The future of the BHP Jansen mine casts uncertainty shadow over potash prices
Potash and Phosphate Week in Review: InvestorIntel’s Potash & Phosphate members fell 2.7% for the week ending on July 26. The result did not offer any special insight to indicate the course of the potash market. The mere fact that EPM Mining Ventures (TSXV: EPM | OTCQX: EPKMF) could fall 17.65% in Toronto while gaining 9.17% at the OTC in New York (the biggest gains of the week in fact) is an indication of the continued ‘wait and watch’ attitude of potash investors. The one stable potash junior has been Allana Potash (TSXV: AAA | OTCQX: ALLRF), whose price, except for an especially bright week about a month ago, started to rise above its annual average of about 50 cents a share to reach 0.56 cents a share in Toronto trading. The potash ‘limbo’ market will likely continue until BHP Billiton makes an its long awaited announcement over whether or not it will proceed with the Jansen potash mine in Saskatchewan, which would, if completed, become the world’s largest potash mine.
The market has been ambivalent; in the eyes of many potash investors and industry insiders, there is no need for Jansen. The big potash players in North America and Russia such as Potash Corp and Uralkali and the cartels that represent them, CANPOTEX and BPC respectively, have been encouraging this view by keeping prices at the USD$ 400/ton mark in order to raise the entry barriers to new potash plays. BHP, however, will have to make a decision very soon and the arguments in favor of the board approving the project or stopping it are equally persuasive. BHP is the world’s largest mining company and has huge resources yet its new CEO, Andrew Mackenzie, has been happy to embark on a program to chop USD$ 80 billion worth of projects to confront lower commodity prices, while building its oil exploration profile. However, BHP could be ready to report no less than USD$ 12 billion in profits soon even as it announces the end of its moratorium on approving more investment. In addition, BHP has already spent close to USD$ 2 billion on the Jansen mine and the Company does consider potash to be an important new pillar in its portfolio. Nevertheless, there are less favorable considerations.
Due to a perception of modest short term prospects in potash fertilizers, K+S, Europe’s main potash producer with Canadian expansion plans of its own, has decided to put a hold on its prospective Saskatchewan expansion, while Mosaic Potash (a CANPOTEX member) announced it would cut its own growth ambitions. The prices for potash fertilizers have been under pressure for some time because major customers have held back orders and enforced discounts. Analysts and investors then fear that new plays and resulting overcapacity would lead to oversupply of potash fertilizers. Nobody questions the long term prospects of food demand: nobody doubts the need to feed growing populations but nobody has also made any valuable argument as to why PotashCorp, Mosaic or Uralkali should give up their very nice margins – even at current prices. Yet, BHP is under pressure. An ambitious gambler might suggest that the company will not go ahead; but a cautious gambler might look at both sides of the argument carefully, noting that it will be cheaper for the company to continue further development of the mine, while avoiding any final green light/red light move on Jansen.
BHP Jansen will therefore remain along the development path, wide enough to allow the company to start producing a fraction of its potential, which might then be better exploited as the world population grows in the next decade. Last month Goldman Sachs suggested as much, predicting that BHP would fund more pre-approval CAPEX until the shaft (to access the potash at depths of 1km) is ready, implying an additional investment of USD$ 500 million in pre-approval capital, pushing the deadline for final approval of the project to 2015-16, when the potash market might be much clearer.