The BHP Group Ltd (ASX: BHP) share price is down 3% after the ASX mining share announced cost increases for the Jansen stage 2 potash project.
BHP is one of the world’s largest miners, as it produces iron ore, copper and coal. It’s also working on a potash project – greener fertiliser – in Canada.
Jansen stage 2 costs increase
Stage 1 of the project is getting closer to being finished, which remains on track for first production in mid-2027 – approximately a year away.
Stage 2 will enable increased production, but it’s coming at a higher cost.
BHP said that after a detailed review of cost and schedule estimates, stage 2 for the Jansen potash project is now estimated to cost a total of US$6.9 billion (including contingencies), up from US$4.9 billion.
First production is expected to be late FY31, so it’s a number of years away. At this stage, Jansen stage 2 is 16% complete, with engineering 83% complete, de-risking the estimate for remaining work.
Why the cost increase?
BHP said that there have been cost and schedule pressures, with the majority relating to additional construction hours and quantities of materials to complete Jansen sage 2 and escalation.
The company said that as it prepares its FY26 result, it’s assessing the Jansen asset base as at 30 June 2026. Due to the higher forecast capital intensity for the Jansen project, it expects to recognise an impairment charge of approximately US$2.3 billion in relation to its investment to date in the Jansen project.
Production and financial projections
BHP said that it still expects Jansen stage 2 will deliver approximately 4.36 million tonnes per year of production.
After a two-year ramp-up period from first production, combined output from Jansen is expected to be 8.5mt per year, and will deliver approximately 10% of total global potash production.
At (analyst consensus) forecast prices, Jansen stage 2 has an updated internal rate of return (IRR) of 11% and an expected payback period of around eight years.
The underlying EBITDA (EBITDA explained) margin for Jansen stage 2 is still forecast to be above 65% due to its low cost position.
Once ramped-up, it expects the combined Jansen mine will be the lowest unit cost Canadian potash mine at US$114 per tonne to US$130 per tonne, in line with unit costs estimates.
Final thoughts on the BHP share price
Higher costs are not ideal, but perhaps not unexpected because of the inflation in recent times.
I think this will be a useful earnings diversification by the business once it’s up and running – the less the reliant it is on iron ore, the better. The iron ore price could reduce in the coming years if African supply continues to increase in the next several years.
I wouldn’t choose to buy BHP shares right now because it has risen more than 70%. I would prefer to buy at a cyclical low rather than a cyclical high for its valuation.
