By Kishori Krishnan Exclusive To Potash Investing News

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When it comes to resource revenues, forget ‘black gold.’ That’s so 2008. This fiscal year, the hot new colour is pink – as in potash. And who better to don it than several North American suppliers. The stock price in major potash groups have risen in recent months on takeover talk.

Why the sudden interest? As lower potash prices discourage large mining companies from starting their own mines, mergers and acquisitions (M&A) appear to be the only way around the problem.

Last year, as prices raced toward US$ 1,000 a tonne, analysts and industry representatives assured investors that higher prices were sustainable because they couldn’t produce enough of the nutrient to meet the demand of the world’s farmers. Amidst the enthusiasm, about 75 so-called greenfield projects were announced – new mines intended to meet an exploding need.

The three large North American firms that mine potash in Saskatchewan’s rich deposits – Potash Corp, Mosaic Co and Agrium Inc - paid heed.

Potash and Mosaic announced plans to spend billions of dollars between them and planned to increase their capacity at existing mines by 50 per cent each, to about 15 million tonnes per year, over the next five and 10 years, respectively. Agrium has also committed to spend $500 million to increase its 2.1 million tonne per year capacity by 40 per cent.

However, prices scraped against $650 a tonne this year as demand was cut in half. Moreover, the majority – if not all – of the 75 projects are reportedly put on hold until demand returns.

“Given the number of [existing mine] expansions expected to come online over the next five to eight years, from a pure demand perspective future production from a large-scale greenfield potash project will likely not be necessary until post 2020,” analysts said. Other analysts have been suggesting that demand would return in 2010, because farmers can skip a year and still get strong yields from their fields.

BHP & potash

Either which way, fertilizer is hot and BHP Billiton (BHP.AX), the world’s biggest miner, wants a heap of the action despite its acquisition last year of Anglo Potash Ltd for $282 million. The company is cashed up and looking for new avenues of growth. Potash, used mainly in fertilizer to grow fruits, vegetables, soy and corn, offers just the right opportunity.

BHP Chief Executive Marius Kloppers is so excited about expanding into potash, he talks about it in the same breath as he talks about the company’s most profitable business, iron ore.

His bullishness on potash has prompted takeover speculation in the sector, with investors betting BHP might bid for one of the two big North American producers, Potash Corp of Saskatchewan (POT.TO) or Mosaic Co (MOS.N), in a drive for instant scale.

Potash Corporation of Saskatchewan Inc is the world’s largest potash company and the third largest phoshate producer and the second largest nitrogen producer in the world. With a market cap of $25.65 billion; its shares were traded at around $85.44 with a P/E ratio of 10.8 and P/S ratio of 2.8.

The dividend yield of Potash Corp Of Saskatchewan Inc stocks is 0.4 per cent and it had an annual average earning growth of 12.6 per cent over the past 10 years.

Strong cash flow

BHP has the firepower to chase new avenues of growth, as it is carrying just $5.6 billion in net debt with a gearing of 12 per cent, or less than a third the gearing of closest rival Rio Tinto (RIO.AX). The miner has built up about $18 billion in cash during the last year and expects to use some of it, along with additional borrowings, to acquire large rivals, possibly setting in motion a new round of acquisitions in the mining sector.

For BHP, the big attraction is the big gross margins in producing potash, running at 50-60 per cent for Potash Corp, and the expectation that potash demand is going to grow rapidly.

Developing countries need potash to boost crop yields to feed growing populations healthier varieties of food.The recent plunge in commodities prices had a negative impact on POT shares, but the stock has rebounded more than 8 per cent so far in 2009.

Attractive target

Though Potash Corp of Saskatchewan Inc has turned out to be an increasingly attractive takeover candidate, it is possible that Cargill is also speaking about a deal with BHP Billiton. Privately-held Cargill is the majority shareholder of The Mosaic Company, which formed in 2004 out of the merger between Cargill Crop Nutrition and IMC Global.

Several other North American suppliers including Intrepid Potash, Athabasca Potash and Potash One are also said to be in the fray.

Potash Corp has been the most widely-cited possibility, but Mosaic’s chief executive James Prokopanko told Reuters in an interview that the company was a “very compelling investment” and that he “could understand interest” from groups like BHP or Brazil’s Vale.

Acquirer to acquire?

It is no one way street though – not by a long shot. Rather than be bought, Potash Corp could also become an acquirer. Traders pointed to market talk that the firm might be considering bidding 50 euros per share for the German fertiliser and salt firm, K+S AG (SDFG.DE), in a bid to strengthen its market position.

However, the German major itself recently purchased Morton Salt for $1.68 billion. On Monday, the head of K+S AG dismissed speculation that its new purchase was a defensive move to ward off an acquisition threat from Potash Corp.

The purchase elevated the German mining group into the world’s largest salt producer by volume and provided a counterweight against the collapse in demand for potash and related fertilizer, its other core business.

Norbert Steiner, chief executive, said in an interview that buying Chicago-based Morton was not a defensive move, despite the persistent speculation linking the company with a bid from Potash, its larger Canadian rival.

Morton Salt was divested by Dow Chemical Co (DOW) to finance its own purchase of chemicals group Rohm & Haas after alternative funding fell through. Steiner said Morton Salt provided stable cash flow until the potash market “normalized” after a boom-and-bust over the past 18 months, something he didn’t expect before 2011.

The buy doubled its revenue from salt and expands its North American footprint into the Midwest and Canada, alongside existing operations in Europe, South America and Asia.