Is This Major Miner a Threat to Potash Corp. and Mosaic Co?

Big miners; BHP Billiton (NYSE: BHP  ) , Rio Tinto (NYSE: RIO  ) , and Vale (NYSE: VALE  ) have been widely criticized for pumping iron ore production and putting tremendous pressure on prices. Recently, these miners mostly told the market that they were ready to operate in a low-price environment.

For example, during its first quarter earnings call Vale stated that its cash cost for iron ore was $21.6 per ton. Vale was confident that it could reduce this further because of cost dilution over a larger production volume.

Recently, Rio Tinto's CEO Sam Walsh stated that he was comfortable in the current price environment with Rio's iron ore costs of $20 per ton. However, there was an interesting change of tone in the words of BHP Billiton's CEO Andrew Mackenzie.

In a recent interview, he stated that Chinese demand would shift for materials with more consumer uses, such as copper, as well as for food, which could lead to more demand for potash. What's more, he stated that the expansion of BHP Billiton's iron ore business was too fast. So, should Potash Corp. (NYSE: POT  ) and Mosaic (NYSE: MOS  ) prepare for intense competition from BHP Billiton?

Taking a phased approach
Right now, BHP Billiton produces no potash at all. But it continues to develop its Jansen potash mine in Canada, which it believes is the best undeveloped potash resource in the world. BHP Billiton's current capital commitment to the project is $2.6 billion. This year, BHP Billiton plans to spend $600 million on Jansen, 25% below the previously announced guidance of $800 million.

The total cost of the Jansen project could be up to $16 billion. When potash prices collapsed in the summer of 2013 following the breakup between Uralkali and Belaruskali, Mosaic's capitalization dropped below the cost estimates of building the Jansen mine. In turn, this spurred rumors that BHP Billiton could choose to acquire Mosaic instead of building its own project.

These rumors proved to be unfounded. Since then, Mosaic has been on the rise, and now the company's capitalization is close to $19 billion. In comparison, Potash Corp. remains much bigger, with a $30 billion capitalization. Therefore, even if BHP Billiton considered buying its place in the potash world, rather than developing its own mine, it is no longer an option.

BHP Billiton will not hurry with Jansen mine
The potash market has changed since BHP Billiton started the Jansen project. Potash prices are under pressure, and Potash Corp. sold its potash for just $250 per ton in the first quarter. Mosaic did not do much better with a price of $267 per ton. While the bottom might have been reached and prices will likely increase going forward, the overall pricing environment is not favorable for gigantic projects.

Thus, BHP Billiton is going to continue its phased approach to build the Jansen mine, or even search for a partner. Right now, the company's profits are pressured by low iron ore and met coal prices, so there is no need to rush the potash project. Clearly, making a big investment to enter another market with depressed prices is a dubious strategy. What's more, the Jansen mine will be a big player and will create additional pressure on potash prices, so the demand must be strong when potash from the mine enters the market.

Bottom line
I think years will pass before BHP Billiton finally enters the potash market. Until then, Mosaic and Potash Corp. have other things to worry about.

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  • Report this Comment On June 14, 2014, at 11:49 AM, abbaman7 wrote:

    Analysis is correct. There is no threat coming from these quarters.

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