PotashCorp buyout proposal for K+S succumbs to world potash market forces

By Leonard Melman

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K+S Potash’s Legacy mine site in 2011, shortly after the company announced the multi-billion-dollar project. Photo courtesy of K+S Potash Canada (previously published in the 2012 issue of PotashWorks).

For several months this summer and early fall, attention of the Saskatchewan potash industry was focused on a proposed buyout involving the first important new potash mining project located entirely within Saskatchewan during the past 40+ years.  We are referring to the Legacy Potash mine located about 50 kilometres north of the city of Moose Jaw and presently under construction.  The buyout offer was presented by PotashCorp to Legacy’s owner, Germany’s K&S AG.

Thanks to important developments within the world of potash itself, as well as conditions specified by K&S, the offer was made in June, rejected conditionally by K&S in both July and August, and then finally withdrawn by PotashCorp in early October.  However, despite the fact that as of fall 2015 the offer is no longer in play, the background history provides us with substantial information regarding the international and domestic world of potash mining; economic forces affecting the potash market and, to some extent, political considerations within the German economy.

Legacy’s history, as well as projected economic returns from the mine itself provides the most important background information to the offer.

Following a period of exploration and preliminary development by previous owner/operator Potash One, K&S acquired ownership of the project and broke ground for construction of production facilities by late 2011.  As work advanced, K&S initially forecast commercial production to begin by late 2015, but later revised that timetable to mid-2016.  Present plans call for production at a rate of 2,000,000 tonnes of potassium chloride per year by 2017 with potential expansion to four million tonnes per year by 2030.

Proven reserves at Legacy occur at about 1,500 metres below surface and have been estimated to be approximately 160 million tonnes with a projected mine life of 55 years.  K20 content grade has been estimated at 18 per cent, significantly higher than K&S’ European operations, and mining is to be accomplished via a sodium chloride-brine solution method which selectively dissolves potassium chloride. The solution will be transported to the surface via two boreholes for further processing.

During the negotiation process, it became clear that one of the attractive features of the Legacy mine included the fact, as noted by K&S CEO Norbert Steiner, that the Legacy mine’s location would permit effective entry into the huge American fertilizer market.   It was entry into North America which was one of K&S’ reasons for initially acquiring the mine.

From the PotashCorp point of view, buying K&S and thereby acquiring the Legacy mine appeared to present important benefits.  As noted, the acquisition would enable PotashCorp to further its marketing efforts within North America via the marketing organization known as Canpotex, which represents PotashCorp, Mosaic and Agrium.  Industry sources suggest that the acquisition of K&S would increase PotashCorp’s presence within that organization.

As originally proposed at the end of June 2015, PotashCorp would pay a price of 41 Euros to acquire each share of K&S, a premium over then current share quotes.  K&S initially rejected the offer in July and, following additional private negotiations, rejected the offer a second time in August.

One of the important stumbling blocks was the K&S concern that their European mines were more expensive to operate and, therefore, PotashCorp would probably close those German operations, resulting in major job losses within the German economy, leading to increasing German political opposition to the deal.

Another objection offered during the initial rejection was that the PotashCorp offer did not fairly value K&S assets.  In a company press release accompanying the second rejection, K&S noted, “…K&S rejected the unsolicited proposal of PotashCorp because the price offered had not nearly reflected the fundamental value of the company and was not in the best interests of the company…”

In the end, in early October PotashCorp decided to withdraw the offer, noting that world potash market conditions continued to decline with several new projects likely to enter the supply stream in coming years while demand appeared unlikely to grow at the same pace, suggesting lower potash prices for some time to come.

Apparently, the securities markets tended to agree with the PotashCorp withdrawal decision as the stock rose immediately following that announcement.  In the opposite direction, K&S shares plunged on European exchanges following word of PotashCorp’s decision, falling quickly from slightly above 30 Euros to below 25.

Although the proposed buyout was ultimately rejected, several important considerations emerged.  First, as a major supplier to the international markets, developments within Saskatchewan’s potash industry continue to garner strong attention worldwide.  Next, concerns regarding a potentially over-supplied worldwide potash market are evident and will become important in future merger or buyout considerations.  Lastly, despite an evident array of current problems, potash mining continues to remain a vitally important and attractive industry – presumably to Saskatchewan’s ultimate long-term benefit.

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