BHP set to build Jansen potash mine

Mining giant BHP Billiton (BHP-N) is set to become a major global player in potash, after recently announcing it could bring its huge Jansen potash project into production by 2015.

The 7,338-sq.-km Jansen project, 140 km east of Saskatoon, Sask., and adjacent to Potash Corp. of Saskatchewan’s (POT-T, POT-N) Lanigan potash mine, will be the first new potash mine in that province in almost 40 years.

At full capacity, BHP estimates that Jansen would be the world’s largest potash mine, with an annual potash production of 8 million tonnes from a deposit boasting 3.37 billion tonnes (3.25 billion indicated tonnes and 120 million inferred tonnes) grading 25.4% potassium oxide (K₂O). The underground mine is expected to have a minimum 50-year mine life.

“The Jansen project is the first phase of what we expect to be a strong presence in the potash sector,” said Graham Kerr, BHP’s president of diamonds and specialty products, in a press release.

Jansen is the most advanced project from the company’s potash development options, which include its nearby Young, Boulder, Burr and Melville projects (all located in the Saskatchewan basin). BHP expects to start a feasibility study on Jansen in the latter half of 2010, while exploring its other potash projects.

“We see potash as a highly attractive industry,” said Kerr at a recent RBC Capital Markets’ Global Mining and Materials conference in Toronto. Kerr explained that the company’s interest in potash is based on rising demand caused by an increasing global population, declining arable land per person and the emergence of biofuels.

Although the demand for potash is broadly expected to rise, current potash production figures are still lagging behind 2008’s record numbers.

Preliminary figures indicate that Canada produced 7.6 million tonnes of potash chloride (KCl) (4.6 million tonnes of K₂O equivalent) in 2009, which is a 56.3% drop in production compared to the 17.3 million tonnes of KCl output (10.6 million tonnes K₂O equivalent) in 2008, writes Kevin Stone, senior commodity analyst for Natural Resources Canada, in an email to The Northern Miner. The drop comes from Canadian potash miners drastically slashing output early last year in response to the global recession.

But, production is slowly recovering. For the first quarter of 2010, preliminary figures pegged Canada’s output at 3.8 million tonnes KCl (2.3 million tonnes K₂O equivalent), a boost from the first quarter of 2009’s 2.2 million tonnes KCl (1.3 million tonnes K₂O equivalent), but still below the first quarter of 2008’s 4.9 million tonnes KCl (3 million tonnes K₂O equivalent), notes Stone.

Along with production, potash prices are rebounding.

Potash prices for the last several months edged up off the bottom and are about US$347.50 per tonne at the port of Vancouver, says Patricia Mohr, vice-president, economics and commodity market specialist, at the Scotiabank Group. (Spot potash prices hit a low of US$342.50 in February.)

“Last year, of course, the prices declined substantially from record levels in late 2008, which were a little over US$870 (at the port of Vancouver),” says Mohr.

Mohr expects the average prices of potash to be a little over US$400 per tonne for 2010 and near the US$500-per-tonne mark in 2011.

BHP’s Jansen news may cause Canadian potash miners more than a little discomfort, argues Charles Neivert, managing director at investment bank Dahlman Rose & Co. in New York City.

Neivert says the potash market would change “fairly significantly” with the iron ore giant entering it, because of the capacity BHP could bring with its Jansen project.

At least initially, established potash producers will have to make room for BHP in the global marketplace, and cede market share.

Though BHP hasn’t disclosed details on how it plans to sell its potash, Neivert doesn’t anticipate BHP will join Canpotex, the world’s largest marketer and exporter of potash, which is owned by the big three Saskatchewan potash producers — Potash Corp., Agrium (AGU-T, AGU-N) and Mosaic (MOS-N).

This is because each of the three producers currently gets a proportional share of whatever Canpotex sells to the international market based on each company’s total contribution to Canpotex.

If Canpotex has about 25 million tonnes in total across the three major Saskatchewan producers and BHP brings another 5 million tonnes (which would be after a few years of production) it would get one-sixth of the share of any sale, explains Neivert.

“The problem is if Canpotex makes a six-million-tonne deal somewhere, BHP would get a million of it. How would it sell the remaining four million tonnes it has? Where is it going to go?”

BHP could enter the U.S. potash market, which would make it a direct export competitor to the Canpotex producers, says Neivert, adding he doesn’t think the U.S. market would be able to absorb more product. “There would be a lot of capacity fighting for a market that is relatively flat.”

Neivert lists figuring out where and for how much BHP will sell its potash, as the major’s main hurdles. But what BHP has going for it, are its existing relationships with countries that consume significant amounts of potash, such as India, China and Brazil, through its iron ore and other product sales.

So, whatever it ends up doing, in terms of pricing, other producers will have to compete against it, even if the company’s entrance to the market pushes potash prices down, says Neivert. “I don’t think BHP is going to crater the pricing. But when BHP enters, it would have some negative impact.”

The initial potash production the company will bring to the market would be around two million tonnes, representing roughly 3% of the global demand of potash in 2015, Mohr says. “It’s a significant development but it’s not huge.

“It takes a long time for a new greenfield development to be put in place. And so BHP won’t really have much of a real impact until 2015, which is quite a while from now.”

As for now, Neivert says BHP is having a “relatively small impact” on other potash producers’ share prices and even less on the actual potash market.

But, Neivert believes that would change if BHP advances Jansen. “If they get close to bringing the product out, their impact on the global prices will get larger.”

The mining giant may even decide to merge with or acquire a producing potash company, says Neivert, adding he doesn’t think BHP would consider Agrium because of Agrium’s nitrogen and phosphate interests, or Intrepid Potash (IPI-N) because it’s not big enough to make a difference to BHP.

“What it really leaves you with is Mosaic and Potash Corp. And BHP has to determine the value of each, and whether it could get it at a fair value,” he says. However, Neivert doesn’t think BHP will feel like it is getting a good deal for either, because of the substantial premium BHP would have to pay.

After BHP settles into the potash market and gets its pricing in order, some kind of merger or acquisition would be “generally helpful” in the long run because of what BHP can do with Jansen and its other potash projects, says Neivert. “But, that’s a long time off.”