Jansen, BHP Billiton's big potash mine is coming

There are many reasons we have chosen BHP as our preferred commodity stock. Sasha has mentioned this a lot lately, mostly in the wake of Anglo's issues and the resignation of Cynthia Carroll. So no, we are not perma-bulls on all commodities. We have been very selective in our mix. Gas, oil, copper, iron ore, coal, potash. All these commodities are vital in the in the development of a region going from an infrastructure boom all the way to a consumption based economy.


The last one I mentioned there, potash, is one I want to focus on today. If you are unaware of what potash is, here is an explanation from wiki: "Potash is the common name for various mined and manufactured salts that contain potassium in water-soluble form. Today, potash is produced worldwide at amounts exceeding 30 million tonnes per year, mostly for use in fertilizers. Various types of fertilizer-potash thus comprise the single largest global industrial use of the element potassium."


Basically it is a vital ingredient in modern day farming. Naturally, as populations increase and farmers adopt more commercial practices, the demand for potash will increase.


Potash does not actually form part of Billiton's production line yet. Not by a long way. But they do own potentially the biggest potash mine in the world known as the Jansen mine which is based in Saskatchewan. If that name rings a bell it is because BHP were bidding for separately listed Potash corp, 2 years ago who are also based in Saskatchewan. This dominated headlines for ages as the massive $40bn bid got rejected by Canadian authorities.

Back to Jansen. I stumbled across this article headed BHP Jansen mine full steam ahead which suggests that drilling of the mine will start in 2 weeks. But there is still a lot of hard work ahead. The article interviews Tim Cutt, BHP's president of speciality products.


"The mine has just received a massive piece of German equipment known as the Herrenknecht. It will drill the hole to create the mine. While drilling is due to start in the next couple of weeks, it will take the Herrenknecht a year to reach the potash supply about one kilometre underground. Then, it will be another two to three years before potash will make it above ground. We think by the end of 2015, we should be in the ore body and starting to build the production rooms."


Wow, quite a lengthy process. So far BHP have put $2bn into this project and certainly more to come. But this should all be worth the wait for a mine that is estimated to produce 8 to 10 million tons of potash a year, comfortably the biggest in the world. The commodity currently trades at $465 per tonne. If we assumed the mine was at full production today, sales of $4.5bn would rival their Aluminium division, will comfortably overtake diamonds and manganese and will fall 25% below energy coal.


I had a glimpse at Potash Corps latest quarterly results to get a better comparison. They produced 2.1 million tonnes with gross profits of $554 million for the quarter. $1.7bn has been made for the first nine months and $2.3bn is expected for the year. These production numbers for the entire company are similar to Jansen's production aspirations. The company who gets 85% of its earnings from Potash is afforded a market cap of $35bn and a PE of around 17. This shows you how big the Jansen mine could be, how strong the margins are and it is certainly a theme we like going forward.