BHP sees potash as ideal fit for portfolio
"Even though we have highlighted the priority areas, we actually do have a number of other areas we plan to explore over the next five years. Our game is to really develop a resource basin for the long term," said Graham Kerr, the head of BHP's Diamond and Specialty Products business.
Kerr noted that BHP is focused on investing in assets that are long-life, low-cost and have expandable resources, making its potash projects in the Canadian Prairie province of Saskatchewan an ideal fit for the company's portfolio.
Earlier this week, BHP released resource data related to Jansen -- its flagship potash project in Saskatchewan. Jansen, which is expected to begin production of the fertilizer in 2015, has 3.37 billion tonnes of material that contained 25.4 percent potassium oxide.
Kerr said BHP has also finished all of its exploration work around its Boulder and Young potash projects in the province. The company also controls the Burr potash project, which it acquired earlier this year through its C$341 million ($325 million) takeover of Athabasca Potash.
Kerr, who was speaking at the RBC Capital Markets' Global Mining and Materials conference in Toronto, noted that the Jansen project will be developed first, followed by the Boulder and Young sites.
BHP plans to develop Jansen into the world's single largest potash mine with eight million tonnes of annual output.
Kerr said the mine will be developed in three phases, with two million tonnes of capacity being added by each of the two initial phases, followed by four million tonnes of capacity in phase three. The mine is expected to be operating at full capacity by 2025.
Kerr said that BHP expects to receive board approval and the necessary environmental approvals to move the project forward in late 2011.
GREENFIELD VS BROWNFIELD
The three big incumbent producers in Saskatchewan, Potash Corp (POT.TO), Mosaic Co (MOS.N) and Agrium Inc (AGU.TO) are all currently in the midst of expanding their output of the crop nutrient through brownfield expansions that will increase production from existing mines.
Many existing producers have argued that the current potash price of slightly below $400 a tonne -- although well above the historical average -- is too low to justify the development of new, or so-called greenfield potash mines.
Kerr, while declining to provide the anticipated capital expenditure requirements for the Jansen projects, said BHP believes that the economics continue to make sense for it to push forward on the development of Jansen.
"There has been a lot of talk around brownfield versus greenfield. One of the important points that we would like to make is that, in the long-term forecast, we believe there is room for both, and in fact both are needed," he said.
Kerr noted that although BHP is a new entrant in the potash sector, it has the skills and the balance sheet necessary to be successful.
"The combination of BHP's strength and ... the resource, gives us the opportunity to build a very competitive greenfield project," he said. "We see ourselves being in a position to be on the right side of the cost curve for a long time."
Kerr also hinted that the Australian mining giant would rather sell its potash through its own marketing channels, than buy itself a seat at the table within Canpotex -- the potash export arm of the three incumbent producers in Saskatchewan.
"One of the strengths in our operating model is that we have a centralized marketing model. We have a central marketing organization that is independent and very customer focused. And in all cases BHP Billiton prefers to sell its own production," said Kerr, adding that the firm prefers a transparent spot pricing model.
Analysts and investors have speculated about whether BHP would try to structure a deal that would allow it to export potash overseas through Canpotex, which competes with BPC -- the export arm of Russia's Uralkali (URKA.MM) and Belaruskali.
Potash -- the common name used to describe compounds that contain potassium -- caught investor interest a few years ago when high grain prices, tight supplies and strong demand drove the fertilizer to above $1,000 a tonne from less than $150.
The price gradually retreated last year, as farmers, hit by the credit crisis and falling grain prices, reined in their applications of the crop nutrient, but demand has already begun to rebound this year.
Potash is currently mined in only a handful of countries globally, with Canada being the largest producer.
Kerr said that BHP has already looked at four different ports from where it could ultimately ship its production.
"We certainly see ourselves owning our own ports. In terms of ensuring that we actually have control and in terms ensuring that our product gets priority," he said. "To be honest, longer term, we see ourselves having two ports rather than one."
($1=$1.05 Canadian) (Reporting by Euan Rocha; editing by Rob Wilson)
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