Sirius Minerals (LSE: SXX) is sitting on one of the world’s most valuable potash mines. BHP Billiton (LSE: BLT) wants to get into the potash business but is struggling to achieve a substantial foothold in the industry. Could these two miners be the perfect suitors for each other?
A Sirius-BHP merger isn’t as far-fetched as it first appears. BHP has been trying to get into the potash business for some time. Indeed, management is trying to make the commodity one of the group’s ‘pillar’ products. Potash would join BHP’s four existing pillar commodities of copper, coal, iron ore and oil.
Tentative steps
So far, BHP’s attempts to get into potash are limited to the $2.6bn Jansen project in the Saskatchewan province of Canada, where development of the mine has slowed to a crawl. At the end of the first half of 2015 the mine was 49% complete, a year later construction is 60% complete. According to City analysts, at this rate, the mine won’t be producing potash much before the end of 2019.
Alongside the Jansen project, there has also been some speculation that BHP may make another attempt to take over Potash Corporation of Saskatchewan. In 2010, Canada blocked BHP’s $40bn hostile takeover bid for Potash Corp arguing the company’s mines are strategic national assets. Today, Potash Corp is worth around $13.5bn but even at this reduced price, in the current environment BHP may prefer to save the cash rather than splash out on a large acquisition.
The answer to BHP’s problems?
Sirius could be the answer to BHP’s problems. It’s developing the world’s biggest and highest grade deposit of polyhalite. Production costs are expected to be some of the lowest in the world, and the location of the mine means the company has easy access to European markets. What’s more important is that unlike most early-stage mining projects, Sirius already has the permissions in place to commence construction of not just the mine but also related infrastructure, de-risking the whole project.
Still, the one thing that’s holding Sirius back right now is funding. The company needs several billion dollars to begin production. BHP could easily foot this bill. The project economics of the Sirius mine are highly compelling, and the company has the experience, as well as the connections needed to push ahead with construction. Further, BHP would be able to draw the funding required to develop the mine at a much lower interest rate than smaller Sirius.
It’s estimated that Sirius’s project has a net present value of $27bn at the production stage with $1bn to $3bn of potential earnings before interest, tax, depreciation and amortisation.
The bottom line
All in all, a deal between BHP and Sirius makes a lot of sense on paper. BHP would get a world class asset at an attractive price in a stable region with all permissions granted, negating the need for costly, risky overseas M&A. A merger looks good on paper but will BHP step up and make an offer?
