BHP Embarks On The Jansen Era

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Approval of Jansen potash has long been heralded as a catalyst and now, with investment details and timeframe, the stage is set for BHP Group's new era

-Jansen products expected to offer lower carbon intensity and higher water efficiency
-Superior automation should put BHP at the forefront of potash mining
-Capital expenditure on Jansen expected to peak in 2025/26
 

By Eva Brocklehurst

Goodbye petroleum, welcome potash, the new favoured commodity for BHP Group ((BHP)). Shaw and Partners asserts BHP will become a globally significant player in potash within a decade.

The company approved the Jansen potash project last month and has briefed investors on the development, located in Canada's potash basin in Saskatchewan where it owns 37% of the tenements. The formal approval should mean potash production commences around 2027, with initial development delivering an underground mine and production capacity ramping up to 4.35mtpa within two years.

Morgan Stanley assesses the growth parts, stages 2-4, have compelling returns and therefore the company has no need to pursue partnerships. BHP's marketing division has commenced engagement with potential customers, anticipating many potash customers will wish to diversify sources of supply.

There are few supply opportunities in potash available globally and BHP has glowingly described Jansen as "the best greenfield opportunity in the best potash basin". Pricing will be negotiated when agreements become binding.

Memoranda of Understanding have been agreed in China and across Asia, South America and North America. BHP expects to be always able to sell product and make a margin, and sales contracts typically last 3-5 years, so an inventory build will not be part of the marketing strategy.

Jansen's products are expected to offer a lower carbon intensity and higher water efficiency compared with competitors, although, as Morgan Stanley points out, ultimately this advantage depends on how customers value these aspects over time.

The processes are dependent on natural gas which will be difficult to displace and the business is working on carbon capture and storage technology to improve the carbon footprint. Numerous studies have optimised the mine plan and there is increased confidence in a projected 92% recovery rate.

It has been a long journey to arrive at the approval for stage 1, with Shaw noting a lot of prevarication over the past 20 years. Still, the opportunity has arrived and opens up a new growth front.

A New Era

Shaw makes the comparison with Fortescue Metals' ((FMG)) entry into iron ore, disrupting the three existing major operators, Rio Tinto ((RIO)) BHP and Vale. The broker believes the same playbook has been appropriated by BHP with its state-of-the-art potash mining. The broker lauds the decision to go ahead, as this is a future-facing commodity that adds to the company's copper/nickel exposure.

Yet Goldman Sachs continues to believe Jansen is one of the most contentious of the company's growth projects because of the large amount of capital expenditure required upfront, and long-dated market returns and payback, albeit it has the greatest ability to grow value in earnings over the long-term.

The global potash market has blossomed in 2021, Macquarie observes, amid rising demand, strong crop prices and supply-side risks in Belarus. Demand growth of 2.5% per annum is expected to outpace supply and the market swing to a deficit after 2026.

Macquarie's base view allows for Jansen to absorb the forecast market deficit for 2027-31. Beyond 2032 a deficit is expected to re-emerge, even with Jansen expanding to 16mtpa. This implies, in the broker's opinion, BHP could expand Jansen at a faster pace.

Development

For Stage 1, BHP envisages 12-14% returns, at a long-run realised potash price of US$320/t. Goldman Sachs calculates stage 1 represents 3-4% of group operating earnings (EBITDA) by FY30 with petroleum and around 4-5% without petroleum, and 15% of capital expenditure at its peak with petroleum and 25% without petroleum.

The company advises that stages 2-4 are significantly de-risked because of the shaft capacity in place from stage 1, which is 93% complete. First production from stage 1 is expected in late 2026. Lower capital intensity in stage 2 is also anticipated because of redundancy in the system and infrastructure that is all that already available as part of stage 1.

The company has outlined a US$5.7bn initial capital investment and has more than 50% of engineering and more than 45% of procurement orders in place. Capital expenditure is expected to peak in 2025/26 and around 85% of total expenditure is in Canadian dollars, currently unhedged.

BHP expects to be the lowest cost producer of potash in Canada with its differentiated mining method that allows for a continuous "one-pass" cut while competitors require two. This results in shorter mining times and efficiency.

Goldman Sachs flags Saskatchewan as one of the most complicated fiscal regimes in the world. BHP will pay royalties from year 1 but is not expected to pay state or federal tax until the mid 2030s. The broker does not rate BHP while Shaw and Partners, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating with a $56 target.

The database has one Buy and three Hold ratings (with three brokers restricted on ratings and targets at present). The consensus target is $47.23, suggesting 15.1% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 9.7% and 6.9%, respectively.

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