BHP’s erstwhile potash prey becomes predator

Despite sinking US$3.6bn into its under-construction Jansen project in Saskatchewan, Canada, BHP Billiton still hasn’t decided whether the fertiliser product will form its 5th pillar.

Back in 2010, the company had no doubts. It launched an ambitious US$39bn bid to buy the world’s number one producer, Potash Corp. At that time, potash prices were high and BHP saw the product as an attractive addition to its portfolio.

Unfortunately, Canadian Prime Minister Stephen Harper blocked the hostile takeover in November 2010, saying the transaction would provide no net benefit for the country.

Behind him, the Province of Saskatchewan, home of Potash Corp, had lobbied furiously against the deal, saying that approval would mean a loss of jobs and taxes and surrender of a valuable national resource.

A disappointed BHP elected to build rather than buy its way into the potash sector.

It had already assembled an area of around 7338 km2 under exploration lease in areas of the Saskatchewan potash basin considered the most promising for economically viable potash deposits. Jansen was the most advanced project, capable of ultimate output of 8mtpa, a good chunk of the 50mtpa world market.

BHP Billiton’s then Diamonds & Specialty Products President Graham Kerr said: “The Jansen project is the first phase of what we expect to be our strong presence in the potash sector. In conjunction with the Jansen project, we will continue to pursue other potash opportunities that fit within our portfolio of tier 1, long-life, export-oriented assets. In parallel with the Jansen project, BHP Billiton is also pursuing the Boulder and Young greenfield potash projects in Saskatchewan as well as advancing work on logistics and a port.”

BHP announced in 2010 it would sink US$240m into Jansen, on top of earlier spending, with the funds “to start the required ground freezing to allow safe and effective shaft sinking to take place, as well as completing detailed engineering, equipment and materials commitments.”

In June 2011, BHP tipped another $488m into Jansen, bringing the total to US$1.2bn, and its total Saskatchewan spend to US$2bn. The latest tranche was for site preparation and the procurement of long lead time items during the project’s feasibility study.

In August 2013, BHP said it would spend another US$2.6bn to finish the excavation and lining of Jansen’s production and service shafts, and to continue the installation of essential surface infrastructure and utilities.

However, BHP had by now delayed its planned start-up date for Jansen, which, back in 2010, had been 2015.

Instead, chief executive Andrew Mackenzie sounded a more cautious note, saying that Jansen’s development “may include the introduction of one or more partners, consistent with our approach for other major operations.”

Against this background, BHP’s erstwhile prey has turned predator, with Potash Corp putting a “private proposal”, worth an estimated $9bn, to Germany’s K + S.

K+S is developing a greenfield potash project in Saskatchewan called Legacy.

According to K+S, “With Legacy, we will be the only potash producer with large and owned production facilities on two continents. The new potash plant will complement the German production network, reduce the average production costs and extend the average lifetime of the mines. In addition, Legacy will strengthen K+S’s competitiveness.”

Analysts were bullish on the impact of a successful Potash Corp bid for K+S on the broader potash sector and BHP Billiton.

Firms like Deutsche Bank and UBS suggested that increased consolidation could improve potash industry incumbents’ pricing power.

Meanwhile BHP Billiton has re-jigged executive responsibility for potash.
Dean Dalla Valle, currently President Health, Safety, Environment (HSE), Marketing and Technology will become Chief Commercial Officer, assuming accountability for potash.

BHP said that “Mr Dalla Valle’s current portfolio includes Group Project Management making the Potash Project a strategic fit for his portfolio. Mr Dalla Valle will retain his existing areas of Health, Safety, Environment (HSE), Marketing, Supply and Information Technology.

“At the same time, the changes will allow BHP Billiton President Petroleum, Tim Cutt, to concentrate exclusively on growing the value of the Petroleum Business. Mr Cutt’s title will change to President, Petroleum. These title changes are effective 1 July 2015 and Mr Dalla Valle will assume responsibility for Potash from 1 August 2015.”