Managed Accounts Purhcase Of Bhp

Good afternoon,

Good afternoon,

On Friday, a parcel of BHP shares was purchased for the Managed Accounts at $37.85, a technical entry at the bottom of its current trading range.

BHP had been moving strongly higher on the back of stronger worldwide commodity prices and the expectation of a very strong annual result from the company. The reason for the fall from $41.65 to $37.65 (9.2% in total) was mostly the news of their A$40Billion bid for a fertiliser company called Potash of Saskatchewan.

Fair to say you're all clear on what BHP does, I'll tell you a little about Potash. Potash is used for a number of different applications; however 93% of the material is used in fertilisers and is the third most used nutrient after nitrogen and phosphate. Potash of Saskatchewan (PoS) controls nearly 60% of the world's current Potash resources, with a resource located in Canada.

So why fertilisers, and why specifically Potash? Below is a chart of the price of Potash over the last five years, and as you can see the price is trading closer to lows than to highs. BHP says the acquisition would be instantly earnings accretive at US$500 per metric ton or higher, and in any case earnings accretive after cost synergies within two years.

It first blush, analysts have been negative on the proposed acquisition due to concerns over the dilutive value implications (and as an index heavy weight we know BHP is a staple holding in managed funds so managers will be watching reports with interest). The market has sold the stock, but we're willing to bet BHP has done more than 3 days research on the investment potential of the acquisition, and that BHP will be shown to be correct in the long term. BHP has massive free cash flows to support the purchase and we suspect they can use their excellent credit rating to secure better terms for debt than PoS itself.

If successful, this acquisition will prove to be an excellent long term purchase. With rising global populations and with ever-increasing food requirements, the price of Potash is forecasted to rise by 300% between now and 2020. As is usual, BHP would be buying PoS at a price that appears expensive on last year's depressed numbers, but we're sure will prove a wonderful purchase through the fullness of time.

As a side note, WPL went ex a dividend today of 56.68c per share, which will be paid to you in around a month's time. Should you receive a cheque, and wish us to deposit it into your account for you please mail it to us at PO Box 69 Richmond VIC 3121.

If you would like to speak with us about anything at all, please call the desk.

Talk soon,

Shawn Uldridge and Hayden Kerr.

by: Hayden Kerr

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