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 Wed Apr 14, 2010
Spec Value Hunter Comment: Amazon pursuing marketing study ahead of PEA completion
    Publisher: Kaiser Research Online
    Author: Copyright 2010 John A Kaiser

Amazon Mining Holding Plc (AMZ-V: $1.94)

Spec Value Hunter Comment - April 14, 2010: Amazon pursuing marketing study ahead of PEA completion

Amazon Mining Holding Company Inc has pulled back to a level where our open Good Absolute Spec Value Buy recommendation initiated on December 18, 2009 at $1.63 is once again applicable. Since our last Spec Value Hunter Comment (Jan 29, 2010) Amazon has reported 43-101 resource estimates at various cutoff grades for a small portion of its 100% owned Cerrado Verde project in Minas Gerais state of southern Brazil. At a cutoff grade of 5.0% K2O the Funchal Norte target has 148,590,000 tonnes of 9.09% K2O, dropping to 64,390,000 tonnes of 11.17% K2O at a 10% cutoff, which is in line with our earlier back-of-the-napkin estimates. To convert that grade into KCl equivalent, we divide by 0.6, which gives us a grade of 18.6% KCL, which when multiplied by a price of $400 per tonne of contained KCL works out to a rock value of $74.40 per tonne. The resource thus has an in situ value of $4.8 billion. This is a very small portion of the 15 billion tonne footprint of glauconite Amazon's consultant Coffey Mining has estimated for the Cerrado Verde project using satellite imaging technology. Amazon has been working on a preliminary economic assessment (PEA) which envisions annual production of 1,000,000 to 4,000,000 tonnes per year of a 10% K2O equivalent ThermoPotash. The Funchal Norte resource could thus be mined for 16 to 64 years. During the course of evaluating the drill results Amazon's geologists came to the realization that the higher grade massive glauconite correlated with the axes (hinges) of the fold system that hosts the glauconite mineralization. The theory is that enrichment took place along these axes during folding. There are numerous sweet spots similar to Funchal Norte within the 15 billion tonne glauconite footprint of the Cerrado Verde belt, some of them with better locations than others. Amazon now has a structural mapping tool to guide prospecting aimed at identifying similar sweet spots for confirmation drilling. Targeting activity is underway as a prelude for additional drilling later this year for those targets deemed ideal in location terms. While the Funchal Norte resource is adequate for the proposed production rate, the scale of this rate is of a proof of concept nature. Amazon's goal is to identify multiple sweet spots for future scaled up development, and select the best located one for definition drilling and the initial production scenario on which the upcoming PEA is based. While Amazon's near term goal is to establish itself as an "alternative potash" producer, the bigger picture goal is to help Brazil wean itself from its potash import dependency. Because achievement of both the short and long term goals will likely require a helping hand from the Brazilian government and the agriculture industry, documenting the existence of multiple glauconite sweet spots helps legitimize the security of supply goal.

Location is important for transportation routes to target markets and for the site of the processing plant, which should be right next to the deposit to minimize raw material handling costs. The ThermoPotash product is created by melting the glauconite feed and then quenching it to create a "shattered glass" product that would be spread on the fields. This whole rock product would include all the minerals in the original rock which would be released into the soil as the fertilizer slowly dissolves. There is thus no concentration of the contained potassium, just a transformation from its silicate lattice into a form that will dissolve. Cost control involves limiting the distance the raw material is moved before processing, and in turn reducing the transportation distance of the ThermoPotash fertilizer to its destination fields. Amazon was initially planning to release a PEA at the end of May, but now plans to delay it until at least late June in order to conduct a "marketing study" designed to better quantify the costs the farmer incurs applying the fertilizer. Potassium chloride (KCl) fertilizer has a grade of 60% K2O, which means that six times as much volume of 10% K2O ThermoPotash is needed to deliver the same amount of potassium to a square unit of crop land. The farmer must supply the energy cost of distributing this extra physical load, which needs to be added to the purchase cost of the ThermoPotash when comparing the total cost with that of KCl fertilizer. The tradeoff is not quite as severe as it looks; apparently the glauconite derived ThermoPotash contains carbonate material which helps balance the acidic soil in southern Brazil. Farmers using KCl fertilizer also have to apply lime to their fields. One factor that will determine the willingness of a farmer to use ThermoPotash as an alternative to KCl fertilizer is the degree of mechanization the farming operation has undergone. The bigger volume of the ThermoPotash makes it likely to be of less appeal to small scale farmers. The marketing study would identify the most likely buyers of ThermoPotash, which in turn would establish the delivery costs based on plant location. Management apparently is also contemplating more specialized downstream fertilizer products, which would complicate the simple plant design associated with a 10% K2O "whole rock" product.

Needless to say, whenever management delays its timeline in order to accommodate additional studies, the market tends to infer that things are not shaping up as happily as expected, and that the company is buying time to find solutions to a new problem. At $1.94 and with 30.5 million shares fully diluted Amazon's market capitalization stands at about $60 million, which in my view reflects considerable market skepticism about the viability of glauconite derived ThermoPotash as a competitive alternative to traditional KCl fertilizer. The company has enough money to pursue its plans until April 2011. This includes producing sufficient ThermoPotash sample material for the argonomic studies scheduled to start in July 2010. Amazon has announced agronomic studies by partners on various crops ranging from carrots with a short 3 month cycle to eucalyptus which has a six year crop cycle, though the effectiveness of ThermoPotash for eucalyptus will be known well before six years are up. Because production of ThermoPotash is energy intensive, and energy prices have been rising, it is critical to find out the cost structure of ThermoPotash. The odds are that the number will not be a pretty sight, and in a world driven by economic logic would probably return Cerrado Verde to the science closet. However, Brazil has adopted a strategic goal of achieving fertilizer independence by 2020, and one way to achieve that would be to make large energy infrastructure investments that utilize local resources such as the natural gas being developed in a nearby basin. Another way would involve imposing import tariffs on KCl fertilizer in order to create a floor price that protects domestic production from global commodity price volatility. Although never initially popular, such tariffs can serve long term strategic goals as has happened in Brazil with its sugar cane based biofuel industry. Amazon's Cerrado Verde project is really an engineering project with major strategic implications that will not be abandoned in a couple months. Spec Value Hunters should take advantage of the recent weakness in Amazon's stock and treat it as a minimum 12 month investment with the next milestone now expected in July. Amazon is confirmed a Good Absolute Spec Value Buy in the $1.50-$2.00 range.


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