BELARUS NEWS AND ANALYSIS

DATE:

13/05/2008

Potash for the green(ing) giant

Barry Sergeant

BHPBilliton (BLT LN, GBP 20.05 a share), the world's biggest diversified resourcesstock, has committed itself fully to the world's hottest mining story by makinga friendly CAD 284m offer for Anglo Potash (AGP CN, CAD 8.06), which holdssignificant potash permits in Canada's Saskatchewan province, estimated to holdaround 50% of the world's potash deposits, and is home to PotashCorp (POT CN, CAD201.75), the world's biggest producer.

Spotpotash prices have risen almost exponentially, some tenfold, over the past fiveyears, mainly on the back of the rapidly rising demand for plant fertilizer,and limited production expansions, along with fairly persistent productionissues at various potash operations. Potash mines have a reputation forattracting flooding and other misfortunes.

The latest excitement can be traced to the sinkhole created by theOctober 2006 flooding of the Berezniki #1 potashmine belonging to Uralkali (URKA LI, USD 52.00). Reports from Russia suggest thatthe sinkholehad advanced by about 25 metres in April and is now only 115 metres from a 6kmrail bypass installed early this year. Further expansion of the sinkhole couldresult in a temporary suspension of potash shipments from Russian producerSilvinit (SILV RU, USD 1,600.00), which produces around 5m tons a year ofpotash, equal to about 10% of global demand.

Theprice expansion of listed Potash stocks has been sensational, at more than200%, on an average weighted basis, over the past 12 months. Measured by marketvalue, PotashCorp now ranks as one of the biggest mining stocks in the world. Mostpotash producers are listed on various stock exchanges, led by PotashCorp,which aims to produce around 10m tons of potash this year. Two importantproducers that are not listed are Belaruskali (Belarus), and the Chinesegovernment. Vale (RIO US, USD 40.58), the world'sNo 2 mining company, is also a potash miner, with about 2% of globalproduction.

Potash mining is a seriousbusiness, according to PotashCorp, which in its annual report states that goodpotash deposits "are rare". Not only that, but barriers to entry are seen as high, given that greenfield developmentis costly (about C$2.5bn for a 2m ton a year mine in Saskatchewan, excludinginfrastructure) and has a long lead time (five to seven years before productionstarts up). Potash, or carbonate ofpotash, is an impure form of potassium carbonate (K₂CO₃),mined from deposits left behind by evaporated prehistoric seas.

Potash has a big future,according to PotashCorp:

â¢There are few global producers. Only 12 countries produce potash, while about 160 consumeit.

â¢Government ownership is low: less government ownership means decisions are primarilymarket-driven, rather than politically motivated.

â¢Demand growth is great: historical under-application of fertilizers is mostpronounced in potash, but farmers have started working on the issue.

â¢Supply is constrained: even with all producer expansions considered, tight supply isanticipated for at least the next five years.

â¢Earnings quality is high: among PotashCorp's nutrient segments, potash is the moststable and provides the highest gross margin per dollar of sales.

Spot prices are currently on themove. The Belarusian Potash Company (BPC) which represents Belaruskali andUralkali, recently announced third quarter 2008 potash pricing for theSoutheast Asian and Brazilian spot markets at $1,000 a ton for standard gradepotash delivered to Southeast Asia, effective July 1.

Canpotex(which represents PotashCorp, Mosaic (MOS US, USD 126.99) and Agrium (AGU US,USD 86.52) previously announced that standard grade potash prices in SoutheastAsia would increase from $525 to $725 a ton, while granular potash prices for Brazil would move from $405 to $750 a ton, effectiveon June 1. "Given current robust potash market conditions", say analysts at RBCCapital Markets, "we would not be surprised to see Canpotex match BPC's newspot potash pricing" of $1,000 a ton for the third quarter of this year.

BHP Billiton has had afirm eye on Potash for some time. Prior to the bid for Anglo Potash, BHPBilliton was in a joint venture with Anglo Potash, where BHP Billiton held a75% interest in the JV, with BHP Billiton the operator of the JV. The JV holds32 potash permits, some of which are pending, covering over 1.8m acres of landsin Saskatchewan.