Things couldn’t be going better if you’re a fan of BHP Billiton (NYSE: BHP) and want to see it win what’s turning out to be a phony bidding war for Potash Corp of Saskatchewan (TSX: POT, NYSE: POT).

Set aside the fact that since 1985 every application from potential foreign investors in Canadian companies reviewed by the Minister of Industry under the Investment Canada Act (ICA) has been approved. The data on ICA approval of foreign investment provides interesting context about Canada’s relatively hospitable climate and reveals a little about the evolution of the global economy.

A theme we’ve pounded in this space–Canada’s natural resources make it an attractive investment destination–is supported, at least on a superficial glance, by the data, which reveal that over the last 12 months “resources” investment by foreign capital are running more than 70 percent above the long-run average, and that overall foreign investment originating from countries other than the US, Japan and EU members is more than 50 percent the historical average since 1985.

But let’s return to BHP Billiton and its good fortune this week. On Monday, the Conference Board of Canada released a report commissioned by the government of Saskatchewan. The apolitical research outfit was retained by the government of Saskatchewan “to assess the risks and opportunities associated with a possible takeover of Potash Corp” in the wake of BHP Billiton’s USD40 billion, USD130 per share offer for the world’s largest producer of a key fertilizer input.

The Conference Board rendered its verdict on BHP’s bid and it also included an evaluation of on the prospect of an investment by a state-owned entity such as China-based Sinochem Group. (China is the world’s largest user of potash-based fertilizer and relies on imports for more than half of its needs. It’s the second-biggest importer of potash after India.)

The Conference Board concluded that BHP’s bid, although it would result in a CAD2 billion revenue loss over the next decade, would provide net benefits to the province because of its commitment to levering Potash Corp’s plans in place for the expansion of the industry in Saskatchewan. BHP has dropped USD1 billion developing its own Saskatchewan-based potash mine at Jansen Lake, a project that will eventually cost USD12 billion and employ more than 3,000 people to complete. The existing tax and royalty structure provides even more for BHP to continue its Jansen Lake development as a Saskatchewan-based operator, and the impact on the province of its potential withdrawal from the Canpotex cartel is negligible. BHP

would be able to avail itself of favourable tax preferences. Acquiring an existing operation would allow BHPB to write off the capital cost of Jansen Lake against current income generated by PCS properties under the existing tax and royalty regime. In addition, the acquisition would allow the company to organize its affairs in such a way as to minimize corporate taxes paid to the Province. Even if BHPB were to follow the same marketing strategy as PCS’s current management–which includes using Canpotex, the jointly-owned marketing and logistics arm of the Saskatchewan producers–Saskatchewan’s tax yield from the potash industry would be temporarily lowered, due to the nature of the current tax and royalty regime.

It also concluded that a successful bid by Sinochem or some other state-backed “consumer” would do harm to Saskatchewan:

The Province, however, should be concerned about a bid from a state-owned enterprise(SOE) like Sinochem, especially given that it is a SOE from a major importer country (China). SOEs such as Sinochem simply do not face the same commercial constraints as do commercial enterprises like BHPB. Therefore, we believe that Sinochem is more likely not to demonstrate market discipline to support the potash price. Sinochem has a strong incentive to lead the world marketplace toward price competition, which would hurt all Saskatchewan producers and, indeed, global producers of potash.

On Tuesday, Professor Jack Mintz, Canadian governments’ ever useful tax expert, derided the Conference Board’s revenue-loss figures for Saskatchewan but concurred with its conclusion that BHP’s pursuit of Potash Corp should be determined by market forces, not an ostensibly protective government. Professor Mintz, who provided a research framework for the so-called tax leakage that led to the October 2006 Halloween Massacre, went so far as to suggest that Canada do away with sector-specific impediments to foreign investment.

The problem isn’t that there’s too much foreign capital buying Canadian assets; it’s that there isn’t enough. According to numbers dug up by Professor Mintz, who doubles as the director of the University of Calgary’s School of Public Policy, dug up data that indicates, contrary to the impression held by many Great White Northerners, Canada is “hollowing out” the rest of the world: It ranks No. 46 among 92 countries based on the amount of foreign direct investment coming into the country, measured by a proportion of gross domestic product, on average from 2004 to 2008. Canada is No. 23 in terms of outflows; in other words, more Canadian dollars are invested abroad than there is foreign money coming into the country.

Late this week Bloomberg reported that Sinochem may be prohibited by Chinese authorities from making a bid that depends on the support of state-backed banks for financing because of the exorbitant costs of an outright acquisition. Chinese authorities, barring Sinochem funding a takeover by itself, a highly unlikely result, are said to prefer that the diversified chemicals outfit take a much-easier-to-finance minority stake.

The battle now seems to be down to BHP Billiton and Potash Corp’s board and management for the hearts and minds of Potash Corp shareholders. The market–if you can call it that–for small “p” potash clearly favors the few producers that together control pricing for their commodity to a degree that would make OPEC members blush. But it’s a very small box the Conference Board of Canada has constructed for Potash Corp.

It’s clear that Potash Corp shareholders will want to see an offer closer to the stock’s all-time high of USD230, set back in June 2008. Potash Corp peaked before the Great Recession forced hard choices on farmers; tough times meant producers would skip fertilizer applications as a cost-saving measure. Demographic realities and the return to somewhat normal economic conditions highlight again the need to get more out of less and less arable land around the world. One easy way to boost yields is to use potash-based fertilizers, which allow crops to withstand extremely arid conditions and survive in depleted soils.

That doesn’t change the fact that the few Canada-based entities able to support a Potash Corp bid have backed off, as have many multinationals for whom an extension of or an expansion into fertilizer inputs is at least plausible in the context of their existing business plans. The problem, for Potash Corp shareholders at least, is that the Conference Board may have chased off the only other institution with the wherewithal to make a bid that hasn’t yet explicitly backed off.

The Roundup

Provident Energy Trust (TSX: PVE-U, NYSE: PVX) announced its plans to convert to a corporation on Jan. 1, 2011. Unitholders will receive one common share of Provident Energy Ltd for every trust unit they now hold.

As expected, the move comes with a distribution cut, from CAD0.06 per unit per month to CAD0.045 per share per month. That equates to a yield of 7.5 percent based on Provident’s current unit price.

This is the last major move for Provident in a restructuring process that began several years ago with the divestiture of its US operations. Earlier this year the company spun off its oil and gas production arm and combined it with Midnight Oil & Gas to form Pace Energy (TSX: PCE, OTC: MDOEF). Provident unitholders received 0.12225 shares of Pace in that deal, which was concluded July 9.

The current company is now purely a provider of midstream energy services, with a focus on the natural gas liquids (NGL) infrastructure and marketing business. The core business is fee-based, generating stable income from a range of high-quality producers and sellers of energy. That’s augmented by an energy marketing arm, which leverages the infrastructure assets.

The new dividend level will bring the payout ratio back to a manageable level–it had exceeded cash flow in recent quarters. It will also permanently absorb any new taxes faced by Provident as a corporation beginning in 2011 and it will conserve sufficient cash flow to fund organic growth of the company’s existing assets. The company also has CAD900 million in tax pools with which to defray future taxes.

The swap from trust to corporation will be a non-taxable event in management’s opinion. And unlike the conversion of Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) completed this week, it shouldn’t involve any change of symbols. US investors holding Provident in IRA accounts will no longer be withheld the 15 percent tax by the Canadian government, once the conversion has occurred.

Looking ahead, this conversion announcement removes the last uncertainty surrounding Provident Energy Trust. That earns it the company an increase in its CE Safety Rating from 3 to 4. The stock remains in the CE Portfolio Aggressive Holdings at least for now, however, as there’s still commodity price exposure relating to pricing spreads for NGLs.

All told, this initial reduction in the distribution upon conversion is well within expectations. Expect to see some appreciation in the units in coming weeks, though some disappointed income investors may cash out in the immediate term. Management has numerous opportunities to expand income going forward, meaning dividends are likely to rise in the coming years. And as a large pure play on NGLs, there’s some takeover appeal here as well.

Adding back in the current per unit value of the Pace spinoff of about USD0.93, Provident unitholders have realized a solid return of 34 percent-plus this year. Look for perhaps slower but more reliable gains in the years ahead for what’s now a fairly conservative way to play an undervalued sector.

Provident Energy Trust remains a buy up to USD8. Continue to hold Pace Oil & Gas, which is likely to benefit from strengthened oil prices going forward and trades at a sharp discount to the value of its energy reserves.

The only CE Portfolio Holdings not to declare post-conversion distributions now are ARC Energy Trust (TSX: AET-U, OTC: AETUF), IBI Income Fund (TSX: IBG-U, OTC: IBIBF) and Parkland Income Fund (TSX: PKI-U, OTC: PKIUF). Look for news for all three in the next month as they announce third-quarter numbers.

One final note: Colabor Group (TSX: GCL, OTC: COLFF) has announced its fiscal third-quarter earnings. Highlights included a slightly higher payout ratio of 89 percent of cash flow for the period, due mostly to the loss of a major contract in the restaurant sector at the beginning of Feb. 2010. The company continues to work to mitigate the loss of revenue but still faces generally tough conditions in its industry.

On the bright side, the company continued to successfully execute its growth through acquisitions strategy and reduced debt to just CAD9.2 million drawn on a bank credit agreement of CAD20.5 million. Debt is now just 0.4 times full year cash flow, and the company has been vigilant cutting operating costs as well.

The results triggered some selling in the stock today. At this point, however, there’s no real cause for concern, as the balance sheet stronger than ever and management states “cash flows from operating activities and the funds from operating credits are sufficient to support planned capital expenditures, working capital requirements (and) quarterly dividends of 26.91 cents Canadian per share.”

Business likely won’t be robust until growth picks up in the Canadian restaurant and foodservices business, where actual growth shrank by 4.7 percent for the 12 months ended Sept. 30, 2009, according to the Canadian Restaurant and Foodservices Association (CFRA). Encouragingly, CFRA states growth turned positive by 0.7 percent in the last 12 months. But the company’s customers are still playing it conservative, particularly given forecasts for slower growth ahead.

Looking ahead, Colabor expects to be able to offset this weakness and realize growth through cost cutting and timely acquisitions. And the RTD purchase completed Sept. 21 will add CAD112 million in annual sales, providing numerous opportunities for synergies. That augurs continued good health despite the tough conditions. Colabor Group remains a buy up to USD12.

Here are third-quarter earnings announcement dates for CE Aggressive Holdings:

• Ag Growth International (TSX: AFN, OTC: AGGZF)–Nov. 12
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–Nov. 1 (confirmed)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Nov. 11
• Daylight Energy (TSX: DAY, OTC: DAYYF)–Nov. 4
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–Nov. 12
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Nov. 5
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)–Nov. 5
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–Nov. 5
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–Nov. 9
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–Nov. 11
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–Nov. 10
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–Nov. 4
• Vermilion Energy Trust (TSX: VET, OTC: VEMTF)–Nov. 5
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–Nov. 4

Here are tentative third-quarter earnings announcement dates for the CE Portfolio Conservative Holdings:

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–Oct. 28 (confirmed)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Nov. 11
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Nov. 10
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–Nov. 10
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–Nov. 9
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–Nov. 3
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Nov. 12
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)–Nov. 10
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–Nov. 11
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–Nov. 2
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–Nov. 4
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–Nov. 12
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–Nov. 5
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–Nov. 2 (confirmed)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–Nov. 3 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Nov. 10 (confirmed)
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–Oct. 28
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–Oct. 26
• TransForce (TSX: TFI, OTC: TFIFF)–Oct. 29 (confirmed)