BHP to Pursue Potash Venture on Strong Return Expectation

BHP Billiton Ltd., the world’s biggest miner, will proceed with its plans for a Canadian potash project that has been called “misguided” by its biggest shareholder, driven by the prospect of strong investor returns.

“We are continuing on this investment because we strongly believe, and we’ve talked a lot about it with the board, this is going to offer very high returns for shareholders in the decades to come,” Chief Executive Officer Andrew Mackenzie said in an interview yesterday on the Australian Broadcasting Corp.’s ‘Inside Business’ program, according to an e-mailed transcript. “We have the best undeveloped green field mine on offer to the world and what we are doing, we will be prepared to respond very quickly to the market when it’s needed.”

Russia’s OAO Uralkali, the largest potash producer, in July quit a marketing venture with Belarus’s state producer that controlled about 43 percent of global exports and kept limits on production, and signaled prices may fall by as much as a quarter. BHP said Aug. 20 that its projections for the project assume a shift away from the current market dynamic.

Melbourne-based BHP last week said it’s seeking partners for the Jansen project after approving spending of $2.6 billion. The company has been approached and has approached possible purchasers of a stake in the project, Mackenzie said then. Jansen may cost $16 billion to build, Citigroup Inc. said last month.

‘Add Value’

“I’m looking for a partner that will add value,” Mackenzie said in a separate interview with the Australian Financial Review newspaper, aired on the Nine Network yesterday. The potential partners are in “a wider range than just some of our mining peers that would be interested in a project like this.”

BHP shares have slipped 3.9 percent this year, compared with a 10.2 percent gain in the benchmark S&P/ASX 200 index.

Blackrock’s Evy Hambro, who manages the $7 billion World Mining Fund, said Aug. 7 that BHP’s plan for its Canadian potash project Jansen doesn’t make sense after Uralkali’s decision, given the expectation for lower prices.

Hambro “said what he has always said to me, which is that he can see the value of that in the long term, as long as we don’t spend too much on it right now,” Mackenzie said in yesterday’s interview. “We will take our time about pushing the button of the development of a major mine that will absolutely reflect our ability to afford it but more importantly, the ability to earn strong returns for our shareholders.”

Potash is a fertilizer ingredient that strengthens plant roots and improves their resistance to drought.

Shelved Projects

Andrew Mackenzie, 56, succeeded Marius Kloppers as CEO of BHP in May. In August last year Kloppers put major project approvals, including Jansen, on hold amid lower prices and waning demand for raw materials. Projects that remain shelved include the Olympic Dam iron-ore port expansion in South Australia and the outer harbor iron ore project in Western Australia.

BHP is still optimistic about growth in iron-ore as Chinese steel production continues to expand.

“They have a lot of additional steel that they need to build into their economy,” Mackenzie said in the interview with the Financial Review. “To get to U.S. levels, they’d have to effectively add two more times the amount of steel they’ve got currently in the economy. That’s going to take time, so we can look to a good future for the growth in iron ore to feed that steel demand.”

‘High Returns’

The company last week said second-half profit fell 6.9 percent to $6.7 billion as slowing emerging market growth sapped demand for raw materials and dragged prices lower. BHP cut capital spending this fiscal year as investors including Blackrock pressure mining companies to defer expansions and acquisitions.

“We chose potash because in the medium to long term it offered the kind of competitive high returns that we would expect to deliver to our investors,” Mackenzie said yesterday. “For the projects that we didn’t do, they haven’t gone forever,” he said, adding the company will monitor technological advancements and global demand for iron ore before making a decision.

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