BHP sets early 2021 for decision on $17B Jansen potash project
Possible drag on prices could deal blow to Saskatoon-based company Nutrien
Shares of Saskatoon-based Nutrien Ltd. dipped Thursday after Australian rival BHP Group Ltd. disclosed its latest plans to build a giant potash mine in the Canadian company’s backyard.
BHP, one of the world’s biggest miners, announced it would commit an additional US$345 million, on top of roughly $3 billion already spent, to de-risk Jansen, a proposed potash mine east of Saskatoon that could upend the market. It gave itself until February 2021 to make a final decision on the estimated $17-billion project.
If constructed, Jansen would add about 4.4 million tonnes of potash per year, roughly seven per cent of the current market, and potentially enough to drive down potash prices and deal a blow to Nutrien, the largest producer in the world. The Saskatoon-based firm’s stock price fell 1.1 per cent to $64.53 on the Toronto Stock Exchange.
Nutrien CEO Chuck Magro declined to comment, but questions about Jansen have dogged him for months, if not years.
“I will tell you this, every time that a company has tried to build greenfield potash mines around the world, it has been a very difficult project to create long-term shareholder value,” Magro said in May at the BMO Farm to Market Conference in New York.
In July, Susan Jones, then head of Nutrien’s potash segment, echoed that pessimism, saying on an earnings call that potash prices “need to be significantly higher” to justify building Jansen.
Magro also said his company was committed to producing five million tonnes of potash per year regardless. Potash constitutes its largest business segment in 2018, accounting for 37 per cent of adjusted cash flows, or about $1.6 billion.
Magro’s job may ultimately hang in the balance depending on what BHP decides. Earlier this month, Joel Jackson and Robin Fiedler, analysts with BMO Capital Markets, suggested a price decline of $100 per tonne could “threaten the viability of many incumbent mines as well as C-suite jobs.”
The Southeast Asian standard benchmark for potash stood at around US$290 per tonne this month, with prices having fallen by nearly half in the past decade.
Now, analysts are predicting producers may flood the market with potash to lower prices — a double-edged sword that could deter BHP, but also hurt earnings.
“We suspect producers are now trying to ‘scare’ BHP that if Jansen is approved, current mines will run full out and drive prices lower,” Jackson wrote in an Oct. 2 note. “However, BHP may call this bluff considering producers have made room” for other projects.
Last month, however, Nutrien declared a “slowdown” in the potash market, and announced a temporary shutdown of three mines in Saskatchewan, affecting 700 staff.
BHP has mined potash in Ethiopia and has long eyed Canada’s Prairies. In 2010, it placed a $38.6-billion hostile bid for the Potash Corp. of Saskatchewan, but withdrew in the face of federal government opposition. Ultimately, Potash Corp. and Agrium Inc. merged in 2018 to create Nutrien with a $28-billion market capitalization.
Today, BHP is known as an iron ore miner that also produces copper, coal and petroleum. With a US$121-billion market capitalization, it is one of the largest mining companies in the world, and has faced pressure to improve its environmental record, including from activists who showed up at its annual meeting in London on Thursday.
Andrew MacKenzie, chief executive of BHP, has said entering the potash market would improve the company’s environmental profile, and characterized it as a “100year” strategy.
“As well as offering diversification away from fossil fuels, it also offers diversification again away from over dependence on China,” MacKenzie said on an earnings call in February.
BHP describes Jansen as 82-per-cent complete, with shafts already excavated, though many analysts say the mine won’t begin producing before the end of 2024.
Alexis Maxwell, research director with Bloomberg’s Green Markets, has also predicted that potash producers may ramp up production to deter BHP from constructing Jansen.
“The biggest threat to the potash long-term outlook is the decision from BHP with their Jansen mine up in Northern Canada,” she said at a conference in April. “Now, this mine is expected.”