INDUSTRIAL METALS / MINERALS
Potash M&A Mania
As mining headlines around the world are consumed with BHP's bid for Potash Corp, Chinese investment funds seem spurred into action
Posted: Monday , 30 Aug 2010
VANCOUVER B.C. (www.BNWnews.ca ) -
The recent headline-grabbing $39 billion bid by the world's largest mining company for the planet's top potash producer appears to be spurring potash-hungry Chinese investment funds into action.
On the heels of BHP Billiton's (NYSE: BHP) unsuccessful initial takeover offer for Potash Corp. of Saskatchewan (TSX: POT) (NYSE: POT) last month, China Mining United Fund has announced a move to more than double its treasury to $760 million. Launched just last year, it is one of China's first private mining-oriented investment funds.
China Mining United Fund's mandate is to secure long-term supplies of key minerals and commodities. Most of which are needed to stoke the furnace of China's thriving economy and to sustain a growing urban labour force that is increasingly demanding feed-intensive animal protein in their diets.
Hence, potash is obviously at or near the top of the fund's shopping list, especially since it already has small but strategic investments in place with privately-owned Brazil Potash Corp. and Toronto-based Allana Potash Corp. (TSX.V: AAA).
Investment industry analysts believe that China Mining United Fund will likely favor Allana's Ethiopian potash project in the near-term. That's partly because the Chinese government committed earlier this year to investing billions of dollars in Ethiopia's underdeveloped economy, which obviously also buys plenty of political influence.
Allana's deposit, which sits at the heart of Ethiopia's historic Danakhil potash basin, has an inferred resource of 105 million tonnes of potash, averaging a favorable grade of 20.8%. Drills continue to turn in the anticipation of building upon this initial resource estimate, as well as validating the company's view that one of the world's lowest cost potash mines is in the offing.
Company president Farhad Abasov says that as yet he hasn't received any solicitations from China Mining United Fund to take a bigger stake in his company.
"However, we're already in talks with several other prospective Chinese and Indian investors, as well as other international mining organizations," he says. "That said, there's no urgency on our part to strike any additional deals, especially since we believe that our ongoing drilling successes will allow us to double or triple our existing potash resources by the year's end."
A leading Toronto-based investment banker whose expertise is in the fertilizers and agricultural sectors told BNWnews.ca: "I think this trend towards consolidation is a global trend and not entirely focused on Canada. These recent developments might propel the Chinese to get more aggressive by getting more involved in some of the junior potash developers. Certainly the juniors are much more ‘in play' than they were before."
China Mining United Fund may therefore be keen to increase its stake in Allana, said the source, who chose to remain anonymous as he is not authorized to talk to the media.
"So I think some of these investment dollars could very well be earmarked for Allana. It certainly is an indication that this Chinese fund is more liquid than was the case previously, which puts them in a good position to increase their stake in Allana," he adds.
In fact, China's $300 billion sovereign wealth fund -- China Investment Corp. -- may yet decide to underwrite China Mining United Fund's plan to develop Allana's potash project, says the China Mining Association's web site, www.chinamining.org. Whether the sovereign wealth fund is participating in China Mining United Fund's latest financing has not yet been disclosed.
Alternatively, China Investment Corp. may opt to directly finance part of the project's construction costs, according to remarks attributed to a senior official in China's central government.
Such developments demonstrate how anxious the Chinese are to ensuring long-term supplies of such an indispensible agricultural nutrient that is key to boosting China's crop yields, an increasing amount of which is now needed for livestock feed.
This imperative is underscored by the fact that the potash mining sector is in the process of a game-changing global consolidation. And this could conceivably place well over a third of the world's potash supplies in the hands of just two major players. One of them would be BHP Billiton (assuming it succeeds in a hostile takeover of Potash Corp.) and the other would involve the pending merger between Russia's two dominant potash producers, Uralkali OAO and Silvinit OJSC.
The advent of a major shake-up of the potash sector was the focus of a research report published this August by Jaret Anderson, a Toronto-based chemicals, fertilizers and agriculture investment analyst for the investment bank, Salman Partners.
"With 36% of the world's potash supply potentially ending up in new hands, both China and India must be feeling some threat with regards to the security and stability of supply," he says.
"In our view the (potash) consolidation developments in Russia/Belarus and the BHP bid for Potash Corp. have increased the incentive China and India have to fund the development of greenfield potash projects."
The strategic value of in-development potash deposits (greenfield projects) to countries like China and India and to major mining companies means that: "development potash companies are well positioned to benefit in this environment," he adds.
Anderson concludes that the world's four leading publicly-traded potash developers, which include Allana Potash "offer upside of 40 to 80% from current levels."
The three other companies that Anderson refers to are Western Potash Corp. (TSX.V: WPX), Potash One Inc. (TSX: KCL), MagIndustries Corporation (TSX: MAG).
The principals of www.BNWnews.ca do not directly own shares in any of the companies mentioned in this article.
Marc Davis has been a business journalist for many years, during which time he has specialized in the mining sector. He has also worked in television and in newsprint for major news organizations internationally. Prior to his journalism career, he also worked in the stock market as a mining research analyst and as a floor trader. Marc also ran www.smallcapmedia for seven years, which is a news and commentary web site that covers junior mining stocks.