BHP Billiton has announced a mineral resource estimate for its Jansen project located in Canada's Saskatchewan potash basin. The in-situ mineral resource is 3.4 billion metric tons at a grade of 25.4% potassium oxide. To put this into context, the world's largest producer, Canada's PotashCorp, reports combined measured, indicated and inferred resources for its seven Saskatchewan mines at 18.4 billion tonnes at 23.3%. This includes proven and probable reserves of 1.6 billion metric tons at 23.6%. PotashCorp says the average extraction ratio of recoverable ore to in-place material for the mines is around 30%.
On this basis, you'd think BHP has a long-life mine. The company suggests more than as much, saying Jansen is nearing the end of its pre-feasibility study, and is anticipated to progress to feasibility during the first half of fiscal year 2011. Based on the current schedule, it could produce saleable potash from 2015, and Jansen is only one of multiple development options for BHP. Nearby it has the less advanced Boulder and Young projects in the concept study phase.
Like an iron ore project, this is the sort of resource play where returns on capital are made via incremental development, not necessarily with initial construction of the first mine and infrastructure. PotashCorp is the world's largest producer at 22% of global supply. It suggests a development cost for a conventional 2 million metric ton greenfield Saskatchewan potash mine at approximately CAD 3 billion to mine gate. Rail and port infrastructure potentially add another CAD 1.2-1.7 billion.
Given these barriers to entry, there hasn't been a greenfield potash mine put into production in Canada in over 40 years. At a 15% required rate of return, PotashCorp estimates a CAD 4.0 billion greenfield development needs an average US$860 per metric ton potash price while CAD 4.5 billion takes US$960 per metric ton. After hovering between US$100 and US$200 per metric ton for most of this decade, Vancouver free-on-board potash prices shot up in early 2008 and peaked at almost US$900 per metric ton in early 2009. They have since retreated to around US$315 per metric ton, an unprecedented decline, and a far cry from the minimum hurdle for new development.
This suggests BHP is either positioning itself for the time if and when considerably higher potash prices come, or that it can build mines at considerably lower cost than PotashCorp suggests. Both scenarios could occur, with scale. BHP believes Saskatchewan could be the next long-life, low-cost expandable basin play. Jansen is being planned to reach an eventual full production capacity of 8 million metric tons annually. The company has allotted pre-commitment funding of US$240 million to support continued engineering, regulatory permitting, and completion of ground freezing necessary to negotiate aquifers.
Over 90% of world potash consumption is used in fertilisers to improve water retention and crop yield. Only 12 countries produce potash with Canada, Russia and Belarus accounting for more than 80% of global reserves.
Mark Taylor is a senior equities analyst with Morningstar.
