BHP’s Potash Mine May Be Mothballed After $2.6 Billion Spent

  • It estimates spending $200 million at Jansen in fiscal 2017
  • CEO says talks continue with potential partners in project

BHP Billiton Ltd., the world’s biggest mining company, may end up mothballing its Canadian potash project by the end of this decade after completing two shafts at a cost of about $2.6 billion.

The shafts at the giant potash deposit in Saskatchewan are now at a depth of about 600 meters (1,970 feet), with a further 300 to 400 meters to go, Chief Executive Officer Andrew Mackenzie told analysts and investors in London on Tuesday. Upon their completion in 2018 or 2019, the board will decide whether to build the mine, he said.

“It’s certainly perfectly possible, if at that time the market is not going to be ready for potash, say, in three years subsequently, that we could mothball the shafts once we’ve completed them,” Mackenzie said.

The comments are the most pessimistic yet from BHP’s CEO on a project that his company describes as the world’s best undeveloped potash resource. The Jansen project is about 60 percent complete with about $200 million left to be spent in fiscal 2017. Mackenzie said recent progress at Jansen indicated the final cost of both shafts will likely be less than $2.6 billion.

The miner has slowed development amid a slump in prices for the crop nutrient. BHP has previously flagged potash as a potential key division for future growth, identifying the fertilizer as a priority alongside existing coal, copper, iron ore and petroleum units to tap rising consumption and an expanding middle class across Asia.

Oversupplied Market

BHP would still need to sink billions of dollars into Jansen to get it into production, and meanwhile prices are low and the market is well supplied with potash, said Vancouver-based Raymond James analyst Steve Hansen. The Melbourne-based company may attempt to offload the potash deposit to a buyer with a longer-term view, as future demand looks good, he said.

“The current price environment doesn’t justify that investment,” Hansen said in a telephone interview. “It’s difficult for them to justify continuing on at this point.”

Palatable Outcome?

Spending more than $2 billion on a mine before a final decision has been taken on whether or not to develop it is almost unprecedented in the industry. When asked if mothballing the project would be a palatable outcome for investors, Mackenzie said: “It might be more palatable to them than going ahead with a project that wasn’t economically attractive.”

“The cost of mothballing would be reasonably small,” he added. “Obviously at that point we’d have to examine whether or not that was something we wanted to stay in for the long term. We have the flexibility to wait and time our entry into the market.”

The company is continuing talks with potential partners in the project, Mackenzie said.

Potash prices have tumbled amid increased production. Farmers are spending less on fertilizer amid bumper crops and lower agricultural commodity prices. Rival producer Potash Corp. of Saskatchewan Inc. idled one of its mines in January in response to the oversupply. In July, U.S. producer Mosaic Co. announced plans to idle its potash mine in Colonsay, Saskatchewan, for the rest of 2016.

Bottom Seen

Potash prices in the Gulf of Mexico have fallen 38 percent over the past year to $190 a metric ton, according to data from Green Markets. The annual benchmark price for imports into China, the biggest buyer, was signed at $219 a ton in July by Belarusian Potash Co. While the price fell 30 percent from last year and is the cheapest in almost 12 years, it exceeded forecasts, according to Raiffeisenbank AO.

Long-range prospects remain strong for the potash industry in Saskatchewan, the world’s largest producer, Bill Boyd, the province’s minister of the economy, said in an e-mailed statement. BHP still has money committed to Jansen and the province expects the company will conduct an evaluation once the shafts are complete, he said.

“With current market conditions, some projects have been delayed,” Boyd said. “But as markets improve, it is expected that work on these projects will resume.”

Jansen’s development requires a long-term potash price of more than $400 a ton to achieve an acceptable rate of return and probably more than $500 a ton to compete for capital against BHP’s other growth options, Macquarie Group Ltd. analysts wrote in a February note.

Still, K+S AG, Europe’s biggest potash producer, said last week it expects to see the bottom in the market this year.

“Our estimates still suggest that some time in the next decade you are going to need a new large greenfield mine, and the longer things go on and no other projects get announced, and given the costs of ours and so, it would look to many observers as the obvious candidate,” Mackenzie said.

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