Henry said at the conference that he would like the project to be approved ten years ago. If that were the case, it would bring in additional revenue of $ 2 billion to $ 3 billion before interest, taxes, depreciation (EBITDA) per year, he said.
While he said that the “tragic events” in Ukraine highlighted the higher than usual potential for disruptions in the potash market, he described it as a “positive reinforcement” for the decision already taken.
The appeal of Jansen, even without the events in Eastern Europe, is that his foundations are good – a big low-cost project in a basin with a century of potential production – in a market whose foundations are strong.
Global population growth, higher calorie consumption as the middle class in emerging economies grows, and arable land growth mean that demand for fertilizers is growing faster than population growth or crop production.
Before the war in Ukraine, the BHP predicted that a new supply would be needed by the end of this decade and that prices were likely to be set by Canadian miners’ operating and capital costs (they pump water or brine into potash deposits to bring them to the surface). for a conventional potash mine like Jansen.
The cost of breakeven for the production of solutions is about $ 300 per ton, which means a structural increase in the minimum price of potash prices compared to prices over the past decade, even without the consequences of proposing ongoing sanctions against Russia and Belarus.
It is expected that the first phase of Jansen will produce from 4.3 million to 4.5 million tons of potash fertilizers per year. Phase 2, if it continues, will add another 4 million tonnes a year with less capital intensity than Phase 1 – from $ 800 to $ 900 per tonne it will be about 30 percent lower – due to existing infrastructure.
According to BHP estimates, at long-term consensus prices that are much lower than current spot prices, this will lead to domestic profit rates of 18 to 20 percent and a payback period of just four years.
In fact, there are potentially four stages of Jansen’s project and end up producing 16 or 17 million tons of potassium per year, or about 25 percent of the current market, with each stage having lower operating and capital costs and higher growth. . If all four stages were in place and prices were half of their current level, Henry said Jansen would bring in $ 4 billion to $ 5 billion in annual EBITDA.
This figure is important and important for BHP’s decision to sell / withdraw its oil business through merger of BHP Petroleum with Woodside. BHP shareholders will emerge from just under half of the expanded business.
If BHP takes the opportunity to accelerate Jansen, it will not only (hopefully) benefit its shareholders, but also reduce the world’s dependence on the two pariah suppliers and reduce their global economic influence and leverage in the process, which would be good.
Jansen provides a long-term replacement hole in its revenue base, which will create an EBITDA loss on oil and gas of $ 3 billion a year, while significantly reducing BHP’s carbon footprint and capital intensity.
Another appeal of potassium is that its market and prices do not compare to other BHP commodities, and Canadian Jansen-scale asset also adds geographical diversity.
Petroleum once played a diversifying role in the BHP portfolio, with an unusual (for a large miner) combination of resources that reduced BHP cash flows and reduced the risk profile.
However, after the 2008 financial crisis, conventional commodities — iron ore, copper, coal, and energy — became increasingly correlated as their markets became “financialized” and became an investment class along with physical demand from derivatives and commodity markets.
The large-scale presence of potash fertilizers in BHP’s portfolio will help it generate more stable cash flows, which is important for a group that needs to invest very large sums over the long term before profiting in an unstable sector. The BHP, for example, has been investing in what became Jansen for almost a decade and a half, but the money will not start flowing until 2026.
Invasion of Ukraine and Western reaction could be a bad wind – it’s almost a disaster – but if the BHP takes the opportunity to speed up Jansen, it will not only (hopefully) benefit its shareholders, but also reduce the world’s dependence on two pariah suppliers and reduce their global economic influence and leverage in the process, which would be good.