Own BHP shares? Here’s what you need to know about the commodity predicted to be bigger than petroleum for the mining giant

The latest move could prove to be a profitable one for the mining giant.

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Key points

  • BHP appears to be making a bold move into potash, a key fertiliser market that's been disrupted amid the Russia-Ukraine conflict
  • The miner says it could even grow its potash segment as large as its petroleum business, which generates a five-year average of US$3 billion 
  • In the last 12 months the BHP share price has held a 7% loss

Shares in BHP Group Ltd (ASX: BHP) are tracking higher in Wednesday’s trade. At the time of writing, the BHP share price rests 3% in the green at $47.06.

The gain today eclipses a 13% gain in BHP shares since trading resumed in January, placing the miner as one of the leading ASX shares this year to date. That well outperforms the S&P/ASX 200 Index (ASX: XJO), which is down 3.6% since the start of 2022.

Now reports have surfaced the mining giant is set to embark on another capital intensive program. News published overnight is that BHP is seeking to develop its interests in the key crop fertiliser, known as potash.

What is potash?

According to Mosaic Crop Nutrition, fertiliser potassium, or potash, stems from “an early production technique where potassium was leached from wood ashes and concentrated by evaporating the leachate in large iron pots (‘pot-ash’).”

Whereas Australian Potash states that potash simply refers to “potassium-bearing minerals or compounds”.

The compound is essential for the successful growth and yield of various essential crops, such as soy, corn and rice.

“Potassium, nitrogen, and phosphorus are the three macro-nutrients vital for plant growth,” Australian Potash goes on to say.

“Potassium helps the ‘blood flow’ of the plant, enabling sugars and waters to move around. It thickens cell walls, protects against drought and helps the plant defend against disease.”

What will the push into potash mean for BHP shares?

According to reports, BHP is seeking to up its stake in key potash assets in Canada. It comes amid a global supply shock of fertiliser from Russia-Ukraine tensions.

The sanctions placed on Russia have hurt global potash supplies. For context, Russia and Belarus account for almost 40% of global supply, per S&P Global.

Now the mining giant is stepping up to the potash plate. BHP is approving a US$5.7 million (AU$8.1 million) investment in the Jansen potash mine in Saskatchewan, the Australian Financial Review (AFR) reports.

BHP CEO Mike Henry spoke at the Bank of America resources conference in Miami. Henry said that if the company were to “bring on all four stages, and at prices just half of where they are today, we’d be generating US$4 billion to US$5 billion of EBITDA per year,” cited by the AFR.

Henry also said the move into potash “will bring greater cash flow and returns resilience”. The company is forecasting an internal rate of return (IRR) of 18% to 20% in stage two of the project with investors realising their initial investment after roughly four years. It will be interesting to see what this will mean for the BHP share price.

In real terms, it’s a lucrative value proposition. So much so, that Henry also predicted BHP’s potash segment could even grow as large as its petroleum division – pushing production of 16 million to 17 million tonnes of output across the project’s four stages.

Compared to its petroleum business, which averages US$3 billion (AU$4.3 billion) across five years, the growth into potash is set to match or even outpace even this large sum, should all go according to plan.

In the last 12 months the BHP share price has held a 7% loss despite rallying more than 13% this year to date.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. Bank of America is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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