BHP freeze on new projects about to thaw
The Jansen potash project has been under development for several years in Canada's Saskatchewan region, and is expected to cost more than $US10 billion ($9.5 billion) to build when approved.
It was one of several "mega projects" that were expected to get the go-ahead from the BHP board in 2012, but fell victim to the company's promise to freeze approvals on expensive growth projects until at least June 30, 2013.
Speaking at a Bloomberg conference in Sydney on Wednesday, BHP's chief financial officer Graham Kerr indicated the freeze would not extend into next financial year, and that Jansen might be one of the first proposals that new chief executive Andrew Mackenzie offers to the board.
If taken to the board within the next 15 months, Jansen could be approved sooner than the Scarborough LNG joint venture with ExxonMobil, which the companies have suggested could be approved in late 2014.
Both appear well ahead of the Olympic Dam expansion in the pecking order of BHP's big-growth options. Olympic Dam is undergoing re-evaluation for up to four years in a bid to find a cheaper way of developing the massive copper, gold and silver deposit in the South Australian outback.
Mr Kerr said potash was the one commodity that could rise to join iron ore, coking coal, petroleum and copper as one of BHP's top-tier growth divisions.
"We are not the iron ore only company," he said, in a thinly veiled swipe at less-diversified rivals such as Rio Tinto and Fortescue Metals Group.
Potash can be mined to help produce fertilisers, and is considered a growth commodity because of the expectation that the world's demand for food will expand and change in the decades ahead.
BHP has previously said that barriers to entry in the potash industry are high, and that will ensure that supply will struggle to keep up with demand in the future.
The company has continued to work on Jansen despite the approvals freeze, and has most recently been building the construction and service shafts for the underground mine.
Deutsche analyst Paul Young speculated in March that BHP might be tempted to sell a stake in Jansen and develop the mine as a joint venture.
"Similar to our view on Olympic Dam, we think selling part of Jansen would reduce risk for shareholders," Mr Young said last month.
BHP reported $US1.9 billion worth of cost cuts (on an annualised basis) at the February half-year results, and Mr Kerr said investors should expect more to be announced at the full-year results in August.
It was revealed earlier on Wednesday that some of those savings would be achieved at the Peak Downs coalmine in Queensland, which BHP operates in a joint venture with Mitsubishi.
The joint venture partners have terminated a supply contract with Leighton Contractors and replaced it with a cheaper contractor, HSE Mining. A spokeswoman for the joint venture said the change was part of the focus on "reducing its overheads and operating costs across the business".
Earlier this year, BHP and Rio Tinto were criticised by Glencore boss Ivan Glasenberg for expanding too quickly and driving down the price of iron ore. But Mr Kerr defended the company against allegations it had "screwed up", saying that someone else would have built the new mines if BHP had not.
BHP shares closed up 57¢ at $33.68 and some pundits have suggested the rise is linked to a decision by Macquarie to upgrade the company from a "neutral" rating to "outperform".
BHP will report its March quarter results next Wednesday, while Rio will report its quarterly results on Tuesday.
Frequently Asked Questions about this Article…
BHP put a temporary freeze on approving expensive new growth projects until at least June 30, 2013. The company's CFO Graham Kerr indicated the freeze would not extend into the next financial year, so approvals are expected to resume after June 30, 2013.
The Jansen potash project is a large underground potash mine BHP has been developing in Saskatchewan, Canada. If approved it is expected to cost more than US$10 billion (about $9.5 billion). Potash is used to make fertilisers and is seen as a growth commodity because of expected long‑term increases in global food demand, so Jansen could be an important new growth division for BHP.
Yes. The article says Jansen could be taken to the BHP board within the next 15 months and might be approved sooner than the Scarborough LNG joint venture with ExxonMobil, which has been suggested could be approved in late 2014. Olympic Dam is further back in priority and is undergoing a re‑evaluation that could last up to four years.
Deutsche Bank analyst Paul Young speculated that BHP might sell a stake in Jansen and develop the mine as a joint venture to reduce risk for shareholders. That idea was presented as analyst commentary in the article, not a confirmed company decision.
BHP reported US$1.9 billion of annualised cost cuts in its February half results and the CFO said more savings could be announced at the full‑year results in August. The article notes one example: the Peak Downs joint venture in Queensland replaced Leighton Contractors with cheaper contractor HSE Mining to reduce overheads and operating costs.
BHP shares closed up 57¢ at $33.68 on the day referenced. Some commentators linked the share rise to Macquarie upgrading BHP from a "neutral" rating to "outperform," as reported in the article.
Potash is used in fertilisers and is considered strategic because rising and changing global food demand should increase long‑term demand. BHP has said barriers to entry in the potash industry are high, which should make it hard for supply to keep up with demand in the future.
Glencore boss Ivan Glasenberg criticised BHP and Rio Tinto for expanding too quickly and contributing to lower iron ore prices. BHP's CFO Graham Kerr defended the company, arguing that someone else would have built the new mines if BHP had not, and emphasised BHP's diversification by saying it is not just an iron‑ore company, a pointed remark aimed at less diversified rivals like Rio Tinto and Fortescue Metals Group.
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