The higher than expected spending guidance for fiscal 2021 came in a profit result that prompted analysts at Citi, Macquarie and UBS to slash their expectations for BHP profits in the next two years by between 6 per cent and 10 per cent a year.
BHP is 84 per cent of the way through a $US2.7 billion spend on early works at Jansen, and those works will be completed in early 2021, forcing a decision over whether to spend between $US5.3 billion to $US5.7 billion on bringing the mine into production.
BHP chief financial officer Peter Beaven confirmed that a portion of the $US8 billion capital spending forecast for fiscal 2021 was reserved for expansions of Jansen and the Olympic Dam copper mine that had not yet been approved.
”It is a provisional amount that is included … but, again, as you well know, it has not gone to final investment decision,” he said.
”If we get there, then we would spend that money. If we did not, then we will not.”
BHP chief executive Andrew Mackenzie said Jansen and Olympic Dam would account for less than $US500 million of the $US8 billion of spending expected for fiscal 2021.
”Both projects, but particularly Jansen, if you look at the full project, it is quite back-end loaded compared to, say, investing in an oil development,” he said.
”We would not in any one year, if the [Jansen] project was to go ahead, be spending more than $US1 billion and that would only be for a few years at that. I think the same would hold with [Olympic Dam brownfield expansion], which of course is a much lower cost.”
Shareholders like Elliott Management have publicly warned that BHP may destroy value if it approves of the development of Jansen, while numerous analysts have questioned the attractiveness of the project this year.
“Jansen remains a key debate in the market with many, including us, concerned that prices above spot are required to generate adequate returns,” said UBS analyst Glyn Lawcock on Wednesday.
But Mr Lomnitzer, a senior investment manager in Janus Henderson’s Natural Resources team, said the role of potash in crop fertilisers meant Jansen was attractive from a long-term perspective.
”Given we have roughly one-third of our fund in agri-business, we have quite an optimistic view of that sector as a structural growth area given that the world needs to feed increasingly large populations,” he said.
”So we can see merit in the very long duration that something like Jansen can offer BHP, and I am talking about very durable earnings.”
Mr Lomnitzer said many of the concerns raised about Jansen, which will require five years’ construction before it starts producing potash, were a product of short-term thinking.
”Sometimes when you are purely focused on net present value and internal rate of returns, very long duration projects can look less attractive compared to a shorter cycle project and at the moment the market is quite short-term focused, so I would say BHP would most likely be penalised if they were to push ahead with [Jansen] in the near term,” he said.
”I think it would hurt the [BHP] share price in the near term if Jansen were approved, but if the share price were to weaken dramatically on the back of that it could be a buying opportunity”.
Olympic Dam lost $US58 million before interest and tax in the year to June 30, and Mr Mackenzie said BHP wanted to achieve several years of consistent production at the accident-prone asset before committing to growth.
Morgans analyst Adrian Prendergast said BHP’s continued commitment to Olympic Dam was confusing, given that the company’s strategy in recent years was to quit assets that were not elite by global standards.
”We struggle to see how Olympic Dam is justifying a spot in BHP’s portfolio,” he said in a note.
”An area of genuine concern for us is how strong is BHP’s genuine commitment to its much touted capital allocation framework if it remains wedded to assets such as Olympic Dam.
”It looks like BHP’s long history with the project is providing protection from potential divestment considerations we expect it deserves as a ‘tier three’ asset.”