Andrew Mackenzie had been chief executive of BHP Billiton for 102 days when he wrote his first big cheque.
It was in August 2013 that the new BHP boss announced a $US2.6 billion investment in Canadian potash, with the intention that the money be spread over four to five years.
Announced in the same year that BHP spent $US21.7 billion on projects, the investment in excavating and lining shafts for a future potash project did not seem large at the time. But more than four years on, Mackenzie has never written a bigger cheque, making the Jansen potash project an inextricable part of his legacy at BHP.
Mostly forgotten since that 2013 investment, Jansen has returned to the headlines in recent weeks, as BHP starts to prepare the market for its next investment in a project that is ultimately a punt on demand for food. Company Profile
Minerals exploration, production and processing (particularly coal, iron ore, copper and manganese ore) and hydrocarbon exploration, production and refining. http://www.bhpbilliton.com/
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The key ingredient in potash is potassium, which helps plants to grow, retain water and strengthen cell walls.
Naturally occurring as either potassium chloride or potassium sulphate, the mineral is a key ingredient in fertilisers, and is extracted by processing brines or underground bulk mining, with Jansen set to be the latter.
BHP and the other miners pursuing potash projects are betting that as demand for food grows, so will Earth's arable lands' need to become more efficient and rely more on fertilisers.
"The basic rationale for rising potash consumption is quite simple. Not only is the total population continuing to grow, but at least 3 billion people are expected to join the global middle class by 2030. That has implications for people's diets," said Dr Paul Burnside, BHP's principal potash analyst, in a blog post this month
"Average calorie intake is increasing and so is the share of those calories coming from animal products, sugar and vegetable oils; foodstuffs that have higher demands on crop production. "As a result, food demand is rising faster than population, and crop production is rising faster than food demand." Joining the chase
BHP is not the only big miner that believes potash production will be a lucrative industry in the future, even though prices are depressed by severe oversupply.
Rio Tinto also has exposure to potash acreage in Canada's Saskatchewan province through a joint venture with Russian company Acron.
Rio and Acron have teams on the ground in Canada working on a feasibility study for the project, dubbed KP405.
Acron indicated this year that there could be progress on the asset before the end of 2017.
"We are aiming to get the full pre-feasibility study complete sometime in October," Acron's finance director Alexei Milenkov said in an analyst briefing.
Brazilian miner Vale has been producing potash and another fertiliser commodity, phosphate rock, for many years, and recently agreed to sell those assets to Canadian potash producer Mosaic in a bid to reduce debt.
But as part of the deal, Vale took an 11 per cent stake in Mosaic, in a sign the company was keen to retain exposure to the sector in case prices do surge.
Melbourne-based private equity firm EMR Capital has a 32 per cent stake in a Spanish potash play (ASX listed Highfield Resources) and a 44.6 per cent stake in a Utah potash play (Toronto-listed Crystal Peak Minerals).
Despite that exposure, EMR managing director Jason Chang says the company wants more.
"We are very positive on potash long term, that is why we are chasing more potash, we are looking at other potash projects around the world, some in this time zone and some in other time zones," he says. "There is no question as China reduces their arable land that is available to produce agriculture products, the only way they can feed the population is really to increase efficiencies."
Work to excavate and line the shafts at Jansen will be complete within a year or two, and will bring BHP to a decision. Should it commit billions more to bring the mine into production for the first time? Or should the company put the project on ice?
Mackenzie told investors in May that the board may approve a further $US4.3 billion investment in Jansen in mid-2018, and that would ensure first production in 2023. "A phased expansion, with an initial stage of 4 million tonnes per annum, is expected to generate competitive returns and we could seek board approval as early as June next year with possible first production in 2023," he says. Wiser after shale
Slides accompanying Mackenzie's presentation revealed the project was forecast to have a 12 per cent rate of return; less than the 15-20 per cent rate of return that BHP has typically demanded in recent years before committing funds. Activist investor Elliott has attacked that return projection with venom, warning that such an investment could replicate BHP's 2011 shale mistake given the abundant supply and depressed prices in the potash sector.
Deutsche analyst Paul Young opined in a research note that a 12 per cent rate of return was not good enough, and he recommended BHP walk away from the project. Speaking this week, hedge fund Tribeca said there was merit in trying to tap into the "feed the world" trend; Tribeca has itself invested in salmon in recent years.
But Tribeca analyst James Eginton says it was not the time to be investing in potash. "The potash market is significantly oversupplied at the moment ... we just don't need to see the [Jansen] project pushed through this early. Having the option there is important but perhaps it might be worthwhile giving it more time to reassess the demand trends for potash and how the market balances," he says."If they can find an equity partner who is willing to free carry them through the development, I think that is probably where we would be most positive."
Having been lambasted for buying US shale assets and conducting share buybacks when prices were high, it's no surprise BHP was keen to invest counter-cyclically in Jansen. So far it has done just that, and where some see low prices as a reason to stay out of the industry, BHP believes the past few years have been a smart time to gradually build a project, so it can respond quickly if prices do suddenly improve in the future.
Eginton agrees that BHP's investment in Jansen had been counter-cyclical to date, but said that did not necessarily mean it was time to pump more money into the project."Yes it is counter-cyclical but we are such a long way from the market balancing in potash, you are talking between 2025 to 2030 before you get a market balance ...There are probably better ways for BHP to invest counter-cyclically," he says.
The right moment
Others like Chang are more optimistic about potash prices."I think there will be a trend upward, even before 2020 I think you will see some trending upward," he tells AFR Weekend.
If, as Mackenzie foreshadowed in May, the BHP board is asked to consider a $US4.7 billion investment in Jansen this time next year, approval is not guaranteed. "First and foremost, our focus is on value. Growth options will always be assessed through the capital allocation framework. This includes being tested against additional cash returns to shareholders and we will only develop when the time is right," Mackenzie said. And there's the rub; BHP wants shareholders to trust its ability to pick the right moment to invest, while many shareholders are unsure whether they can trust the company to spend money wisely.
While shareholders continue to ruminate over the shale errors, BHP wishes they would also consider the well-timed decisions to walk away from massive proposals like the $US30 billion open cut at Olympic Dam, the $US10 billion outer harbour at Port Hedland, and the original $US18 billion version of the Mad Dog oil expansion, which was eventually halved in cost. Indeed, Jansen was slated to be a $US12 billion project, with first production in 2015.
Todd Warren, of Colonial First State Global Asset Management's Resources Fund, says it was unfair to suggest BHP was a poor investor based on solely the US shale transaction. "Historically, they have made smart investments and some questionable investments, but they are not Robinson Crusoe on that front, so I don't think it is fair to say that BHP have been particularly poor stewards of capital, indeed their historical record of return on investment in their petroleum business before the onshore acquisitions was very high," he says.
"You pull apart the returns they've had in each of their divisions, iron ore has been very high, but petroleum has historically had a very high return on investment as well; the issue has been in the short term."
Warren says the key to getting potash right would come down to when BHP chooses to invest.
"BHP run this business not for three to five years, they are running it on a 10-year-plus timeframe; the criticism the market makes, sometimes unfairly, is very much because the market is looking far shorter term than these companies are looking," he says.
"In the immediate term the potash market looks pretty ordinary, there is a lot of excess supply in the market and certainly commissioning Jansen would not improve the balance; but that said, I think BHP see potash as the next iron ore in terms of it being a bulk mining project, in a safe geopolitical jurisdiction and with better long-term fundamental supply demand drivers than iron ore, frankly."We all recognise Jansen is not going to be seeing a lot of daylight in the medium term, so they are not delivering their tonnes into a weakened potash market. A longer-term commitment is reasonable, the question is how quickly they choose to pursue that market."
HFR Price at posting:
88.0¢ Sentiment: Buy Disclosure: Held
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