DBRS Places BHP Billiton Under Review – Negative Following Announcement of Potash Corporation Acquisition Strategies

DBRS has today changed the Under Review status on the AA (low) and R-1 (middle) ratings of BHP Billiton Ltd. and BHP Billiton plc (collectively, BHP Billiton or the Company) to Under Review with Negative Implications from Under Review with Developing Implications following the Company’s announcement of details of its financing strategy, earnings impact and post-acquisition marketing and project development strategies if the acquisition of Potash Corporation of Saskatchewan Inc. (Potash Corp.) is completed successfully. The original Under Review with Developing Implications status was initiated on August 17, 2010, at which time terms regarding potential financing and other key elements were not available. The Company is expected to launch its formal offer August 20, 2010.

In a news release and conference call presentation on August 18, 2010, BHP Billiton indicated that it will finance the acquisition with debt, and that post-acquisition, it will change Potash Corp. from being the swing producer in the industry by seeking to maximize its potash production as well as continuing Potash Corp.’s and its own aggressive development of added production capacity. With Potash Corp.’s implementation of a shareholder rights plan and its resistance to being acquired, as well as the potential of other suitors for Potash Corp., BHP Billiton’s bid for Potash Corp. could become more expensive than the initial salvo would indicate and may or may not be successful. Accordingly, the ratings of the Company have been placed Under Review with Negative Implications.

DBRS expects BHP Billiton’s intention to finance the Potash Corp. acquisition with debt will increase the Company’s leverage to greater than 50% if all shares are acquired at the expected offer price of $130 per share. The Company also indicated the acquisition would not be earnings accretive for two years. The added debt and negative impact on earnings can be expected to significantly erode BHP Billiton’s financial metrics.

Potash Corp. has traditionally managed its production levels in weak market conditions in order to maintain a semblance of balance in world potash markets. For example, in response to soft demand, Potash Corp. produced only 3.4 million tonnes in 2009, well below its 2008 production tonnage of 8.7 million tonnes. BHP Billiton has indicated that it will change Potash Corp.’s marketing strategy and seek to maximize production, thus becoming “price takers” in the marketplace. In addition, BHP Billiton has indicated it will carry on with Potash Corp.’s and its own aggressive capacity-expansion initiatives if it successfully acquires Potash Corp., leading to the potential for weak prices in an already oversupplied market.

Ultimately, DBRS views there is a potential for a multi-notch downgrade of BHP Billiton’s long-term issuer rating if the acquisition is successfully completed and depending on the final terms of the transaction.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.