BHP Billiton plans to build Saskatchewan's first new potash mine in 40 years are in doubt after Ottawa's stunning rejection last week of the miner's proposed takeover bid of the world's largest potash producer.
While BHP has said it continues to work on developing the estimated $12-billion Jansen mine, cost concerns recently threatened to shut down the project, according to internal company e-mails that were disclosed in a court proceeding last week between BHP and Potash Corp.
Now that Ottawa has turned away its $38.6-billion (U.S.) bid for Potash Corp., some question whether BHP will pull the plug before it makes a final decision whether to build Jansen late next year. Shutting down the project would be a significant blow for Saskatchewan, given BHP's promises to hire thousands of workers and amid estimates that it would pay tens of billions of dollars in royalties and taxes to all levels of government over the estimated 50-year life of the mine.
BHP still has until Dec. 3 to convince the federal government that its Potash Corp. takeover would provide a net benefit to Canada, but its chances are considered slim because both Ottawa and Saskatchewan see potash as a strategic asset. The province is home to about half of the world's potash reserves.
Ottawa's decision, delivered Nov. 3 by Industry Minister Tony Clement, could mean there is less incentive for BHP to push forward with Jansen, in particular because of the rising costs to build what is expected to be the world's largest potash mine about 140 kilometres east of Saskatoon.
BHP chief executive officer Marius Kloppers threatened to shut down Jansen as recently as late July, citing soaring costs for the first phase of the development, according to internal company communications.
"You simply don't have a project with the current preferred configuration approach," Mr. Kloppers wrote in a July 28 e-mail to colleague Andrew Mackenzie, the executive responsible for developing the Jansen project. "Either the team makes a very dramatic step change or they get shut down in due course. This is the simple brutal truth."
The e-mail was made public as part of a lawsuit Potash Corp. filed against BHP, alleging the company made false and misleading statements in its takeover bid and overstated its commitment to building a potash mine in Saskatchewan to drive down Potash Corp.'s stock price. BHP denies the allegations and the two sides continue to battle in court despite Ottawa's decision last week.
Mr. Mackenzie defended the e-mails, saying Mr. Kloppers is "a man who uses a strong challenge as his management tool," according to a transcript of a Nov. 4 court hearing in Chicago.
"He was going to propose that I shut it down, yes, and we'd have the debate. But that was his view at that time," Mr. Mackenzie added, saying that it was his job to "rise up" to the challenge "or persuade him otherwise."
In separate court documents, BHP said the internal communication is "not a prediction that the project will fail."
BHP's court documents also state that since the e-mails were written, Mr. Kloppers has been "highly satisfied" with progress to reduce capital costs of the project.
Saskatchewan opposed BHP's bid for Potash Corp. in part because it estimated it would lose up to about $6-billion in tax revenue over the next decade. BHP later offered to restructure the deal to cover the losses.
A BHP spokesperson said Monday the company "continues to progress" on Jansen and is planning to submit an environmental impact statement by the end of the year. The BHP board is expected to make a decision on whether to begin construction of a mine late next year.
While BHP may feel slighted by Saskatchewan and Ottawa's denial of its bid for Potash Corp., analysts believe a decision on whether to build Jansen will be strictly business based on costs and the outlook for the potash market.
"BHP is not going to go [for]revenge," said analyst Charles Neivert of Dahlman Rose & Co, "They are not going to say, 'Let's mess around with the Saskatchewan government.' That is not their idea of having a good time."
In fact, Mr. Neivert said BHP's unintended revenge could be to go ahead with Jansen, which could have the impact of driving down potash prices as new production is brought into the market. That, in turn, would mean lower royalties for the province.
After opening a new office in Saskatoon in September, BHP said it would make the city its global potash headquarters, no matter the outcome of its proposed takeover.
"We certainly want the Jansen lake potash project to continue because it's new investment in Saskatchewan, which translates into new jobs, and other spinoffs that benefit Saskatchewan," said Kathy Young, Saskatchewan's executive director of communications.
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'A magnificent asset'
BHP Billiton Ltd. CEO Marius Kloppers has described the Jansen potash development in Saskatchewan as a "magnificent asset." The company spent two years exploring the property, 140 kilometres east of Saskatoon, before deciding in 2008 that it could move from the first stage of mine development (known as identification) to the second stage (known as selection or prefeasibility). BHP's board is expected to decide in late 2011 whether to proceed with construction of the mine. If approved, production would begin in 2015, and reach full capacity of eight million tonnes a year about a decade later.