Replies to post #1702 on The Rising Influence of Rising Affluence

[DewDiligence]

BHP Rebuff Is Latest in Protectionist Wave

http://online.wsj.com/article/SB10001424052748704353504575596701384301106.html

›NOVEMBER 6, 2010
By PHRED DVORAK and ROBERT GUY MATTHEWS

Canada's rejection of the year's biggest mergers and acquisitions bid has thrown a different type of protectionism onto the global stage—the struggle to safeguard natural resources.

Canadian Industry Minister Tony Clement shocked markets Wednesday by saying he didn't think Anglo-Australian miner BHP Billiton's $38.6 billion bid to take over fertilizer firm Potash Corp. of Saskatchewan would be good for the country. Though Canada hasn't disclosed the reasons behind the move and says the door remains open to BHP, the decision was particularly surprising since Canada has been a vociferous denouncer of protectionism, castigating the U.S. this year over its "Buy America'' provisions and cobbling together free-trade agreements from Colombia to Jordan.

The Canadian coolness on the BHP-Potash deal appears to dovetail with what mining-industry experts call a growing global tendency for countries to hoard, guard and extract higher tariffs for use of their natural resources. In the past few years, countries have thrown private companies off their mining land, applied large tax increases on extracted metals, and renegotiated contracts in an effort to tighten their hold on everything from gold to oil on their territory.

"Resources and resource nationalism have become major items on the geopolitical agenda,'' said Rio Tinto's chairman Jan Du Plessis, on an earnings conference call in August.

Efforts to lock down national resources come at a time of broader concerns, amid global financial crisis, that some trade barriers may be reconstituted. Some countries see a protectionist hand in the ongoing global "currency wars"—alleging that China, or the U.S., want to keep national currencies weak to help make their own exporters more competitive. The currency issue will top of the agenda of next week's summit of the Group of 20 leading nations in Seoul.

Protecting national resources can be particularly important as prices for commodities from iron to copper soar on the back of expanding demand from economies like China, India and Brazil. Some countries are concerned they will be short of materials such as potash—a crop nutrient of which Canada is believed to control half of the global supply—and rare-earth minerals, which China largely controls. Beijing officially discourages foreign investment in certain industries including mining rare-earth elements.

"If you're dealing with a strategically important national resource, you have to play it differently," says Mel Cappe, a former top-ranking civil servant who now directs the Montreal-based Institute for Research on Public Policy.

Protectionism has also been driven by economic turmoil, says Tom Whelan, a partner at Ernst & Young's mining and metals practice. "The real simple reason is that the global financial crisis resulted in so many governments on the brink, with significant budget deficits," he said. With recent spectacular earnings, he said, mining companies have "become a target to replenish these national treasuries."

In a study released last month, Mr. Whelan found that nationalism was the fourth-highest strategic business risk within the mining sector in 2010, up from the ninth in 2009.

Last year, the West African country of Guinea tossed miner Rio Tinto from the northern portion of its iron-ore development, complaining the miner wasn't working fast enough to bring in tax revenue from the sale of iron ore. Australia famously proposed raising its tax on some mining profits to 40% this year, sparking resistance from the country's mining giants and setting the stage for the ouster of its prime minister.

Oil is another resource often thought too precious to subject to normal investment rules. Since the 1990s, Brazil's government eased the path for most foreign investment to spur economic growth. But it moved to erect new walls around its growing domestic oil industry after making massive deep-water oil discoveries off the coast of Rio de Janeiro a few years ago.

Last year, for example, Brazil's President Luiz Inácio Lula da Silva announced a new law that would give state-controlled oil company Petroloeo Brasileiro a dominant role in developing the new fields while relegating foreign oil firms to supporting roles.

Brazilian government officials say the sheer size of the giant oil find makes it a special case that must be treated differently.

Canadian politicians are using similar arguments in their opposition to a Potash sale. Canada has approved the takeovers by foreign companies of its biggest miners of nickel, copper and aluminum, gaining a reputation internationally as a country open to investment. But Potash controls more than one-fifth of the world's reserves of potash; its home province of Saskatchewan sits on roughly half.

Control over that much of the mineral gives Canada a leg up in global markets—particularly since the country is a big supplier of foodstuffs as well, Agriculture Minister Gerry Ritz argued in Parliament on Thursday. Ceding control to Australia would be especially painful, he said.

"Australia is a major marketer of a lot of the same foodstuffs that Canada has," Mr. Ritz said. "For it to be able to go to the Indias and Chinas of the world and say that it now controls their fertilizer too, I think would have had a very detrimental effect'' on Canada.

The sale was complicated by the long-simmering feeling that Canada had lost too many of its star companies to foreign firms, and not protested when foreign-investment rules abroad prevented its own companies from acquiring others, said John Manley, a former Industry Minister who now heads the Canadian Council of Chief Executives.

"There's a strong sentiment in the Canadian business community that we've been patsies," he said. Mr. Manley says he's an advocate of an open investment process to make sure it's not railroaded by politics.

In the U.S., one of the most well-known cases of protectionism came in 2005 when Chinese oil company CNOOC Ltd. made an ambitious $18.4 billion bid for Unocal Corp. The move of the Chinese government-backed company drew the attention of Congress and other prominent politicians.

The backlash caused CNOOC to drop its bid, and Chevron Corp. was able to make its own move for Unocal at a lower price.

In Australia, eyes are on another Canadian-Australian agricultural deal: Agrium Inc.'s $1.1 billion bid for AWB Ltd., which topped an agreement AWB already had with fellow Australian company GrainCorp Ltd. AWB is Australia's largest wheat exporter.

The deal has already received approval from Australia's foreign investment review board and it would be unprecedented for the Australian government to step in to block a deal at this point. Such a move is not expected.

But Agrium and AWB are keeping an eye on Australian politicians and the government to ensure there is no backlash against the deal as a result of Canada's rejection of BHP's Potash bid, people familiar with the matter said.‹

[DewDiligence]

BHP Drops Potash Bid, Reinstates Share-Buyback Program

[With termination of the bid for Potash, BHP now has ample liquidity for an aggressive buyback program. $4.2B remains on the previously suspended buyback authorization, and a new authorization will presumably be approved in due course if BHP does not find a new large acquisition target. Investors anticipated the renewed-buyback decision by bidding up the shares of BHP/BBL late last week (#msg-56316970).]

http://www.bhpbilliton.com/bb/investorsMedia/news/2010/bhpBillitonWithdrawsItsOfferToAcquirePotashcorpAndReactivatesItsBuybackProgram.jsp

›15 November 2010

BHP Billiton (ASX:BHP/LSE:BLT/NYSE:BHP and BBL/JSE:BIL) today announced that it has withdrawn its offer to acquire all of the issued and outstanding common shares of Potash Corporation of Saskatchewan Inc. ("PotashCorp") (NYSE:POT/TSX:POT) (the "Offer").

BHP Billiton has determined that the condition of its Offer relating to receipt of a net benefit determination by the Minister of Industry under the Investment Canada Act cannot be satisfied, and accordingly, the Offer has been withdrawn. A total PotashCorp-related transaction cost of approximately US$350 million, of which approximately US$250 million related to the US$45 billion acquisition financing facility, will be recognised as an exceptional item in the December 2010 interim accounts.

BHP Billiton continues to believe its Offer would have resulted in a significant net benefit to Canada, Saskatchewan and New Brunswick. As a package, the proposed undertakings offered by BHP Billiton in a signed, written submission to the Minister of Industry were unparalleled in substance, scope and duration, reflecting the importance of potash to Canada and Saskatchewan. The company had offered to commit to legally-binding undertakings that would have, among other things, increased employment, guaranteed investment and established the company’s global potash headquarters in Saskatoon, Saskatchewan.

The investment commitment included US$450 million on exploration and development over the next five years over and above commitments to spending on the Jansen project. An additional US$370 million would have been spent on infrastructure funds in Saskatchewan and New Brunswick. BHP Billiton would also have applied for a listing on the Toronto Stock Exchange.

In addition, BHP Billiton was prepared to make a unique commitment to forego tax benefits to which it was legally entitled and, as a condition of the Minister’s approval, BHP Billiton was prepared to remain a member of Canpotex for five years. Both of these undertakings were intended to allay any concerns the Province of Saskatchewan may have had regarding potential losses in revenues.

Further, to give the company an even stronger Canadian presence, BHP Billiton undertook to relocate to Saskatchewan and Vancouver over 200 additional jobs from outside Canada. BHP Billiton would have maintained operating employment at PotashCorp’s Canadian mines at current levels for five years and would have increased overall employment at the combined Canadian potash businesses by 15% over the same period. BHP Billiton also made a number of additional undertakings in relation to Saskatchewanian and Canadian participation in senior management roles within the combined potash business, within a new Potash Advisory Board and also on the Board of BHP Billiton.

Local suppliers would have been guaranteed a full and fair opportunity to provide goods and services and BHP Billiton undertook to spend at least US$8 million per annum on community programs, primarily in Saskatchewan and New Brunswick, while raising overall community spending from PotashCorp’s current levels to BHP Billiton’s levels. BHP Billiton also offered to invest in the University of Saskatchewan to create a Mining Centre of Excellence to enhance the province’s mining capabilities and to raise the international profile of both the University and the province.

BHP Billiton was prepared to accept an unprecedented monitoring and compliance regime that would have provided the Government with additional assurances that the undertakings would be complied with, including making available a US$250 million performance bond.

During the investment review process, BHP Billiton engaged extensively with officials from the Investment Review Division of Industry Canada. In view of the reasons underlying the Minister's interim decision of November 3, the company believes that the Minister of Industry would have required additional undertakings beyond those BHP Billiton had already offered which would have conflicted with BHP Billiton’s business strategy and been counter to creating shareholder value. BHP Billiton Chief Executive Officer Marius Kloppers expressed disappointment at the outcome while emphasising the company’s commitment to Canada and disciplined approach to shareholder value.

"Unfortunately, despite having received all required anti-trust clearances for the Offer, we have not been able to obtain clearance under the Investment Canada Act and have accordingly decided to withdraw the Offer. We remain committed to Canada and we plan to develop a significant presence in the potash industry in Saskatchewan. As part of those plans we will continue to progress our Jansen Project and other development opportunities," he said.

"Our core business strategy of diversifying our investments across geographies and commodities differentiates us and, more importantly, continues to deliver value to our shareholders and the communities and countries where we operate. We have an unparalleled portfolio of tier one assets, which we believe can sustain decades of increased production. We plan to invest US$15 billion in our global business this financial year and expect our ongoing capital commitment to continue to deliver robust production growth," Mr Kloppers added.

BHP Billiton also announced its intention to continue the company’s strong track record of returning excess capital to shareholders by reactivating the remaining US$4.2 billion component of its previously suspended US$13.0 billion buy-back program.

BHP Billiton Chairman Jac Nasser said: "The decision to reactivate the buy-back program is entirely consistent with our commitment to maintain an appropriate capital structure while we continue to make substantial investments in our growth projects. BHP Billiton has a strong track record of returning capital to shareholders. From 2005, BHP Billiton has completed buy-backs totalling US$12.7 billion or 11% of issued capital, and has also paid out US$17.9 billion in dividends."‹