Putin’s war should be a boon for BHP

Henry told the conference he wished the project had been approved ten years ago. If it did, it would generate an additional $2 billion to $3 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) per year, he said.

While he said the “tragic events” in Ukraine had highlighted the higher than usual potential for supply disruption in the potash market, he described it as a “positive reinforcement” for the potash market. a decision already made.

Jansen’s appeal, even without the events in Eastern Europe, is that its fundamentals are good – it’s a big, low-cost project in a basin with a century of production potential – in a market whose fundamentals are solid.

BHP chief Mike Henry is optimistic about the company’s Jansen project in Canada.Credit:Bloomberg

Global population growth and higher calorie intakes, as the middle classes in emerging economies swell and limit the growth of arable land, mean that demand for fertilizers is growing at a faster rate than population growth or agricultural production.

Before the war in Ukraine, BHP predicted that new supply would be needed by the end of this decade and that prices would likely be set by the operating and capital costs of Canada’s new solution miners (they pump water or brine in the potash deposits to bring them to the surface), which are higher than for a conventional potash mine like Jansen.

Break-even costs for solution mines are around US$300 per tonne, implying a structural increase in potash price floor relative to prices of the past decade, even without supply effects continued sanctions against Russia and Belarus.

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Jansen’s first stage is expected to produce between 4.3 and 4.5 million tonnes of potash per year once started. Stage 2, if continued, would add an additional 4 million tonnes per year at a lower capital intensity than stage 1 – at US$800 to US$900 per tonne, it would be around 30% less – in because of the existing infrastructure.

BHP estimates it would generate internal rates of return between 18 and 20% and a payback period of just four years at long-term consensus prices well below current spot prices.

In fact, the Jansen project potentially has four stages and an eventual production of 16 or 17 million tonnes of potash per year, or about 25% of the current market, with each stage having lower operating and capital costs and yields additional higher. . If all four stages were in place and prices were half their current level, Henry said Jansen would generate between $4 billion and $5 billion in annual EBITDA.

This number is important and central to BHP’s decision to divest/split off its oil business via the merger of BHP Petroleum with Woodside. BHP shareholders will emerge with just under half of the expanded business.

Putin's invasion of Ukraine has shaken commodity markets.

Putin’s invasion of Ukraine has shaken commodity markets.Credit:PA

Jansen provides a long-term replacement for the hole in its revenue base that the loss of $3 billion a year in oil and gas EBITDA will create, while significantly reducing BHP’s carbon footprint and capital intensity in the process. .

Potash’s other appeal is that its market and price is uncorrelated to BHP’s other commodities, and a Canadian asset of Jansen’s scale also adds geographic diversity.

Oil once played a diversifying role in BHP’s portfolio, with the unusual (for a large miner) mix of resources putting a floor under BHP’s cash flow and lowering its risk profile.

Since the 2008 financial crisis, however, conventional commodities – iron ore, copper, coal and energy – have become increasingly intertwined, their markets becoming “financialized” and becoming an investment class alongside physical demand, with derivatives and exchange-traded markets. some products.

If BHP seizes the moment to fast-track Jansen, it will not only (hopefully) benefit its shareholders, but reduce global dependence on two pariah country suppliers.

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A large-scale presence of potash within BHP’s portfolio will help it generate more stable cash flows, which is important for a group that has to invest very large sums with long lead times before returning to a volatile sector. . BHP has, for example, invested in what became Jansen for almost a decade and a half, but the cash won’t start to flow until 2026.

Ukraine’s invasion and the West’s response could be ill wind – it’s almost the definitive ill wind – but if BHP seizes the moment to speed up Jansen, it will not only (hopefully) benefit its shareholders, but will reduce the world’s dependence on the country’s two supplier pariahs and reduce their global economic influence and leverage in the process, which would be a good thing.

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