PCA shareholders to vote next week on Rio offer

Preferred shareholders of beleagured Potash Co. of America, who paid $25 for their shares in July, 1984, will vote Dec 14 on whether or not to accept the latest takeover bid from Rio Algom. The diversified uranium, copper, molybdenum and steel producer already owns all of pca’s common shares.

Rio Algom has offered to give shareholders $18 for every pca preferred share held or one common share of Rio Algom.

Both shares were trading this week in Toronto at $18 — pca up sharply from the pre-bid trading range of about $7.

The offer, if accepted by at least 66220/30303 1/2% of preferred shareholders will be good until Feb 15 — about the same time the U.S. Department of Commerce is expected to bring down its final decision on the anti- dumping case launched last August by a number of U.S. potash producers in New Mexico. That decision could have a profound effect on the company.

If duties of 77% (about $46 per ton) imposed on pca’s potash exports to the U.S. fertilizer market since Aug 24 are not reduced or eliminated it is highly unlikely that the company could continue to compete in what has traditionally been the company’s largest market, according to pca.

About 90% of the 1.9 million tons of potash pca has the capacity to produce from two mines: one in Saskatoon, Sask., and one in Sussex, N.B., is exported to four major market areas: the U.S., Western Europe, Latin America and the Far East. Potential solution mine

Flooding problems in the Saskatoon mine last February, however, have shut that mine down completely. Pca has had to buy potash from the Potash Corp. of Saskatchewan and resell it to its customers in North America in order to maintain a reasonable position in the marketplace.

Since then the company has spent $16.8 million protecting the mine shaft and has decided to build a small solution mine pilot plant at the Saskatoon mine and run it for six months. Results from this test, expected to start soon, will be used to evaluate the commercial viability of re-opening the mine as a solution mine. Estimates are it could produce 700,000 tons annually beginning in 1989.

Problems have plagued the company’s relatively new mine in Sussex, too. That mine opened in 1983.

Fundamental design problems have been corrected but the company is still unable to maintain production consistently at design levels. The mine expects to produce 60,000 tons of product per month in 1988 and a total of 725,000 tons in 1989. Another quarterly loss

Pca’s precarious position is exacerbated by its financial results. In the third quarter of this year the company reported a loss of about $3.19 million, has borrowed $189 million from the banks and a further $21 million from Rio Algom.

In this background, the Board of Directors of pca requested Burns Fry to prepare an evaluation of the Rio Algom offer. Should shareholders reject the Rio Algom offer, the net present value of the estimated intrinsic worth of the shares is $10-$11, that report says.

If the offer is accepted, Burns Fry estimates the net present value of a pca share would be $19. Burns Fry concludes that the average of these two extremes ($12.25-$15.50) would be a fair asking price.

An independent review committee, comprising the five pca directors who have no relationship with Rio Algom unanimously recommends shareholders accept the bid since it is somewhat above the fair value as determined by Burns Fry.

Since shareholders bought their shares in July, 1984, pca has deferred eight consecutive quarterly dividends of 10 cents .

Rio Algom, on the other hand, paid a 65 cents dividend last year and with $200 million in cash has a good chance to achieve further corporate growth in areas of the industry other than potash.