How the Canucks saved BHP's backside

Potash prices have halved in the past two years. Now they are expected to drop another 25%. BHP must give thanks to the Canadian government for blocking its Potash Corp bid.

It could well have turned out to be BHP’s very own Alcan moment.

When Canadian authorities blocked BHP’s $39 billion takeover bid for fertiliser giant Potash Corp in late 2010, it was seen as yet another expensive failure by chief executive Marius Kloppers.

Two failed bids for Rio Tinto – one full merger and the other a joint venture proposal for the company’s Pilbara iron ore assets – both had foundered on regulatory issues after protracted negotiations that cost BHP shareholders hundreds of millions of dollars in fees.

But after this week’s events, the Canadian government’s controversial decision appears to have saved BHP and Kloppers from the ultimate humiliation.

Just as aluminium prices collapsed after Rio’s fateful purchase of Alcan, potash prices now fetch less than half the $US900 a tonne being achieved during the bid by BHP (see Robert Gottliebsen's Making BHP more like CBA).

And this week’s decision by Russian potash producer Orakali to break ranks with its cartel partner Belaruskali could see potash prices drop a further 25% to $US300 a tonne.

That undoubtedly would have resulted in a massive write-down this year in the value of Potash Corp, had the deal proceeded. And that quite possibly could have obliterated BHP’s earnings this year and left the company mired in debt just as commodity prices enter a long term period of decline.

The circumstances of the two bids are eerily similar. Both were for Canadian companies. Both were for a similar amount. And in one of those quirks of history, the Canadian government's jingoistic Potash Corp decision largely reflected domestic opposition to foreign takeovers after Rio's Alcan purchase. It saved BHP's bacon.

Rio Tinto’s disastrous tilt at Alcan almost sank the company. Overloaded with debt, it found solace in the arms of the Chinese government controlled Chinalco which then attempted to wrest control of its prized Pilbara iron ore deposits.

Through sheer good fortune, Rio was saved by a revival of the resources boom in 2009. But that time has passed.

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