BHP to invest additional US$2.6 billion in Jansen

Speculation that BHP Billiton (NYSE: BHP) might defer a decision on whether to proceed with the massive Jansen project in Saskatchewan after the recent collapse of one of two global potash cartels, came to an end today, with the Australian mining giant confirming that it plans to continue to invest billions in the project.

The miner, which depends on iron ore sales for the majority of its earnings, and on coal, copper, shale-oil wells, aluminium, manganese and nickel for the rest, said it will invest US$2.6 billion over a number of years to finish excavating and lining Jansen’s production and service shafts and to continue installing essential surface infrastructure and utilities. The company expects to complete the two shafts in 2016.

The excavation and lining of both shafts will reduce development risk and allow the company to time first production to meet growth in market demand, the company said.

“Continued development of the shafts reflects our confidence in the quality of our 5.3-billion-tonne measured resource and the compelling long-term fundamentals of the potash industry,” chief executive Andrew Mackenzie outlined in a press release.

The US$2.6 billion investment brings BHP’s total investment to US$3.8 billion in the project, which the company describes as “the world’s best undeveloped potash resource.” Once fully developed, the company expects Jansen to be one of the cheapest sources of supply of potash.

The decision “should give management an option (albeit an expensive one) to launch into potash production quickly in the aftermath of any price war as the current marketing system comes under threat from producers chasing volume not prices,” Peter Mallin-Jones of Canaccord Genuity comment in a research note.

Mackenzie—who was the point man during BHP’s failed US$40-billion bid to acquire Potash Corporation of Saskatchewan (TSX: POT; NYSE: POT) in 2010, and was appointed as chief executive in February—noted that investment at Jansen “is creating a valuable asset” and that its development “may include the introduction of one or more partners, consistent with our approach for other major operations.”

In an interview with The Wall Street Journal, Mackenzie said significant production volumes from the project, 140 km outside Saskatoon, are not expected before 2020.

The company says the resource at Jansen is capable of supporting a mine with annual capacity of ten million tonnes for more than half a century.

The company reported a profit of US$10.88 billion in the year ended June 30, down 29.5% from the US$15.42 billion profit it earned in 2012. Revenues declined 8.7% year-on-year to US$65.97 billion from US$72.23 billion, primarily due to lower prices for copper, coal and iron ore and one-time charges of US$922 million, after tax. The bottom line was also affected by a temporary increase in the group’s effective tax rate and financing charges incurred managing interest rate exposure on recently issued debt securities.

BHP achieved a reduction in controllable cash costs of US$2.7 billion during the financial year, excluding one-off items.

The company did not approve any major growth projects in the 2013 financial year, and 70% of the 18 major projects in execution at the end of the financial year are expected to deliver first production by the end of the 2014 calendar year.  

BHP forecasts that its capital and exploration expenditure will fall to US$16.2 billion in the 2014 financial year. Annual investment in Jansen of about US$800 million will make up an important part of that budget.

The miner ended the year with cash and equivalents of US$6.1 billion.