BHP earnings set to jump 50pct

[] — BHP Billiton looks to strengthen its hand this week in its $39bn bid for Canadian fertiliser group Potash Corp.

With a set of monster earnings, BHP hopes to intimidate any rival bidders.

The world’s biggest miner is set to report a 50% jump in second-half profit to $6.9 bn on Wednesday, effectively sending a loud warning shot toward Potash Corp, which is thought to be lining up white-knight bidders to fend off BHP.

“Clearly it’s going to be a very good result…The balance sheet is in excellent shape and the cash flow will be significant,” said James Bruce, a portfolio manager at Perpetual Investments, which owns BHP shares.

Potash, the world’s biggest fertiliser company, talked up the chances of a counterbidder on Monday, but some potential rivals have already virtually ruled themselves out.

Potash chief Bill Doyle, who stands to earn half a billion dollars from a deal, said his firm was considering all options, including joint ventures and levering up Potash’s balance sheet.

He did not name the company’s price but said it should be “a hell of a lot more than the price on the table”.

Canada’s Globe & Mail newspaper web site, citing unnamed sources, said global miner Rio Tinto might be considering a bid for Potash Corp with a Chinese partner.

Rio Tinto, which sold off its potash assets to help pay down a mountain of debt only two years ago, declined to comment on the report.

Rio Chief Executive Tom Albanese last week would not comment on whether the company would consider a bid.

However when asked whether his company had any interest in agriculture, he said: “I’m not a farmer. I’m a miner.”


While BHP’s result should be impressive the company has effectively confirmed market expectations. Shareholders are nervous over the bid and want hear more on why it wants to make a pricey acquisition in a new business area.

They want to be persuaded that the deal makes more sense than using the company’s cash pile to buy back shares and boost earnings per share instantly.

“When you’re paying $40 billion (cash) at a minimum they’ll have to up that there’s not a lot of room for error if it doesn’t quite go your way,” said Peter Chilton, an analyst at Constellation Capital Management, another BHP shareholder.

No one expects a deal to go ahead at $130 a share, and a Reuters poll of 11 global shareholders in Potash indicated an offer 25% higher at around $162 a share could win support for a takeover.

BHP’s low gearing and massive cashflows have allowed it to line up $45bn in debt funding for its bid, and analysts see those cashflows growing in the year ahead to as much as $40bn from a forecast $24bn in 2009/10.

BHP CEO Marius Kloppers bragged about the group’s strength a week ago after news broke of its Potash approach.

“You’ll see that this is a company that creates a prodigious cashflow, even against the backdrop of investments that we are already making,” he told reporters.
Once BHP’s results are out, Kloppers and his team are free to begin their charm offensive with Potash shareholders.

Other bidders are rapidly ruling themselves out of a bidding war. On Monday, Brazil’s Vale denied talk it was lining up a bid.

Aluminum Corp of China Ltd (Chalco), which is looking to diversify, said on Tuesday it was targeting coal and rare earth businesses but sidestepped talk of interest in potash.

“Chalco’s investment should meet our investment criteria. We are not interested in just everything,” Chairman Xiong Weiping told reporters.