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 Wed Mar 18, 2009
Bottom-Fish Comment: Recommendation Strategy for Amazon Mining Company plc
    Publisher: Kaiser Research Online
    Author: Copyright 2009 John A Kaiser

 
Amazon Mining Holding Plc (AMZ-V: $0.17)
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Bottom-Fish Comment - March 18, 2009: Recommendation Strategy for Amazon Mining Company plc

Amazon Mining Holding plc was recommended a medium priority bottom-fish buy in the $0.10-$0.19 range on December 24, 2008 based on its strong working capital position of about $9 million, good structure in the form of 25% of 27.5 million issued held by management, a strong management team balanced between a London/Toronto group experienced with capital markets (ie Simon Lawrence and Kevin van Niekerk) and a Brazilian group experienced with the junior's Brazil focus, and two interesting projects consisting of the Madeira paleoplacer gold play in northwestern Brazil and the Cerrado Verde potash play in central-eastern Brazil. Amazon started trading on the TSXV on November 21, 2007 following a $16 million IPO at $1.20 through Cormark, GMP and Dundee, but received little after-market support and quickly collapsed into the $0.10-$0.19 range in July when the Crash of 2008 took down the resource sector. By mid summer of 2008 Amazon had dropped two of its gold projects after disappointing drill results as well as its alluvial diamond project to avoid expensive holding costs. Amazon shifted its focus to the 226,554 ha Madeira project straddling the Rondonia and Amazonas states where the Madeira River had yielded 1.7 million reported ounces of gold in 1975-1995 through artisanal and dredging operations. The gold had been shed from the Bolivian Andes through erosion during their uplift and deposited within a large fluvial fan, apparently concentrating as native gold within a 2-3 metre thick conglomerate horizon that had been cemented into an iron-duricrust during a dry climate period 6-10 million years ago. The Madeira River cut through this gold bearing conglomerate, releasing the gold which became the focus of the artisanal mining activity during the late seventies. A northeast trending fault active during the past 2 million years has repeatedly disrupted the Madeira River drainage system, stranding old meanders that may have been placer gold bearing channels and which have since been buried by a bed of argillaceous sediments up to 20 metres thick. Amazon's initial exploration strategy was to use satellite imagery to identify such stranded paleoplacer channels and investigate them with auger drilling. During 2008 Amazon used a water well bore to collect samples from the target horizon in areas outside interpreted paleo-channels and established the widespread presence of low grade gold mineralization away from current and ancient river beds. Contamination problems, however, rule out water well bore drilling, and Amazon is considering reverse circulation drilling as future way to identify "hotspots" with sufficiently elevated gold grades to justify resource delineation.

No work was being done in the November-March rainy reason, during which Amazon's focus has shifted to the Cerrado Verde potash project in centra-eastern Brazil which Amazon announced in November 2008 as having staked. The current 118,742 hectare land position covers a 100 km by 6 km wide belt of "green slate" with a thickness ranging 20-40 metres in Minas Gerais State. The "Verdete Slate" is a combination of glauconite and sericite, silicates with a potash (K2O) content ranging 5%-14%. The material is friable and occurs as a near surface lithological unit that outcrops in places, and could conceivably be open pit mined. Its potential as a source of potash for the fertilizer industry had been investigated by Vale (then CVRD) and several universities during the eighties. One of the studies demonstrated that a "thermo-potash-lime" product suitable as a slow-release, non-chloride fertilizer could be created if the materials were heated in a kiln to 1,100 degrees celsius. The energy costs, however, prevented this product from competing with the more traditional KCl produced from evaporite beds which at the time had a price of less than $80 per tonne. CVRD found itself a more traditional potash deposit elsewhere in Brazil, and the Verdete Slate was forgotten. During the potash rush of the first half of 2008 one of Amazon's advisors, Ysao Munemassa, who had once worked for CVRD, remembered this story, investigated the land situation, and brought it to Amazon's attention.

The idea intrigued Amazon's young CEO, Cristiano Veloso, whose great uncle was a prominent Brazilian agronomist and whose family has agricultural interests in the "cerrado" region of southern Brazil where the savannah has produced poor crop yields because of the nutrient poor acidic soil that gets subjected to heavy tropical rains. Although seeds have been engineered that can handle this soil provided it is supplemented with fertilizers, the tendency of KCl to dissolve and rapidly wash out of the soil has hampered agricultural development in this vast region blessed with abundant water. It turns out that the "thermo-potash-lime" product developed during the eighties has a lower water solubility than KCl, which gives it a functional advantage in the cerrado region. In addition, higher crop prices created by the growth of the BRIC economies have sparked a renewed interest in planting the cerrado region. Furthermore, while the global economic downturn has hit commodity prices hard in general, the world's appetite for food has not diminished. Potash prices, which had been stable at $100 per tonne until they started to creep higher in 2004, had skyrocketed over $500 per tonne in early 2008, and after a brief dip in July 2008 have recovered and remained high (in Brazil, which imports 90% of the potash consumed by its agricultural industry, the price for delivered KCl has been at the $1,000 level).

On the speculation that it could become instrumental in mobilizing a vast economic process in this region of Brazil by developing the Verdete Slate as a local source of potash uniquely suited to overcoming the region's handicaps, Amazon staked the main formation hosting this rock during mid 2008. A few days later Vale, which has been under pressure from the government to develop domestic potash sources, staked the "lesser" limb of the formation where it had done some work in the eighties, and by September everything else had been staked up by speculators. Amazon's gambit is that the unique circumstances of the cerrado region and the Verdete Slate coupled with what looks like a high price for KCl in the foreseeable future will make it possible to produce a glauconite derived potash fertilizer at a profit that may be uninteresting to Vale and other major potash producers, but of a great magnitude for the shareholders of a junior with only 37.8 million shares fully diluted. The trick will be to get the government and agricultural interests involved as partners who are less interested in the profits from producing local potash than they are in the broader profits made possible by stimulating farming in the cerrado region. Amazon is currently conducting a study to identify the capital and operating costs associated with producing "thermo-potash-lime" and is lobbying the Brazilian government for support. If these efforts are fruitful, Amazon hopes to have pilot plant tests for the pyrometallurgical process underway by the end of 2009. Because the resource is likely amenable to open-pit mining, most of the capital costs will involve plant construction, with energy intensive operating costs the key factor. Amazon's management has put in place a spending strategy designed to leave it with $7 million in working capital by the end of 2009. The downside risk for bottom-fishers is that management puts all its efforts into the Cerrado Verde project without generating the structural momentum needed to get it off the ground; this downside risk, however, is balanced by the company's simultaneous strategy of using its Brazilian network to search for gold opportunities in Brazil.

 
 

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