Activist Investor Takes Fresh Aim at BHP Billiton's Potash Plans

MELBOURNE, Australia--BHP Billiton Ltd.'s (BHP.AU) incoming chairman faces another early test as one of the activist investors dogging the mining company warned against misspending billions of dollars in shareholder money diversifying into potash.

In its latest salvo, New York hedge fund Elliott Management Corp. said it was concerned expanding into potash with a proposed development in Canada would be a severe strategic misstep and risked being the next U.S. shale, a business it has urged BHP to spin off.

"This sounds alarmingly familiar," a spokesman for Elliott said.

He said the recent appointment of relatively new board member Ken MacKenzie as the next chairman was an opportunity to set a new strategy and avoid repeating costly mistakes. "Billions in shareholder value is at stake," the spokesman said.

Speaking at industry conference in Barcelona in May, BHP Chief Executive Andrew Mackenzie said management could seek board approval for the Jansen potash project as early as next June, with possible first production in 2023.

"We will only develop when the time is right," Mr. Mackenzie told an audience of industry executives and investors, adding the company's growth options would firstly focus on value.

A spokesman for the company declined to comment on Elliott's latest attack.

Elliott has been pushing for sweeping changes at BHP since last year, and in April went public with its case that called for BHP to exit its U.S. onshore oil-and-gas operations, which were bought at the peak of the natural-gas boom, and to collapse a dual U.K.-Australian structure in order to release billions of dollars in shareholder value and halt what it says has been a longstanding underperformance against rival Rio Tinto PLC (RIO) and the broader equity market. It refined its case in May, urging BHP to launch an independent review of its global petroleum division, and encouraged Chairman-elect MacKenzie to address capital allocation and review the board and executive team.

Although BHP has yet to make a decision on whether to develop a mining operation at its Jansen project in Saskatchewan, it has laid the ground work. In its quarterly production update on Wednesday, it said it was 70% of the way through a US$2.6 billion investment in excavation and other work and was digging the shaft for a mine.

Days earlier, BHP published analysis that forecast demand for potash could double by the late 2040s, by which point it could be a US$50 billion market. Potash, a nutrient in plant growth, is a key ingredient in fertilizer, demand for which is expected to rise as the global population expands and diets become more varied.

Elliott, which manages nearly US$33 billion, is known as an aggressive activist investor that is willing to chip away at the companies it targets. The investment firm managed by Paul Singer has been meeting with other BHP shareholders since it went public.

Deutsche Bank estimated the Jansen project could cost BHP US$13 billion. In a research report, the investment bank earlier this month recommended BHP scrap what it said would be a lower-returning, technically risky project as part of a strategy revamp under Mr. MacKenzie that should focus on returns.

BHP has proposed developing Jansen in several phases, the first at a US$4.7 billion incremental capital cost would have the capacity to product 4 million metric tons of potash a year and would have an internal rate of return of more than 12%. Broadening into potash would add a fifth pillar to the company's operations, which currently focus on iron ore, copper, coal, and oil and gas.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

July 20, 2017 00:05 ET (04:05 GMT)