BlackRock Inc.’s Evy Hambro, manager of the $7 billion World Mining Fund including BHP Billiton Ltd. shares, said recent events in the world potash market make the company’s plans to mine the fertilizer ingredient unattractive.
“The overwhelming view right now on that project is it doesn’t make sense,” Hambro said today in an interview with Francine Lacqua on Bloomberg Television’s “The Pulse.” “If you do see a lower price scenario as a result of what’s going on in the potash space, then the rate of return on that project would be well below their hurdle rate.”
OAO Uralkali, the largest potash producer, last week quit a marketing venture controlling almost half of world exports of the crop nutrient and signaled prices may fall by as much as a quarter. The unwinding of the venture may be “game over” for BHP’s Canadian Jansen project, which has a 3 billion-metric-ton resource and may cost $16 billion to build, said Citigroup Inc.
“To be committing significant amounts of capex to that, on their own, without a partner, into a market that now looks like it’s going into increased volumes, and they would just be adding to the problems there, would probably be a misguided decision,” Hambro said today. “It would go against what the new CEO of BHP has been guiding the market to.”
Andrew Mackenzie, 56, succeeded Marius Kloppers as CEO of the world’s biggest mining company in May. In August last year Kloppers put major project approvals, including Jansen, on hold amid lower prices and waning demand for raw materials. The Melbourne-based company will report full-year earnings Aug. 20.
“We’ve always been clear that we think that the market is likely to evolve into more of a free market and be less driven by what some would call cartels,” Mackenzie said today in an interview. “We continue to take an interest in Saskatchewan because we believe we have some great ore bodies there and it’s also part of our diversification strategy.”
BHP dropped 1.6 percent to close at 1,844.5 pence in London trading. BlackRock’s World Mining Fund holding in BHP was its second-largest at 9.1 percent of the total as of April 30, according to data compiled by Bloomberg.
In June, Mackenzie said the mine was “a great option, but it’s just an option.” The company’s website says Jansen has the “potential to become one of the world’s premier potash mines.”
BHP has said it sees the fertilizer ingredient becoming the fifth pillar of its business in addition to copper, iron ore, coal and petroleum production.
Russia’s Uralkali is planning to boost sales to consumers including China, which imports about a fifth of global supplies.
The change in trading policy may push prices below $300 a ton, CEO Vladislav Baumgertner said last week. That’s at least 25 percent below the current contract price for China.
Prices for the nutrient have been falling, demand is waning and stockpiles have been growing. A price war started by Uralkali may last as long as 18 months, leading to even lower prices, Citigroup said.
“The landscape has been absolutely changed with the, I guess, supermarket price war going on here and I think the only people who win there are the customers,” Hambro said. “We are seeing this chase for volume over price in the potash space. It does seem as though the kind of status quo among the producers is certainly under attack.”