Potash expansion risky for BHP, warns investor
BlackRock fund manager Evy Hambro told Bloomberg that BHP chief Andrew Mackenzie would be going against some of his guidance on investment hurdles if he announced new money for Canada's Jansen potash mine this month.
BHP will release its full-year results on August 20. The company is due to provide some guidance about the Jansen expansion, which could include new spending to sink shafts at the mine.
The investment decision on the expansion, expected to cost more than $US10 billion ($11.15 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 potash prices.
Mr Hambro said lower potash prices would make the project unattractive. "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 the company's self-imposed targets.
"To be committing significant amounts of capex [capital expenditure] to that, on their own, without a partner, into a market that now looks like it's going into increased volumes ... would probably be a misguided decision."
It is not the first time Mr Hambro has campaigned for outcomes at BHP, where BlackRock is the biggest shareholder.
In 2011 and last year, he led a shareholder push for more dividends, which helped stifle BHP's plans to develop a series of big projects such as the Olympic Dam expansion.
The trend for greater returns for shareholders has now spread across 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 on Wednesday BHP had not been surprised by the cartel's 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," he said.
"We think very long term; this is something that has happened short term."
Frequently Asked Questions about this Article…
An influential investor at BHP, BlackRock fund manager Evy Hambro, warned that spending more than US$10 billion on a Jansen potash expansion could be a "misguided" move if potash prices decline following a recent cartel collapse. He says lower forward price estimates could push the project's rate of return below BHP's self-imposed hurdle rate.
Evy Hambro, a BlackRock fund manager and representative of BlackRock — BHP's biggest shareholder — has publicly urged caution. Investors should care because large capital expenditure decisions affect future returns, dividends and how BHP allocates shareholder capital.
The cartel's collapse in eastern Europe has dragged down forward estimates of potash prices. According to Hambro, sustained lower prices would reduce expected returns on a major expansion like Jansen, potentially putting the project below BHP's investment hurdle rate.
BHP could announce new spending to sink shafts at the Jansen mine as part of an expansion. The company was due to release full‑year results on August 20, when it might provide guidance about the project and any new capital commitments.
Hambro suggested that committing significant capital expenditure alone, without a partner, into a market that looks set for increased volumes and lower prices would probably be misguided — implying BHP should consider partners or hold off until the market outlook is clearer.
Yes. The article notes potash is converted into fertilizer and is seen as a long‑term investment tied to the world's growing appetite for food, though short‑term market disruptions like the cartel collapse can affect near‑term pricing and project economics.
Hambro has a track record of campaigning at BHP for greater shareholder returns. In 2011 and more recently, he led pushes for higher dividends that helped temper BHP's plans for large projects — for example contributing to resistance around developments like an Olympic Dam expansion.
BHP chief Andrew Mackenzie said the company wasn't surprised by the cartel's collapse and expects potash to lose its cartel‑like structure over time and become more globally traded. He emphasized that BHP thinks very long term and views the collapse as a short‑term event.
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