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 Wed Nov 30, 2011
Spec Value Hunter Comment: Verde Potash working on PEA for Cambridge process
    Publisher: Kaiser Research Online
    Author: Copyright 2011 John A Kaiser

Verde Potash PLC (NPK-V: $7.00)

Spec Value Hunter Comment - November 30, 2011: Verde Potash working on PEA for Cambridge process

Verde Potash plc announced on November 30, 2011 that it has successfully produced potassium chloride through a continuous pilot plant test and that it has commissioned SRK Consulting to complete a preliminary economic assessment (PEA) expected to be delivered in January 2012. This is a very significant announcement for which we have been waiting nearly a year since Verde Potash announced in late 2010 that it had filed patents for a process developed on its behalf by Cambridge scientist Derek Frey which converts a silicate form of potash called glauconite into a conventional fertilizer product. Bottom-fishers should continue to hold Verde Potash 100%, and Spec Value Hunters who have been waiting for market volatility to deliver a cheaper stock price need to purchase a position immediately or give up waiting. Verde Potash has title to more than 1 billion tonnes of outcropping glauconite in Minas Gerais state that is amenable to low cost strip mining. It grades 9%-11% K2O equivalent, compared to 20%-30% K2O equivalent for the KCl based sylvite deposits that make up the enormous but deep evaporite beds in Saskatchewan. The junior published a PEA last year based on producing ThermoPotash, a whole rock product suitable only as a supplement to conventional N-P-K fertilizer blends. Brazil is 90% dependent on potassium chloride imports, which totaled 6.4 million tonnes from January through October in 2011. The delivered cost in the cerrado region of Minas Gerais where the glauconite deposits are located is now $660/t, compared to the $550/t landed cost on the Brazilian coast. ThermoPotash is limited to a blender supplement role that could at most replace 15% of Brazil's import dependency because Brazilian farmers are not interested in spreading fertilizer on their fields that weighs six times as much as conventional potassium chloride fertilizer. Apart from pleasing the Brazilian government by reducing potash import dependency somewhat, the main marketing hook behind ThermoPotash was that because it dissolved more slowly than KCl, it could provide balance in the form of a more controlled release cycle compared to KCl which is vulnerable to rapid leaching in the acidic cerrado soils that get inundated by torrential rains.

But with transportation costs becoming an increasingly worrisome part of the potash fertilizer cost, there is incentive to develop a domestic source that could dramatically reduce the import dependency. The Cambridge process borrows from the rotary kiln method used for ThermoPotash to produce conventional KCL by combining glauconite, limestone and a local chlorine source. One of the obstacles Verde had to tackle this year was the fact that the Cambridge process worked best with a chlorine source not readily available in Minas Gerais, and one of the key accomplishments was to modify the process to utilize a cheap local source. Additional patents have been filed and the company is keeping quiet about the details of the solution. Verde Potash also announced that it has successfully tested a revised flowsheet for the production of ThermoPotash which reduces the reliance on water supply and creates some energy cost savings. A prefeasibility study for ThermoPotash was supposed to be ready by Q1 of 2012, but Verde Potash has decided to complete a feasibility study instead which is now expected in Q3 of 2012.

While the ThermoPotash development could support a price target in the $10-$15 range based on the cost parameters outlined by the earlier PEA, the Cambridge process could support a much higher price target. The company has been fairly quiet since my property visit in mid June other than to publish an updated resource estimate for the glauconite and an initial estimate for a limestone deposit that will feed its own operation and possibly also become feedstock for cement makers. But today's announcement signals that management believes it can run with the Cambridge process; the only work left to be done is the engineering details of the PEA. When I spoke with Cris Veloso he indicated that if the PEA delivers robust numbers in January, Verde Potash will make developing the glauconite as a source of conventional KCl based potash its top priority, and would defer developing the ThermoPotash blend supplement until after it has Cambridge up and running. A feasibility study would be done by the end of 2012. The production scale proposed by the PEA will depend on cost optimization, but will not be more than 1 million tonnes of KCl production per year, which would make this a very sizable operation. Scaling production larger to replace Brazil's potash import dependency would be an option once the process has proven itself at a commercial scale. The junior has already secured the interest of potential lenders who will be plugged into the feasibility study if the PEA provides a green light so that debt financing can quickly follow a positive feasibility study. Veloso believes commercial production could be achieved by early 2015. With only 35.3 million shares fully diluted, Verde Potash at $7 has an implied project value of $247 million, which is cheap for a junior which appears to have the key to achieving potash security of supply for Brazil.


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