert B. Winslow of Wellington West Capital Markets Inc., who cut his ratings Monday on two Vancouver-based producers, Potash One and Western Potash

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The problem, as he sees it, is that BHP Billiton's bid for Potash Corp. could cause pricing pressure in the industry. It also highlights the high cost to the juniors of developing the infrastructure that supports potash mining, and might reduce the prospects of a takeover of them.

"We believe the bid by BHP, should it ultimately be successful, will complicate the situation for Canadian junior potash companies in a number of ways, making access to capital somewhat more challenging for them," he said.

A chief problem is BHP's operating philosophy of running plants at capacity, a contrast to Potash Corp.'s long-standing policy of cutting back production to help support market prices. BHP's strategy "could very well cap (or decrease) potash pricing in the medium-term," making the economics of Potash One and Western Potash projects less attractive, Mr. Winslow said.

While Mr. Winslow believes potash-starved countries like India or China may seek to secure potash supplies, creating acquisition opportunities, the likeliest buyer of the Canadian juniors - BHP - is now preoccupied.

He also believes BHP's decision to buy rather than build may have been motivated by concerns over developing the infrastructure and distribution network that comes with new potash mines - a challenge the Canadian juniors still must face. But he still sees attractive gains in the stocks. His new target price of $4.50 for Potash One, down from $5.50, is well above its $2.88 closing price Monday. And his target of 75 cents a share for Western Potash, down from $1.25, exceeds its Monday close of 49 cents.

Other analysts, while not as concerned as Mr. Winslow, also failed to herald the BHP bid as good news for the smaller players. BMO Nesbitt Burns Inc. analyst Joel Jackson called the bid's impact "neutral" on the two companies' shares.

"The key question is whether partners … or acquirers feel more compelled today to help fund or acquire one of the [companies]versus before BHP's formal bid," he wrote last week. "We are not convinced this is the case."

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A dissenter is Ben Isaacson of Scotia Capital, who believes a combination of one or more Russian potash companies would mean that Belarusian Potash Co., their distributor, and the major Canadian producers would control 70 per cent of the world's output, with potential to raise it to 80 per cent in the next five years. That would produce a "pricing discipline," and "ultimately, a higher and more sustainable potash price significantly improves the economics of Saskatchewan-based greenfield potash juniors."

More imminently, Mr. Isaacson believes, BHP would put its own Jansen project "on the back burner." With the removal of that mine, and the need for a new two million tonnes potash mine every year to support growth in the fertilizer market, "the opportunity for Potash One or Western Potash to develop their projects suddenly becomes a lot more interesting (and probable) than it did [before the bid was announced]"

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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