Tracker - November 21, 2019: Poor spin control makes Verde Agritech a bargain
Verde Agritech Plc was slammed on November 14, 2019 when it reported third quarter results for its Super Greensand operation in Brazil even though the news was that it has sold 86,400 tonnes during the nine month period compared to 29,648 tonnes in 2018. Unfortunately Chris Veloso headed the news release with the statement "that it will not achieve the stated sales target of 200 thousand tonnes for 2019". Instead the expected sales for all of 2019 would be 110,000 tonnes of product, 45% lower than projected. The 200,000 tonne sales target was set in a March 29 release reporting the financial results for 2018. It was based on the current mining permit of 149,800 tpa for Pit #1 and the fact that commissioning problems at the plant last year resulted in the company being unable to fulfill all its orders (meaning lost sales), leaving it with a raw material stockpile of about 50,000 tonnes. The plant problems were sorted out last year, and its capacity has now been boosted to its theoretical limit of 500,000 tpa.
The new problem that emerged in 2019 was that the marketing strategy pursued by the new vice president of sales failed to generate orders for 200,000 tonnes. While most of the farmers who bought and applied Super Greensand in 2018 placed repeat orders for 2019, some didn't for the simple reason that Verde Agritech did not contact them to get a repeat order. This was a wakeup call for CEO Cris Veloso who realized that when selling an alternative fertilizer product to hundreds of farmers located all over southern Brazil you need a very efficient, well organized selling machine, not one individual with a couple assistants. Did the stock deserve to be punished by the market for missing its sales target? Not really, but if management is going to put that learning curve "failure" at the top of the news release rather than at the bottom with a clear explanation, it does deserve some sort of consequence. The market setback creates a fresh opportunity for Spec Value Hunters to acquire a cheap position in a junior with a revolutionary, largely internally funded growth story that will resonate with a Post Boomer audience.
When production started in 2018 the junior had to overcome technical problems involving moisture and the crushing-grinding system. Those were not a problem in 2019. The junior stumbled in 2019 because it was not properly prepared for selling the product on a larger scale; fulfillment and delivery were not a problem. NPK has since installed a Salesforce software system, fired the vice president of sales, and the CEO has immersed himself in product marketing theory. So NP should be much better prepared for 2020. Product revenue averaged $49 per tonne and the cost $24 per tonne, a healthy 50% gross operating margin. Because of administrative overhead the company lost $1,095,000 on $4,538,000 revenue for the 9 months ending September 30, 2019 compared to a loss of $1,110,000 on $666,000 revenue for the same period last year. The income statement shows NPK paying $145,000 "income tax" based on a pre-tax loss of $950,000, but that relates to tax paid by the Brazilian operating subsidiary. NPK has elected to apply a small business tax method which is a low rate applied to gross revenues, but for accounting reasons it shows up in that odd location in the consolidated statements.
NPK states that will have sold 110,000 tonnes by the end of 2019 which is 271% higher than 2018. That in itself is a substantial improvement. The original plant now has a 500,000 tpa capacity which means it could generate revenues approaching $25 million per annum. Assuming the selling problem has been resolved courtesy of the 2019 experience, the revenue bottleneck is the current mining permit of 149,800 tpa for Pits 1 and 3. Applications to expand mining by 333,000 tpa are pending, which would allow NPK to reach Plant 1 capacity. If NPK sells 149,800 tonnes in 2020 it will be close to breaking even. Any sales growth beyond that starts turning into positive cash flow. Since the Brazilian winter (northern hemisphere summer) is when orders are placed for spring time application and planting, there is time for NPK to get approval for a bigger mining rate. It thus becomes a question of how full can the new sales strategy fill the order book for H2 of 2020, and how much more than 149,800 tonnes can it sell?
The company still has only 51,216,745 shares fully diluted and working capital of $1.6 million which hopefully is enough to avoid another financing, though if necessary, such financing would not need to happen until sometime next year when the stock has recovered from the mishandled news release. As far as bigger long term growth is concerned, NPK has received an environmental license to build a plant with 890,000 tpa capacity next to Pit 2, which would avoid the local trucking cost of quarried material to plant. The foundation is gradually being laid for this growth story to accelerate.
Why would the Verde Agritech story be of particular interest to Post Boomers, that collection of generations most concerned about the future health of the planet? The NPK story has gone through several permutations but the current one is the most environmentally friendly one of all. The verdete slate which runs 9%-11% K2O, the critical fertilizer called potassium, has proven effective if ground fine enough and applied to healthy soil, which means soil teeming with microorganisms. The current fertilization strategy of agriculture is to pound the soil with potassium chloride, a salt produced from evaporite beds in places like Saskatchewan and Belarus. While highly efficient in providing potassium to crops, the salt nature destroys the microorganism based eco-systems in soils. Studies are showing that the interaction between microorganisms and plant roots is a symbiotic process that releases all sorts of elemental nutrients from minerals naturally in the soil. It is a reason uncultivated land remains fertile over centuries. If the Brazilian agricultural sector gradually replaces its reliance on potassium chloride with the naturally occurring glauconite mineral, the technical name for the verdete slate, it will preserve the fertility of the Brazilian farmland in a way that is not possible in the long run with KCl. This is not a problem that will affect the Boomers, but it is meaningful for Post Boomers. In addition there is a fungi called arbuscular mycorrhizal which has nothing to do with the Super Greensand but which has a symbiotic relationship with plant roots that results in storing carbon dioxide. Potassium chloride kills this fungi, indirectly contributing to the buildup of greenhouse gases that drive climate change. That is why NPK is an environmentally friendly growth story of particular interest to Post Boomers, though if NPK has indeed sorted out its startup production and marketing problems, the potential for a much higher market valuation as the growth unfolds is of immediate interest to profit minded Boomers. Verde Agritech Plc is confirmed as a Good Spec Value Favorite.
*JK owns shares in Verde Agritech Plc