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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 ...

Meet the Herrenknecht, a borer drill the size of a blue whale that is tearing up the Saskatchewan landscape – and with it the economics of the mining industry’s new hot commodity.

Some 32 metres long and as wide as a small house, the custom-made piece of German engineering is embarking on a journey to a point one kilometre below the province’s grain fields. There it will strike prairie gold – potash.

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Jansen is slated to be the world’s largest potash mine, twice the size of its closest rival. With a total estimated cost of some $14-billion, it’s a brazen bet by Australian mega-miner BHP Billiton Ltd. that the crop nutrient will be the world’s most important mined commodity for decades as farmers struggle to boost food production for a hungry planet.

Jansen promises to drive a momentous power shift in the global potash industry, dominated for decades by groups of producers, under fire as alleged cartels, that have controlled most of the world’s supply and enjoyed strong profits.

BHP is throwing down the gauntlet on that cozy arrangement. The world’s largest mining company says it will sell its potash independently of any rival marketing group, adding a weighty new competitor to the negotiating table when major consumers seek new supplies of the fertilizer.

That’s music to the ears of emerging nations such as China and India. Those countries have delayed signing new long-term purchase contracts over the past year as they push for a better deal.

But it’s a worrying proposition for established potash producers such as Saskatoon’s Potash Corp. of Saskatchewan Inc., the world’s biggest. BHP says it will tap its deep ties with major emerging nations as it battles for potash market share.

The Jansen project is on a scale not seen before in the industry. BHP is developing a potash deposit nearly the size of Montreal. It will be the first major new mine the industry has seen in decades. The company describes it as a 70-year bet on potash.

“We believe in the long-term fundamentals of potash, in population growth and limited arable land growth,” says Tim Cutt, president of BHP’s diamonds and specialty products unit, standing beside two 47-metre head frames at the Jansen mine, with the barren Saskatchewan prairie stretching in the distance.

“We’re viewing this as an opportunity as demand grows in Brazil, China and India for potash from Saskatchewan,” Mr. Cutt says.

But Jansen’s big size also brings big risks.

The mine, along with other new industry projects and expansions, will bring massive new supply onto a market that is increasingly grappling with a surplus. Prices have been cut by half in recent years as some countries balk at new purchases. Some fear the new supply could create a glut that will punish the entire industry, Jansen included.

Indeed, on the Saskatchewan prairie, the consequences of oversupply are already evident.

Just 20 km to the west of Jansen, a train used for shipping potash sits idle. Snow squalls waltz across the Trans-Canada highway, whipping past the rust-brown steel wheels of parked rail cars.

“Lanigan is down,” explains a gas station attendant, referring to a mine owned by Potash Corp., whose mines are visible along the highway leading to Jansen.

In October, the potash giant announced temporary shutdowns at some mines in an effort to better match supply with demand. Meanwhile, the world’s second-largest producer, Uralkali of Russia, plans to cut production in half from December to March in the face of weak demand from India and China, Reuters reported this week.

Potash Corp. and Uralkali are leading members of two global marketing organizations known as Canpotex and Belarus Potash Co. (BPC) that together control 70 per cent of supply and curtail production when needed to support prices.

BHP, though, doesn’t want anything to do with that.

“We do believe that there’s room in the market for several producers and several marketers,” says BHP’s Mr. Cutt.

The problem, some potash experts say, is that BHP is dead wrong.

“Considering all the other expansions coming, the world doesn’t really need the Jansen potash mine for at least a decade,” says Joel Jackson, an analyst with BMO Nesbitt Burns Inc. He recently penned an extensive report concluding that BHP should not build Jansen in light of current production capacity and expansions at major mines soon to be completed.

But that won’t stop BHP, he figures. “BHP will go ahead with Jansen because the company really values the commodity and it is looking for good diversification and growth and there are no easy choices to get into the potash industry,” he says.

Saskatchewan is home to the world’s largest potash deposits. They were formed as giant, ancient inland oceans evaporated and left a highly uniform, highly mineable seam under a sea of prairie lands. It is one of three key crop nutrients – the other two are nitrogen and phosphate – and it is an increasingly vital component of agriculture as farms struggle to boost yields.

Saskatchewan has proven irresistible for BHP, which has been looking for a way into the potash industry for about a decade. Jansen marks its second attempt after a first try failed miserably.

Two years ago, BHP became a household name in Canada when it tried to acquire Potash Corp. But the $39-billion hostile bid was rejected by the federal government, which viewed Potash Corp. as too strategic to Canada’s resource industry.

BHP’s Jansen plan is not a done deal either.

BHP, a major producer of iron ore, coal, copper and other resources, put some of its massive spending plans on hold in August after a slowdown in global demand for commodities. Some industry players are skeptical that the company will approve the full budget that is needed to build Jansen at a time when there is little clarity about where the market is going.

Potash prices, at about $500 a tonne, are down sharply from close to $1,000 when BHP was getting involved in Saskatchewan potash several years ago.

BHP insists its view of potash looks decades into the future, and bets that the need for the industry to manage supply as it does today will dissipate as demand rises with the world’s growing population. After all, potash proponents say demand from developing nations could grow rapidly as more and more people enter the middle class and put a strain on farmers whose yields can be but a fraction of those in the United States, for example.

 

Bigger and better

BHP knows it has to be bigger and cheaper than its competitors to make it worth the billions it will need to spend to get Jansen into production. The mine is an exercise in innovation, starting with the Herrenknecht, which is being used for the first time to dig a potash mine, and is faster, cheaper and safer than conventional methods.

It will be several years before Jansen begins production, but it’s not clear exactly when. The mine will start production at four million to five million tonnes a year, eventually reaching as much as nine million tonnes.

Using 2-D and 3-D seismic imaging, followed by drilling, the company has mapped the entire ore body, allowing it to design the entire 70-year mine life up front. Using a method called retreat mining, BHP will first dig out to the edges of the ore body and then work backward systematically, avoiding the cost of maintaining mined-out areas.

Even as it digs out from the production shaft, BHP will be stockpiling potash ore via conveyor belts that unfold behind custom-designed horizontal borers assembled underground. The continuous miners will be built to the full height of the 4.5-metre-tall ore body, allowing them to excavate tunnels with fewer passes than regular machines.

Once at surface, potash will be loaded onto trains via doors on top of rail cars. Upon reaching port in Vancouver, Washington state, it will be unloaded onto ships through trap doors underneath cars.

BHP figures it will be able to load and offload its trains in 12 hours, compared to an industry average of three days.

“We’re not in a position to give the numbers yet, but you have to understand that it has to be enough to where you have some sort of competitive advantage,” says Mr. Cutt, who spent 25 years with Exxon Mobil before coming to BHP.

“On a unit basis, we just have to produce and transport at a number that is substantially lower than current producers,” he says. “It’s all about the efficiency. We believe in doing as much automation as possible,” Mr. Cutt says.

The company will have to bring all its expertise to bear as a 150-year old producer of bulk commodities if it is to challenge the status quo developed over decades.

 

A warning of oversupply

Jansen will take direct aim at a market currently controlled by Potash Corp., Mosaic Co. and Agrium Inc., the triumvirate of the Canpotex marketing organization, which sells Canadian potash exports outside of North America, as well as Russia’s BPC.

Canpotex exported some 10 million tonnes of potash to markets in Australia, Brazil, China, India, Indonesia, Japan, Malaysia and South Korea last year. The nutrient is especially important to vulnerable economies because it acts like an insurance policy for farmers, strengthening plant stalks and roots as well as improving yield, flavour, texture and even the colour of a plant.

BHP is confident of its ability to operate outside of Canpotex because its global marketing arm and deep connections into Asia will help it sell potash profitably on a spot basis. And by being an independent, it may create new markets as it makes the nutrient more available.

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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