BHP’s Strategic Briefing
The strategy briefing announced by BHP Group (ASX: BHP) has revealed several strategic amendments across the medium and long term. These headlined amendments have been altered by expansion plans to Olympic Dam mines, a revised focus on the Canadian potash project, along with a hardened stance of the group to shift away from thermal coal and other fossil fuels.
A recent amendment of the operational size and output projection of the Olympic Dam expansion plan was announced by the BHP board due to the ground conditions in South Australia. The group’s chief financial officer Peter Beaven has emphasised that the program will remain conceptually unchanged, despite different sized options for expansion now being considered.
The previously proposed $2.1 billion “brownfield expansion” has been re-estimated to cost up to $2.5 billion, which aims to expand both underground and surface operations into the unexploited Southern Mine Area, delivering improved throughput of the existing plant and subsequently increasing overall copper production capacity. The originally estimated 20 per cent rate of return to be generated by 2023 has also been revised to ”between 12 per cent and 25 per cent”.
The Wednesday announcement has downgraded the previously advised 330,000 tonnes of copper output to between 240,000 and 300,000 tonnes per year, implying the expansion may increase production capacity by as little as 20%, rather than the 65 per cent increase that was previously proposed. The originally proposed scale of operation also projected that Olympic Dam would be cheaper to operate than 75% of the world’s copper mines.
As BHP have historically demanded a 15% minimum estimated rate of return before approving projects, the current revisions have raised concerns of the investment decision delaying from its 2020 schedule, or a potential dismissal of the project as seen with numerous previous Olympic Dam expansion plans that have failed to compete for capital against BHP’s other growth options.
Despite this, the Olympic Dam expansion plan continues to be central to BHP’s long term strategic direction in facilitating the development of the group’s copper assets. Mr Beaven has thereby expressed that ”(BHP) are continuing to see what the optimum expansion size is and determine at what pace should maximise value”.
Expansion into Canadian potash
The strategic briefing has also laid out an 18 month procurement timeframe of the first phase of Jansen project in producing Canadian potash – which is estimated to cost $8.3 billion and a production cost of $US100 per tonne. Currently, Canadian potash is priced at $US270 per tonne and BHP has estimated the price to rise beyond $US300 in 2025 due to a heightened demand which will grow by 2 to 3 per cent in the 2020s, hence delivering a return on investment of between 14 per cent and 15 per cent.
BHP has outlined potash, a crop nutrient used by farmers, to be a key resource for the next decade in feeding the world’s growing population and identified potash margins to be even higher than the margins in iron ore. The strategic briefing aims to utilise the latent potash capacity of the current market as an opportunity to capture the high margins and provide a significant return on equity.
Additionally, Mr Beavan responded to criticisms made by big potash producers such as Mosaic and Nutrien, which questioned BHP’s price estimations and doubted the creation of shareholder value by indicating potential issues with market oversupply would arise from the Jansen project. Mr Beaven said BHP’s forecast for long-term potash prices to be above $US300 per tonne was consistent with various other forecasters, and would only bring Jansen into production once the potash market was tighter to avoid oversupply.
BHP’s decision to enter the potash market was initially proposed back in August 2013, whereby the chief executive Andrew Mackenzie announced $US2.6 billion spending on building shafts at Jansen. That spending has slowed amid the current weak potash prices, and BHP is expected to take another 18 months to complete the Jansen shafts. Regardless, there have been ongoing stakeholder concerns since the initial announcement of potash projects, with BHP entering the already saturated fertiliser market, along with the implementation timeframe which is estimated to take 5 years for Jansen to reach its initial capacity.
Moving away from thermal coal
Furthermore, BHP has reaffirmed its position in limiting its thermal coal investments due to the decarbonisation of the energy sector, despite its lucrative returns. The miners have expressed a continued bullish stance on copper and nickel assets, indicating that these resources are well positioned to benefit from the increasing demand for modern batteries especially driven by the emergence of electric vehicles. The mining group has raised its forecasts in estimating that at least 132 million electric vehicles will be on the roads by 2035. However, the strategic briefing has also underlined that BHP is unlikely to invest in core battery resources of lithium due to abundant market supply and cobalt due to competition from substitutes.
Overall, the market has responded to BHP’s revised and reinforced medium to long term strategic outlook with relative optimism, closing the Wednesday trades at $38.06 per share.
By Andy Gu
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