BHP Billiton Limited (ADR) (BHP), Mosaic Co (MOS): Should This Miner Move Forward With Its Potash Project?

Mosaic Co (NYSE:MOS) recently reported fourth-quarter fiscal 2013 results the company’s average potash selling price fell from $455 per ton to $368 per ton. With the latest development in the potash market, the outlook for North American potash producers has turned gloomy, even though demand for potash is expected to remain robust.

Should BHP Billiton move forward with its Jansen project?

BHP Billiton has already spent over $2 billion on preliminary development work at Jansen. Goldman Sachs said last month that it expects the company to invest another $500 million of pre-approval development capital into Jansen ahead of a final decision on the project in 2015 and 2016. But the potash market has just turned upside down.

With potash prices expected to fall sharply following the breakup of the BPC cartel, it might not be feasible for BHP Billiton to pursue the project. If as Uralkali’s CEO predicted, potash prices do fall to below $300 a ton, that would significantly reduce margins for potash producers. According to Goldman Sachs, the average expenses for potash producers are about $240 a ton currently.

Given that BHP’s Jansen is a greenfield project, one can expect the company’s cost when the initial production begins to be on the higher side. If prices remain below $300 a ton then the project would not be feasible for BHP Billiton in my opinion even though potash demand is expected to remain strong.

I expect BHP Billiton to put the Jansen project on hold until there is a clear indication that potash prices will remain at around $400 per ton. However, without the “fifth pillar” BHP is not an attractive investment, given the weak demand for industrial metals and minerals. I would therefore remain on the sidelines with BHP Billiton for now.

Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Varun is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Should This Miner Move Forward With Its Potash Project? originally appeared on Fool.com is written by Varun Chandan.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.