BHP Billiton (ASX: BHP) is facing a tough decision on whether to proceed with its $14 billion Jansen potash project after one of the two cartels controlling the market for the crop nutrient collapsed.
Earlier this week, the world's largest potash producer, OAO Uralkali, announced that it would lower its prices in order to chase market share and break away from the cartel-controlled industry. As a result, many analysts believe that Uralkali's decision will start a price war that will make BHP's Jansen project too risky to proceed with.
Whilst the mining heavyweight maintains a heavy focus on cutting costs and cutting non-core projects in order to ensure long-term sustainability, BHP CEO Andrew Mackenzie has stated that any new investments that the company gets involved with will need to pass strict cost vs. benefit hurdles in order to be approved. In regards to the Jansen project however, he admits that it is not an option that needs to be rushed into, despite having spent roughly $1.2 billion on the project so far with a further $600 million planned for this fiscal year.
What Mackenzie needs to weigh up is whether the project will return significant enough profits in the long-term with the price for the fertilizer ingredient set to drop. The project is not expected to begin producing before 2017 and from there will take years to reach full production, whereby an estimated 8 million metric tonnes per year could be produced.
With a long-term potash price tag of US$500 per tonne and $16 billion in capital expenditure, Citi has estimated the net present value of the project to be $7.2 billion. On the other hand, the net present value would be around negative $2.2 billion should the potash price fall to US$300 per tonne.
One thing seems for certain: BHP would be breathing a sigh of relief that its $40 billion bid to takeover Canada's Potash Corp in 2010 fell through.
Foolish takeaway
BHP should not rush its decision as to whether to proceed based on Uralkali's threat to increase supply and lower prices, however, Mackenzie will need to assess whether, or how much more, capital to invest in the Canadian-based Jansen.
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
