Shares in BHP Billiton (ASX: BHP) have plunged 4% since the release of its full-year report on Tuesday. Whilst a lower than expected profit was recognised, the miner's decision to invest a further $2.6 billion in its Jansen project in Canada did not fare so well with investors.
Investors urged the miner to at very least slow down its spending on the potash project, following the massive drop in the price of the fertilizer ingredient as one of the key cartels controlling the market collapsed. With the level of global demand for commodities decreasing, many investors would have preferred the miner to cut unnecessary spending to instead focus on core operations.
However, the decision has received the backing of analysts and fund managers. As reported by The Australian Financial Review, Citi analyst Clarke Williams said it would have been "cleaner" had the company committed in full to the project and provided the market with firm details on capital costs and timing, but the way in which it was spreading the investment over a number of years was a fair compromise, considering the circumstances.
By drawing the investment out for four years, Williams believes "it allows them to work on reducing the capital costs and letting some of the oversupply in the (potash) market work through before they actually have to commit significantly more capex to bring it into production."
Whilst BHP's CEO Andrew Mackenzie recognised the short-term concerns regarding potash, he sees excellent potential in the long-term as the world's population increases and incomes in emerging economies improve. He believes this will lead to an increase in demand for agricultural products such as potash.
Furthermore, in order to fund the project, BHP stated the possibility of getting other partners involved – partially to spread the funding but also to "enhance the performance of the project". Mackenzie said that "we've seen that with Rio Tinto (ASX: RIO) at Escondida and many of our partners in the petroleum space so we're looking for a similar model as we go forward."
Foolish takeaway
A number of analysts have thrown their support behind the project, but others remain cautious due to the lack of details provided to the market. With the project now expected to begin production by 2020, it will be a long time before investors start to reap any benefits from the investment.
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More reading
- BHP reports, Jansen project to continue
- Earnings reports and stocks to avoid
- Is this Australia's most expensive company?
- Investors call for BHP to slow down potash project
Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
