BHP seizes on a Canadian chance

As Australian mining investment falls on the back of government incompetence, Canada is picking up the projects, including a likely $10 billion bet by BHP Billiton in that country's potash reserves.

About two years ago a number of leading miners, including BHP, warned the top echelons of our government that Australia faced a catastrophic fall in mining investment around 2013-14. The Australian government thought the miners were merely promoting their own book and so Australia continued to attack miners.

But, unlike Australia, the Canadians understood what was really happening in mining and made sure that Canada remained one of the most attractive places to develop mining projects. And it is paying off. Accordingly my guess is that the next major greenfields investment by BHP will be in Canada where construction costs have been kept under control and where the government wants investment.

Last week BHP received the required mining rights for its giant Canadian potash deposits. While no decision has been made it is highly likely that in 2013 BHP will proceed with the $10 billion Canadian project.

Back in Australia, once current projects are completed our iron ore and coal mine construction will slump and we only have ourselves to blame.

Of course some two years ago most government advisors were convinced that a long-term mining construction boom was ahead with $200 billion-plus projects in the pipeline ready to replace a similar number of plans that had been committed.

And so our miners were politely shown the door and told to stop talking their own book – 'In Canberra, we know better’.

Now everyone – perhaps with the exception of the top people in government – knows that Australia cannot avoid a huge fall in mining investment. There will be almost no new projects in Australia apart from extensions to existing mines or developments close to existing mines. It is the biggest single threat over the Australian economy.

In some ways BHP in Canadian potash is like Andrew Forrest in Australian iron ore. BHP should have taken the deposits that Forrest acquired and then developed them because they were close to Mount Newman. BHP misjudged the potential.

Similarly, the Canadian giant Potash Corp should have taken the same action with the potash deposits on its doorstep. But like Forrest in Australian iron ore, BHP quietly keep buying and acquiring acreage and increasing their exploration drilling. BHP now has a giant deposit. Initially BHP preferred to buy Potash Corp and delay a greenfield development but the Canadians blocked the hostile bid. BHP then proceeded with its own deposits.

It is possible BHP will bring in a partner to lower the funds exposure to Canadian potash. Potash is sold via a cartel dominated by Potash Corp. BHP will not join the cartel. Instead BHP will produce about one million tonnes of additional production each year which equates to about two-thirds of the market growth for potash based fertilisers. That way BHP can enter the potash market without destroying the price.

The majors led by Potash Corp have to decide whether to give BHP a hard time or allow the Big Australian to take the space. One-product listed companies, like Potash Corp, that engage in a price war often come off second best.

I emphasise that no decisions have been made by BHP but there is no greenfields project in Australia that goes anywhere near Canadian potash for returns and low risk.