BHP Group was flagged using improbable projections for the price of potash to justify the economics of its US$5.7 billion Jansen project in Saskatchewan, The Australian Financial Review reported May 20.
The mining giant is banking on a price increase of 24% compared to current prices to deliver a project return of up to 15% ahead of an investment decision expected within 18 months, according to JPMorgan analyst Lyndon Fagan.
BHP expects to produce 10% more potash each year than previously planned, with the building cost between US$5.3 billion and US$5.7 billion and potash demand rising 2% to 3% in the next decade.
However, other potash major producers warned the company that they could bring idled production or mine expansions into the market more quickly and at a lower cost than BHP can build Jansen, the newswire wrote.
Mosaic Co. CEO Joe O'Rourke said BHP's predictions are unlikely to be achieved as there is little need for new supply. Nutrien Ltd. CEO Charles Magro said BHP could not gain profit quickly as greenfield potash projects generally have difficulties creating long-term shareholder value.
Green Markets research director Alexis Maxwell does not expect Jansen to start production before 2024 and said it was "the biggest threat to the potash long-term outlook" as rival potash producers would try to ensure prices do not rise in order to discourage the project's development.
She added that North American producers could easily bring on twice as much production as the first stage of Jansen, which is projected to be about 4.5 million tonnes a year.
BHP also predicted that the second and third stages of Jansen would each bring a further 4 million tonnes of potash capacity at a cost of US$4 billion for each stage, but they are not expected within the next 15 years.
BHP CEO Andrew Mackenzie, who announced US$2.6 billion of spending to build shafts at Jansen in August 2013, recently admitted that the miner overinvested in the project, although it remains an attractive option given its "strategic fit, risk-return metrics and the longer-term optionality."
The company described the project as having low operating costs and low risks but also relatively low returns compared to other investment options. It said it will consider the risk of market oversupply and high capital costs before the investment decision, which will come after completing the shafts.
In August 2018, BHP was looking to increase productivity of Jansen ahead of a mining decision amid its forecast of potash demand exceeding supply by the mid- to late 2020s.