Analysis: BHP takeover could cut Saskatchewan's potash take

WINNIPEG/TORONTO (Reuters) - BHP Billiton’s potential takeover of Potash Corp could short-change one of Canada’s most resource-rich provinces if the Australia-based miner speeds up production of the fertilizer nutrient and markets it independently.

Depending on how BHP applies a Saskatchewan tax credit to develop its own new mine, the western Canadian province could also see lower revenues from existing Potash Corp mines, and it is seeking outside analysis of the takeover’s impact.

“If it means much greater production going into a finite market, then our feeling is we would see lower prices,” Saskatchewan Energy Minister Bill Boyd told Reuters. “Lower prices would result in lower revenues to the province of Saskatchewan and that would obviously be of concern.”

Saskatchewan, home to one-quarter of the world’s potash production, took in C$1.4 billion ($1.3 billion) in potash royalties in 2008/09, or about one-tenth of its budget.

Royalties are set to ease to more normal levels of about C$205 million for 2010/11. But the province of about 1 million people still sees potash as its fiscal lifeline. That could be in jeopardy if BHP’s takeover bid succeeds.

BHP, the world’s biggest miner, has traditionally maximized production to capture market share, unlike Potash Corp which has adjusted production to support prices.

Potash Corp exports through the marketing arm Canpotex, a joint venture with Mosaic Co and Agrium Inc. BHP has said it intends to market its potash independently.

Both abandoning Canpotex and producing more of the mineral, a key agricultural nutrient, are likely to weaken prices, the main factor in calculating Saskatchewan’s potash royalties.

Potash Corp pays the Saskatchewan potash production tax on its first 5.7 million tonnes per year, its average production level from 2001-02. So any further production that dampens prices would cause a net drop in Saskatchewan revenues.

“We would not want to see ourselves in a situation where we’re selling significantly more potash at a low price, resulting in obviously not only a rapid rate of decline of the resource but of the royalties as well,” Boyd said.

BHP chief executive Marius Kloppers said on Wednesday that the company would only change the potash marketing system with agreement from other parties.

Reduced potash royalties in Saskatchewan could affect the federal budget too. Saskatchewan currently receives none of the federal transfers to poorer provinces, but it collected them before commodity prices rose steeply several years ago.

“In years where (royalties) are very significant, obviously it would have an impact on the equalization formula,” Boyd said.


Saskatchewan’s finances could see another hit depending on how BHP would cash in on an incentive for expansion that reduces taxes that potash miners pay on profits.

BHP is entitled to a credit if it builds an C$8-C$10 billion new mine at Jansen, Saskatchewan as planned. But with no current potash production in the province, BHP cannot use the credit until the Jansen mine opens in about five years, unless it acquires already-producing mines like Potash Corp’s.

“If you have producing assets in Saskatchewan and are building a new mine, you can apply the credits now,” said Joel Jackson, chemicals and fertilizers analyst at BMO Capital Markets in Toronto.

For every dollar a miner spends on expansion, it collects C$1.20 in credits against the production tax, Jackson said.

“Normally, having a tax base where everything goes into one tax pot does have some small benefits usually,” Kloppers said of tax advantages of buying Potash instead of simply developing Jansen. “While I haven’t looked at this specifically, it would surprise me if it were any different, but I don’t think it’s a material impact here.”

Boyd said he didn’t think a Jansen credit would offset taxes the province gets for Potash facilities, but an industry official expects the consultants to review that scenario.

Potash Corp is expanding its mines and generating its own tax credits, so it’s unclear when BHP would apply the Jansen credit if its takeover succeeds.

BHP could also use Potash Corp’s credits first and delay on developing the costly Jansen mine until it bolsters its balance sheet by selling Potash’s nitrogen and phosphate assets or minority stakes it holds in other companies.

($1=$1.06 Canadian)

Additional reporting by Eric Onstad in London; editing by Janet Guttsman