Investor urges BHP caution on potash expansion
BlackRock fund manager Evy Hambro told Bloomberg that BHP chief Andrew Mackenzie would be going against some of his guidance on investability hurdles if he announced new money for Canada's Jansen potash mine later this month.
BHP will report its full-year results on August 20 and the company is due to give some guidance about the direction of Jansen, which could include a tranche of new spending to sink shafts at the mine.
The investment decision on the expansion - which is expected to cost more than $US10 billion - has been complicated over the past week by the collapse of a potash cartel in eastern Europe, which has dragged down forward estimates of the potash price.
Mr Hambro said the likelihood of falling potash prices should make the project unattractive for now.
"If you do see a lower price scenario as a result of what's going on in the potash space, then the rate of return on that project would be well below [BHP's] hurdle rate," he said, in reference to BHP's self-imposed targets.
"To be committing significant amounts of capex to that, on their own, without a partner, into a market that now looks like it's going into increased volumes, and they would just be adding to the problems there, would probably be a misguided decision.
"It would go against what the new CEO of BHP has been guiding to."
It's not the first time that Mr Hambro has campaigned for outcomes at BHP, where BlackRock has long been the biggest shareholder.
In 2011 and 2012 he led a shareholder push for more dividends, which helped stifle BHP's plans to develop a series of mega projects such as the Olympic Dam expansion.
The trend for greater shareholder returns has now spread across most of the resources industry.
Potash is converted into fertiliser, and is seen as a long-term investment based on the world's growing appetite for food.
Mr Mackenzie said BHP had not been surprised by last week's cartel collapse. "We've always said potash is a business which will lose some of its cartel-like structure in time and will become more globally traded like everything else, so we to some extent predicted what has happened," he said. "We think very long-term; this is something that has happened short-term."
He said he would be better placed to speak on BHP's outlook for potash during its full-year results later this month.
Frequently Asked Questions about this Article…
The debate centers on whether BHP should commit billions more to develop the Jansen potash mine in Canada. BlackRock fund manager Evy Hambro warned spending on the expansion now could be 'misguided' because recent events have pushed down potash price forecasts, potentially making the project fail to meet BHP's self-imposed investability hurdles.
The expansion is expected to cost more than US$10 billion. For everyday investors, a multi-billion dollar commitment matters because if potash prices fall, the project's rate of return could sit below BHP's hurdle rate, reducing shareholder value and influencing BHP's capital allocation and dividends.
Forward estimates dropped after the collapse of a potash cartel in eastern Europe, which appears to have increased market volumes and pressured prices. That change in market structure has prompted concerns that potash could become more globally traded and less cartel-controlled, at least in the short term.
Evy Hambro advised caution, saying committing significant capex to Jansen now—especially without a partner—could be a misguided decision because a lower-price scenario would likely push the project's returns below BHP's hurdle rate and add to market oversupply issues.
BHP is scheduled to report its full-year results on August 20, and the company is expected to give some guidance at that time about the direction of Jansen, which could include whether it will approve a tranche of new spending to sink shafts at the mine.
BlackRock, where Evy Hambro is a prominent fund manager, has long been BHP's biggest shareholder. In 2011–2012 Hambro led a shareholder push for higher dividends, which helped curb BHP's plans for several mega projects—showing shareholders can meaningfully influence capital-allocation decisions.
Potash is converted into fertilizer and is viewed as a long-term play on the world's growing appetite for food. Investors care because potash demand links to agriculture trends, but short-term price swings and market structure changes (like a cartel collapse) can significantly affect profitability for producers like BHP.
Investors should watch BHP's full-year results on August 20 for guidance on Jansen, monitor potash price forecasts following the cartel collapse, and pay attention to whether BHP plans to fund the project alone or with partners—since those factors will influence project returns and BHP's capital-allocation decisions.
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