share the cost of its big potash project

November 27, 2012, 11:41 AM
Could BHP Share the Cost of Its Big Potash Project With Partners?
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By Robb M. Stewart

It would be a brave board of directors that gives the nod to a big-budget mining project in the current environmentof subdued demand, softer prices and shareholder antipathy toward “slow-burn” developments that don’t offer a quick return.

Reuters
A digging machine loads ore from stockpiles onto trucks at a copper and gold mine on Indonesia’s Sumbawa island. Unless, that is, mining companies follow in the footsteps of the oil industry.

Deutsche Bank’s analysts in the U.K. and Australia suggest the diggers will move closer to the oil industry model of forming joint ventures for large capital-intensive projects, and BHP Billiton could set an example with its Jansen potash project in Canada.

As Deutsche notes, Jansen is the last of the major low returning, long payback mega-projects still alive and in its original form after BHP shelved the proposed expansion of its Olympic Dam copper and uranium mine and postponed the construction of a new harbor for its iron ore operations in Australia.

Bringing in one or more partners would reduce the outlay for shareholders and could guarantee long-term sales volumes outside Canpotex, the Canadian cartel that lets members negotiate prices together overseas but which BHP is opposed to. Deutsche suggests that BHP sell some of the project, perhaps 25%, to a suitable partner such as a fertilizer company or sovereign wealth fund.

BHP is pushing ahead with studies for the project and sinking a shaft, with mine planning and engineering well advanced. The next milestone should be the granting of the mining leases over key areas of the project, which Deutsche says should be received by year end.

A spokeswoman for the Melbourne-based company declined to comment on the timing for Jansen or the possibility of a joint venture. The company has stated its potash strategy is to “build a material industry position over the long term. It already has several assets that it operates with partners, including the Escondida copper mine in Chile and BHP Billiton Mitsubishi Alliance coal venture in eastern Australia.

Of course, BHP has said no major project is likely to be approved before mid-2013 as it focuses on defending its balance sheet and targeting costs.

Deutsche’s analysts estimate that a 25% stake in Jansen could attract a price of US$2 billion or more.

They value the project at US$7.3 billion, and calculate that it will generate an internal rate of return of 12.6%. The first stage of the project will only just clear the cost of capital because of the “flagfall” upfront capital cost of as much as US$5 billion-US$6 billion, they say.

“In our opinion, large fertilizer producers and distributors from China, India, the U.S. and to a lesser extent South America could all potentially be interested,” Deutsche says. China and India are two of the largest growth markets for fertilizer, while the U.S. is the largest export destination for Canadian potash

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