The world’s largest mining company is making a surprise move in the Canadian potash market.
BHP Group (LON: BHP) went on to say today that it was laying out a case for investing $8 billion into a major potash project, claiming that increased fertilizer supplies are needed as the demand for food around the world grows.
In a recent strategy briefing, CFO Peter Beavan has gone on to emphasize that more potash will be needed by around 2025 in order to sustain the world’s growing population.
Although a somewhat surprising strategic move for a mining company, the move into potash would help diversify the company, especially since fertilizer prices have historically had a low or even negative correlation with other commodities.
“The world will consume more food and will demand a higher quality. Competition for land is intensifying. And mitigating historical unsustainable land and water use in certain regions will be a challenge. Demand for potash should continue to grow in line with established historic trends. However, there is today material existing latent potash capacity,” said Beavan according to The Financial Times. “We expect this existing latent capacity will be utilised by the middle of next decade given this demand growth. This is likely to cap prices in the near term. Thereafter, new greenfields projects will be required.”
So far, BHP CEO Andrew Mackenzie has already signed off on an extra $2.7 billion in spending for the construction of deep mining shafts for a potash project in Jansen, Saskatchewan, Canada. The decision, made just 100 days after being appointed to the position, was a significant expenditure that he later admitted as being an over-investment.
Many shareholders have criticized the move to diversify into potash, however. Elliott Advisors, well known activist investors who have a stake in the company, have argued against the move and questioned the logic of moving half-heartedly into a fertilizer market they think is already saturated on the promise that future supplies will be limited.
JPMorgan went on to say that BHP’s move makes some sense on a strategic level and that the company would rely on potash prices being 24 percent higher than current market prices by 2025 in order to make a 15 percent ROI. “It creates a high-margin, long-life asset” with significant expansion opportunities, analysts and JPMorgan wrote. However, they added that excess potash supplies won’t be used up until later in next decade, meaning prices will still remain low even after the Jansen facility comes online after the $8 billion injection in cash.
Shares of BHP dipped slightly on the London stock markets but stayed relatively the same.
BHP Company Profile
BHP is a leading global diversified miner supplying iron ore, copper, oil, gas, and coal. A 2001 dual-listed merger of BHP Limited (now BHP Ltd.) and Billiton PLC (now BHP PLC) created the present-day BHP. Shareholders in each company have equivalent economic and voting rights in BHP as a whole.
Major assets include Pilbara iron ore, Queensland coking coal, Escondida copper, and conventional petroleum assets, principally in Australia and the Gulf of Mexico. Onshore U.S. oil and gas assets are likely to be sold in 2018. – Warrior Trading News