The problem with building a potash mine when it is 40 degrees below freezing point

BHP is keeping the faith in potash long-term, but looking at better ways to get bang for its buck while global supply of the crop fertiliser ingredient works against it.

BHP believes its potash bet will pay off. Picture: William WEST / AFP

What’s gone wrong in Saskatchewan? Not a lot if you believe BHP and share its long-term view on potash.

The mining giant maintains its big bet on the fertiliser will pay off well into the 21st century despite Friday’s disclosure about a cost blow out of around $2.5bn and a delay in first production at the Jansen project.

The size of blow out is enough to make an investor’s blood run cold just like a winter at Jansen, about 130 kilometres east of Saskatoon in the Canadian province of Saskatchewan that is thought to hold about half of the world’s potash reserves.

Johnny Cash once sang When its Springtime in Alaska its 40 Below. Temperatures in Saskatchewan and Jansen regularly fall to around minus 40 degrees Celsius, but the past winter was especially tough and marked by high winds that played havoc with building the mine.

BHP knew to expect tough weather conditions when it sanctioned Jansen stage 1 – then expected to cost $US5.7bn – in August 2021 when Canadian Mike Henry was about 18 months into his term as chief executive.

Even locals concede last winter was one of the worst in years. It happened to coincide with a peak in Jansen construction that saw some 3500 workers engaged on the project. Call the timing bad luck or bad management.

A lot of the early work on Jansen in the years since 2021 – like building the mine shaft – was underground and mostly immune from the weather.

That’s very different from working on the surface in Saskatchewan and trying to build processing infrastructure with both dry and wet mills, and product storage buildings. On some days the winds were too high or the temperatures too low to do any work at all.

Unlike an iron ore, coal or copper mine, BHP has never built a potash mine, or supplied and marketed a crop nutrient.

Canadian global fertiliser giant Nutrien, which is headquartered in Saskatoon, warned last year that life was about to get harder for BHP.

“They’re getting closer to that date where they are able to bring some product out from below the ground,” Nutrien president of global retail Jeff Tarsi said on a visit to Australia, where his company became the biggest player in farm services with its $469m takeover of Ruralco in 2019.

“But the closer you get to it, the more complicated that process gets. It’s not as if you get closer, it gets easier. As you get closer, it gets more difficult because everything has to work.”

BHP, which once had Nutrien in its takeover sights, remains confident it will work and eventually have some similarities to the iron ore juggernaut it created in WA’s Pilbara almost 50 years ago. The iron ore empire started with the Goldsworthy mine in 1966 and quickly grew.

Under Mr Henry, BHP has visions of multiple stages at Jansen. That is based on having a huge resource base and low-cost options to expand and strong demand, as happened in iron ore.

However, unlike the steady flow of iron ore from Port Hedland to China, potash players like Nutrien need to deliver big volumes of fertiliser to farmers in periods of high demand that might only last seven or eight weeks.

BHP’s revelation on Friday that the price tag on stage 1 of Jansen had increased to between $US7bn to $US7.4bn ($10.77bn – $11.39bn), and that first production had been pushed backed to mid-2027 soured a set of results notable for record iron ore and copper production.

The previous price tag was $US5.7bn and first production had been slated for the end of 2026.

The revision suggests BHP has exhausted all the contingency dollars included in the original capital expenditure budget and needed to let the market know the bad news.

A mild winter in Saskatchewan might see it deliver stage 1 under $US7bn but a repeat of last winter or worse could lead to another blow out.

Meantime, Jansen stage 2, slated to double production to about 8.5 million tonnes a year at a cost of $US4.9bn back in 2023, is in the cooler.

BHP is considering delaying stage 2 by two years from 2028-29 to 2030-31 “given potential for additional potash supply coming to market in the medium term”.

The rethink suggests BHP sees more value-accretive ways to spend its finite capital.

Jansen defenders point out that in the period from 2015-25 taking in the Covid-19 years, many projects with price tags upwards of $US1bn have suffered cost blow outs of more than 50 per cent. In Jansen’s case, the upper range of the blow out is just under 30 per cent.

BHP's Jansen Potash project in Canada. Picture: Supplied

In its most recent deep dive into the fertiliser trade, Rabobank noted potash was in ample supply globally and that prices were barely covering production costs. A price plunge in 2024 was linked to higher exports from Russia and Belarus.

Rabobank tipped prices to remain low through 2025, boosting the buying power of farmers in jurisdictions like Brazil and the US. China and India, the nations with the most mouths to feed, negotiate annual supply contracts.

The crop nutrient is only produced in only a few specific regions and highly susceptible to geopolitical issues.

“Despite current geopolitical turbulence, the potash market is rather stable, supported by the ample supply of the product. We do not expect that potential US tariffs on Canadian imports will change this,” the bank said.

“Throughout most of 2024, potash traded below its historical average price. According to industry sources, the price was negotiated very close to operating costs.”

Originally published as The problem with building a potash mine when it is 40 degrees below freezing point