Toronto, 5 October 2010

Saskatchewan's advisers urged the Canadian province not to oppose a takeover of Potash Corp by BHP Billiton, and said a Chinese bid, if one emerges, could hurt their budget more. Shares in Potash Corp, the world's largest fertilizer producer, jumped almost 2 percent in response, suggesting that investors believe the recommendations in a report commissioned by Saskatchewan will increase the likelihood that BHP's $39 billion hostile takeover bid will succeed.

"If (Saskatchewan) wanted to act tough with BHP, it doesn't give much political cover," David McGrane, a political studies professor at University of Saskatchewan, said of the report. "It definitely weakens their ability to be strict with their conditions" on a takeover.

The report, by the non-profit Conference Board of Canada, said the BHP offer could cost Saskatchewan C$2 billion ($1.96 billion) over 10 years in lower royalty payments, or about 2 percent of the state's annual revenue.

But it also said BHP's interests in getting an economic return from its investment would be more closely aligned with Saskatchewan's than those of any Chinese-led rival bid, given that China, as one of the world's top consumers of the crop nutrient, would prefer to keep potash prices low.

"A producer that is unhinged from market discipline could potentially wreak havoc on Saskatchewan's finances," it said. Saskatchewan, where Potash Corp is based, will play a crucial advisory role as the Canadian government decides whether to approve the BHP bid or any other that may emerge.

Ottawa said on Monday it had extended the review period by 30 days as it determines if the bid is of net benefit to Canada, which would take its review deadline to Nov. 3.

Potash Corp, which says BHP's offer is too low, is the No. 1 supplier of potash. Demand for its namesake product is set to surge in coming years as China, India and other countries work to feed growing populations. China has encouraged its state-owned companies to explore a possible rival offer.

BHP shareholders and a source familiar with the situation said there was nothing unexpected in the Conference Board report.

"The issues have been fairly well flagged in the past," said Tim Barker, portfolio manager at BT Investment Management, which owns shares in BHP. He said it appeared unlikely that Canada would stand in the way of a BHP takeover of Potash Corp.

"(If you look) at the standard means by which the U.S. or Europe would use to prohibit or allow these kinds of deals - you'd have to make the assumption it'll be cleared," Barker said.

The report said a BHP bid could cost Saskatchewan as much as C$5.7 billion under current tax rules if it acquires Potash, maximizes production and develops its own Jansen project in Saskatchewan.

If Potash Corp's mines are run at full capacity, supply would surpass demand and depress potash prices, hurting provincial royalty revenues, which favor price over volume. That said, the scenario under which production is maximized and potash prices fall is more likely under Chinese rather than BHP ownership, the report added.

Saskatchewan Energy Minister Bill Boyd said the province has not ruled out any options -- endorsing or opposing BHP's bid or suggesting conditions -- as it prepares its recommendations to Ottawa by early November. He said Saskatchewan plans to talk with other industry players before making its recommendations to Ottawa, which has the right to veto the proposed takeover.

CAUTIONED AGAINST OPPOSING BHP BID

Another Saskatchewan concern is that BHP prefers to market its commodities independently and would likely try to skirt Canpotex, which exports the fertilizer for three big firms -- Potash, Mosaic Co and Agrium Inc.

But the view that Canpotex manages supply-side risk "overstates the importance of its role," the report said. Boyd said the province views Canpotex as "imperfect" but hardly redundant and would be cautious about making any royalty changes that would irritate Mosaic and Agrium.

Warning Saskatchewan not to formally oppose the takeover bid, the report said opposition would depress Potash Corp's share price and could hurt junior potash companies.

"It is encouraging to see that the (report) did not outright lean toward the negative impacts of a successful bid for Potash and actually takes BHP one step further in its quest to acquire Potash," said Darryl Levitt a lawyer with Macleod Dixon in Toronto.

BHP's shares were down 1.5 percent a A$39.41 on Tuesday, in line with a fall in the metals and mining index. The report said a rival bid involving China's Sinochem, a sprawling state-owned chemicals group, would present "a riskier scenario", given Sinochem has a strong incentive to cut prices, which would hurt all potash producers. Efforts by Sinochem to mount a rival proposal have so far not been successful.

"We are picking up they aren't very confident they can buy the whole thing, so they are trying to get partners, which is not working very well," said a source familiar with the situation.

BHP said it welcomed the report and believed its offer will bring significant net benefits to Saskatchewan and Canada. A Potash Corp spokesperson noted that BHP's takeover could reduce provincial revenue, and said its board continues to recommend that its shareholders reject the bid.

Potash Corp's attempt to fend off BHP's bid through the courts continued on Monday when it asked a court to deny BHP's request for documents on potential alternative bidders.

Last month, Potash Corp filed suit in U.S. District Court in Chicago seeking a preliminary injunction to block BHP's offer. BHP has asked the court to dismiss the suit.

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