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BHP Billiton Limited Message Board

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  • gradkowski_07 gradkowski_07 Sep 17, 2010 12:01 PM Flag

    BHP should walk away

    According to calculations by Reuters Breakingviews, every $50 increase in the long-term price of a metric ton of potash, currently $350, adds about $20 to the Potash Corporation’s share value. BHP’s $130-a-share offer roughly reflects the current pricing situation.

    To value the Potash Corporation, start with its other businesses. The phosphate and nitrogen units are worth about $11 billion, according to Morgan Stanley estimates. The company’s stakes in smaller listed rivals have a current market value of $8 billion.

    The potash business is trickier to value. Deutsche Bank estimates that building two million tons of new potash capacity requires a $4 billion investment. On that basis, replacing the Potash Corporation’s 11.2 million tons of capacity would cost $22.4 billion.

    Knock off next year’s estimated net debt of $3.5 billion, and the company’s standalone value is around $38 billion, or just about what BHP is offering.

    Yet that valuation doesn’t capture the company’s plans to increase potash capacity to more than 17 million tons by 2015 — or BHP’s intention to produce almost as much potash as possible.

    Assuming long-term potash prices remain at their current level, and that BHP runs the operations at 90 percent of future capacity, the potash business could generate earnings before interest, taxes, depreciation and amortization of around $3.2 billion after deducting local taxes. Apply a peer group multiple of nine times, and the Potash Corporation is worth about $148 a share, or right around where the shares are trading.

    If potash prices dip to $300 a ton, the bid already looks full. But what if long-term prices rise? Only two years ago, potash peaked at $600 a ton. At $500, Potash shares could be worth $207 each, close to their highs during the commodity boom

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