BHP Billiton's missing billions

Last week Marius Kloppers had a lot of analysts scratching their heads after he revealed BHP Billiton planned to spend $US80 billion investing in its current portfolio over the next five years.

Even though Kloppers nominated, without specifics, the broad areas in which the $US80 billion would be spent, they were struggling to work out how BHP Billiton could spend that amount of money within that time period on the projects he identified – expansion of BHP Billiton’s Queensland coal mines, its Pilbara operations, its Escondida copper project in Chile, oil and gas, the first phase of the Olympic Dam expansion and the Jansen potash project in Canada.

The planned capital expenditure program represents a major acceleration of the projects within BHP Billiton’s massive pipeline of identified prospective developments. But to reconcile the sheer scale of spending with the analysts’ puzzlement might, unless BHP Billiton changes its mind about the planned cautious rate of expansion at Olympic Dam, require something extra from left field.

The big new project in BHP Billiton’s near term plans is the $US12 billion or so Jansen potash project in Canada, which has taken on a sharper focus and is being pursued with greater urgency since the failure of BHP Billiton’s $US39 billion bid for Potash Corp. Last month BHP Billiton declared the project had moved into the feasibility study phase of its development, although within BHP Billiton there appears to be no doubt that Jansen will be developed.

BHP Billiton’s gate-crashing of the tightly-managed potash industry would have been given an instant kick-start had it been able to acquire Potash Corp, the world’s largest potash producer. Without it, assuming Jansen is sanctioned, it will take BHP Billiton a long time to have an impact.

On the current timetable BHP Billiton, which is spending $US240 million on drilling and site preparations ahead of the ground-freezing that will enable it to sink the shafts for the project, would start full development of the mine late this year or early next year and see initial production in 2015. It would, however, take the best part of a decade for the project to scale up from its initial output of about two million tonnes a year to it planned full production rate of 8 million tonnes a year.

BHP Billiton controls a vast amount of acreage in Canada’s Saskatchewan potash basin, much of it acquired when it took over Athabasca Potash at the start of last year at a cost of $US320 million. With Athabasca came the Burr, Boulder and Young projects, which BHP Billiton is also evaluating. It started exploring another area in the basin, Melville, around the middle of last year.

BHP Billiton’s development concept has been to get Jansen up and running and then progressively add new developments – what it has described as a "conveyer belt" strategy. That may have changed, both because the Potash Corp bid failed and because, while it hasn’t said much publicly about the results, it appears to be getting quite excited about Melville.

BHP Billiton likes potash for a number of reasons. The fundamentals are good, with demand rising as the bigger developing economies move up the wealth and protein curves and the pressure on the availability of arable land continues to rise. Within the industry there is a broad consensus that this will lead to demand significantly out-stripping supply by the middle of this decade, although the price has already moved significantly.

Another key appeal is that potash/fertiliser usage by developing companies follows the same growth curve as iron ore and coal but lags well behind them. As demand for its current bulk commodities matures – and as new production comes on stream after the financial crisis interrupted the flow of new supplies – having a product in its portfolio that doesn’t have strong correlations with its existing line-up would be a valuable source of growth and diversification.

Kloppers would also look at the industry structure, where the Canadian and Russian producers operate marketing and distribution co-operatives, or cartels, in order to maintain prices. There hasn’t been new potash mine built for 40 years.

Kloppers is completely committed to selling as much of any of his products at market-clearing prices – he has forcibly shifted the iron ore and coal markets over to market-related pricing and is working on the alumina market. If BHP Billiton is producing potash it will produce as much of it as it can at the lowest cost it can and sell it at whatever price the market is prepared to pay.

Jansen in full production would be the world’s largest potash mine, and its production would represent about 13 per cent of current industry capacity. BHP Billiton, of course, prefers to be the dominant producer in any key commodity.

That’s where the missing billions within the capital expenditure plans might be found.

BHP Billiton is thought to be mulling over the idea of not just building Jansen but, tracking very closely behind it, fast-tracking a second big potash project of broadly similar scale and cost. Melville has been nominated as a potential candidate.

That would enable BHP Billiton to produce twice as much potash during the ramp up phase than if it developed Jansen alone and could give it a much more influential market position far earlier than envisaged, particularly if it executed its conveyer belt strategy once the initial projects were up and running.

A twin-project strategy would be far more disruptive of the status quo in the potash market – it would undermine the cartels very quickly – but would obviously be roughly twice as costly.

（Business Spectator）