A Canadian prairie game-changer: BHP bets big on potash – by Pav Jordan (Globe and Mail – December 10, 2012)

Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

JANSEN, SASK. — Meet the Herrenknecht, a borer drill the size of a blue whale that is tearing up the Saskatchewan landscape – and with it the economics of the mining industry’s new hot commodity.

Some 32 metres long and as wide as a small house, the custom-made piece of German engineering is embarking on a journey to a point one kilometre below the province’s grain fields. There it will strike prairie gold – potash.

Jansen is slated to be the world’s largest potash mine, twice the size of its closest rival. With a total estimated cost of some $14-billion, it’s a brazen bet by Australian mega-miner BHP Billiton Ltd. that the crop nutrient will be the world’s most important mined commodity for decades as farmers struggle to boost food production for a hungry planet.

Jansen promises to drive a momentous power shift in the global potash industry, dominated for decades by groups of producers, under fire as alleged cartels, that have controlled most of the world’s supply and enjoyed strong profits.

BHP is throwing down the gauntlet on that cozy arrangement. The world’s largest mining company says it will sell its potash independently of any rival marketing group, adding a weighty new competitor to the negotiating table when major consumers seek new supplies of the fertilizer.

That’s music to the ears of emerging nations such as China and India. Those countries have delayed signing new long-term purchase contracts over the past year as they push for a better deal.

But it’s a worrying proposition for established potash producers such as Saskatoon’s Potash Corp. of Saskatchewan Inc., the world’s biggest. BHP says it will tap its deep ties with major emerging nations as it battles for potash market share.

The Jansen project is on a scale not seen before in the industry. BHP is developing a potash deposit nearly the size of Montreal. It will be the first major new mine the industry has seen in decades. The company describes it as a 70-year bet on potash.

“We believe in the long-term fundamentals of potash, in population growth and limited arable land growth,” says Tim Cutt, president of BHP’s diamonds and specialty products unit, standing beside two 47-metre head frames at the Jansen mine, with the barren Saskatchewan prairie stretching in the distance.

“We’re viewing this as an opportunity as demand grows in Brazil, China and India for potash from Saskatchewan,” Mr. Cutt says.

But Jansen’s big size also brings big risks.

The mine, along with other new industry projects and expansions, will bring massive new supply onto a market that is increasingly grappling with a surplus. Prices have been cut by half in recent years as some countries balk at new purchases. Some fear the new supply could create a glut that will punish the entire industry, Jansen included.

Indeed, on the Saskatchewan prairie, the consequences of oversupply are already evident.

Just 20 km to the west of Jansen, a train used for shipping potash sits idle. Snow squalls waltz across the Trans-Canada highway, whipping past the rust-brown steel wheels of parked rail cars.

“Lanigan is down,” explains a gas station attendant, referring to a mine owned by Potash Corp., whose mines are visible along the highway leading to Jansen.

For the rest of this article, please go to the Globe and Mail website: http://www.theglobeandmail.com/globe-investor/a-canadian-prairie-game-changer-bhp-bets-big-on-potash/article6122809/?page=all