SVH Tracker - February 13, 2017: Recommendation Strategy for Verde Agritech Inc
Verde Agritech plc has been a continuous Spec Value Hunter recommendation since 2010 based on the company's efforts to convert its multi-billion tonne potassium silicate resource in Brazil into a fertilizer source for Brazil's agricultural sector. On December 30, 2016 I rolled over the 2016 Good Absolute Spec Value Buy made at $0.19 on December 31, 2015 to a new Good Relative Spec Value Buy at $0.26 in the hope that a mining permit might finally be granted in 2017. I switched the recommendation from "Absolute" to "Relative" because in 2016 Verde Agritech had embarked on a new marketing strategy where it would simply quarry the "verdete slate", grind it up, and package it for sale as a consumer product branded "Super GreenSand" sold as a coarser grained cat litter and a finer-grained lawn fertilizer. The CEO Cris Veloso had shipped me a batch of the cat litter last summer and I initiated a Super GreenSand comparison test with Arm & Hammer's Super Scoop. The marketing catch for me was that I could dispose of the GreenSand cat litter in my compost, providing additional fertilizer in the form of nitrogen and potassium.
The test ran into a hitch during the summer when my tester cats decided to shun both litter boxes. I finally figured out why when I discovered that they had turned the soft dry soil at the side of my house into a giant, very gross outdoor litter-box. When the cooler fall weather arrived they happily resumed using their litter boxes in the garage whether GreenSand was the only option in the two boxes I provide for them in the garage or when Super Scoop occupied the other box. I also came to the conclusion that I ought to build a sandbox under the eaves of my house and fill it with GreenSand which I could periodically transfer to my compost heap and replenish with fresh GreenSand.
I figured that GreenSand would be a consumer hit once it was available on a commercial scale in the United States, but I was not sure about the economics since Verde Agritech has not published a 43-101 economic study on its new strategy. The company did apply for an environmental license in November 2016 for excavating 20,000 tpa from another part of the property outside that for which the ThermoPotash environmental license had been submitted, but I was no more optimistic about the smaller scale license being granted any time soon than I was about the bigger scale license after two years of waiting. These uncertainties prompted me to downgrade the recommendation from "Absolute" to "Relative". I was thus shocked when on February 9, 2017 Verde Agritech reported that it been granted an environmental license for producing 20,000 tonnes of its Super GreenSand and Alpha products. This license can be expanded to a maximum of 200,000 tpa. I was doubly shocked by the strong positive market reaction because the company still needs to receive a mining license to begin quarrying and grinding its verdete slate into a Super GreenSand product. However, the permitting regime seems to be similar to that of Australia's New South Wales where the environmental license is the primary hurdle, with the mining license contingent on a review that the mining plan has been competently designed. Cris Veloso thinks it will take only a couple months to get the mining license, and he even thinks the ThermoPotash application submitted early 2015 will finally receive its environmental license in 2017. The importance of this small scale license is that it will allow Verde Agritech to begin test marketing the Super GreenSand consumer product as well as provide test material for the potentially much bigger agricultural market in Brazil thanks to emerging insights about the manner in which micro-organisms convert insoluble potassium minerals into a soluble form suitable for plant uptake. If the ThermoPotash environmental license is granted it will allow mining to scale up to 20 million plus tonnes per year. To sum up, the KCl conversion process about which I and everybody else got very excited about in 2012 is dead because of the current low potash price of about $200 per tonne, the ThermoPotash plan revived in 2014 is a lower priority because of the $100 million plus CapEx associated with a rotary kiln based operation, and the new strategy of a vey low CapEx whole rock quarrying and grinding operation appears to be on track for commercialization. The fact that Verde Agritech owns 100% of the project and has only 41 million shares fully diluted leaves lots of running room on the upside and Spec Value Hunters should brace themselves for substantial gains.
Covering Verde Agritech's story has been one of alternating agony and ecstasy as the company collided with various speed bumps, so some background is necessary. Brazil is a global agricultural powerhouse and will remain such due in part to the fact that it has the largest area of unused arable land. The country, however, is forced to import over 90% of the fertilizer potassium in the form of potassium chloride from major producers such as Canada, Russia and Belarus. Brazil's import reliance on potash has been exacerbated by the country's acidic soils and heavy rainfall which leach a good portion of the applied potassium chloride out of the soil before it is taken up by crops. The "Verdete Slate" belt of rocks was first recognized during the eighties as a potential source of potassium because it runs 7%-12% K2O, but the potassium in this sedimentary rock, technically known as "glauconite", is tied up by silicate mineral bonds which do not readily release their potassium payload. In a certain sense Verde Agritech was initially a Lazarus story about resurrecting an innovation written off a long time ago. But in another sense the company has become a remarkable "cat came back" story which I just cannot get rid of as an SVH pick.
Verde Agritech's efforts to convert the insoluble potassium into a marketable fertilizer product have gone through multiple iterations. After staking the known belt of "verdete slate" rocks in 2008, the company first revived a process developed during the eighties which used calcining in a rotary kiln to convert the verdete slate into a whole rock product called ThermoPotash which was intended to be spread onto the fields as a slow-release fertilizer to supplement normal applications of KCl. The earlier eighties effort failed because the cost of producing ThermoPotash could not compete with the price of imported potassium chloride around $100 per tonne. After potash spiked towards $1,000 per tonne in 2008 and Brazilian farmers adapted to a new price reality Verde Agritech decided it was time to give ThermoPotash another chance.
The junior delivered a positive PEA in 2010 but still faced the task of persuading farmers to use ThermoPotash as a fertilizer supplement, which it worked on by conducting agronomic studies on various crops. At the same time Verde Agritech collaborated with a Cambridge scientist called Derek Fray to develop a process for converting the potassium silicate into potassium chloride. Verde Agritech delivered a PEA in 2012 for the production of KCl, and went on to deliver a BFS in 2013 which proved not to be "bankable" because suppliers wanted to see a 200 tpd demonstration of the KCl process before providing a performance guarantee. That outcome, coupled with the declining potash price, which needed to be above $400 per tonne for the KCl process to be feasible, crashed the stock price and led to a management fallout that left the Brazilian team headed by Cris Veloso in charge of a market orphaned company.
Verde Agritech dealt with the KCl process setback by turning back to the ThermoPotash strategy and delivered a PFS in 2014 for a 700 tpd "Flex Plant" operation which could also double as a pilot plant for testing the KCl process. However, after the Russians broke the cartel and potash settled down to its current level of $200 per tonne, the KCl process for the verdete slate ended up hopelessly sub-economic and today is considered dead in the water. However, given that Donald Trump appears determined to destroy the post WWII order constructed by the United States through his rather unenlightened "America First" policy, which could lead to a global free-for-all the United States from its new position of diminished global stature will be unable to stabilize, the reliability of potash shipments from Russia and Belarus could become a question mark for Brazil's agricultural sector. While a lot of money was sunk into the KCl process, it may yet prove to be a very valuable investment.
Verde Agritech, which had noted that ThermoPotash was a multi-nutrient fertilizer that also qualified as organic, focused its marketing strategy on the organic potential of Brazil's coffee production. It had obtained a government agency guarantee for most of the USD $114 million CapEx and in early 2015 submitted an EIA based application for an environmental license in Minas Gerais state that soon got bogged down in the quagmire created by Brazil's Petrobras corruption scandal. While waiting for the bureaucrats to process the ThermoPotash application, Verde Agritech turned its attention to the results of control studies it had done using verdete slate that had simply been ground up and not subjected to calcining in a rotary kiln in order to make somewhat soluble the insoluble potassium silicate. Much to their surprise the crops planted in soil "fertilized" with ground up verdete slate performed better than unfertilized soil.
Why was this happening? The answer is partly explained in an important new book by a group of Indian soil scientists published in 2016, Potassium Solubilizing Microorganisms for Sustainable Agriculture, which argues that certain soil bacteria have the ability to liberate potassium from common insoluble potassium bearing minerals such as feldspar and mica. Their idea for achieving "sustainable agriculture" without heavy reliance on applied chemical fertilizers such as potassium chloride is to promote microorganism cultures in soils as an alternative way to make potassium available from minerals already naturally present. It turns out that the lateritic soils of Brazil's cerrado farmland are rich with microorganisms but not well endowed with potassium minerals. Unfortunately the salinity created by heavy KCl application harms the microorganism cultures which have a complex relationship with plants. What Verde Agritech discovered was that applying ground up verdete slate to cerrado soils provided a long term, slow release of potassium for plant uptake provided the right microorganism cultures were present.
The ThermoPotash strategy is not obsolete because the calcining process does include the addition of limestone which plays an important conditioning role for Brazil's acidic soil, and the potassium is released at a faster rate than ground up verdete slate beavered away at by microorganisms and acids released by plant roots. But one cannot avoid the fact that Verde Potash is sitting on billions of tonnes of 7%-12% K2O verdete slate. Why not harvest this national treasure to feed Brazil's agricultural industry? Management estimates it would cost about $6 per tonne to quarry and grind up the verdete slate to a fineness of about 0.7 mm needed to a make it accessible to efficient bacteria attack, and an average of $30 per tonne to ship the bulk product to Brazil's farming region where it can be applied directly to the soil. The economic question is what price the company will be able to command for its Super GreenSand? Because the potassium liberation is a multi-year process, whereas potassium chloride needs to be applied several times a year because of run-off, it may be possible that Super GreenSand is competitive with KCl in the $60-$70 per tonne range. I do not have the ability to confirm whether or not this is possible, but management seems to think so, and the company stands to make a very big score if it turns this concept into reality. If the 20,000 tpa mining license does get granted within a couple months, Verde Agritech can start producing Super GreenSand with very little capital cost. though with only about $2 million working capital left I suspect the junior will be looking to do a modest financing before the stock price gets too expensive. This type of license can be expanded to up to 200,000 tpa, enabling Verde Agritech to grow its GreenSand business into a $10-$15 million annual revenue range. That is still chump change, which is why the ThermoPotash strategy that kept me interested in Verde Agritech remains important. The full-blown ThermoPotash permit application would start at 225,000 tpa, but this environmental license, because it is EIA based, can be expanded to greater than 20 million tpa (ie 50,000 plus tpa). If Brazil's permitting body were to grant an environmental license for the ThermoPotash scenario, there would be no difficulty in adapting it to the simple quarrying and grinding scenario associated with the Super GreenSand product. If Brazilian agriculture were to undertake widespread adoption of Super GreenSand as a fertilizer supplement that reduces its reliance of imported KCl applications, Super GreenSand could grow into a $1 billion plus annual market that the verdete slate resource could sustain for many decades. As long as you are willing to assume that Brazil will allow the current title owner of the claims covering this resource to maintain long term title, you can dream about Verde Agritech becoming a very vaulable company, one that could be bought out very quickly if the science behind Super GreenSand proves acceptable to both the farmers and the big fertilizer companies. It is worthwhile to check out my past coverage via the Verde Agritech KRO Profile.
*JK owns shares in Verde Agritech Plc