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 Tue Mar 11, 2014
Spec Value Hunter Comment: Verde Potash gets specialty coffee designation for ThermoPotash fed beans
    Publisher: Kaiser Research Online
    Author: Copyright 2014 John A. Kaiser

Verde Potash PLC (NPK-T: $1.55)

Spec Value Hunter Comment - March 11, 2014: Verde Potash gets specialty coffee designation for ThermoPotash fed beans

Verde Potash Inc, recommended on January 3, 2014 as a Good Relative Spec Value Buy at $0.44, has achieved 2 of the 4 milestones outlined in SVH Comment Dec 3, 2013: Recommendation Strategy for Verde Potash plc: (Inova funding eligibility (done), "specialty coffee" designation (done), delivery of a PFS for the ThermoPotash and KCl facilities (due end of March 2014), and an environmental license for the ThermoPotash facility (due after Brazilians navigate Carnival, the World Cup, and their General Election). The stock has run as high as $2 per share and is very volatile, possibly because there still remain only 41 million shares fully diluted, which at $1.55 imply a $64 million value for the Cerrado Verde Potash Project. On January 21 the stock peaked at $0.95, prompting IIROC to ask NPK to explain itself, but remained silent when during the next couple weeks the stock sagged to $0.335. Apparently a new fund manager went on an anonymous selling rampage as he purged his new assignment of the former manager's best ideas. When the selling ended and the stock bounced back, IIROC woke up and once again demanded an explanation for this upside market action. It would seem that the only constituency IIROC serves is parties who get hurt when a stock goes up. NPK is volatile because it holds Brazil's key to future security of supply for potash, the fertilizer input for which this agricultural powerhouse has 90% import dependency. Although I had $20 plus targets in 2012 based on the PEA assumptions, I am holding off on any price targets until NPK publishes its PFS for its two stage ThermoPotash and KCl conversion facility business plan, now expected by the end of March 2014. Today's market action is due to the good news that Brazilian coffee from a crop fertilized with ThermoPotash tastes sufficiently better than potassium chloride fertilized coffee to earn a "specialty coffee" designation. The real volatility will come when the PFS is published.

On March 11, 2014 NPK announced that the Specialty Coffee Association of America has confirmed that coffee grown with ThermoPotash as the exclusive potassium source achieved an average ranking of 83 points while the control crop fertilized with potassium chloride (KCl) averaged only 73 points out of 100. This is an important milestone because if a coffee achieves 80 or better it is designated a "specialty coffee" and can command premium pricing. Brazil is the world's biggest coffee producer, but its coffees cannot achieve "specialty coffee" status because its soils require fertilization with potash, and coffee crops require several more times the amount of potash than do other cash crops like soybeans and corn. In contrast, coffee grown in regions with volcanic soils naturally rich in potash such as Central America do not require fertilization with KCl, whose chlorine component negatively affects the taste of coffee. Thus while Brazil exports good quality arabica beans, they cannot achieve "specialty coffee" status, and because KCl is created through chemical processes, cannot achieve "organic" status even when the SCAA's rating squeaks above 80. In contrast, ThermoPotash, which is created from a potassium silicate ore by roasting in a rotary kiln and quenching to create a "shattered glass" product whose potassium, magnesium, silica and calcium becomes available as nutrients or soil conditioners, qualifies as "organic". The implication is that coffee fertilized with ThermoPotash could qualify as an organic "specialty coffee" which opens up new domestic and foreign markets for premium priced Brazilian coffee beans.

It is also convenient that half of Brazil's coffee crop is grown in Minas Gerais state, home to the verdete slate deposits from which NPK plans to produce ThermoPotash. One of the problems with ThermoPotash is that it is a whole rock product whose K2O content ranges 9%-11% whereas the K2O content of potassium chloride is 60%. As a result the farmer would have to apply six times as much ThermoPotash volume as KCl to deliver an equal amount of K2O. However, ThermoPotash has a slow-release character compared to potassium chloride, a salt that dissolves quickly when subjected to torrential rains of the sort that characterize the growing season in the Cerrado Verde. On September 12, 2013 NPK reported that a 30 month field test had demonstrated that a single application of ThermoPotash had achieved the same crop yield as 4 applications of potassium chloride, with the difference being that the ThermoPotash application contained only 36% of the K2O equivalent of the KCl applications. In other words, the farmer using ThermoPotash will have to apply only three times the volume of KCl to achieve the same crop yields. The cost of applying ThermoPotash triple the KCl volume only once is likely close to the cost of applying the overall smaller KCl volume four times to the field. This is important for the ThermoPotash story because in its initial incarnation in 2009-2010 before NPK achieved a verdete slate to KCL conversion breakthrough the higher volume related application cost limited ThermoPotash to the role as a multi-nutrient supplement to conventional fertilizer blends. But with a premium product pricing made possible by the SCAA "specialty coffee" ranking, fertilizing the coffee crop exclusively with ThermoPotash becomes cost competitive with KCl. ThermoPotash may also gain an extra competitive edge because the form of its non-potassium nutrients acts as a soil conditioner which allows more effective uptake of phosphate by plants, reducing the intensity of phosphate applications. The prospect thus emerges that coffee plantations will consume all of the 300,000-400,000 tonnes of ThermoPotash that NPK's proposed 1,000 tpd Phase I Flex Plant will produce annually.

Funding the $115 million cost of the Flex Plant is the second important milestone NPK has achieved. On February 19, 2014 NPK announced that its ThermoPotash business plan had been accepted by Inova Agro for subsidized debt financing of $105 million (280 million reais) out of the projected $115 million capital cost. Inova is a Brazilian government agency whose mandate is to identify innovative capital projects for loans and grants from the Brazilian Development Bank. These loans, done in reais, typically have an 8 year payback period and a 4.5% interest rate that is below Brazil's inflation rate. Only a third of the capital cost involves equipment, some of which will be imported and thus vulnerable to currency risk. The funding is contingent on NPK achieving two additional milestones. One of these is the delivery of a feasibility study to the BDB which has all the engineering needed to construct the Phase I Flex Plant. This non-43-101 compliant document will be in Portuguese and not public, but it will be an extension of the prefeasibility study (PFS) NPK hopes to release by the end of March 2014.

The PFS was initially expected in February, so delivering it will be an important milestone in itself which will allow the market to quantify the economic potential of NPK's future. All we currently have is the PEA published in 2012 for the KCl conversion plant I described in SVH Comment - March 27, 2012 which was supposed to be replaced in 2013 with a bankable feasibility study (BFS). NPK was forced to abandon the BFS in May 2013 (see SVH Comment: May 14, 2013) because the equipment supplier would not provide a performance guarantee for the 12,000 tpd rotary kiln required for the plant to be feasible unless NPK conducted a 200 tpd continuous pilot plant study whose cost would have approached $50 million. The new PFS will have a Phase I Flex Plant designed to produce ThermoPotash at 1,000 tpd but will also double as a test plant for the production of KCl from the verdete slate. The Phase II Flex Plant will be the full-blown version of the KCl production plant featured in the PEA capable of 3-4 million tpa of KCl output and which was the basis for the unpublished BFS. We will thus learn the business economics of running the 1,000 tpd ThermoPotash Flex Plant, which probably will not be a huge number. Its real value, beyond the capacity to expand the ThermoPotash output in future years as other "organic" crops adopt it, will reside in getting the 200 tpd KCl pilot plant study done for free in the sense that NPK will not have to raise equity at hideous dilution for a feasibility demonstration stage that carries a risk of failure and retains only a scrap metal value. The Phase II Flex Plant part of the PFS will give us updated numbers on the economics of the 3-4 million tpa KCl conversion facility for which the PEA implied an NPV supporting a price target above $20 per share for Verde Potash plc whose fully diluted remains at a very low 41 million shares. The PFS numbers for the KCl facility will approach BFS quality because the BFS work was completed in 2013 except for the technical issue of not being "bankable" due to the absence of an equipment performance guarantee. The followup feasibility study required by the BDB will likely take until the end of 2014 or Q1 of 2015 to complete.

The second contingency for the Inova/BDB funding is receipt of an environmental license for the Phase I Flex Plant and verdete slate quarry, which is the fourth key milestone for Verde Potash plc. This milestone is critical for NPK's future and the company's CEO Cris Veloso refuses to be pinned down on the timing even in ballpark terms, sheepishly blaming his Brazilian culture. For example, Brazilians, especially government employees, do not start the new year until Carnival is over, which ran from February 28 to March 4 this year. But this year we have the added distraction of the Brazil hosted World Cup which runs from June 12 to July 13. And by the time Brazilians stop celebrating their pre-destined World Cup victory, the Brazilian General Election is just around the corner on October 4, providing a further excuse for government employees to get nothing done. All we can hope is that by the time NPK has the BDB feasibility study ready at the end of the year, somebody in power will have prodded the permitting body to make the Flex Plant environmental license a priority. The coffee milestone is important because it almost guarantees "offtake" for the ThermoPotash output, and the Inova milestone is critical because it will allow NPK to finance most of the ThermoPotash plant cost with government agency debt at a subsidized interest rate. The environmental license is just a matter of bureaucratic process - there are no noticeable environmental impacts one should worry about. The key upcoming milestone is the PFS because it will form the basis for a re-valuation of NPK, which could be considerably higher than the current level if the assumptions in the PEA have not deteriorated.

*JK owns shares in Verde Potash PLC


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