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SVH Tracker - November 28, 2017: Verde Agritech spells out Super GreenSand game plan
 Verde Agritech plc published a prefeasibility study on November 27, 2017 for a plan to produce and sell within Brazil a bulk fertilizer product called Super Greensand from its multi-billion tonne "verdete slate" deposit. The bluish-green rock also known as glauconite is a sedimentary deposit laid down in a marine environment containing 8%-11% potassium (K2O) in a silicate form. Most of the world's potash production comes in the form of potassium chloride recovered from evaporite beds in places like Saskatchewan and Belarus or brines such as the Dead Sea. Potassium chloride is the dominant form of potassium used by the global agricultural industry. It is a salt that readily dissolves in water which is a problem in Brazil whose soil gets drenched with tropical downpours that wash away a significant portion of the potassium chloride before it can be taken up by plants. As a silicate the glauconite has the opposite problem in that water by itself does not dissolve the potassium out of its silicate prison.
The giant deposits in Minas Gerais were recognized in the 1980's and a process that involved grinding and calcining the material to loosen the chemical bonds was developed to create ThermoPotash. This product was never commercialized because the cost of processing, delivering and applying it well exceeded the cost of delivering an equivalent amount of potassium through conventional imported potassium chloride. That changed with the China super cycle in the noughties which drove potash from its stable price of about $100 per tonne to nearly $1,000 per tonne before settling back into a $200-$300 per tonne range. Verde Agritech staked the open "verdete slate" deposits in 2008 and has spent the past decade trying to commercialize this resource for the Brazilian agricultural industry as a domestic potassium fertilizer alternative whose price is competitive with imported potassium chloride.
The PFS represents the latest iteration after last year's detour into testing a small package consumer product for the American cat litter and lawn market. CEO Cristiano Veloso entertained me by shipping me samples of a GreenSand cat litter product that can be disposed of in a properly maintained compost heap, namely one whose temperature gets high enough to destroy the toxoplasmosis parasite in cat feces that is dangerous for pregnant women. After my cats demonstrated that they couldn't care less what the cat litter was made of I concluded that given the benefit of disposing the cat litter in my compost heap I would buy the product if it was not priced too much above the better quality kind like SuperScoop that needs to be dumped in a garbage can. But Verde Agritech's big picture goal was to introduce a bulk version to the Brazilian agricultural industry that could be scaled from an initial 600,000 tonnes of product to as high as 25 million tonnes annually. The PFS describes how this will be done in 3 stages over a 38 year period that depletes a proven and probable reserve of 777.28 million tonnes of 9.78% K2O, about a quarter of the overall 3.3 billion tonne resource. The headline numbers are a USD $1.98 billion after tax net present value with an internal rate of return of 290%. Given that Verde Agritech has only 41.3 million shares fully diluted that should translate into a double digit price target but until the company publishes its technical report and includes its cash flow model these numbers should be treated with caution.
The PFS proposes to build phase 1 production to 600,000 tpa, phase 2 to 5 million tpa and phase 3 to 25 million tpa. In February 2017 Verde Agritech announced that it had obtained approval to process 20,000 tpa, and has submitted an application to increase that to 50,000 tpa. The news release did not spell out the timeline for reaching the various production milestones. The PFS does indicate that CapEx to jumpstart the quarrying and crushing-grinding operation to produce bulk Super GreenSand for shipment to farmers is only USD $3.05 million. All processing capacity expansions will be funded from internal cash flow. We need to see how this unfolds in the cash flow model.
Although Verde Agritech will be producing a potassium chloride substitute fertilizer and pricing it so that it will be competitive with KCl as currently applied by Brazilian farmers, it is not the same thing and could encounter adoption resistance. For example, how much more physical volume of Super GreenSand needs to be applied than KCl, and how many more (fewer) application events per crop cycle? It is not just the cost of the delivered material that the farmer must consider, but the total cost of applying it to the fields. If Super GreenSand simply costs the same as KCL the farmers will be slow to adopt it, especially since there will be doubt as to whether it is truly as effective as the KCl they have used forever. Fortunately Verde Agritech's management includes some very smart Brazilians involved in agriculture, so whatever went into the PFS assumptions are not going to be wishful numbers. On the plus side, because production will scale up gradually in response to demand growth, Verde Agritech will develop a firm grip on its cost numbers. This is important because the farmers' KCl costs are a function of global market and shipping prices which makes it difficult for the farmers to control their profit margin as it relates to potassium fertilizer cost. As Super GreenSand climbs the adoption curve with a pricing model that tracks the KCl price, there will be a time where Verde Agritech will be in a position to offer long term supply contracts and the farmers will want them. That is the scale up inflection point. Where does the PFS put this inflection point? Verde Agritech is neither a mining nor a commodity optionality play. It is a marketing growth story and it really has no competitors. Once the technical report is published a lot of people will be in a position to study and query the numbers, possibly coming up with their own versions. Verde Agritech is on the threshold of becoming a very interesting junior with a lot of upside potential, but Spec Value Hunters will need a framework to place intelligent bets on this story.
Now is a good time to get one's head around the Verde Agritech story. I provide a set up for the current story in my recommendation strategy published in SVH Tracker - Feb 13, 2017. For a more detailed backgrounder check out SVH Tracker - Mar 16, 2015. What follows is a quick backgrounder.
The first iteration involved the original ThermoPotash product which was intended as a slow-release supplement to conventional potassium chloride. This was fairly small scale but in 2010 the junior began work on a process developed at Cambridge by Derek Frey which converted the potassium silicate into a conventional potassium chloride product. The potassium chloride iteration had large scale potential to displace Brazil's 90% potash import reliance. It had high energy input costs and needed $400 plus KCl prices to be feasible. When potash dropped below $300 per tonne the potassium chloride conversion process became a non-starter. Verde Agritech returned to the original ThermoPotash product which it hoped to market to farmers whose crops were either sensitive to the salt component of potassium chloride or were to be designated "organic" which means KCl cannot be involved.
Throughout this period Verde Agritech conducted agronomic studies to establish the relative effectiveness of ThermoPotash with KCl. The studies demonstrated that ThermoPotash could deliver potash to plants on a basis comparable to conventional KCl when the volume applied was adjusted to reflect the relative K2O content of the two fertilizer products. The drawback was that farmers had to bear the cost of applying theoretically six times as much fertilizer volume when using ThermoPotash. The actual extra volume was reduced by the fact that the ThermoPotash was a slow release product that did not lose anywhere near its potash content to rain-water run-off which diminished the percentage of the potash in KCl available for plant uptake. In addition the ThermoPotash process allowed the addition of limestone as a conditioner for Brazil's acidic soils and the glauconite included other useful elements available for plant uptake. The ThermoPotash facility involved a meaningful capital cost which the junior secured through a government credit agency but the project got bogged down in Brazil's dysfunctional permitting regime.
As Verde Agritech twiddled its thumbs waiting for the bureaucrats to grant a permit, the junior noticed an unusual aberration in its agronomic studies. Some of these studies used ground up glauconite as a control - no heat treatment to loosen the chemical bonds of the potassium silicate. The goal was to show that the heat treated glauconite had results comparable to potassium chloride and the expectation was that the ground up glauconite would have the same effect as applying no potassium based fertilizer. This was based on the assumption that the potassium stayed tied up in its silicate structure no matter how finely you ground the material. To everybody's surprise the untreated ground up glauconite was achieving the same results as the plots to which ThermoPotash or KCl had been applied. Did this mean that potassium fertilizer was not needed to grow crops?
A closer look pointed Verde Agritech to an emerging field which studies the complex interactions between plant root secretions and microbe populations which liberate elements like potassium from mineral grains such as feldspar so that they can be taken up by the plant. These revelations were leading to new soil management strategies that were not exactly music to the ears of potash producers. But when Verde Agritech's team connected this radical soil management field with the puzzling agronomic study results, the realization arose that heat treatment was not necessary to liberate the 8-11% K2) content of the verdete slate. All that was required was to grind the material up and apply it to the fields were the plant roots and microbes would complete the liberation process. Instead of an expensive plant with rotary kilns and high energy costs all that was needed was an excavator to quarry the material, a crusher, and a hammer mill to produce a very simple fertilizer product Verde Agritech rebranded as Super GreenSand. The company has figured out the specifications of its product, has started to produce it on a small scale, and has approval to sell it in most states of the United States for organic production. The product has also proven suitable for cannabis cultivation. The key things to worry about for the upside potential of Verde Agritech are how fast the product will sell at the company's chosen price points and will Brazil's bureaucrats approve capacity expansion as it is needed. After nearly a decade of frustration Verde Agritech Inc is finally ready to succeed.
It is difficult to assign a fair value for the Super GreenSand story without having the details of the PFS technical report in hand. The junior raised $1.8 million in July through a private placement of 1,727,143 units at $1.05 per unit with a full warrant exercisable at $2.00 for two years. Should the stock's 20 day VWAP exceed $2.20 the expiry can be accelerated to within 30 days. Aside from pushing the marketing portion of its business plan as hard as possible, the company's focus in the near term will be to raise the remainder of the USD $3 million needed to kick off Phase 1 of the PFS. There is no need to produce a feasibility study because this is an agricultural product growth story not an all or nothing giant CapEx mine development story. It is disruptive for conventional potassium chloride supply to the Brazilian agricultural industry and it will have government support because potash security of supply is a critical risk for a major part of Brazil's GDP. The American consumer products initiative will seek to carve out a corner of the premium product market. It is probably more useful for marketing the stock to American consumers; the big prize is the Brazilian commercial farming sector.
*JK owns shares in Verde Agritech Plc
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