BHP looks to the future; US Senate passes infrastructure bill

After years of indecision and US$4.5 billion (pre-tax) invested in development since 2008, BHP has announced that it will move forward with its Jansen potash project in Saskatchewan and approved capital expenditure of US$5.7 billion to build the first phase of the project. The sum includes funding for the required port infrastructure.

BHP, the world’s largest mining company, paired that news with its plans to pursue a merger of its petroleum business with Australia’s Woodside Energy to create a top ten independent energy company. If the transaction is completed, the expanded company would be owned 52% and 48% by existing Woodside and BHP shareholders, respectively. The move underscores a strategic shift for the Melbourne-based mining giant out of fossil fuels in its efforts to cut net carbon emissions from its operations and increase its appeal to investors.

During a conference call with analysts and investors on August 17, CEO Mike Henry said the Jansen decision meshed with the company’s desire to ensure “a sustainable world for future generations.”

“The approval of Jansen Stage 1 is aligned with our strategy of growing our exposure to future facing commodities,” Henry said on the call.  “Demand for potash is underpinned by the need for more productive agriculture with a lower environmental footprint to provide affordable nutrition for a growing global population. It will benefit from increased demand for the biofuel required for decarbonisation and from the need to increase global food production from constrained arable land. And it provides positive differentiation from the rest of our portfolio, in terms of commodity, country and customer.”

“While we haven’t always gotten everything right with Jansen in the past,” he conceded, “we are confident in the decision we are taking today.”  (The company took a pre-tax impairment charge of US$1.3 billion (US$2.1 billion after-tax) for existing infrastructure spending at the asset as of June 30. The impairment charge, BHP said, “reflects an analysis of recent market perspectives and the value that we would now expect a market participant to attribute to our investments to date.”)

As Alisha Hiyate writes on the front page of our next issue, the investment in Jansen will see BHP produce about 4.4 million tonnes of potash a year in a first phase of development (Jansen S1). After a six-year construction period, initial production at the underground mine will start in 2027, with ramp up to full production taking a further two years.

Construction of two shafts and associated infrastructure is already 93% complete and will likely be finished in calendar 2022, and about 50% of all the engineering required for Jansen S1 has also been completed, which has “significantly de-risked the project,” Henry noted.

Henry, who was born in Canada and became CEO in January last year, also noted that the project, 140 km east of Saskatoon, is expected to operate for up to 100 years in the world’s best potash basin, and “plays to BHP’s strengths” in mining, processing and bulk logistics. Jansen will be “one of the world’s most sustainable potash mines,” he added, “with a low carbon footprint and low water intensity embedded into its design.”

The investment, BHP emphasized, gives the company “increased leverage to key global mega-trends, including rising population, changing diets, decarbonisation and improving environmental stewardship.”

As for the outlook for potash, BHP noted that prices for the fertilizer have “increased sharply” over the last year and “despite ongoing excess production capacity.” Citing statistics from commodities research firm CRU, granular spot prices — CFR Brazil and US (New Orleans) freight on board (FOB) barge — rose to about US$600 per tonne in July, which is a year-on-year increase of 150% and 180%, respectively, it said.

Looking ahead, BHP outlined in a press release, “trend demand growth will progressively absorb the excess capacity currently present in the industry,” which will “create the need for new greenfield supply by the late 2020s or early 2030s.”

For Saskatchewan, BHP’s decision will bring jobs and some serious tax revenue. “This is a truly monumental decision,” the province’s premier, Scott Moe, said at a press conference. “It represents, to date, the largest private economic investment that our province has ever seen.”

BHP emphasized that its investment in potash, and its planned exit from petroleum and non-core coal assets, means it “will be focused on high quality iron ore and metallurgical coal for the steel that is needed for infrastructure including for renewable energy; copper to support unprecedented demand for renewable energy; nickel for batteries; and potash to make food production and land use more efficient.” It also noted that management “will also continue to create and secure further options in future facing commodities.” (Iron ore, its key commodity, made up about 56.7% of its revenue in the fiscal year ended June 30, 2021.)

BHP’s decision on Jansen comes one week after the U.S. Senate passed a US$1 trillion infrastructure bill. In a rare (dare I say hopeful?) bi-partisan move, nineteen Republicans including Senate Minority Leader Mitch McConnell joined 50 Democrats to approve the bill, which is good news for mining companies that produce ‘future-facing commodities’ like nickel, copper, silver, lithium, cobalt, and rare earths. The bill includes US$65 billion that will be allocated to improve the electrical grid and energy production and about US$7.5 billion for building charging stations for electric vehicles.

According to Reuters, about US$6 billion in the bill is dedicated for battery materials processing and manufacturing projects and roughly US$140 million for a rare earths demonstration plant. The bill also earmarks about US$100 million a year through 2024 “in grants for developing, processing and recycling critical minerals.”

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