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[EZ2]

BHP Sees a Hungry Planet, Elliott Sees Another Shale Disaster

MARKETWATCH 8:28 AM ET 7/21/2017

Having just written off more than $10 billion in U.S. shale investments, BHP Billiton(BLT.LN) looks poised to make a big move in the oversupplied potassium fertilizer business. Activist shareholder Elliott Management isn't impressed.

After BHP's chief potash analyst wrote a bullish blog item on the commodity's outlook, Elliott warned in a terse statement that the comments sounded "alarmingly familiar." Elliott is already leading a shareholder movement to push BHP out of the U.S. oil business and increase returns (https://www.wsj.com/articles/bhp-needs-to-prove-oil-and-iron-are- better-together-1491842913), which it says have lagged behind its main competitor, Rio Tinto.

Deutsche Bank(DBK.XE) estimates the massive Jansen mine the company is building in Saskatchewan, Canada, could ultimately cost a cool $13 billion to develop. BHP has yet to make a final call on further investment to complete the project but Chief Executive Andrew Mackenzie said in May that management could seek board approval as soon as next year.

The amount of cash involved could make such a greenlighting of BHP's potash ambitions its most important strategic decision over the next five years.

There is little doubt that potash is risky. However, Elliott is wrong to draw a direct analogy between it and shale. BHP's main mistake there was investing at the top of the commodity bubble in a new, highly technical sector in which it had little experience (https://www.wsj.com/articles/flailing-opec-leaves-western-oil-majors-holding-the-bag-149579625).

By contrast, potash prices are down by more than half from their 2008 and 2009 highs, and the mining technology is well established. BHP has long argued it needs to diversify into different commodities to smooth out its earnings, but iron ore and oil are subject to many of the same demand drivers: namely, Chinese industry and construction. Fertilizer, ultimately driven by food demand, does offer the company genuine diversification. And while China's construction boom is slowing structurally, the world's growing food needs look to be a surer bet (https://www.wsj.com/articles/commodities- still-face-iron-laws-of-supply-and-demand-1479890081). Climate change will also likely make arable land scarcer, meaning the same acres will have to produce more food.

The main worry with potash isn't demand, but supply: By most estimates the market will be saturated for the next decade, driven by major producers in Canada and Eastern Europe. BHP's project wouldn't come online until the mid-2020s, but even if it is able to leverage the latest technology and equipment to produce cheaply, margins might be unimpressive for the first few years. The best hope for substantial profits earlier on would be big mine closures from competitors now--a possibility if potash prices remain low in the years it takes BHP to build the Jansen mine.

Finally, there is always technological risk with such long-term projects: Just ask Canadian oil-sands producers such as Royal Dutch Shell if they would have invested had they known that the Americans would figure out a way to profitably squeeze oil out of shale basins (https://www.wsj.com/articles/shells-oil-sands-exit-puts-it-on-solid-ground-1489066662).

Big mining companies need to keep investing--that is unavoidable. The key questions are always when, and in what. Potash in 2017 makes more sense than shale in 2011, but it's still a risky bet.

Write to Nathaniel Taplin at [e-mail] (mailto:[e-mail])

-Nathaniel Taplin; 415-439-6400; [e-mail]


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