Potash expansion risky for BHP, warns investor

An influential investor in BHP Billiton has warned that spending billions on a new potash expansion would be a "misguided" move for the company at a time when prices appear set to fall.

An influential investor in BHP Billiton has warned that spending billions on a new potash expansion would be a "misguided" move for the company at a time when prices appear set to fall.

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."