Why the cash splash on potash could send the BHP share price higher

The world's growing need for food could help cause potash demand to soar.

| More on:
An engineer takes a break on a staircase and looks out over a huge open pit coal mine as the sun rises in the background.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • BHP is planning to spend over US$5 billion on the first stage of its Jansen potash project
  • Fertilisers like potash could be critical to ensure land farming remains sustainable
  • The Jansen project could earn a high EBITDA margin of around 70%

Diversification of earnings in the future could be a real boost for the BHP Group Ltd (ASX: BHP) share price with the expansion into potash.

BHP already has exposure to multiple commodities including iron, copper, nickel and coal.

But, in the next few years, BHP is planning to unlock another stream of earnings by growing into a different commodity sector – fertilisers.

What is potash?

The ASX mining share describes it as a "potassium-rich salt used mainly as fertiliser to improve the quality and yield of agricultural production."

It said that potash fertilisers are a critical source of the potassium that crops need to grow. Potash strengthens the plants, helps them move water and sugar, and defends them against disease.

BHP also explained that potash and derivative chemicals are used in a variety of applications, including "glass manufacture, oil & gas drilling, aluminium recycling, water softening, fireworks and many more."

What's the appeal of potash?

More than 70% of global potassium chloride capacity is based on conventional underground mining which is the intended process for BHP's Jansen potash project. Mining is what BHP does and it seems to be one of the best in the world with its long-term successes and low operating costs.

BHP thinks that potash demand could double by the late 2040s when it could be a US$50 billion market, partly thanks to the global population rising close to 10 billion by 2050.

The ASX mining share's research suggests that there could be a rising calorific intake that involves more varied diets. BHP is projecting that food demand will increase by 50% and "sustainable increases in crop yields will be crucial if we are to continue to feed the world."

BHP pointed out that in many parts of the world, "potassium is being removed from the soil faster than it is being replenished." This suggests there's an essential global need for potash.

The company has said that potash could see reliable base demand with "attractive long-term fundamentals and differentiated demand drivers." It noted that the potash price doesn't have much correlation to the iron ore price, which could smooth BHP's earnings through economic cycles.

Potash reportedly has lower emissions than other types of fertiliser, so it's "positively leveraged" to decarbonisation.

How could Jansen help the BHP share price?

The ASX mining share reminded investors in its most recent quarterly update for the three months to 31 March 2023 that it has approved US$5.7 billion of capital expenditure for stage one of Jansen, with an initial production target date for the end of 2026.

The goal is to have the capacity to produce 4.35 million tonnes of potash per annum, while the feasibility study for Jansen stage two continues to progress and is reportedly on track to be completed during FY24.

The Jansen project could have a 100-year life, meaning it could generate earnings for the long term for the business.

BHP has said that Jansen will use less equipment, have a larger capacity, have lower costs and be more automated than other potash mines. This is expected to mean that Jansen is one of the lowest-cost potash producers in the world when it's completed.

In August 2021, BHP suggest that Jansen could earn an internal rate of return (IRR) of 12% to 14%, with an expected payback period of "seven years from first production". It also suggested that the underlying earnings before interest, tax, depreciation and amortisation (EBITDA) margin could be approximately 70% because of its expected cost position.

If the ASX mining share can achieve those numbers, then potash could be very useful for the BHP share price as a way to diversify, defend and grow the profit.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Resources Shares

A mining worker wearing a white hardhat and a high vis vest stands on a platform overlooking a huge mine, thinking about what comes next.
Dividend Investing

BHP shares have fallen out of the global top 20 dividend payers. Here's why

Global dividends continue to climb.

Read more »

Miner standing in front of a vehicle at a mine site.
Resources Shares

Is the worst now over for Mineral Resources shares?

What's next for the miner?

Read more »

A miner holding a hard hat stands in the foreground of an open cut mine
Resources Shares

A close look at BHP shares. What is the mining giant's next move?

Let's take stock of what the experts think.

Read more »

Miner looking at a tablet.
Resources Shares

Short bets on Pilbara Minerals shares are declining. Is now the time to buy?

Could the trade be unwinding?

Read more »

two men in hard hats and high visibility jackets look together at a laptop screen that one of the men in holding at a mine site.
Resources Shares

'I hate what I have done': Mineral Resources share price down as Ellison laments actions

Managing Director Chris Ellison says he deeply regrets the impact of his 'error of judgement'.

Read more »

A man in shirt and tie uses his mobile phone under water.
Resources Shares

The Lake Resources share price is sinking yet again. Here's why

The longer-term downtrend continues.

Read more »

Miner and company person analysing results of a mining company.
Resources Shares

With a P/E ratio of 6, is the Fortescue share price a bargain?

Let’s dig into whether Fortescue shares are good value or not, in my eyes.

Read more »

A man wearing a hard hat and high visibility vest looks out over a vast plain where heavy mining equipment can be seen in the background.
Resources Shares

Down 15% this year, where's the next stop for Rio Tinto shares?

Where to next for the miner?

Read more »