BHP Billition bets on potash with Jansen project investment

August 20, 2013

Despite the turmoil in the potash sector, BHP Billion, the largest mining company in the world, placed a $2.6 billion bet on rising global food demand even as it was driven to a second straight annual profit drop by the continued slump in commodity prices.

BHP Billiton will move forward with its Jansen potash project in Western Canada. The investment ends a freeze in spending on major new projects after it last year moved to conserve cash and protect earnings as China’s cooling economy hurt commodity prices, the Wall Street Journal reported.

BHP relies on sales of iron ore for the majority of its earnings, but is looking to bulk up in other commodities that will be more in demand as China shifts into the next phase of its development. BHP warned that rising supplies of iron ore, coking coal and copper would squeeze prices in the short term.

The potash investment will be spent over several years on completing infrastructure including production and service shafts at the proposed mine in the prairie province of Saskatchewan, which could be one of the world’s biggest and produce 10 Mt/a (11 million stpy) of potash for more than 50 years.

It is a bet on growing agricultural demand as the world’s population continues to expand, but comes amid uncertainty over potash prices after the collapse of one of two global cartels that helped control the market to the benefit of producers.

Andrew Mackenzie, who took over as BHP’s chief executive in May, said the company was aiming for considerably more savings after stripping out $2.7 billion in costs in the fiscal year just ended. Capital spending would also be pared back more aggressively, and the company would consider bringing in a partner to help it develop the Jansen mine, he added.

“We continue to believe [Jansen] will offer shareholders significant returns,”Mackenzie said, adding the amount being spent on the project was a fraction of the company’s overall budget.

In an interview with the Wall Street Journal, he declined say when the Jansen mine could open although he said significant production volumes were not likely before 2020. Meanwhile, the company would retain the flexibility to enter the potash market at time when it could maximize returns for shareholders, he said.

The investment highlights BHP’s push to remain one of the most diversified of the world’s major mining companies, potentially adding to a portfolio of assets that already includes iron-ore pits in Western Australia, copper mines in Chile and shale-oil wells in Texas. BHP, unlike other major mining companies, makes around a third of its earnings from petroleum. That has provided a hedge against falling prices of other commodities, as crude oil futures have largely held up over the past year amid geopolitical tensions in the Middle East.


 

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