BHP Ltd. CEO Andrew Mackenzie this week reiterated that potash continues to have long-term appeal for the mining group, and believes, in the long term, the crop nutrient stands to benefit from “the intersection of a number of global megatrends,” namely, rising population, changing diets, and the needs for the sustainable intensification of agriculture, and which “are likely to drive demand for fertilizers for decades to come.”
But in the nearer term, however, BHP now sees slowing momentum for the crop nutrient. In its latest Economic and Commodity Outlook accompanying the publication this week of its best-in-five-years annual results, the group noted that potash prices have lost some momentum, “having been on a slow – but steady – rally since mid-calendar year 2016.” It noted demand for the crop nutrient in calendar year 2019 is facing some headwinds.
The group is staying with its earlier trend demand growth forecast of 1.5-2.0 million mt/y, representing growth of between 2 and 3 percent per annum through the 2020s (GM Feb 22, p. 1), and reiterated that the need for new supply to be induced will only arise once both the spare capacity held by incumbents and capacity additions that are under construction have been absorbed by the market.
Back in February, reporting its interim results, BHP was hopeful of potash demand exceeding available supply from existing and forthcoming capacity by the mid-to-late 2020s, although it emphasized that it had no fixed timeline to take a decision on green-lighting further investment in its Jansen potash project in Saskatchewan (GM Feb. 22, p. 1).
This week, the group in fact included a low case view for potash in its Economic and Commodity Outlook.
“Our low case for potash is predicated on all presently latent capacity returning to the market at disruptive speed; considerable brownfield and greenfield additions coming to market; a low-case macro environment curbing both opex and capex costs; ‘cheap’ currencies in major producer jurisdictions; a five percentage lift in crop residue recycling; minimal dietary change and crop mix; and a similar end-state for soil K mining to what is being observed today,” BHP wrote in this week’s Outlook report.
“All of which serves to delay market balance and the onset of inducement pricing to well beyond the 2020s,” it said.
BHP so far has committed US$2.7 billion to the current investment program at Jansen, and has yet to sanction any further investment in the project. Work under the current investment program to complete the production and service shafts at the mine, as well as the installation of essential surface infrastructure and utilities at the site, is around 84 percent complete (GM July 19, p. 27). The final shaft lining is currently being installed in the two shafts, and BHP this week said it expects this to be completed by early calendar year 2021.
A feasibility study assessing a potential stage 1 construction to provide a potential initial capacity of 4.3-4.5 million mt/y of potassium chloride is underway (GM May 17, p. 1; May 24, p. 1), which the group said this week will be finalized in parallel with the completion of the final lining of the shafts at Jansen. If it were to go ahead, BHP said stage 1 would take less than five years from sanctioning to commissioning, and around two years from first production to ramp-up. It put the required capex at between US$5.3 to $5.7 billion.
But earlier this year, the company admitted to investors and analysts that it has over-invested in the potash project (GM May 17, p. 1).
In this week’s results report, BHP said it has maintained its capital and exploration expenditure guidance for the new fiscal year (FY2020), which started July 1, at below US$8 billion, up from US$7.6 billion in FY2019. For FY2021, it currently expects capital and exploration expenditure to be approximately US$8 billion.
At an Aug. 20 earnings call, BHP CFO Peter Beaven, responding to an analyst’s question, said the FY2021 capex figure “does include an assumption that we continue with the Jansen project,” but he added it is a provisional amount that is included for Jansen and the figure is “a relatively small spend.”
“We will have to wait and see where we get to on the approval of Jansen, so it is part of the possibilities [in that capex],” Beaven said.
According to CEO Mackenzie, Jansen and the Olympic Dam copper-gold-uranium mine expansion in South Australia would account for less than US$500 million of the expected FY2021 capex.
Mackenzie added that the full Jansen project is “relatively back-end loaded in terms of costs, which gives us some flexibility.”
Responding to an analyst’s question whether BHP would go above its US$8 billion capex guidance if Jansen stage 1 got approved, Mackenzie said the expected US$5 billion round-figure cost would be spread out over at least as many years [five], “and probably in any one year, BHP wouldn’t anticipate spending more than US$1 billion”.
The CEO reiterated that, as with all of BHP’s other capital projects, Jansen will have to pass through the group’s capital allocation framework tests to get sanctioned (GM Feb 22, p. 1).
BHP spent US$174 million on Jansen in FY2019, down from US$205 million in the previous year.
The group on Aug. 20 reported its biggest annual profit in five years, record full-year dividends on higher iron ore prices, and record output in some of its business segments.
The mining group reported a 2 percent rise to US$9.12 billion in underlying attributable profit for the year to June 30, up from the year-ago US$8.93 billion, and will pay out a US.$0.78 per share dividend, or a total of $3.9 billion to investors, in addition to the $17 billion already announced for the FY2019 fiscal year. It attributed the bumper profits as being fueled by higher iron ore prices and record output in some of the group’s business segments. Both profit and dividends slightly missed analysts’ expectations.
The group took a new US$1.1 billion after-tax charge related to the November 2015 tailings dam failure at its Samarco iron-ore joint venture in Brazil (GM Nov. 23, 2015), and a US$240 million after-tax gain related to global taxation matters resolved in the first half of the fiscal year.
Going forward, BHP warned of global economic headwinds that could hit demand for its key commodities, iron ore and copper.
Mackenzie reminded investors and analysts that the iron ore cost curve would likely be flattened by further development of West African iron ore production or the cooling of the steel industry in China, as well as more recycling in China not immediately replaced by similar growth in India – which would take BHP into “price territories where it would be a much less attractive business than it is today.
“Which,” he said, “is why BHP creates the options we have in potash, nickel, copper and oil, and gas.”