The world’s largest mining company, BHP Group Ltd., signalled its future is focused on sustainable industries by committing $7.5-billion to a massive Saskatchewan potash project while exiting the oil and gas business.
On Tuesday, Melbourne, Australia-based BHP announced it is moving forward with the Jansen mine, mothballed for several years after more than $5-billion of development spending, and it will begin shipping potash in 2027. The project will create 3,500 construction jobs and permanent work for 600 employees.
BHP also announced it will spin out its energy business to Australia’s Woodside Petroleum Ltd., creating one of the world’s largest independent oil and gas companies. BHP shareholders will receive Woodside shares that give them a 48-per-cent stake in the energy company.
BHP chief executive Mike Henry, a native of Vancouver, said in an interview the decision to build the Jansen mine while selling the oil and gas business reflects “a number of megatrends, including population growth, rising standards of living, sustainable farming practices and decarbonization and electrification of the economy.”
Over the next two decades, BHP projects demand for potash, used in fertilizer, will significantly outstrip supply. Saskatchewan has the largest potash reserves in the world. Russia and Belarus – a country currently facing U.S. and EU economic sanctions – are home to the commodity’s other major producers.
“BHP’s decision highlights the strength of our potash resource and will undoubtedly help build a strong economy for Saskatchewan,” said the province’s Premier, Scott Moe, in a news release. Mr. Henry said while the federal and provincial governments support the Jansen mine, BHP received no special incentives for the project.
If potash prices do rise, BHP plans to further expand the Jansen mine and develop other potash properties in Saskatchewan, BHP president of minerals for the Americas Rag Udd said in an interview. The company expects to earn an internal rate of return of 12 per cent to 14 per cent on its investment in Jansen. BHP said the Jansen work force will be gender balanced, with 20 per cent First Nations employees.
BHP has a long-standing interest in Canadian potash producers. Earlier this year, the company held talks with Calgary-based Nutrien about a joint venture at Jansen, but failed to reach an agreement. On Tuesday, Mr. Henry said, “We are always open to working with a partner, but we don’t need a partner to move forward on this project.”
A decade back, BHP tried to buy PotashCorp, which later merged with Calgary-based Agrium to form Nutrien. But the Saskatchewan government opposed the BHP takeover, and the federal government eventually blocked the transaction on the grounds there was no net benefit to Canada.
This is BHP’s second major investment in Canada this summer. The company bid $325-million in July for Noront Resources Ltd., which owns properties in Northern Ontario’s Ring of Fire that contain nickel and chromite. Mr. Henry said while the timing was coincidental, “Canada has always been one of the world’s great mining jurisdictions.”
The price of BHP and Nutrien shares fell on Tuesday, in part on concerns that building a new Saskatchewan mine that produces more than four million tonnes of potash annually will flood a global market that currently consumes 70 million tonnes of the commodity.
However, analyst Ben Isaacson at Bank of Nova Scotia said in a report that demand is expected to grow by 2 million tonnes a year, because of increasing agricultural use. “Jansen is unlikely to impact the potash market for several years beyond where most investment time horizons end, and even then, the tonnes will be needed by the market,” he said.
Potash prices briefly spiked to more than US$800 a tonne in 2008, when the Jansen project was launched, then spent much of the last decade between US$200 and US$400.
BHP is making its investment in Jansen based on projections that potash will sell for between US$292 and US$341 a tonne from 2027 to 2037, the mine’s first decade of operation. In recent months, prices rose sharply from around US$300 to more than US$570 a tonne, in part because of sanctions again Belarus.
BHP is exiting the energy business at a time when oil and gas prices are rising, in part because of increasing economic activity coming out of the COVID-19 pandemic. In a report, Australia-based RBC Capital Markets analysts Kaan Peker and Gordon Ramsay said BHP’s decision to sell the unit to Woodside was driven in part by recent activist shareholder campaigns against energy companies such as Royal Dutch Shell PLC and Exxon Mobil Corp.
”Petroleum is a notably ESG negative exposure within a rapidly greening and, in parts, decarbonization-enabling mining industry,” the RBC analysts said.
As BHP relaunched the Jansen mine on Tuesday, the company took a US$1.3-billion pretax impairment charge on its potash business. Mr. Udd said the accounting charge reflects the fact that the project is currently worth less than BHP has invested in its development.
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