BHP Billiton bullish on potash push

MELBOURNE (Reuters) -Fertilizer is hot and BHP Billiton (BHP.AX)(BLT.L), the world's biggest miner, wants a heap of the action.

The company is cashed up and looking for new avenues of growth. Potash, used mainly in fertilizer to grow fruits, vegetables, soy and corn, offers just the right opportunity.

BHP Chief Executive Marius Kloppers is so excited about expanding into potash, he talks about it in the same breath as he talks about the company's most profitable business, iron ore.

His bullishness on potash has prompted takeover speculation in the sector, with investors betting BHP might bid for one of the two big North American producers, Potash Corp of Saskatchewan (POT.TO) or Mosaic Co (MOS.N), in a drive for instant scale.

BHP has the firepower to chase new avenues of growth, as it is carrying just $5.6 billion in net debt with a gearing of 12 percent, or less than a third the gearing of closest rival Rio Tinto (RIO.AX) (RIO.L).

There are few other opportunities that would fit its strategy of diversifying and developing large, low-cost, expandable assets with export markets, without running into competition concerns.

"One of the challenges BHP faces at the moment is finding industries where they can grow into with sufficient scale, where they're going to make a difference to the company," said Neil Boyd-Clark, portfolio manager at Fortis Investment Partners.

"Potash presents a new growth avenue, without question."

For BHP, the big attraction is the big gross margins in producing potash, running at 50-60 percent for top producer Potash Corp, and the expectation that potash demand is going to grow rapidly.

Developing countries need potash to boost crop yields to feed growing populations healthier varieties of food.

The industry is dominated by Belarussian and North American producers and one major consumer, China, giving it a similar buyer and seller profile to the iron ore business.

While Kloppers sees blue sky, the growth path might be bumpy. A Bank of America-Merrill Lynch analyst highlights that producers slashed volumes this year to prop up prices following two years of weak demand from China.

"I don't think we're coming into a situation of shortage of supply," said Beijing-based Merrill Lynch analyst Timothy Bush.

IN HOUSE OR TAKEOVER?

BHP spent $95 million last year studying its Jansen potash prospect in Canada, which Kloppers said the company believes could produce 8 million metric tons a year for 50 years.

"We think it's a magnificent asset," Kloppers told analysts at the group's results briefing last month. BHP bought out Anglo Potash's stake in the Jansen potash project in July 2008.

At 8 million metric tons a year, its capacity would be behind Potash Corp, which expects to have annual capacity of 18 million metric tons by end-2012 and Mosaic, which has a capacity of 10.4 million metric tons.

The company plans to run feasibility studies on Jansen next year and decide whether to invest in the project in 2011. Developing a mine typically takes seven years.

Analysts' estimate the project could cost $4-$10 billion.

Investors said BHP did not need to make an acquisition, as Jansen alone would give the company scale in potash. A bid for Potash Corp, which has a market value of $27 billion, would be a big bite, they said.

"I just can't imagine BHP going out and paying that kind of money. They would have to pay $40 billion, which is what Rio paid for Alcan. I just don't see it," said Peter Chilton, an analyst at Constellation Capital Management, which owns BHP shares.

He said the risk was that BHP would pay a big price and then end up overweight in potash, and, like Rio Tinto with its aluminum acquisition at the top of the market in 2007, BHP's share price could suffer if potash prices sink.

A bid for Mosaic, which has a market value of $23 billion, would depend entirely on whether its 64 percent owner, privately owned U.S. agribusiness giant Cargill, wants to sell.

RACE AGAINST CHINA, VALE

If BHP did chase a takeover, it might run into competition against China and Brazilian miner Vale (VALE5.SA), which recently bought Rio Tinto's undeveloped potash assets in Argentina and Canada for $850 million.

"There might be a window of opportunity before the Chinese turn their attention to securing supplies of potash offshore," said Tim Schroeders, portfolio manager at Pengana Capital.

Chinese state-run Sinochem Corp, whose Sinofert Holdings (0297.HK) subsidiary is the country's biggest distributor of potash imports, is already staking out acquisitions offshore with talks going on to take over Australian farm chemicals group Nufarm Ltd (NUF.AX).

While developing Jansen might be the best way to go, Kloppers himself did not rule out an acquisition.

"We do not see greenfield and M&A activities as being mutually exclusive," he told analysts, when asked whether BHP's move into potash would include acquisitions.