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For months the market has been waiting for a go/no-go decision from BHP Billiton Ltd. concerning its decision to proceed with a giant potash mine in Saskatchewan. On Tuesday, the company, under new CEO Andrew Mackenzie, gave an answer, and it's "may go."
BHP may have committed to spend $2.6-billion (U.S.) on the Jansen project over the next three years, and Saskatchewan Premier Brad Wall may have heralded it as "a good day for Saskatchewan," but let's not get ahead of ourselves. Three years after Ottawa barred BHP's hostile takeover attempt of Potash Corp. of Saskatchewan Inc., the Australian miner has essentially just renewed its option to build at some point several years out, a prudent move by a new CEO whose job is to manage risk and maintain a healthy balance sheet during an uncertain stretch ahead for commodities. But the Jansen mine is still no sure bet.
BHP had already spent $1.2-billion on Jansen, and the newly approved expenditure may sound like big dollars, but perspective is everything. The $800-million annual expenditure amounts to just 5 per cent of the company's totally forecast capital and exploration budget, an amount Mr. McKenzie pointed out is a relatively "modest sum" for the company. (This is 5 per cent, by the way, of a capital budget that will already be 25 per cent lower than fiscal 2013's outlay of $21.7-billion.) Mining the potassium-based fertilizer remains a distant dream for a company that now counts iron ore, petroleum, copper and coal as its "four pillars." Second, the $2.6-billion will buy surprisingly little: completion of the project's essential surface infrastructure and utilities and the completion of two shafts. It would take real money – another $10-billion to $11-billion – to build plants and facilities to make the mine operational, with some of that coming from joint venture partners who would be needed to share the cost and risk, Mr. Mackenzie said.
BHP clearly indicated it is nowhere near a decision to spend that kind of money. Mr. Mackenzie said the industry needs to show steady 2 to 3-per-cent demand growth for years to come; demand has actually been flat for eight years, despite long-term promises of continued growth from emerging markets. With the recent demise of one of two potash-producing cartels, pricing, demand and overall industry dynamics are now a big question mark. "We can't be absolutely sure how that demand will evolve, and that's why we don't want to make a firm commitment in time yet as to when we'll push ahead with the construction of the mine itself," Mr. Mackenzie said Monday.
But spending to inch the project forward is a wise move. At a time when other miners are deferring or cancelling their plans to build or expand potash mines, BHP is making a decision it can afford and that positions it to act relatively quickly once the market signals it can handle more capacity. For the current players in the potash industry, including Potash Corp., this is good news: BHP may yet become a serious rival, but for the foreseeable future, it is one less thing they have to worry about.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.
Editor's note: A previous online version of this story said BHP Billiton announced its Jansen investment on Monday. In fact, the announcement was made Tuesday. The error has been corrected.
Sean Silcoff