China working hard on rival Potash bid: sources

MELBOURNE/SASKATOON, Saskatchewan (Reuters) - China's top chemicals company Sinochem is working hard to come up with a challenge to BHP Billiton's $39 billion bid for Potash Corp , sources said, but efforts to secure a Russian partner have failed, according to a report.

Sinochem had a team of around 20 people working overtime to come up with options to stall the BHP bid, and was looking to make a decision soon, sources close to the Chinese company said.

The Financial Times reported that Sinochem held talks with Russian fertilizer maker UralKali over a possible joint bid for Potash, but those negotiations had collapsed.

Sinochem spokesman Li Qiang declined to comment on the report or on the company's efforts to thwart BHP.

"As the matter progresses, we will make our comment in due time, when we see appropriate. Now is not the time yet," he said.

While some bankers speculate the state-owned chemicals group does not need to rush into making a move after BHP extended its bid deadline to November 18, the sources close to Sinochem said a decision could come soon.

"There is no doubt Sinochem is very actively pushing ahead the Potash matter, and the company is getting very strong support from all the related government departments...the reason being, the government is dearly concerned with the grain problem," a person with knowledge of Sinochem's thinking said.

The sources declined to identified due to the sensitivity of the matter.

China's main worry is that a BHP takeover of Potash Corp could push up the price of potash, a nutrient essential for boosting grain production to meet booming food needs.

Government officials, potash producers and industry experts agreed that Chinese firms should "cautiously get involved" in response to BHP's bid for Potash Corp, Chinese business magazine Caijing reported on its website on Thursday.

It said officials at the conference, which included representatives from Sinochem, decided to adopt a three-pronged strategy of domestic production, overseas production and imports to meet potash needs.

TAX CONCERNS

BHP Billiton is sitting tight while it tries to win regulatory approvals in Canada.

The Canadian province of Saskatchewan has raised fears its tax revenues will take a hit if BHP Billiton buys Potash Corp. The premier of Saskatchewan Brad Wall warned the deal could cut into corporate tax revenues and mining royalties, adding Ottawa would consider how the offer could affect federal and provincial revenues.

His comments came as Canada's federal government reviews whether BHP Billiton's hostile takeover bid for the fertilizer giant would provide a net benefit to the country.

The deadline for the ruling is Monday, October 4, but the review is widely expected to be extended by 30 days to November 3, and could be extended by up to 60 days.

Saskatchewan, Potash's home base, is specifically concerned that BHP could use the interest it is charged for borrowing money to complete the takeover to write off corporate income taxes owed to both Ottawa and Saskatchewan.

"We don't have the final estimates yet, but there is a real risk in terms of a substantial, potential decrease in corporate income taxes," Wall told reporters. "We will balance the desire that we have for a positive investment climate with also the need to think long term."

Potash Corp shares last traded at $144.86, 11.4 percent above BHP's offer of $130 a share, indicating investors are expecting a higher offer.

BHP shares fell 0.5 percent to A$39.16 on Thursday, holding up slightly better than the broader market. Its shares have fallen 2.6 percent since the bid was announced in August.

CAREFUL LOOK

Saskatchewan's Wall said Saskatchewan, which produces a quarter of the world's potash, would take a careful look at any rival bid for Potash involving a Chinese sovereign fund or state-owned company.

Wall has said in the past he is also concerned that a BHP takeover of Potash, the No. 1 producer of the fertilizer, could reduce royalties if the Anglo-Australian mining giant markets the crop nutrient independently, instead of through the Canpotex marketing consortium.

Such a change could weaken potash prices and lower provincial royalties, which amounted to nearly C$1.4 billion ($1.35 billion) in 2008-09 after potash prices jumped.

Saskatchewan Energy Minister Bill Boyd said the provincial government has met with Mosaic Co and Agrium Inc , Potash Corp's partners in Canpotex, and both have expressed concerns about changes to the marketing regime.

"BHP Billiton will look after their shareholders, and they should, and I respect that," Wall said. "Potash Corp will look after their shareholders, and they should, and I respect that.

"We will look after our shareholders, the people of the province, whose resource it is in the first place, and I know all companies will respect that as well."

($1=$1.03 Canadian)

(Additional reporting by Rod Nickel in Winnipeg, Eric Johnson in Chicago, Joseph Chaney in Hong Kong, Lucy Hornby in Beijing, and Michael Erman in New York; Editing by Ed Davies and Lincoln Feast)