The Distillery: BHP's potash potential

BHP Billiton chief Andrew Mack­enzie has resisted pressure to put the miner’s potash play in Canada on the backburner. The mining giant’s results missed expectations, but the commitment to keeping options open in Canada is instructive when it comes to the company’s Mackenzie chapter, according to Australia's business commentators.

The Australian Financial Review’s Matthew Stevens says BHP Billiton’s decision to triple its position in Canadian potash shows Mackenzie still sees the industry as a potential fifth pillar for the miner.

“The investment market’s clear preference was that a newly frugal BHP would defer further spending on the $US14 billion Jansen project. But having demonstrated its capacity to operate with record production across seven assets working in five commodities, its intensifying thrift by extracting $US2.7 billion from its ‘controllable cash cost’ base and then its generosity by offering a small increase in dividend, BHP opted to maintain its growth mission by committing $US800 million over each of the next three years to its potash venture. Jansen was not, mind you, the only surprise in these results.”

The Australian’s Barry Fitzgerald is on the same beat, saying Mackenzie can envisage potash slotting in with iron ore, petroleum, copper and coal in the BHP portfolio.

“Jansen is to get another $US2.6 billion ($2.8 billion), spread across several years, to finish the sinking of its two shafts into the potash beds that lie more than 1km beneath Saskatchewan’s barren prairie, as well as complete surface infrastructure. That comes on top of the $US2 billion already spent by BHP on establishing Jansen as potentially the next big thing, one that could keep giving for decades to come. Against a backdrop of investor demands for capital constraint and greater shareholder returns, the ongoing annual investment of $US800 million in Jansen is a gutsy call, which is kind of neat in that potash is all about the need-to-feed the world.”

The Australian Financial Review’s Chanticleer columnist Michael Smith says Mackenzie is trying to juggle BHP Billiton’s need to pull back spending without erasing the miner’s next growth opportunities.

“The [Jansen] decision shows BHP is not yet ready to abandon its push into the fertiliser market which Mackenzie believes will boom as the world’s demand for food increases in line with population growth.”

Yesterday wasn’t just about Jansen of course. Business Spectator’s Stephen Bartholomeusz says the 31 per cent fall in earnings to $US11.8 billion excluding significant items might have been a larger pull back than expected. But it could have been worse.

“BHP’s response to the steep decline in prices as China’s demand softened and supply surged on the back of an earlier wave of resource sector investment was to start carving into costs and freezing new capital expenditures. While it wasn’t sufficient to offset the $US8.9 billion impact of the lower prices, BHP did rip $US2.7 billion out of its cash costs and helped mitigate the impact on the group’s cash flows, which were down 25 per cent to $US18.3 billion. Mackenzie believes the potential for further cost reductions is significant.”

While acknowledging that he’s exaggerating a little, the Herald Sun’s Terry McCrann writes that BHP’s capital spending is set to fall ‘off a cliff’.

And Fairfax’s Malcolm Maiden does what all investors are constantly doing, comparing BHP to its chief rival Rio Tinto.

“BHP and Rio Tinto are Australia’s two mining whales, and they are swimming through similar, slightly chilly water this year as the resources bubble deflates and they focus much more tightly on costs and productivity. Investors are taking on different risks depending on which whale they ride. Rio is the biggest punt on the iron ore price.”

The other big corporate story from yesterday was Coca-Cola’s disappointing numbers. The Australian’s Richard Gluyas says the problem for CCA boss Terry Davis stems from the company’s consistent success over a long period, while the same newspaper’s John Durie says the decision to issue a special dividend of 2.5 cents in addition to the 75 per cent franked ordinary dividend of 24 cents is questionable.

Fairfax’s Elizabeth Knight reports that QBE Insurance boss John Neal is finding the task of cleaning up the sprawling business left behind by predecessor Frank O’Halloran is more difficult than originally thought.

The Australian Financial Review’s economics editor Alan Mitchell urges all federal parliamentarians to read this year’s Stan Kelly Lecture from former Productivity Commission chairman Gary Banks on economic policy in post-mining boom Australia.

And finally, Fairfax’s Ross Gittins gives his take on why policy feels so woefully absent from modern Australian elections.