All Posts from September 17, 2021

BHP Reports Prelim Jansen Deals, Says Overspend Will Eventually Pay Dividends

BHP Group, Melbourne, has signed nonbinding Memorandums of Understanding (MOU) with importers to cover 100 percent of Stage 1 future production of potash from its Jansen project in Saskatchewan, the mining major said in a Jansen briefing held on Sept. 15.

An expanded marketing team bringing in more specific regional sales experience would have six years prior to market entry – and a further two years in ramp-up – to secure binding sales ahead of first production targeted for the 2027 calendar year, the group said. BHP plans to replicate its model of marketing directly to major customers via regional offices “leveraging the group’s broader commercial resources.”

It said Jansen Stage 1 (Jansen S1) will sell two established agricultural red potash products, and sales would target large buyers across growth regions in the Americas, Asia, and the rest of the world – including, for example, Africa.

In addition to offshore export sales via Vancouver, the Jansen operation will also benefit from being able to direct rail potash to the North American market.

“Jansen has a logistics optionality and flexible granular processing capacity; that means we will be able to shift sales between export markets and North America, depending on the market,” said BHP Head of Sales and Marketing for Potash Mark Swan.

Swan noted, however, that BHP would be “underweight” in China, given its exclusive red potash offering in Stage 1.

BHP said it expects the majority of the sales would be on a term contract basis.

The mining group’s board gave the go-ahead for Jansen S1 last month, approving US$5.7 billion in capital expenditure for Stage 1 (GM Aug. 20, p. 1). This first stage is expected to produce some 4.35 million mt/y of potash.

BHP remains positive about the potash demand outlook going forward.

“Our central view is that demand will catch up to excess supply by the late 2020s or early 2030s, and the major potash supply basins are mature,” said BHP Chief Economist Huw McKay.

As previously reported, construction of the two shafts at Jansen was 93 percent complete at the time of board sanction for Jansen S1. Completion of the shafts remains on track for calendar year 2022, “removing our principal barrier to entry and significantly reducing the overall development risk for the project,” the mining group said.

BHP said it erred by building shafts that were bigger than required for its first potash mine, but told briefing participants the consolation would be cheaper expansion of the mine going forward, according to an Australian Financial Review report.

When the mining group first started investing in the project in 2013, it envisaged a mine producing some 10 million mt/y of potash.

BHP confirmed last month that it already has sunk US$4.5 billion (pre-tax) into Jansen, including US$2.972 billion to finish the current investment program to complete the two shafts and associated infrastructure and utilities at the site, as well as engineering and procurement activities, and preparation works related to Jansen S1 underground infrastructure.

It took a US2.1 billion (after tax) impairment on its Jansen spending to date in its FY2021 financial year ended June 30. BHP Minerals Americas President Ragnar Udd told briefing participants that the size of the shafts was the major error. According to the Australian Financial Review report, Udd said the shafts were built to accommodate 16 million to 17 million mt of finished potash, in terms of capacity.

He reiterated earlier comments by CEO Mike Henry that BHP is not happy with the amount of capital it has sunk into Jansen.

According to Udd, the initial overspend would eventually “pay dividends” for BHP when it is ready to expand into further stages of the mine, and will provide the group with “a lower capital intensity” in terms of future phases in terms of stages two through four at Jansen.

The mining group plans to take capacity at Jansen to 16-17 million mt/y, in four stages of development. But it emphasized again at the briefing that each subsequent stage beyond Stage 1 will be subject to the group’s disciplined capital allocation framework.

At consensus prices, BHP estimated internal rate of returns on the second, third, and fourth stages of Jansen will be between 18-20 percent. This compares to the 12-14 percent returns that the group believes the first stage of the mine will deliver.

That estimate for Stage 1 excludes BHP’s spending to date on Jansen. If it were be included, the first stage of the project would yield “a much lower level internal rate of return,” the group told investors last month.

Macquarie analysts were cited this week in the Australian Financial Review report as putting the returns on Jansen S1 at closer to 6 percent if the 2013 to 2021 spending was included.

Udd highlighted that BHP is now familiar with the geology, engineering, and procurement challenges at Jansen and believes investors should not expect further spending errors on the project.

In the note cited by the report, Macquarie analysts see the second stage of Jansen beginning construction around 2032, but acknowledged that market conditions would be the chief determinant. Macquarie estimates BHP will spend a total of US$21 billion as it gradually expands Jansen over 30 years.

Udd was cited by the report as reiterating earlier comments by BHP on project partners – that the group remains open to a partnership. But he said it would be really only “for value,” and that up to this point BHP has been unable “to make that marriage work.” Udd reiterated BHP doesn’t need a partner to make Jansen work.

Media reports were circulating in early summer that the mining major was in talks with Nutrien Ltd., Saskatoon, about a potential partnership in Jansen (GM May 28, p.1).

New York City-based Goldman Sachs analysts this week, as cited by a Dow Jones report, described BHP’s Jansen potash project as one of its most “contentious growth options,” given “the huge amount of cash the mining major is having to pour up front into a project that will have low returns and a long payback in a market that won’t be attractive for some time”.

However, Goldman Sachs added that Jansen is “one of the assets with the greatest ability to grow value and earnings for BHP over the long term given the significant resource optionality and low cost position.”