BHP Billiton Ltd. (BHP), the world’s biggest miner, is seeking partners for its Canadian potash project after approving spending of $2.6 billion, less than a month after the largest producer set off a possible price war.
“We have actively been approached and have approached people to see what might be possible” over selling a stake in the Jansen project, Chief Executive Officer Andrew Mackenzie told reporters today on a call, declining to provide further details of the talks. The project in Saskatchewan province may cost $16 billion to build, Citigroup Inc. said last month.
Russia’s OAO Uralkali, the largest potash producer, quit a marketing venture in July that controlled about 43 percent of global exports and signaled prices for the crop nutrient may fall by as much as a quarter. BHP’s projections for Jansen assume a shift away from the current market dynamic and the expectation that prices will reflect the cost of adding new supply, the company said in a statement.
“They’ve always said they want market-related pricing, and that’s what we’ve got with the break-down in the Russian pricing,” Glyn Lawcock, a Sydney-based analyst with UBS AG, said in an interview. “It’s unlikely that they wouldn’t go ahead” with Jansen because they will have invested about $4 billion by the time they make a decision, he said.
Melbourne-based BHP, which today reported a 30 percent drop in full-year profit, fell 1.6 percent to 1,924 pence at 2:19 p.m. in London.
The Jansen announcement “is probably a net negative in the short-term given our, and the market’s, view of the project’s net present value,” Liberum Capital Ltd. said today in a note to clients. “The company is clearly showing its commitment to Jansen, flagging it will spend a further $800 million” a year to 2017, Liberum said.
“Once we’ve done that, then we’re three years from first potash,” Mackenzie told reporters today on a conference call, adding that it’s possible the mine may start as early as 2020. He said he has begun briefing shareholders on the Jansen plan.
BHP made a $40 billion hostile bid for Potash Corp. of Saskatchewan in 2010 as it sought to add production of the crop nutrient. The approach was blocked by the Canadian government. Saskatchewan is the world’s biggest potash-producing region.
BHP may see the move by Uralkali as accelerating a switch to more market-oriented pricing for potash, a process it has encouraged in other commodities such as iron ore, and a development that may bolster its faith in Jansen’s economics.
“It doesn’t really affect our decision making,” Mackenzie said of Uralkali’s change in strategy. “We’re very confident the market is going to need a new greenfield mine some time in the next decade, but the exact timing is not clear.”
The development decision on Jansen, which has a 5.3 billion metric ton measured resource, was delayed in August by former CEO Marius Kloppers as part of a plan to shelve all major project approvals for the 2013 fiscal year. BHP said in 2011 it had committed to spending $1.2 billion on the project and almost $2 billion in Saskatchewan as part of its “commitment to develop a world-class potash business in the province.”
“You don’t have to take a project all the way to production to realize value, that is indeed my intention though with potash,” Mackenzie today told reporters.
Potash producers have plunged since July 30 as investors dumped the shares on concern profits will crumble because of lower prices and surplus supply. Belaruskali, the state producer abandoned by partner Uralkali, said yesterday it won’t follow the new low-price approach of its former ally or consider a reconciliation unless the policy changes.
The market upheaval means about 6 million tons of production capacity that’s unprofitable or barely profitable will have to be cut in the next two years, Goldman Sachs Group Inc. analysts said in an Aug. 1 note. That’s equal to about 12 percent of last year’s global output. Goldman cut its 2014 potash price forecast by 42 percent to $281 a ton.
According to the bank, potash is similar to the iron ore market, where years of booming demand from Asia led to a rush of investment in new mine capacity, creating a looming oversupply.
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