BHP’s dilemma: Build, sell or scrap?
Decision on potash project due next year
BHP Group may be heading for another clash with investors as the world’s biggest miner gets closer to a decision on whether to build, sell or mothball its $20-billion (U.S.) potash project.
The Jansen mine in Saskatchewan is aimed at giving the company exposure to rising global food demand and represents one of its few big growth prospects. BHP has already spent about $2.7 billion on the project, according to an October filing, and chief executive officer Andrew Mackenzie last month spoke enthusiastically about the outlook for potash, a crop nutrient.
Yet investors and analysts are skeptical. The big-ticket project means getting into a new commodity dominated by a small handful of producers.
The world’s largest miners are still on probation for spending decisions made during the last commodity boom and BHP has a poor record of capital allocation, including a disastrous $20-billion foray into shale. While BlackRock Inc. and others have flagged they’ll back some projects, particularly in copper, there’s less appetite for riskier investments.
“There’s no case to be made where they throw good money after bad,” said Brenton Saunders, a Sydney-based analyst at Pendal Group Ltd., which holds BHP shares. While the outlook for potash has improved, Jansen “is not a project that at this stage we think deserves serious consideration,” he said. “It should be shelved or sold.”
One way or the other, a decision is likely next year. BHP is nearing completion on two 1,000-meter deep shafts, which it has said will be a trigger to decide whether to press ahead with an initial $5-billion development. BHP has also been seeking a partner for Jansen since at least 2013.
The company last year delayed plans to seek board approval for the project, citing a weaker market outlook. It also followed investor criticism, including from activist Elliott Management Corp. New Yorkbased Elliott declined to com- ment on its current position on Jansen.
BHP is continuing to investigate “all options to enhance returns and improve capital efficiency,” and won’t take the project to the board until it meets capital allocation hurdles, spokesperson Bronwyn Wilkinson said in a statement.
BHP believes it has the world’s best undeveloped potash assets, and the business could eventually rival its iron ore unit in scale, Mackenzie said. Iron ore is BHP’s top earner and accounted for almost 40 per cent of underlying earnings in the 12 months to June 30.
After spending the better part of a decade in a downward spiral, prices of potash have finally turned around. Stronger demand has come just as Canadian producers idle some mines, while new capacity has been added at a slower pace than expected.
BHP argues Jansen would enter production into a tighter market in the mid-2020s and that it could apply techniques from the oil industry to cut operating costs.