BHP CEO expresses frustration at Jansen cost, schedule amid positive potash view

BHP Group's Jansen potash project in Saskatchewan, at which CEO Mike Henry has expressed frustration about the amount of time and money that has been spent on it before an investment decision has even been made. Source: BHP Group

BHP Group CEO Mike Henry expressed frustration at the exorbitant toll in terms of cost and time that its Jansen potash project in Saskatchewan has taken on the company.

However, he said BHP has a positive view on the commodity, which is one tick for the project ahead of the board deciding in mid-2021 on a final investment decision.

The diversified miner has budgeted $2.97 billion to complete the excavation and lining of the production and service shafts, and to continue installing essential surface infrastructure and utilities, it said Feb. 16 in its first-half results for fiscal 2021.

BHP said Jansen is now 89% complete, after reporting in August 2020 that it was 86% complete. The company initially planned for the project to start producing saleable potash in 2015 when it entered feasibility phase in 2011.

Jansen Stage 1 remains in feasibility phase, according to BHP's Feb. 16 investor presentation. Project capex is between $5.30 billion and $5.70 billion, with planned production volumes of 4.3 million tonnes per year to 4.5 Mt/y.

"I don't like where we're at with this asset," Henry told a Feb. 16 analyst call. "The fact that we've got $4.5 billion sunk into Jansen, and the time it's taken us to get here, is something that [I'm] certainly not pleased with.

"We will build upon the learnings that we've taken away from that in how we think about further projects in future-facing commodities."

As he is accountable for ensuring BHP makes the right decisions about "fresh shareholder capital," Henry said the company's decision on Jansen will be based on its views on "the best application of shareholder capital."

This decision will be taken in light of "what we can see in the project, and given the other opportunities that we see in other projects or increased returns to shareholders."

BHP believes the megatrends playing out in the world "bode well for long-term potash demand under a range of different scenarios," and the prospects for potash look even better in a more rapidly decarbonized world, Henry said.

The company's "large position in the world's premium potash basin," with the capabilities to run the asset well, is also a tick for Jansen's investability, he added.

The final test for Jansen is whether it generates attractive returns to compete well into BHP's capital allocation framework, Henry said.

Uneven but solid recovery

In its economic and commodity outlook also issued on Feb. 16, BHP said an "uneven but solid recovery is underway" for muriate-of-potash following the year-long market downswing caused by demand volatility that predated, but was exacerbated by, COVID-19.

BHP believes the commodity price troughed at around $186 per tonne during that downturn.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

The company said it was "something of a surprise" when the marketing arm of JSC Belaruskali and Indian Potash Ltd. settled a contract priced just $17/t above the previous one in late January, at $247/t CFR.

BHP said that contract pricing "drew the ire of other exporters who had their sights set on something more substantial."

BHP was surprised given the positive momentum of U.S. import prices continuing to rally strongly this year, passing $300/t in early February. The company cited new offers extended by Nutrien Ltd. in the week of Feb. 8 "pushing towards $375/t to $380/t," which is up about 64% year over year.

"Long–term demand for potash stands to benefit from the intersection of a number of global megatrends: rising population, changing diets, and the need for the sustainable intensification of agriculture," BHP's outlook stated.

BHP anticipates MOP demand growth of 1.5 Mt/y to to 2 Mt/y, at a rate of between 2% and 3% a year, in its base case.

"The need for new supply to be induced is expected to arise once both the spare capacity held by incumbents and capacity additions that are under construction have been absorbed by this steady expansion of demand," the company stated.

BHP expects the window for new supply to open from the late 2020s or early 2030s.