BHP steps up its multibillion-dollar bet on global megatrends

With little fanfare, mining giant BHP late on Tuesday committed to nearly doubling its developing footprint in the global potash sector in a $US15 billion ($23.7 billion) bet on what it has described as “global megatrends.”

The formal approval of the $US4.9 billion investment in stage two of BHP’s Jansen project in Canada was expected. It does, however, underscore the Melbourne-based miner’s commitment to potash -the nutrient essential to producing food for growing populations – and highlight its confidence in its outlook for the product by accelerating the pace of investment in a project whose first production target date had already been brought forward by a year.

BHP’s Jansen potash project in Canada.Credit: AFR

It is a massive bet on those world megatrends – an increasing global population, urbanisation, higher nutritional values in diets, the need for increased agricultural productivity as the availability of arable fertile land diminishes, and decarbonisation – that will have seen BHP sink more than $US15 billion in the project by the time stage two’s initial production starts flowing in 2029.

Should it eventually continue on to stages three and four, which would double the scheduled production from the first two stages from about 8.5 million tonnes a year to around 17 million tonnes, potash will become, alongside copper and to a lesser extent nickel, a critical “future-facing” commodity within the BHP portfolio.

It will also, with the spin-off of BHP’s oil and gas businesses and its exit from energy coal, not just be a key pillar for the company’s long-term growth, but a major diversifier as a commodity whose markets and pricing are not correlated with the more conventional resources within the BHP portfolio. Its location within Canada will also provide geographical diversification.

Jansen has tantalised BHP since it first started looking seriously at Canada’s Saskatchewan basin more than a decade and a half ago. Over that time, BHP has secured a massive resource that, even if it were to complete stage four of the project, would have a life of more than a century.

It should be a low-cost producer (BHP’s estimates are for production costs of $US105 to $US120 a tonne), with diminishing capital intensity as each stage is added and the company is able to leverage its existing infrastructure.

With an estimated internal rate of return of between 15 and 18 per cent and EBITDA margins (earnings before interest, tax, depreciation and tax) of 65 to 70 per cent, it should also be highly profitable.

How successful the Jansen investment is will obviously depend on how the potash markets develops over the next several decades.

The megatrends mentioned above might favour it, but it will be the actual demand and what happens on the supply side that will determine the success, or failure, of a project which – if it were to produce 17 million tonnes a year – would be able to supply about 25 per cent of the global demand.

The international trade in potash today is dominated by Canadian, Russian and Belarus producers. Canada represents about a third of global supply and Russia and its ally Belarus about the same if their output is combined.

There is latent increased capacity from both existing mines and new projects on the drawing boards of the dominant producers, although BHP’s confidence that Jansen will be at the lower end of the cost curve and below the break-even costs for new production from Canada’s solution miners (who pump water or brine into deposits to bring the potash to the surface) provides some protection.

The war in Ukraine might also have helped.

In the immediate aftermath of the invasion last year, potash prices achieved by Canada’s producers soared from around $US300 a tonne to about $US780 a tonne before dropping back to pre-invasion levels a few months later as buyers realised that supply had been less disrupted than they had anticipated.

The invasion has, however, led to some self-sanctioning, largely by European buyers, and initially impacted Belarus’ ability to ship its potash and other fertilisers. Russia has provided workarounds for Belarus, sacrificing some of its own output. It is producing at a rate of about 85 to 90 per cent of its pre-war output.

So essentially there hasn’t been much of a longer-term impact on the supply, although there have been shifts in the trade flows for potash as the Europeans and Americans look elsewhere for their requirements.

There was also something of a buyers’ strike in response to the initial dislocations in price and supply – farmers’ deferring their use of fertilisers – which would have contributed to the rapid falling back of fertiliser prices.

While it might have produced some windfall profits if Jansen were more advanced and in its production phase, the pricing of potash today is of little consequence for a project whose first production isn’t due until 2026 and which is expected to operate for many decades.

What might help BHP when Jansen does start producing is the impact of the war and other geopolitical tensions on new investment by the incumbent producers.

Russia and Belarus’ planned new projects will be affected to some degree by the war – the costs of financing it, the self-sanctioning by buyers, the increased costs of shipping their product to more distant markets and the financial sanctions the West has imposed – while North American producers have also deferred some investment because of the volatility of the market.

BHP believed, even before the Ukraine war, that there would be a modest shortfall in supply relative to demand in the latter part of this decade. As Jansen launches into the market, that deficit may now be somewhat larger in a market expected to grow by around 2 per cent a year into the distant future.

Having divested its petroleum and energy coal businesses, with its iron ore and metallurgical coal assets operating with a long-term question mark over them because of the global effort to reduce carbon emissions and, despite an exciting outlook for copper, few discoveries of new, large and low-cost resources, the importance of potash to BHP’s long-term prospects can only increase.

Having committed more than $US15 billion so far, with probably another $US8 billion to $US10 billion to come over the next couple of decades, the performance of Jansen when it does enter the market will be critical.

It will have to live up to BHP’s expectations, not just of the mine’s costs and competitiveness, but of the long-term evolution of demand for the market-impacting volumes of potash it will be producing. That is, of course, the risk a miner always takes when it invests very large amounts of capital in projects, like Jansen, that will come to market a decade or more later.

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