Bottom-Fish Comment - October 2, 2009: Amazon's ThermoPotash attracts steel giant ArcelorMittal
Amazon Mining Holdings plc has attracted the attention of steel giant ArcelorMittal through a Brazilian subsidiary which has 170,000 hectares of eucalyptus trees under cultivation in the southern Brazilian states of Minas Gerais and Bahia. Eucalyptus is a fast-growing tree native to Australia which has become an invasive species in places like California where it serves no useful purpose and was a major culprit in the Oakland Firestorm of 1991. Brazil, however, has 5 million hectares of eucalyptus trees under cultivation. The trees are harvested after 5-7 years for pulp and paper as well as the production of charcoal. These plantations are located in southern Brazil, far from the Amazon Basin, and represent a renewable resource that is recognized as a desirable alternative to rainforest logging. ArcelorMittal converts its eucaplyptus trees into a form of charcoal it uses as a substitute for metallurgical coal. It has agreed to conduct and fund agronomic tests using "ThermoPotash" supplied by Amazon Mining Holding plc on its eucalyptus plantations. In return ArcelorMittal will have the right to acquire 15% of Amazon's potential ThermoPotash production at market price for a period of 24 months, presumably from the start of commercial production which is several years down the road. ThermoPotash is a slow-release, multi-nutrient fertilizer made from the silicate based potash resource (4%-14% K2O) on Amazon's 100% owned Cerrado Verde project. This form of potash was investigated during the eighties as a possible solution to Brazil's potash fertilizer import dependency, but never commercialized because of its energy intensive cracking cost. In light of surging potash prices during the past couple years Amazon had the wit to stake the majority of this outcropping silicate potash resource in mid 2008, and is now conducting a scoping study on the associated costs which it hopes to have completed by the end of the year, along with a 43-101 resource estimate that would form the basis for an initial open-pit mining operation. Although the ThermoPotash fertilizer is unlikely to offer any competitive cost advantage to imported KCl potash from places like Saskatchewan and the Ukraine, its lower solubility is expected to offer functional benefits over KCl based fertilizers which leach out of the soil quickly under the onslaught of Brazil's torrential rainfall. The implications for extending the productivity of Brazil's "cerrado" region has attracted the support of the Brazilian government which perceives the downstream benefit for the region. Readers are referred to earlier Amazon bottom-fish comments for details on this unusual "security of supply" story which seeks to substitute ThermoPotash for tradional KCl based fertilizers in southern Brazil.
Amazon's stock price has been helped by a major research report titled "Brazil - The Next Major Supplier of Potash" issued on August 19, 2009 by Wellington West Capital Markets whose analyst Robert Winslow argues that traditional potash producers such as Potash Corp (POT-T) of Saskatchewan are threatened by the possibility that significant KCl potash resources in the Amazon Basin may get developed and lead to Brazilian self-sufficiency in potash production. Winslow's pessimism, or optimism depending on which perspective you use, hinges on estimates by the Brazilian state oil company Petrobras that the Amazon Basin may host 1 billion tonnes of K2O on the basis of consistent oil well intercepts grading 17%-30% K2O. Petrobras initiated a feasibility study in June 2009 which wil tackle the tricky topic of developing anything in the ecologically sensitive Amazon Basin and the expensive topic of building transporation infrastructure into this region. (One has the wonder if this has anything to do with the decision by Lula da Silva's environmental minister Marina Silva to quit the Worker's Party in favor of the Green Party. For some background on this amazing woman I recommend the August 28, 2009 New York Times article A Child of the Amazon Shakes Up a Nation's Politics). While the Wellington report is clearly fishing for corporate finance involvement in the development of potash resources in the Amazon Basin, as can be inferred from its finger-wagging about the risk that the Brazilian government may simply exclude foreign capital from developing the Amazon potash, the report does mention juniors with potash prospects elsewhere in Brazil, including Amazon Mining and its Cerrado Verde project. Because Winslow's focus is on the transportation cost advantage Amazon potash would have over equally expensive to mine Saskatchewan potash, Amazon Mining and its Cerrado Verde project would likely only qualify as an interesting but economically insignificant science project because of the comparatively lower grade. But just as we have seen the prices of rare earth juniors with significant deposits surge in recent months, the market also appears to have recognized that "strategic logic" and not "economic logic" could very well drive the development of the lower grade but at surface silicate based potash controlled by Amazon Mining. There is, of course, the risk that the Brazilian government will expropriate Amazon Holding's Cerrado Verde potash deposits, but, given the small current implied project value of only $41 million, a simple buyout for several hundred million dollars would seem to be a course of action with less political fallout, especially now that Brazil has scored the 2016 Summer Olympics for Rio de Janeiro. Should such a scenario materialize it would imply a price target in the $5-$10 range. I recommended Amazon Mining as a medium priority bottom-fish buy in the $0.10-$0.19 range on December 24, 2008, and applied a Spec Cycle 100% Hold at $0.80 on July 31, 2009. With still about $8 million working capital and only 38.2 million shares fully diluted Amazon Mining is in no hurry to finance, but there will come a time when it needs to build a pilot plant to confirm processing cost assumptions and generate product for testing such as required by the ArcelorMittal agreement, so there is reason for the Canadian investment houses to develop a strong interest in Amazon Mining. The recent sharp price increase accompanied by decent volume reflects the growing awareness that Amazon Mining Holding plc is a very special situation in the fertilizer arena. I confirm that Amazon Mining Holding plc should be held as a "security of supply" play with significantly higher price targets than the current $1.07 price.