Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
PotashCorp chief executive Bill Doyle threw down a challenge to rival BHP Billiton today, saying in an interview with The Financial Post that he doesn’t believe the world’s biggest miner is able to establish a potash beachhead in Canada with its Jansen mine.
“Until they decide to push ahead, we’ll believe it when we see it,” he said during a stop in Calgary, where he attended a meeting of the Canadian Council of Chief Executives this week.
“But right now they can’t make the numbers work. I know. Returns aren’t there. There is no mystery to us why they haven’t decided to go ahead, because no one takes a project to the board of directors and they say, ‘What is the return on investment?’ And you say, ‘It’s negative’. ”
It’s not the first time the two mining giants have squared off. Back in 2010 BHP made a $39 billion hostile bid for PotashCorp- a bid that was eventually rejected by the Canadian government as being against the national interest.
Since then, the Australian megaminer has spent $1.2 billion to bring the Jansen potash mine project in Saskatchewan to the feasibility stage and has undertaken some construction. Jansen is among four “mega projects” that will require more than $120 billion of capex over the next 15 years but only increase returns from 2023, according to Deutsche Bank estimates, something that worries investors, Reuters reported earlier this month.
The last of the four mega-projects, the greenfield Jansen project, was BHP’s response to the federal government of Canada’s blocking of the PotashCorp deal.
It will be presented to the board later this year. Production could start as early as 2015. The life of the mine is predicted to be a staggering 70 years.
Meanwhile, PotashCorp stock has come off the boil the last two quarters due to buyers deferring purchases of the key fertilizer ingredient as the world economy continues to sputter. POT fell 3.4% last week after revising its earnings guidance for the year and announcing a 26% drop in earnings.
Doyle however shrugs off the demand concerns as a “supply chain blip,” telling the FP “potash shipments have rebounded and empty shelves are being replenished.”
The straight-talking CEO went on to disparage BHP’s efforts to muscle in on its Saskatchewan turf, noting Billiton will have a tough time with high costs, the long lead time needed to bring mines in the Prairie province into production, volatile prices, and labour availability challenges.
