Potash Weekly Review: Change at BHP raises questions about the Jansen Potash Mine?
Some of the biggest news about potash from last week was not directly about potash. BHP Billiton, the world’s largest mining company, announced the resignation of its merger-happy CEO, Marius Kloppers and his replacement by Andrew Mackenzie. Kloppers is known to potash aficionados as the CEO who led the failed USD 39 billion bid for Potash Corp in 2010. Kloppers is also the CEO who stuck to big potash dreams by launching the USD 14 billion Jansen potash mine project in Saskatchewan. The Jansen project has the potential of becoming the largest potash operation in the world; however, the change of leadership has raised many questions about whether or not potash will continue to fertilize BHP’s ambitions to revolutionize the global potash industry. Indeed, BHP has promised to shun the ‘cartels’ such as Canpotex, which would be welcomed by large buyers such as India and China. By extension, with a production that would dwarf even Potash Corp, the Jansen mine would also be in a position to challenge the Russian-Belarusian cartel ‘Belarusian Potash Corp’ (BPC).
The new CEO, Andrew Mackenzie, has not revealed any major plans yet. His past experience suggests he will focus on improving existing assets rather than engage in new projects. He has also a history of cutting off assets and ambitions following significant market moves that are no longer seen as advantageous. He famously reduced BHP’s uranium production assets after Fukushima in 2011. Mackenzie is also an oil industry expert, having been an executive at BP, and is expected to lead BHP along an oil exploration path. The full funding for the Jansen mine, which has already absorbed USD 2 billion in investment, has not been approved yet, and the project could be slated for the chopping block; however, Mackenzie is one of the potash ‘dreamers’, having served as the lead officer for BHP’s takeover bid for Potash Corp and having led a massive potash project in Argentina, since sold to Brazil’s Vale SA.
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Detractors of the project suggest that Mackenzie will focus on confronting the fact that lower commodity prices have contributed to a 57.8% drop in net profit the second half of 2012 compared to the same period in 2011. BHP’s potash plans were conceived in 2009 at a time when potash cost over USD 600/ton and after a major surge. The investment projections to complete it may scare off BHP’s board, which would be prompted to push for BHP to buy its way into potash rather than build the world’s largest potash mine. On the other hand, should Mackenzie drive the Jansen mine to completion, it would send a strong signal of confidence in potash prices returning to higher territory – if not the records of 2008-2009.
The speculation over BHP is bound to lead to a shifting balance of power in the potash space. Currently, about 70 percent of global potash fertilizer exports come from Canpotex and BPC. If Jansen goes through, it would affect Canpotex and BPC’s market share significantly. At that point competitive CAPEX and production costs would be the keys for profitability. To this extent some of the emerging juniors such as IC Potash (TSX: ICP | OCTQX: ICPTF) or Allana Potash (TSX: AAA | OTCQX: ALLRF) , which are slated to enter production within the next 24 months, could benefit from the additional competition even if the price of potash drops. Operations at Vale’s USD 6 billion potash mine project in Argentina remain in limbo as the Company has cited very high currency exchange costs to bring it to a halt.
Vale said that it has entered talks with a new investor this week and that it would proceed with the project if an agreement were reached; otherwise, the Rio Horizonte potash mine would be closed. In that case, a large gap would be left to fill growing demand for potash in Brazil, which has been one of the most active markets for the mineral in 2012. Meanwhile, at least in the short while, potash prices could drop because of the effect of the rather inconclusive Italian elections, spelling a threat to the stability reforms of the outgoing government, will have on the Euro and on the world economy. Italy is one Europe’s third largest economy and one of the largest in the world and until the political situation is sorted out, economic sentiment will be low worldwide, pushing oil prices lower.
The Italian post-election quagmire effect should not be long. Despite the dramatic headlines in the world press, it is useful to recall that when France’s socialists won the elections in spring 2012, the world markets also reacted with fear. Yet, that particular fear factor had a very short run. For now, the best that can be said is that, if some bearish analysts were concerned by the market running a bit ‘hot’, they now have a chance to take an ‘espresso’ break. Let’s hope, the break doesn’t dwell into dinner by way of a siesta. As for the weekly share performance of ProEdgeWire’s potash and phosphate sponsors, there was little change as they endured a -1.93% overall drop that reflected the performance of the market in general.