BHP Gains Upper Hand in Potash Battle

NEW YORK (TheStreet) -- The momentum may have swung in BHP Billiton's(BHP) favor Wednesday in its attempt to swallow Potash(POT) for nearly $40 billion.

Shares of Potash declined by about 2% Wednesday after BHP rattled its sabers a bit in the wake of its fiscal-year earnings report.

The Anglo-Australian mining goliath indicated that it wouldn't be budging on its $130 per-share offer -- not any time soon, at least. BHP boss Marius Kloppers, the South Africa-born CEO whose stature as a wily practitioner of the dealmaking arts has grown exponentially since last week, vowed Wednesday that BHP would be "disciplined on this bid."

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Later, appearing on CNBC, Kloppers said, "There's not an infinite universe of potential bidders," adding, "nothing is impossible, but this is a large transaction, the fit with us is pretty unique, and financing a $40 billion takeover in cash -- only a few players are capable of doing that."

The company took its bid directly to Potash shareholders on Friday.

Possibly BHP knows that no other buyers (or group of buyers) could squeeze the same returns out of Potash that the big miner could. If another party were to win out and strike a deal with Potash, BHP would likely proceed with its plans to build out another potash mine it's been in the process of developing, in Jansen, Saskatchewan. It would be the first new potash mine constructed in the province in 30 years.

Eventually, when it begins production (which BHP has projected for 2015, an abnormally short period of time for potash-mine development, some say), it will add supply to a potash market that has until now been tightly controlled by a group of cartels -- an oligopoly of 14 global producers. With Jansen online and churning out potassium compounds, it would threaten to undercut world potash prices, hurting the profits of everyone in the business.

For its part, BHP has suggested that it would opt out of the North American potash cartel should it succeed in buying the fertilizer behemoth, and that it would run its newly acquired mines harder than Potash has in the past. In doing so, BHP would reduce its cost of production even while playing looser with the supply side. That's been the BHP way since before Kloppers took the helm in 2007: the hard-charging company likes to operate its mines at full capacity, no matter where in the commodities supply-demand cycle the world markets happen to be. By doing so, BHP feels it's wringing all it can out of each mine's finite lifespan.

BHP vs. Potash

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Of course, the company wouldn't want to destroy the value of the asset it had just purchased. Further, the North American cartel of potash exporters, called Canpotex, which includes Potash, Mosaic and Agrium(AGU), is something of a cash cow for the local Saskatchewan economy and government. Canadian authorities, in considering the approval of any BHP-Potash deal, may therefore have something to say about the Canpotex matter.