Potash plan to test BHP boss
Shareholders launch campaign against mining company over concern about entering fertiliser market
Melbourne — BHP’s plan to enter the potash market with a contentious $13bn project in Canada is adding to challenges facing the incoming chairman of the world’s biggest mining company.
Ken MacKenzie, a 53-year-old board member who takes up the role in September, is on a global tour to meet investors in the wake of an activist campaign in recent months spearheaded by Elliott Management Corporation. Issues of concern for some shareholders include the producer’s US onshore oil and gas assets and its plans to accelerate the Jansen potash venture.
Proceeding with Jansen risked a "severe strategic misstep", said Sanford C Bernstein analyst Paul Gait, as the new supply would risk depressing prices by delaying to about 2036 the ability of the potash market to work through overcapacity.
Paul Singer’s Elliott went public in April with a campaign seeking asset sales and a corporate overhaul, claiming management decisions have eroded as much as $40bn in value.
"Potash is going to be a big, big decision and I get the feeling most people in the market are fairly cautious," said Andy Forster, senior investment officer at Argo Investments.
Investors were looking to MacKenzie to show he will be "more disciplined in the capital-allocation process", he said.
BHP declined to comment on talks with investors on the Jansen project. Potash demand could double by the late 2040s to develop into a $50bn market, Paul Burnside, BHP’s principal for potash analysis, said on Monday in a blog post on the company’s website.
BHP could seek board approval as early as June 2018 to begin a $4.7bn first phase of production at Jansen from as early as 2023, Mackenzie said in a May speech in Barcelona.
The company previously had approved spending of about $3.8bn on developing the asset in Saskatchewan.
Describing the Jansen project as "highly contentious", Sydney-based Deutsche Bank analyst Paul Young said: "The market is severely challenged, may not improve for at least five years and there’s a lot of spare capacity in the industry."
The company should seek to sell or mothball the Jansen project, which the bank estimates requires total capital expenditure of $12.8bn, Deutsche analysts said in a July 6 report.
BHP has faced widening criticism of its performance in recent months, as investors including AMP Capital and Schroders have joined Elliott in calling for changes or a review of parts of its portfolio. Sydney-based Tribeca Global Natural Resources Fund has proposed replacing five or six members of the producer’s 11-person board.
Developing Jansen, BHP argues, would add potash, a fertiliser, as a fifth key material alongside coal, copper, iron ore and petroleum.
"Potash demand sits at the intersection of inexorable mega trends ranging across demographics, economics, diet and the environment," BHP’s Burnside said in the blog post.
Adding 4-million tonnes a year of supply would be "worrisome", with modest demand growth unlikely to be sufficient to absorb about 8-millions tonnes of capacity already scheduled to be added in the next few years by existing suppliers, said BMO Capital Markets.