From the Editor - A Canadian Double Standard?

Steve Fiscor
Even though gold is now trading above $1,400/oz, 2010 might be remembered as the Year of Potash. When BHP Billiton purchased Athabasca Potash for $341 million, few outside the natural resources sector took note. Vale paid $3.8 billion for several South American fertilizer assets and people started to pay attention. BHP’s $38.6 billion bid for PotashCorp established potash as a valuable bulk commodity. It is also testing the limits of international trade.

Canadian regulators ultimately ruled against BHP’s pursuit of PotashCorp (See “Canada Blocks BHP Billiton,” p. 6). This is the third major business deal—not just by mining standards—that BHP’s CEO Marius Kloppers has tried to put together in the last three years only to be shot down. One has to wonder: Is BHP too big to pull off a major acquisition without encountering regulatory opposition?

Shortly after taking the helm three years ago, Kloppers tried to merge BHP with Rio Tinto. Ultimately the deal unraveled because of the global economic crash, but both companies’ main customer (China) was also opposed to the deal. His second effort focused on combining the Australian iron ore segments of both companies. Again, the deal was unpopular with the Chinese, but the company ultimately dropped its plans based on opposition from regulators in Europe as well as Australia.

The failed PotashCorp bid is certainly a setback for BHP, but maybe more so for Canada than Kloppers. He refused to overpay and stockholders respect that position. In a way, the Canadian rejection places the country among those that advocate resource nationalization. Protecting jobs and natural resources is an important consideration for any country. Understandably, politicians in Ottawa need to strike a balance among a diverse constituency, such as multinational mining companies based in Toronto and Vancouver, successful exporters (domestic miners), and miners laid off by or striking against foreign-owned companies.

Even though the iron ore JV with Rio Tinto failed, Kloppers succeeded in reshaping how iron ore is traded in global markets. Much to China’s chagrin, he launched a more transparent system based on spot market prices. If commodity pricing is based on free markets, then the lowest cost producers post profits based on volume rather than margins. A similar free-market approach would impact tax revenues and make members of Canpotex, Canada’s potash cartel, uncomfortable.

The proposed BHP takeover unleashed opposition unlike anything seen in Canada in years, especially in Saskatchewan. Saskatchewan Premier Brad Wall, one of the deal’s most outspoken opponents, warned the province could lose as much as $6 billion in royalties and tax revenue. Under the Investment Canada Act (ICA), federal officials screen foreign acquisitions to verify that Canada would see a “net benefit” from the proposal. BHP said it made significant concessions and assurances to the Canadian government, but it was not enough to sway the regulators. Rarely has the law been used to block foreign buyouts. Politicians and miners have always had a love-hate relationship. Conservative leaders believe in free markets and globalization, which favor business. Left-leaning politicians share that view as long as it favors the homeland, in this case Canada.

Nationalism is on the rise as one of the highest strategic business risks for the mining sector. Canada should tread carefully when making these decisions, while at the same time denouncing protectionist practices abroad. In the past, the country has approved foreign takeovers for aluminum, copper and nickel, gaining a reputation as a country open to investment. PotashCorp, however, controls more than a fifth of the world’s potash reserves, and half of those reserves can be found in its home province, Saskatchewan.

Steve Fiscor, Editor-in-Chief, E&MJ

As featured in Womp 2010 Vol 09 -