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A complacent BHP lets the opportunities slip by

When we last looked at BHP Billiton, the world's top mining company, it was dangling its legs over the rim of an open-pit mine, doing pretty much nothing. Yes, it had made a few investments, joint ventures and small acquisitions, but no move that could be considered truly bold, transformational or opportunistic.

This is a remarkable non-achievement for a company equipped with the best balance sheet in the business. The Anglo-Australian giant could have picked off virtually any rival commodities player when the financial crisis clobbered values. Instead, it dropped its bid for competitor Rio Tinto in 2008 and has been on the sidelines since.

If we are to believe the recent stories, BHP's wallflower status is about to end, perhaps with an energetic waltz through the Canadian Prairies. Last week, BHP bought Saskatoon's Athabasca Potash for $341-million. BHP also announced a $240-million investment in its existing Saskatchewan potash project, known as Jansen. Can the province's mighty Potash Corp. be far behind?

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Potash Corp. is the industry's biggest supplier of potash, one of the main nutrients in crop fertilizer. In 2008, when a global food crisis seemed imminent and when commodities of every description were still soaring, the company was briefly the most valuable name on the Toronto Stock Exchange. Today it's worth about $33-billion, half its peak value. But the shares have been climbing (up 25 per cent in the past 12 months) on takeover rumours and rising fertilizer demand. In a January report, Morgan Stanley said global potash demand may rebound 50 per cent this year.

A company of Potash Corp.'s size is certainly affordably for BHP, which is treading water in a $11-billion (U.S.) pool of cash. Its cash-to-current liabilities ratio is 0.91, about four times its 10-year average and far higher than that of its rivals. With a market value of about $200-billion, BHP could wolf down the Canadian company without getting indigestion. Will it?

For the reason why, just keep an eye on the provincial government, writes Fabrice Taylor

The "yes" crowd argues that BHP does nothing in half or quarter measures. It wants to be first, second, at worst third, in its production areas - copper, silver, lead, zinc, coal, iron ore, nickel, uranium - or at least have a reasonable chance of getting there before the next CEO arrives. Owning Athabasca Potash and pumping the equivalent of pocket change into the Jensen project won't make BHP a global player in the fertilizer business. Owning Potash Corp. would.

Indeed, Potash Corp. boss Bill Doyle thinks BHP's apparent desire to build the business on its own, as opposed to buying it, is a smokescreen. "We do think some of [BHP's]recent public announcements have been designed to drive down the share prices of existing potash players to make a potential acquisition more attractive," he said on his last conference call.

Mr. Doyle should not get his hopes up, for BHP, under South Africa's Marius Kloppers, the CEO since 2007, has been remarkably non-aggressive on the takeover front and it can't be because his company was a recession casualty. BHP's low debt and commodities diversification strategy made it the only big mining company capable of paying dividends throughout 2009. In the 2008 crunch, it lost only 25 per cent of its stock market value, far less than most of its competitors (Xstrata lost 79 per cent that year, Rio Tinto 67 per cent). If there were any company with the muscle to take advantage of distress prices, it was BHP. But it failed to pounce.

BHP was formed by the blockbuster 2001 merger of Australia's BHP and South Africa's Billiton, with listings on both the Australian and London exchanges. The new behemoth wasted little time in making itself even bigger as Chinese demand for every commodity imaginable suddenly proved insatiable. In 2005, it paid $7.3-billion for WMC Resources, an Australian nickel, copper and uranium miner, trumping a rival bid from Xstrata (the Anglo-Swiss miner that went on to buy Canada's Falconbridge). WMC was a rounding error compared with BHP's next move - Rio Tinto, the second-largest name in the mining business.

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BHP's all-share offer for Rio, in the autumn of 2007, at the time would have valued the merged companies at $360-billion - more than Microsoft. Rio, which was buying Canada's Alcan at the time, turned it down. BHP upped the bid, went hostile, then dropped the whole thing in November, 2008, when the financial crisis was its peak. In retrospect, it was a mistake. Mr. Kloppers went after no other companies, though he did announce an Australian iron ore joint venture with Rio.

As commodity prices climb out of the pit, driven once again by Chinese growth, BHP may be redrawing its takeover wish list. Potash Corp. may be on it, and Mr. Doyle must relish a fat takeover premium. But BHP's recent history suggests it may be just as happy playing a minor role in the next consolidation wave. Having failed to buy at the bottom of the market, how can Mr. Kloppers justify buying as mining company prices approach their pre-crisis levels?

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