Australia | Sep 17 2021
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 Saskatchewanwhere 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 andacross 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 andthe 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.