BHP’s Jansen Potash Project Moving Along – Contrary to Some Media Reports
Here are a few items that occurred over the past 24 hours.
First, two stories from today – CKOM and Star Phoenix – refuting the below stories which claim the Jansen project may be mothballed. These cite more current comments from Saskatoon-based VP Chris Ryder.
Then, two stories from yesterday – The London Telegraph and Bloomberg (which became the basis for today’s National Post item and yesterday’s Mining.com item) – stating BHP may mothball the Jansen project. These cite comments from CEO Andrew Mackenzie.
- 17 Aug 2016
- The StarPhoenix
- ALEX MACPHERSON
Jansen mine work goes on
The sinking of two shafts and construction of surface facilities at BHP Billiton Ltd.’s massive Jansen potash mine is “progressing well” despite uncertainty about its future and a massive annual loss, according to BHP Billiton Canada’s head of corporate affairs.
“The financial results released (Tuesday) really reflect a number of one-time writedowns, which are noncash items … But from a cash flow perspective, there is cash available for capital expenditure, including at Jansen,” Chris Ryder said.
On Tuesday, BHP Billiton reported losing US$6.4 billion in the fiscal year ended June 30. By comparison, the mining company said it earned US$1.9 billion in fiscal 2015.
In a news release, the Melbourne, Australiabased firm attributed its annual loss to weak commodity prices as well as US$7.7 billion in charges related to the value of its U.S. assets and the 2015 Samarco dam failure in Brazil.
At the same time, BHP Billiton reported free cash flow — cash flow from operations less capital expenditures — of US$3.4 billion, and said it plans to spend US$5.4 billion on capital projects, including Jansen, this fiscal year.
Located about 140 kilometres east of Saskatoon, Jansen is expected to be the world’s largest potash mine, with projected annual capacity of eight million tonnes — roughly 15 per cent of current global supply.
Analysts have predicted it will cost $14 billion to bring the mine into production. BHP Billiton has so far committed US$3.8 billion to the project, of which US$2.6 billion is earmarked for sinking the two shafts and completing other work at the site.
Ryder said work on the 975-metre-deep production shaft is 60 per cent complete, and that both it and the service shaft have passed through the Blairmore Aquifer.
“That’s considered one of the main risk areas when you’re sinking shafts in the province of Saskatchewan, and the fact that we’re through the Blairmore in both shafts is an important milestone for us.”
BHP Billiton doesn’t make specific timelines public, but Ryder reiterated the firm’s general commitment to bring Jansen into production in the decade following 2020, when global demand for potash is expected to ramp up.
However, the mammoth mine project’s future beyond the current US$2.6 billion spend will be uncertain until its board of directors approves an inprogress feasibility study — which, Ryder said, is “not going to be in the next year.”
“You’ve got to be careful to do what you say you’ll do,” he said. “(That) also means you’ve got to be careful not to make promises when things could impact those.”
Jansen mine unaffected by $6.4 billion loss at BHP Billiton
August 16, 2016 – 5:02pm
Construction at the Jansen potash mine near Lanigan, Sask. will continue despite heavy losses reported Tuesday by BHP Billiton.
Company spokesman Chris Ryder said a large part of that loss reflects writedowns in the value of assets the company owns, rather than a loss of cash flow.
“We were actually cash flow positive for the fiscal year just ended, we had about $3.4 billion of free cash flow,” he said.
Ryder said the company’s board approved the current phase of construction at Jansen in 2013. He said they’re about 60 per cent of the way through completing about $2.6 billion worth of work, including excavating two mine shafts and getting utilities installed for the site.
Acknowledging potash prices remain stubbornly low, Ryder said the company isn’t expecting to bring the mine into production until sometime in the 2020’s.
“We believe in the long term fundamentals of the potash market and we think that the potash markets are going to require new production after 2020,” he said.
Once completed, the Jansen mine is expected to produce as much as 8 million tonnes of potash per year.
Mining giant BHP Billiton stumbles to worst-ever loss
16 AUGUST 2016 • 2:58PM
The London Telegraph
BHP Billiton’s chief executive has declared the business is “strong and getting stronger” despite reporting its worst loss since the it was formed from the merger of BHP and Billiton in 2001.
Stubbornly low commodity prices and costs relating to its US shale business and the Samarco disaster in Brazil pushed the FTSE 100 miner to a pre-tax loss of $7.3bn (£5.6bn) for the year to June 30, from a profit of $8bn a year ago. Its loss after tax was $6.4bn.
Underlying profit fell to $1.2bn, slightly ahead of analyst expectations.
Andrew Mackenzie, chief executive, admitted the result was “very disappointing” but said: “Many of these items are very exceptional and won’t be repeated. Our underlying business is strong and getting stronger.”
The company took a $4.9bn impairment on its onshore shale operations in the US, and a $2.1bn charge to cover costs from the failure of a tailings dam at its Samarco joint venture in Brazil.
The collapse of the dam at an iron ore mine last November resulted in a flood of waste water that destroyed two towns, killed 19 people, and polluted a river valley. BHP also set aside $570m to settle pending global tax bills.
Mr Mackenzie said the freefall in commodity prices had “paused”, and while iron ore may struggle in the medium term, demand from China remained solid.
“The world economy is still growing, demand [for commodities] is still growing, and supply is not being replaced,” he said. “But these are volatile times and we can’t assume the worst is necessarily over.”
BHP draws the bulk of its earnings from iron ore, which is used to make steel. The metal tumbled to a multi-year low of $38 a tonne last December, before struggling back up to $60 in the first half of this year. Low prices pushed BHP’s overall revenue down 31pc to $30.9bn.
In line with its peers, the mining group has been cutting costs at a furious pace. It saved $437m in operating costs this year, including a 45pc reduction in “functional headcount”, and is targeting $2.2bn of savings by the end of its next financial year. Capital expenditure fell to $6.9bn from $11.9bn the year before.
These savings, coupled with a broad improvement in some commodity prices since January, boosted BHP’s free cash flow to $3.4bn during the year – a number Mr Mackenzie suggested was key to the company’s underlying health, despite the “dramatic statutory loss”.
These are volatile times and we can’t assume the worst is necessarily overAndrew Mackenzie, BHP Billiton
BHP will use that cash flow to pay a dividend of 30 US cents a share, down from 124 cents last year. Earlier this year it joined a spate of big miners in abandoning its cherished progressive dividend policy, which saw payouts rise or stay the same each year.
BHP is now investing in oil and copper projects as it believes these two commodities will remain in long-term demand. In May it outlined a strategy to expand its footprint in these commodities and potentially grow the value of its assets by 70pc, while weaning itself off its dependency on iron ore.
Mr Mackenzie defended BHP’s decision last year to spin off a collection of mineral assets into standalone company South32, which has benefited from the rise in some minerals prices. “We have led the industry in portfolio simplification,” he said, revealing he had kept his shares in South32, which reports its own annual results on August 25.
Meanwhile BHP confirmed that Samarco is unlikely to restart operations this year, with the results of an independent investigation into the disaster set to be released “in the next few weeks”. It struck an agreement with the Brazilian government to pay at least £1.6bn towards the clean-up costs earlier this year, but this settlement has been suspended by the courts while federal prosecutors pursue a £33bn compensation claim.
BHP believes the earlier agreement reflects the “true cost” of the disaster while the latter claim is based on a flawed comparison with the costs BP had to pay following the Deepwater Horizon oil spill in the Gulf of Mexico in 2010.per-skimmer deployed to clean up BP oil
BHP continues to look for a partner for its Jansen potash mine in Canada, where it has spent $2.6bn sinking two mining shafts. Potash is used in fertiliser, but with no pick-up in prices expected this decade, Mr Mackenzie admitted the company would be prepared to mothball the project.
“That might be more palatable to our shareholders than going ahead with a project that’s not economically attractive,” he said.
Tyler Broda, an analyst at RBC, said: “BHP’s solid cost performance once again continues the trend showing that mining companies have been able to sustain productivity and cost saving gains in this lower price environment.”
BHP’s shares in London were up 2.6pc in afternoon trade.
BHP’s Potash Mine May Be Mothballed After $2.6 Billion Spent
August 16, 2016 — 8:32 AM CST
Updated on August 16, 2016 — 3:14 PM CST
BHP Billiton Ltd., the world’s biggest mining company, may end up mothballing its Canadian potash project by the end of this decade after completing two shafts at a cost of about $2.6 billion.
The shafts at the giant potash deposit in Saskatchewan are now at a depth of about 600 meters (1,970 feet), with a further 300 to 400 meters to go, Chief Executive Officer Andrew Mackenzie told analysts and investors in London on Tuesday. Upon their completion in 2018 or 2019, the board will decide whether to build the mine, he said.
“It’s certainly perfectly possible, if at that time the market is not going to be ready for potash, say, in three years subsequently, that we could mothball the shafts once we’ve completed them,” Mackenzie said.
The comments are the most pessimistic yet from BHP’s CEO on a project that his company describes as the world’s best undeveloped potash resource. The Jansen project is about 60 percent complete with about $200 million left to be spent in fiscal 2017. Mackenzie said recent progress at Jansen indicated the final cost of both shafts will likely be less than $2.6 billion.
The miner has slowed development amid a slump in prices for the crop nutrient. BHP has previously flagged potash as a potential key division for future growth, identifying the fertilizer as a priority alongside existing coal, copper, iron ore and petroleum units to tap rising consumption and an expanding middle class across Asia.
BHP would still need to sink billions of dollars into Jansen to get it into production, and meanwhile prices are low and the market is well supplied with potash, said Vancouver-based Raymond James analyst Steve Hansen. The Melbourne-based company may attempt to offload the potash deposit to a buyer with a longer-term view, as future demand looks good, he said.
“The current price environment doesn’t justify that investment,” Hansen said in a telephone interview. “It’s difficult for them to justify continuing on at this point.”
Spending more than $2 billion on a mine before a final decision has been taken on whether or not to develop it is almost unprecedented in the industry. When asked if mothballing the project would be a palatable outcome for investors, Mackenzie said: “It might be more palatable to them than going ahead with a project that wasn’t economically attractive.”
“The cost of mothballing would be reasonably small,” he added. “Obviously at that point we’d have to examine whether or not that was something we wanted to stay in for the long term. We have the flexibility to wait and time our entry into the market.”
The company is continuing talks with potential partners in the project, Mackenzie said.
Potash prices have tumbled amid increased production. Farmers are spending less on fertilizer amid bumper crops and lower agricultural commodity prices. Rival producer Potash Corp. of Saskatchewan Inc. idled one of its mines in January in response to the oversupply. In July, U.S. producer Mosaic Co. announced plans to idle its potash mine in Colonsay, Saskatchewan, for the rest of 2016.
Potash prices in the Gulf of Mexico have fallen 38 percent over the past year to $190 a metric ton, according to data from Green Markets. The annual benchmark price for imports into China, the biggest buyer, was signed at $219 a ton in July by Belarusian Potash Co. While the price fell 30 percent from last year and is the cheapest in almost 12 years, it exceeded forecasts, according to Raiffeisenbank AO.
Long-range prospects remain strong for the potash industry in Saskatchewan, the world’s largest producer, Bill Boyd, the province’s minister of the economy, said in an e-mailed statement. BHP still has money committed to Jansen and the province expects the company will conduct an evaluation once the shafts are complete, he said.
“With current market conditions, some projects have been delayed,” Boyd said. “But as markets improve, it is expected that work on these projects will resume.”
Jansen’s development requires a long-term potash price of more than $400 a ton to achieve an acceptable rate of return and probably more than $500 a ton to compete for capital against BHP’s other growth options, Macquarie Group Ltd. analysts wrote in a February note.
Still, K+S AG, Europe’s biggest potash producer, said last week it expects to see the bottom in the market this year.
“Our estimates still suggest that some time in the next decade you are going to need a new large greenfield mine, and the longer things go on and no other projects get announced, and given the costs of ours and so, it would look to many observers as the obvious candidate,” Mackenzie said.