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John Stubbs, Jansen project manager, with the Herrenknecht driller that will be used at the BHP Jansen mine. (DAVID STOBBE FOR THE GLOBE AND MAIL)
John Stubbs, Jansen project manager, with the Herrenknecht driller that will be used at the BHP Jansen mine. (DAVID STOBBE FOR THE GLOBE AND MAIL)

A Canadian prairie game-changer: BHP bets big on potash Add to ...

That may be good news for buyers in China and India, which are resisting long-term pricing contracts with Canpotex and BPC.

The sides are already months behind on deals due to be signed this year and Potash Corp. was forced to cut its profit outlook as sales failed to materialize.

BHP will suffer along with the rest of the industry if it floods the market with cheap potash. Some analysts say it may even price itself out of the market because Jansen will come on line together with expanded capacity embarked on years ago by established competitors.

Potash Corp., for example, is set to lift capacity to more than 17 million tonnes by 2015, compared to production in 2011 of 9.34 million.

“Building Jansen will not help this surplus situation and ultimately potash prices may need to fall below the marginal cost of production of $250 a tonne to tighten up supply and stimulate demand,” says Jacob Bout, an analyst at CIBC World Markets Inc.

Some market watchers expect that demand will grow enough to absorb the growing potash output.

“Despite current pricing, we believe that the result of burgeoning middle classes in China, India and other rapidly growing economies will lead to increased agricultural product demand and drive related commodity prices,” says Sander Grieve, co-chair of the mining group at Fraser Milner Casgrain LLP, a Toronto law firm that is positioning itself for growth in the potash market.

But aside from BHP, other new entrants in the potash business are also racing toward production, arguing that demand growth could be more than the average estimates of anywhere from 3 to 5 per cent a year on global consumption of some 60 million tonnes last year.

 

The competition heats up

A short drive from the Jansen mine, Karnalyte Resources Inc. chief financial officer Ronald Love visits his company’s potash project, wearing just a blue suit and steel-toed boots despite howling subzero winds. The tiny Okotoks, Alta.-based company – market capitalization of about $140-million – is making the same bet as BHP with a new potash mine in development, but on a smaller scale.

“I think, in terms of the supply and demand, while there are fluctuations in the short term, the medium and long term look pretty strong,” says Mr. Love, standing on the edge of a massive field being cleared by trucks and back-hoes to prepare it for construction in the spring.

“One of our advantages is we feel we will be one of the first to get our foot in the door with the new expansions,” he says.

Other major resource companies are also getting into the potash game. New greenfield projects are under way by Brazil’s Vale, Germany’s K+S and others.

Including land acquisitions, exploration and site work at Jansen, BHP has so far spent close to $2-billion in Saskatchewan.

Jansen’s currently approved funding will run out by the end of its fiscal year in July. But most signs point to a green light by BHP’s board for the full funding needed.

For the past nine months, every three minutes a large dump truck has delivered a load of gravel to the mine site to be used to stabilize the surface footprint and avoid flooding in the spring. On a recent Monday, white gravel trucks criss-crossed roads leading to the site like a procession of worker ants carrying crumbs to a nest.

Between the head frames housing the Herrenknecht, a plant is busy pumping cold brine to points 500 and 700 metres below the surface, where it will freeze aquifers so that borers can cut through them without risk of flooding and reach the potash deposit.

The plant has the capacity to freeze the equivalent of 30 professional hockey rinks.

Construction is at full-tilt on a state-of-the-art camp called Discovery Village that will at its peak house 2,600 workers, each with their own washroom; 500 apartments will be ready by December.

The nearby town of LeRoy is investing in infrastructure upgrades and has already sold residential lots to investors in anticipation of welcoming new residents as Jansen – with its head shaft towers visible in the distance – ramps up.

Once built, Jansen will have an underground footprint that runs 18 km from east to west and 30 km from north to south.

“We’ve started the excavation of the shafts, we’ve been working on site for the last two years and we believe in the long-term fundamentals of potash,” says Mr. Cutt, who expects that by the end of 2015, the company will have the shafts fully constructed down to the ore body one kilometre below the surface and be prepared to build production rooms.

“We keep the board informed as we go, we keep the executive committee informed. We feel good about it.”

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