Mackenzie vs BlackRock

BHP Billiton's Andrew Mackenzie (BHP) and BlackRock’s Evy Hambro may be heading for a showdown. BlackRock, the world’s largest asset manager, is the biggest shareholder in the world’s biggest mining company, with a 4.9% stake according to Bloomberg. And Hambro, who manages the $US7 billion ($7.81 billion) World Mining Fund, told Bloomberg that BHP’s Canadian potash project “doesn’t make sense”.

Mackenzie, of course, is of the opposite view. Yesterday, after a speech to the Asia Society in Melbourne, reporters asked him about BHP Billiton's potash project in Canada, which could cost as much as $US16 billion but has yet to receive board approval for further development. The BHP Billiton boss, however, says his company is thinking long term and that the collapse of potash cartels, which may send prices down 25%, has been factored into the bottom line by the company's own analysts.

“We have always said that potash is a business that will lose some of its cartel-like structure in time and become more globally traded, like everything else,” said Mackenzie.

But BlackRock’s Hambro says that kind of thinking should encourage the miner to stop further spending on potash.

“If you do see a lower price scenario as a result of what’s going on in the potash space, then the rate of the return of the project would be well below their hurdle rate,” Hambro told Bloomberg. “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 to increased volumes – and they would just be adding to the problems there – would be a misguided decision.”

Hambro may get his wish, at least for a couple of years. Mackenzie is unlikely to spend much of anything on new projects, as he’s more worried about cash flow and focussing on cutting spending and expenses (see Robert Gottliebsen's Making BHP more like CBA). In the latter quarter of his speech Mackenzie told his audience that BHP Billiton's costs in February had fallen by 6.5%, though he gave no context to the figure. He also said the company's workers had cut in half the time it takes to fill a truck.

The catchphrase of the BHP Billiton Mackenzie era is 'productivity' – Mackenzie wants his workforce to do more with less, and the will probably cut the company's workforce as it mine sites are automated. So Mackenzie's parsimony may end up fulfilling Hambro's wish – just not on potash.