BHP Billiton Ltd still likes giant Saskatchewan potash project, but not in any hurry to develop

The world’s biggest mining company says it’s still keen to construct the earth’s biggest potash mine, despite a severe bear market within the crop nutrient.

But it sure doesn’t seem to be in a hurry.

Andrew Mackenzie, BHP Billiton Ltd.’s leader, told investors on Tuesday that he doesn’t expect the potash market to make a serious recovery before the early 2020s.

“It’s a long way off,” he said on a conference call to discuss half-year earnings.

Melbourne, Australia-based BHP is in the midst of the US$2.6-billion investment to construct production shafts at its Jansen project in Saskatchewan. Jansen will be a game-changer in the industry, as BHP is aiming to produce eight million tonnes of potash a year, which may amount to nearly 15 percent of worldwide supply.

However, it may need a lot more vast amounts of dollars to really bring the work to production. Analysts and investors are skeptical that BHP’s board will approve Jansen in the near future, or indeed if it ever will. At current potash prices, nobody thinks the mine makes sense.

Mackenzie said BHP is moving at a “relatively slow rate” at Jansen, and can ‘t be ready for any push to production until the potash market recovers. Given that BHP doesn’t observe that happening until the 2020s, production remains a long way away.

The shaft sinking, which was approved in August 2013, was 54 per cent complete after December.

“Shaft sinking at the project continues, though BHP seems to continue the go-slow track at Jansen it has been on for years,” said Joel Jackson, analyst at BMO Capital Markets.

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Jansen is clearly not really a priority for that company. Mackenzie noted that Dean Dalla Valle, the BHP executive responsible for Jansen, has relocated to Brazil in order to lead the company’s reaction to the disaster at its Samarco mine. Samarco’s tailings dam burst last November, killing a minimum of 17 people and causing massive environmental damage.

“(Valle’s) keeping a weather eye on our potash project because he’s within the same time zone, however i think that’s about one percent of his time,” Mackenzie said.

Nonetheless, BHP said it is committed to the project. The organization told analysts it still likes the long-term outlook for potash, it likes the resource at Jansen also it sees a lot of options to expand production over time.

The potash marketplace is suffering because of oversupply and growing competition between producers. Prices, which peaked at a lot more than US$900 in 2008, are now mired below US$270. Demand from customers has not grown nearly as fast as the producers expected over the last decade.

The bear market has forced potash companies to respond. Recently, Potash Corp. of Saskatchewan Inc. shuttered its New Brunswick operation and cut 430 jobs.

The economics of Jansen remain a mysterious. BHP hasn’t released any estimates of the items the project would cost, or what potash price would be necessary to produce a decent return. Analysts have estimated the company would have to spend US$14 billion or more to create eight million tonnes a year, although it could start with an inferior operation and gradually expand.

Financial Post

pkoven@nationalpost.com

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