10/23/2012 08:02 EDT | Updated 12/23/2012 05:12 EST

BMO report says BHP Billiton should not go ahead with Jansen mine

SASKATOON - A report from BMO says BHP Billiton should not go forward with the Jansen potash mine near Saskatoon.

Joel Jackson, the vice-president of BMO's fertilizer research team, says BHP (NYSE:BHP) says the world does not Jansen's capacity for at least another decade.

The Jansen project, just east of Saskatoon, would be the largest potash mine in the world.

In August, the company announced it was delaying final approval of the Jansen mine due to economic concerns.

Jackson, along with BMO analyst Tony Robson, also say in the report that the Australian mining giant should return cash to shareholders, but it likely won't do that, so they suggest it try to buy Mosaic (NYSE:MOS).

The report says Mosaic is an American company which could fare better with Canadian regulatory approvals.

However, the report says BHP would need to be comfortable with Mosaic’s large phosphate business and water inflow at the large Esterhazy potash mine.

“While we think that buying a company like Mosaic is probably a better bet than Jansen, we’re not so sure BHP will be able to buy Mosaic,” he said, adding there aren’t any great buying options for BHP.

Jackson says BHP’s best option is to return capital to its shareholders.

The Jansen mine would not give great return and the market is already oversupplied, says Jackson. He estimates that the Jansen project is as unattractive as the two recently cancelled projects — Olympic Dam and Outer Harbour.

He says using a potash price forecast of about US$450 a tonne, which is below current prices, would produce a projected internal rate (IRR) of return around 10 per cent. To receive a 12 to 15 per cent IRR, prices would have to be US$600 to $650 per tonne.

Prices may not change much if BHP acted disciplined and followed supply management, says Jackson. The problem he sees is that in all of BHP’s public statements, the company talks about their philosophical demeanor to run full out. Jackson says this would push prices down.

“BHP is likely to push into potash,” said Jackson.

“The company needs diversification and growth. Potash, the commodity, checks a lot of boxes for them."

BHP has already allocated $1.2 billion for the Jansen project, estimated to fully cost $12 billion.

The federal government rejected BHP's hostile takeover of PotashCorp in 2010.

At the beginning of the month, a report in an Australian newspaper insisted BHP still felt the potash market is "attractive."

Premier Brad Wall hinted this summer to changes to the way royalties are paid to the province. Saying the changes are year away, the premier says a new royalty structure needs to be put in place, since the potash industry is focused on volume, not the price, which is the system the current royalty fees are based on.

In early August, PotashCorp announced a temporary shutdown of its Lanigan Mine. Vale SA announced a delay of its proposed $3 billion potash mine southeast of Regina.