Is potash the key to driving BHP shares higher?

This mining giant is betting big on potash. Is it a smart move?

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BHP Group Ltd (ASX: BHP) shares are having a decent session.

In morning trade, the mining giant's shares are up 1.5% to $45.79.

This means the Big Australian's shares are now up 3% over the last two trading sessions.

Why are BHP shares rising?

Investors have been snapping up the company's shares after it announced that it was betting big on potash.

As we covered here, the BHP board approved a US$4.9 billion (A$7.7 billion) investment for stage two of the Jansen potash project in Saskatchewan, Canada.

This is on top of the previous approval of a US$5.7 billion (A$9 billion) spend on stage one and its pre-Jansen Stage 1 investment of US$4.5 billion (A$7.1 billion).

All in all, that's a whopping US$15.1 billion (A$23.8 billion) investment that the Big Australian is making into potash.

What on earth is potash?

It might not sound as exciting as lithium or rare earths, but potash could be hugely important for the decarbonisation of the planet. It is for this reason that BHP is focusing on it and skipping lithium.

The miner highlights that it is essential for food security and sustainable farming, which will be important as populations grow. It said:

The stage two investment advances BHP's strategy to increase its exposure to commodities positively leveraged to the global megatrends of population growth, urbanisation, rising living standards and decarbonisation. Potash, used in fertilisers, will be essential for food security and more sustainable farming.

BHP has also previously stated its belief that "potash sits at the intersection of global demographic, social and environmental megatrends" and that "the environmental footprint of potash is considerably more attractive than other major chemical fertilisers."

And at the company's annual general meeting in Adelaide on Wednesday, CEO Mike Henry said:

We also have a significant, exciting growth path ahead of us in potash in Canada. Potash, used in fertilisers, will be essential for food security and more sustainable farming, against the backdrop of a growing global population. We believe the long-term fundamentals for the potash market are compelling and they have further improved since we sanctioned Jansen Stage 1.

Will potash boost BHP's earnings?

We're still a little way off seeing potash as a big earnings contributor for BHP.

At present, Jansen Stage 1 is 32% complete and progressing in line with its schedule. First production from stage 1 is expected to be delivered in late calendar year 2026.

Construction of Jansen Stage 2 is anticipated to take approximately six years and is expected to deliver first production in FY 2029, followed by a ramp-up period of three years.

But it could be worth the wait. Analysts at Citi believe that stage 1 and stage 2 will contribute ~US$2.4 billion (A$3.74 billion) of EBITDA at steady state production. This represents approximately 9% of group earnings based on the broker's EBITDA estimate for FY 2024. It said:

Our NPV is up 2.7% to $41.90. We increase our TP from $44 to $45 and keep our Neutral rating; BHP trades on 1.08x P/NAV and 5.4x FY25 EV/EBTDA. Jansen Stages 1 and 2 add ~US$2.4bn of EBITDA at steady state production – but that's not until FY33 and group underlying FY24 EBITDA we forecast at US$27.6bn.

BHP shares are up almost 17% over the last 12 months.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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