October 28, 2010 / 10:38 AM / 7 years ago

WRAPUP 1-Potash results surge but stock drops on bid fears

* Q3 EPS $1.32 vs $0.82 a yr ago

* Q3 revenue $1.58 bln vs $1.10 bln a yr ago

* Sees 2010 EPS of $5.75 to $6.00; Wall St view $5.62

* Shares slip on report that Ottawa may block BHP bid

* BHP slams newspaper report as inaccurate

(All figures in U.S. dollars)

By Euan Rocha

TORONTO, Oct 28 (Reuters) - Potash Corp POT.TO posted quarterly results on Thursday and issued an outlook that far surpassed expectations, but its stock dropped on a report that Canada is leaning toward blocking BHP Billiton’s BHP.AX $39 billion hostile bid for the fertilizer giant.

Canadian Industry Minister Tony Clement is due to decide by Nov. 3 on whether to allow the Anglo-Australian miner’s $130-a-share bid to proceed, against the strident objections of Saskatchewan, Potash’s home province.

Citing sources close to the discussions, the Globe and Mail newspaper said the province’s top elected official may have persuaded Clement to short-circuit the bid by arguing that the company is of strategic importance to Canada. Potash Corp is the world’s biggest producer of its namesake crop nutrient. [ID:nN28117784]

“I think we’re going to get screwed,” one source close to BHP told the newspaper.

But a BHP spokesman slammed the newspaper report as inaccurate, and denied that the company thought the government had formed an opinion. He said it had confidence in Ottawa’s review under the Investment Canada Act, which says foreign takeovers must offer a net benefit to the country.

Even so, Gleacher & Co analyst Edlain Rodriguez said the negative stock reaction was due to arbitrage traders backing away from the stock on fears that Ottawa may block a deal.

“When you look at the fundamentals in the fertilizer market right now, they are very, very strong. And I think that’s going to be enough to eventually support the stock, regardless of what happens with BHP’s bid,” said Rodriguez.

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For other BHP-Potash stories [ID:nN22340110]

Value investor view on Potash: [ID:nRTV153281]

Timeline: link.reuters.com/nav26p

Top producers: link.reuters.com/sus55n

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Potash Corp’s quarterly results provided ample evidence of the strength of those fundamentals. The company posted a 62 percent rise in earnings for the three months ended Sept. 30, far surpassing forecasts.

During the quarter, grain prices spurred robust demand for potash and also pushed pricing of phosphate and nitrogen-based fertilizers higher.

The company said it expects demand for potash, or potassium-based nutrients, to rise by as much as 20 percent next year. It also issued full-year earnings forecasts for 2010 and 2011 that were well above of Wall Street’s previous expectations.

Third-quarter net income rose to $402.7 million, or $1.32 a share, from $247.9 million, or 82 cents, a year earlier.

Quarterly revenue rose 43 percent to $1.58 billion.

Analysts on average had forecast earnings of $1.16 a share on revenue of $1.31 billion, according to Thomson Reuters I/B/E/S.

The company’s potash business, which typically accounts for the lion’s share of its profits, generated about two-thirds of its gross margin in the quarter, as demand staged a steady comeback from a lean patch in 2009.

“Rapidly rising prices for a number of key crop commodities pushed our industry past the inflection point, as demonstrated by stronger demand and the beginning of pricing momentum for all nutrients,” Potash Corp Chief Executive Bill Doyle said in a statement.

MULTIPLE HURDLES

BHP, the world’s largest mining company, is courting Potash Corp with an eye on winning control of its world-class potash assets -- most of which are located in Saskatchewan.

Potash Corp has flatly rejected BHP’s bid and launched a lawsuit against the Anglo-Australian miner to stymie a takeover.

BHP launched its $130-a-share bid in August, but Potash Corp’s stock has consistently traded well above that level, signalling expectations of a sweetened bid.

Shares of Potash Corp dropped 2.7 percent by midday in New York to $143.40.

Saskatchewan has strongly recommended that Ottawa block a takeover of the provincial crown jewel, fearing a loss of billions of dollars in royalty and tax payment as well as job losses.

It has also argued Canada would lose control of a strategic asset if BHP takes over Potash.

Saskatchewan Premier Brad Wall said on Thursday he doesn’t want a “golden share” in BHP’s potash business as a means of easing the province’s concerns about its takeover bid. Earlier this week Wall said the province’s opposition was firm and not intended to be a bargaining chip.

A golden share -- giving the province veto power in shareholders votes -- would ostensibly allow Saskatchewan to influence how BHP produces and markets potash, but Wall said in an interview with Reuters that he doubts it would effectively ease his concerns.

“We’re really focused on ‘no’,” Wall said. “The success of golden shares in exercising some more authority on the part of governments is almost as suspect as promises given under the Investment Canada review process.”

Wall was referring to conditions accepted by other companies in the past in securing Ottawa’s approval of takeovers of Canadian companies.

If the proposal does get past Canadian regulators, BHP will still have to win over Potash Corp’s shareholders, who are far from convinced by the current offer. If BHP does sweeten its offer, it may also be forced to seek the approval of its own shareholders, if the new bid exceeds 25 percent of its own market capitalization.

The mining giant also has to get provincial regulators to overturn the ‘poison pill’ anti-takeover defense adopted by Potash Corp and win the ongoing legal battle between both companies.

A U.S. District Court in Chicago is due to rule on Potash Corp’s request for a preliminary injunction on Nov. 4. (Reporting by Euan Rocha in Toronto and Rod Nickel in Winnipeg; Editing by Frank McGurty)

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