BHP reveals big profit, to face Potash questions

BHP reveals big profit, to face Potash questions

Melbourne/London: BHP Billiton, the world’s biggest miner, fired a warning shot to its takeover target Potash Corp and potential counterbidders, showing off its best half-year profit in two years and a hefty balance sheet.

BHP, with a $39 billion hostile offer out for the top global fertiliser maker, said it was cautious on the short-term global outlook and that the economy in China, its biggest customer, would slow from recent highs.

“Following a broad recovery in prices for the majority of BHP Billiton’s products, the short term outlook for commodities is mixed," the company said on Wednesday in announcing its results.

But BHP is still in a strong position to raise its Potash offer, as widely expected, with $45 billion in debt lined up and annual cash flows of $24.5 billion. The group’s net debt fell to $3.3 billion, with net gearing down to a mere 6%.

BHP chief executive Marius Kloppers is set to face questions from investors and analysts in London about the $130 per share bid, launched a week ago.

Shareholders are worried about the risks BHP is taking on, expanding into a market it has never served, as it aims to tap an expected boom in demand for potash from farmers trying to boost crop yields to feed fast-growing countries like China and India.

“The question is not whether BHP can afford the bid. It’s whether there’s a strategic fit," said an investor who declined to be identified ahead of talking to Kloppers.

Net profit before one-offs for January-June rose to $6.77 billion from $4.59 billion a year earlier, in line with analysts’ forecasts of around $6.9 billion.

“I have to say it’s probably a very welcome result with very little to worry about," said Ric Ronge, portfolio manager at Pengana Capital.

“BHP could probably go up to close to A$200 a share (in its Potash Corp bid)... In the absence of another bidder for those assets, BHP is doing the right thing in the sense it’s basically offered a price... and is waiting for a response."

One key question for shareholders will be whether BHP will be willing to raise its bid by more than 22%, which would require it to seek approval from its own shareholders for the deal under UK rules.

BHP also plans to ask a Canadian commission to end Potash Corp’s poison pill early if the bid appears likely to receive regulatory approval, sources familiar with the matter said.

Such a move would force the Canadian company to work faster as it seeks to line up a white knight to fend off the bid. Potash Corp adopted a 90-day shareholder rights plan last week in response to BHP’s hostile bid. The plan will trigger a massive dilution in shares if a single investor acquires a stake of more than 20% by giving existing shareholders the right to buy more Potash shares at a sharp discount.

But BHP can ask a provincial securities’ commission to have the shareholder rights plan lifted early so it can take up shares tendered to its offer. One source, who spoke on the condition of anonymity, said BHP could ask to have the pill removed within 30 to 45 days after its 20 August bid, which expires on 19 October.

BHP’s bumper profits came as the U.S. Securities and Exchange Commission charged two Spanish residents with insider trading in Potash Corp shares before BHP announced its bid.

The SEC alleged that the Madrid, Spain residents, one of whom was an equities derivatives trader with BHP adviser Santander, made nearly $1.1 million in profits using material nonpublic information to illegally trade Potash securities before the BHP announcement.

BHP shares have dropped 6.9% since it announced the bid for Potash Corp, underperforming a 2.6% dip in rival Rio Tinto as investors bet Rio would be a safer mining play.

Leading into the result on Wednesday, BHP’s shares were down 0.3%, while the metals and mining sector was down 1%. Potash Corp shares slipped 0.7% on Tuesday to $149.11, trading 15% above BHP’s offer.

Potash Corp investors polled by Reuters said they would be willing to accept an offer around $162 a share, while many analysts think an offer around $157 would clinch a deal.