Bottom-Fish Comment - July 31, 2009: Market starting to appreciate security of supply aspect of Amazon's non-chloride potash
Amazon Mining Holding Plc has more than doubled during the past couple of weeks in what appears to be a growing market appreciation for the security of supply aspect of the junior's Cerrado Verde potash project in southern Brazil. As discussed in recent bottom-fish comments, Amazon's flagship project consists of a large silicate based potash resource in Brazil's Minas Gerais state where heavy rains rapidly deplete the soil of soluable fertilizers such as the traditional KCl produced by Saskatchewan. Amazon owns a substantial resource of an at surface "green slate" which runs 5-14% K2O that was first investigated during the eighties but abandoned due to the high energy cost of cracking the rock to produce a "slow release" fertilizer and the prevailing low price of potash. Since then potash has soared as high as $1,000 per tonne from which it has fallen to a level where India has recently negotiated import contracts at $460 per tonne which possibly defines a new bottom for potash prices that remains well above historical levels. Amazon staked the Cerrado Verde potash system in mid 2008 in the hope that potash prices would stabilize above historical levels and thus create an economic basis for a fresh look at the Cerrado Verde potash. Since the start of the year management has been busy marketing the concept of developing a slow release potash based fertilizer from its resources to government officials in Brazil and has secured several technology assistance deals. This initially caused a flurry of market interest that took the stock into the $0.30-$0.40 range, but the stock faltered in June when a management rift became apparent through the departure of the Canadian part of the team involving Kevin Van Niekerk, Simon Lawrence and Richard Topham. The situation was aggravated by the board nomination of Michael Atkinson who is affiliated with the Quest Capital cash stalking crowd. The rift seems to have arisen during mid 2008 about the corporate direction of Amazon and other still private Brazilian vehicles in which the group had a stake. At issue was how to pursue the Cerrado Verde opportunity and in this regard CEO Cristiano Veloso won out with the result that Amazon staked the land package and has since shifted its focus from gold to this agribusiness related story whose key challenges are metallurgy and marketing. Because the Van Niekerk group was more comfortable with traditional metal plays, it chose to bow out. As part of the cleanup Amazon agreed to acquire the assets of Toucan Metals Inc for $127,332 and 853,712 shares which consists of the Tucano and Mimoso projects which have copper, zinc and vanadium potential. Whatever agenda Atkinson might have been pursuing appears to have disappeared as the June 24 AGM approached, for he withdrew his nomination and was replaced by Peter Gundy who also became chairman. Gundy brings a relevant resume to Amazon, having been in charge of Brascan's Brazilian subsidiary during the seventies and played a key role at Potash Corp of Saskatchewan, followed by a founder role at Neo Materials during the nineties. Former Cormark analyst Jed Richardson who had been running Amazon's IR department also became a director, and along with Gundy represents the Canadian side of this London domiciled junior headed largely by Veloso's Brazilian contingent. Resolving this "people" uncertainty encouraged a new audience of prairie based brokers and farming related investors who had caught on to the significance of the verdete slate's "slow release" character and the promise it holds for boosting agriculture in southern Brazil. Veloso has put Amazon's Madeira gold project on the back-burner, but will keep it alive as the basis for a possible future spin-off of the non-potash assets. From a bottom-fisher's perspective Amazon Mining is now shaping up to become a major winner after last year's post-IPO washout. The junior has achieved its goal during the first half of 2009 of getting the attention of Brazilian government officials, and is now focusing on a metallurgical study that will establish which of the various hydrometallurgical processes is best suited for producing "ThermoPotash". The result of this program, which Amazon hopes to have done by the end of 2009, will also form the basis of a scoping study, for a critical question is what will it cost to produce a tonne of ThermoPotash. Compared to conventional chloride potash which has a very high mining cost both in operating and capital terms, the verdete slate is at surface and will have very low mining costs, but high processing costs. This is one of the two key uncertainties where a negative outcome could abruptly kill the alternative potash supply story. Amazon will also spend the second half of 2009 figuring out which portion of its vast resource holding it should focus drilling on to produce a resource estimate that would form the basis for a mine. Sorting out the best metallurgical process and associated cost, however, is only half the challenge faced by Amazon. The other half will be to demonstrate that ThermoPotash is in indeed effective as a "slow release, non-chloride, multi-nutrient fertilizer" and convince the Brazilian agriculture industry to adopt ThermoPotash. The work during the second half of 2009 is expected to put Amazon in a position to produce ThermoPotash samples for testing and marketing. This a longer term milestone for which there is no event such as a scoping study which could kill the story, and Amazon seems to have had some success in this area. In addition to catching the attention of the Brazilian government, which is very conscious that a third of Brazil's GDP involves agriculture and that fertilizer security of supply is a critical national issue, Amazon's ThermoPotash has caught the attention of Brazil's agricultural industry because of the promise it holds for allowing the "cerrado" to be planted with cash crops. As with the rare earth sector, the story here is less about the economic value of the upstream raw material supply business, but more about the downstream implications, which is why I am taking such a strong interest in Amazon's potash story. While it is very difficult at this stage to quantify what Amazon might be worth as a producer of slow release potash, it does not take much to recognize that a company with only 38.2 million shares issued and a treasury of $8 million working capital could ultimately command a strategic premium well above the $30-$40 million market cap to which the stock has recently risen. From a financial perspective Amazon's burn rate this year will be less than $2 million, leaving it with $7 million working capital at year end, so there is little short term equity dilution risk. Amazon was initially recommended as a medium priority bottom-fish buy in the $0.10-$0.19 range on December 24, 2008 and given detailed coverage during Q1 of 2009. At the current price Amazon is well above the bottom-fish buy range and we are now converting the recommendation to a Bottom-Fish Spec Cycle 100% Hold with the expectation that Amazon has plenty of upside left whose realization during the next six months will depend largely on the degree that investors interested in agri-business stories embrace Amazon.