BHP should....
Peter Koven, National Post
Tuesday, Oct. 23, 2012
Mining giant BHP Billiton Ltd. continues to move forward with Jansen, a massive Saskatchewan-based project that is expected to become the largest potash mine in the world. But is it the right move? Analysts at BMO Capital Markets don’t think so.
In a lengthy report, Joel Jackson and Tony Robson argue that building Jansen is BHP’s “worst” option if it wants to diversify into potash, though they think that whole concept could be a mistake.
“We believe that the best decision for BHP is [to] not build or buy its way into the potash industry, and instead return cash to shareholders. However, we expect BHP will not go down this route,” they wrote in a note.
Put simply, they think that the economics of Jansen are not attractive. Using a potash price of US$450 a tonne (just below current levels), they projected an internal rate of return (IRR) for Jansen of just 10%. To get to a more reasonable IRR of 12% to 15%, they calculated that a “lofty” long-term price of at least US$600 would be required.
The problem is that building Jansen could put pressure on prices, because it would bring more product into a market that is already well supplied right now. Mr. Jackson and Mr. Robson believe that potash demand is adequately covered out to the mid-2020s without Jansen. And while they wrote that the decision to build Jansen can be justified by taking a much longer-term view and focusing on the period beyond 2025, they noted that is “inherently riskier” because of the forecasting challenges.
If BHP is convinced it needs to get into potash, the analysts suggested that a better option would be to buy rather than build. While Potash Corp. of Saskatchewan Inc. is out of the question after the failed 2010 bid, they wrote that Mosaic Co. could be a good option. Mosaic could present fewer Canadian political headaches it is a U.S. company operating in Saskatchewan. However, BHP would need to be comfortable with Mosaic’s large phosphate business and other unique issues.
“We note that purchasing Mosaic and shelving Jansen argues for better potash prices in the future, making the ‘buy’ option an asymmetrically better bet,” they wrote.