Mine Sinkhole Bolsters BHP’s Plan for Potash, CEO Says #potash

By David Stringer Nov 24, 2014 9:00 AM CT

Bloomberg

The flooding of a mine owned by the world’s biggest potash producer is confirmation for BHP Billiton Ltd. (BHP)’s Chief Executive Officer Andrew Mackenzie of the wisdom of his company’s planned move into the industry.

“These sorts of factors, combined with continued economic growth and demand for potash all conspire, if you like, to bring toward us the time when a new mine is required,” Mackenzie said in an interview in Sydney. “We have the lowest cost mine that would be useful to bring into the market at that stage.”

According to Mackenzie, no major new mines have been developed since the 1970s and the halt of operations at Uralkali’s Solikamsk-2 mine, which accounts for 3 percent of world supply, is a sign of the vulnerability of supply — just as the need to feed a booming global population spurs demand.

BHP is looking to build its Jansen project in Canada’s Saskatchewan province sometime in the next decade, though Mackenzie is cautious about giving an exact timeline. Spending of $3.8 billion has been approved so far on Jansen, including mine and service shafts, and Citigroup Inc. (C) forecasts the whole project may cost $16 billion.

“We do know we have to wait for the market to come towards us, but once those shafts are complete, we are only three to four years — at most — from first potash,” Mackenzie said yesterday in the interview.

Half the World

Proceeding with Jansen without a partner probably would be “misguided,” Evy Hambro, manager of BlackRock Inc.’s $6 billion World Mining Fund, said last year after Russia’s Uralkali quit a marketing venture controlling almost half of world exports. Sanford C. Bernstein & Co. forecast in July that it didn’t see the industry’s existing capacity overhang fully cleared before 2027 “at the earliest.”

Demand for potash, a crop nutrient that improves drought resistance and strengthens roots, is seen being supported by the need to raise global crop production from limited agricultural land. About 80 percent of growth in crop output will come from more intensive farming, according to the Food and Agriculture Organization of the United Nations.

“As people seek better living standards, without deforestation, that brings you back to food, and brings you back to fertilizers,” Mackenzie said. “We’ve chosen the fertilizer that is essentially a mining play, and where we think we can add value in the long run.”

Being Complicated

“It’s something they aren’t going to get a return on for some time,” Mark Taylor, a Sydney-based analyst at Morningstar Inc., said today by phone. “But it’s worthwhile to spend the dollars and keep a foot in the game.”

Efforts to bring in a partner to help develop the project are being complicated because BHP hasn’t yet committed to any firm schedule for developing Jansen, Mackenzie said.

“That’s quite a lot of uncertainty for a lot of people who might invest,” Mackenzie said. “The partner universe is much smaller because there are some who would want to see that timeline set out.”

BHP doesn’t plan to revisit the $40 billion hostile bid for Potash Corp. of Saskatchewan Inc. in 2010 that was blocked by the Canadian government, according to Mackenzie. Acquisitions probably cannot compete with returns the producer can capture from internal options. “Therefore, I’m not interested,” he said.

Broken Cartels

The end of cooperation on a joint marketing venture between Uralkali and Belarus may also support BHP’s ambitions to enter the potash sector, and help make demand more predictable. “Previously, there were cartels,” Mackenzie said. “They have been broken, or weakened to the point that now we are moving to a free market.”

Farmers have skipped applications of potash to their land in the past amid efforts to cuts costs, according to Green Markets data. Potash users can chose to halt the application of the nutrient to their land for a year or more before yield declines.

“Buyers can go on strike, and they can allow their nitrogen to potassium ratios to rise. But as they are rising, their fertility is falling and at some point they need to correct,” Mackenzie said. “If a cartel is no longer functioning, there isn’t the same game playing that needs to be done by the consumers either.”

To contact the reporter on this story: David Stringer in Melbourne at dstringer3@bloomberg.net

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Keith Gosman, Andrew Hobbs