Spec Value Hunter Comment - August 11, 2010: Amazon study shows release rates comparable between KCl and ThermoPotash
Amazon Mining Holding Plc, which has been very quiet during the past quarter, surprised the market on August 11, 2010 with a trading halt for a technical announcement regarding a comparative study between KCl (muriate of potash) and ThermoPotash in terms of nutrient availability. The halt apparently was imposed by the TSX to give it time to review the news release, and was not requested by Amazon because it felt the news was material. The study involved placing samples of muriate of potash (the standard KCl form of fertiliver), ThermoPotash (the whole rock based product created from the verdete slate through a pyro-metallurgical process), and crushed verdete slate (main potassium mineral is a silicate called glauconite) containing equal amounts of potassium (K2O) into closed soil systems for 90 day cycles. The study was done on clay-rich and sandy soils with two application doses, 200 kg per hectare and 400 kg per hectare. The study showed that the verdete slate was inert, meaning that it released no potassium into the soil. The verdete slate from Amazon's Funchal Norte zone runs 9-11% K2O equivalent, as would the ThermoPotash which is essentially the verdete slate melted and quenched to create a "shattered glass" product which is then reshaped into pellets as in the photo of the sample material. Muriate of potash is potassium chloride which grades about 63% K2O equivalent and thus requires one sixth to one seventh the weight of ThermoPotash. Although Amazon's news release did not indicate how much more ThermoPotash than KCl was used in the study, my math suggests it would have been 6-7 times as much ThermoPotash, assuming the density of the two fertilizers is similar. The study concluded that muriate of potash and ThermoPotash released roughly equivalent amounts of potassium into the clay rich and sandy soils during the 90 day test cycle at the different application doses. In addition the ThermoPotash added calcium and magnesium to the soil, which is not present in muriate of potash. The comparable nutrient availability is good news for Amazon because it demonstrates that ThermoPotash is a comparable source of potassium as a fertilizer. The next study will be a nutrient leaching test which will determine how much of the potassium will get washed away by rainfall typical of southern Brazil's cerrado farmland. The expectation would be that muriate of potash dissolves more quickly than ThermoPotash during the rainy season, which loss would require re-application of KCl or a heavier dosage of it that would not be required for ThermoPotash. This would offset the undesirable fact that 6-7 times as much volume of ThermoPotash fertilizer than KCl needs to be applied to the land.
Amazon has traded below $1 and bounced back over $2 since my last Spec Value Hunter Comment on April 14 during which I confirmed Amazon as a Good Absolute Spec Value Buy below $2. The pullback was in part due to softness in potash prices in response to weak prices for agricultural commodities, but it was also partly due to a delay in delivering a PEA which Amazon had initially guided as being available during Q2 of 2010 and then by early Q3 of 2010. During the past quarter Amazon has been unusually quiet, and the PEA is now well overdue, which raises concerns that technical and/or financial issues have emerged that put into question the viability of ThermoPotash as a security of supply solution to Brazil's heavy dependency on imported potash for its agricultural industry. On August 12 I had an opportunity to talk with Amazon's CEO Cris Veloso who indicated that he now expects the PEA to be ready by early October 2010. One reason for the delay was the decision during Q2 to embark on a product marketing study which was instigated by the realization that there might be resistance to a fertilizer product that requires farmers to apply 6-7 times as much volume as the traditional KCl fertilizer to their fields. In that regard Amazon hired Mauricio Sampaio who has spent his career in the marketing and distribution of fertilizer products in Brazil. Sampaio has apparently come up with a marketing strategy which avoids the single product application problem and can achieve rapid and widespread market penetration. Amazon is not disclosing details for strategic reasons, but the general outline presented to me does make sense. As for the agronomic studies that third parties were supposed to start in July, this has been postponed to September to coincide with the planting season which in turn coincides with the rainy season.
Amazon is also involved in nursing along legislation which would provide tax breaks for certain input costs related to the production of ThermoPotash which Veloso hopes will be passed by the end of 2010. Mapping work intended to identify other high grade zones within the Verdete slate belt that may have a better location with regard to power, natural gas supply and transportation access than the Funchal Norte zone are progressing, with drilling expected to be underway late in Q4 of 2010. The original milestone timeline I had envisioned saw Amazon constructing a pilot plant scale facility during the first half of 2011 which would be used to produce material for marketing purposes and to optimize the process for producing ThermoPotash. A full-fledged pilot plant study, however, may not be necessary because Amazon's pyrometallurgical facility will be based on off-the-shelf technology, though some optimization will have to be done on the quenching system for the glauconite melted in the rotary kilns. Velso still thinks that a production decision by early 2012 is feasible, with commercial production starting in 2013. Meanwhile the stock has likely strengthened because the general negative market pressure of the second quarter has eased, and because the drought in fire-ravaged Russia has raised the prospect of sharply higher grain prices, which in turn has boosted interest in fertilizer stories. The uptrend in Amazon is a somewhat belated response to the sharp trend reversal Potash Corp of Saskatchewan underwent in early July. With the stock above the $2 buy limit and the key PEA milestone more than a month down the road, I recommend that during the interim bottom-fishers hold their positions and spec value hunters who are not already long not chase the stock above $2 and instead look for a pullback below $2 to accumulate a position. What we will be looking for in the PEA is not a fabulous NPV and IRR, but rather a breakeven production scenario where the required price for ThermoPotash is competitive with the KCl fertilizer currently used by Brazilian farmers after adjustment for application costs and efficiency with regard to Brazilian soil conditions. Amazon is a scalable security of supply story with long term implications for Brazil's agricultural industry because there is a near infinite supply of glauconite controlled by Amazon; if the PEA shows a reasonable cost structure whose inputs promise long term price stability, one of the big fertilizer companies such as Vale which bought Bunge this year will buy out Amazon at a valuation which could deliver a $5-$10 price for Amazon, if not higher.