BHP talks up Saskatchewan potash project (story from Australia)
BHP talks up Saskatchewan potash project
- The Australian
- 12:00AM May 23, 2017
- MATT CHAMBERS
Andrew Mackenzie envisages an initial stage of 4 million tonnes of potash a year. Picture: Aaron Francis
BHP’s board could have the most expensive single development approval decision in the miner’s history in front of it next financial year, in the form of a $US4.7 billion ($6.3bn) investment in the Jansen potash project in Saskatchewan.
Lost in the ramp-up of activist fund Elliott Management’s hostilities last week was the revelation that the miner is nearly ready to give approval to the first production stage of the Jansen project, where it has approved $US3.8bn to sink 1km-deep shafts to get to the big potash deposit.
The enthusiastic BHP mood around potash will create trepidation among some investors that the Elliott push to create value through an oil and gas restructure and share unification is accelerating potash development, while Canadian analysts have queried whether the global potash market can support it.
But if it does go ahead, and BHP is right in thinking the market can support production from the world’s best undeveloped potash deposit, it will be the foundation of a new Saskatoon-based BHP business unit with the potential for four other mines the same size as the huge Jansen.
“We are looking at a phased expansion into Jansen, with an initial stage of 4 million tonnes per annum, which will generate competitive returns,” BHP chief Andrew Mackenzie said last week at a presentation to a Barcelona conference on the same day Elliott stepped up its campaign to get more value from BHP.
“It could be something that we seek board approval of as early as June next year, with possible first production in 2023.”
The biggest single project investment decision approved by the BHP board during the boom — outside of acquisitions such as the $US15.1bn takeover of US shale company PetroHawk — was the iron ore Rapid Growth Project 5, in the Pilbara. BHP’s share of this was $US4.8bn, but $US930m had already been spent before it was approved, meaning the future outlay the board ticked off on was $US3.9bn.
On its shale ground, BHP has spent more than $US16bn but it has never been announced as a major board decision. And had the boom not abruptly ended in 2012, Jansen would have paled in comparison to BHP’s original plans for a $US30bn expansion of Olympic Dam or a $US20bn Outer Harbour expansion of Port Hedland, meaning the board has considered bigger projects.
BHP is betting that growing demand for higher-quality food at the same time the availability of farming land shrinks will bring growth in global potash demand of 2-3 per cent. The market is oversupplied but the growth rates are similar to the long-term view of Potash Corp, the US producer the Saskatchewan government stopped BHP buying in a $US30bn takeover attempt in 2010. Potash is a crop nutrient.
And BHP says the supply side dynamics are also on side.
“There are a limited number of players able to bring on additional capacity,” BHP said in potash presentation slides this month.
In Canada, Bank of Montreal analyst Joel Jackson wrote that he thought the market would struggle to absorb four new potash mines starting this year and next, let alone more production from Jansen, Reuters reported after Mr Mackenzie’s speech.
Mr Mackenzie said the project would be approved only “when the time is right” and that it would be measured against other uses of capital, including cash returns.
The first Jansen stage, not including the $US3.8bn already spent, would have an internal rate of return of 12 per cent. The next stages, which could bring Jansen to 10 million tonnes a year, would be in the high teens.
The slides say BHP’s potash ground in Saskatchewan, the world’s biggest and highest-quality potash basin, could yield 60 million tonnes of potash a year for more than 100 years.