Spec Value Hunter Comment - March 21, 2014: Recommendation Strategy for Verde Potash plc
Verde Potash plc was recommended on January 3, 2014 as a Good Relative Spec Value Buy at $0.44 with the expectation that during 2014 it would deliver a positive and plausible PFS for a two-stage ThermoPotash/KCL conversion plant business plan, secure funding for the ThermoPotash Flex Plant from the Brazilian agency Inova Agro, secure an environmental license for the ThermoPotash Flex Plant, deliver a feasibility study in the format required for the Inova funding to be completed, and get a "specialty coffee" designation for coffee whose exclusive potash source is its organic certified ThermoPotash. The Inova funding milestone ($105 million out of projected CapEx of $115 million - to be confirmed by the PFS) and specialty coffee designation milestones were achieved in February and March as discussed in SVH Comment: Mar 11, 2014. The PFS, expected by the end of Q1 of 2014, is the most important milestone because it will detail the economics of operating a 1,000 tpd plant that will produce 300,000 plus tonnes of ThermoPotash annually, and serve as a pilot plant to test NPK's KCl conversion "Cambridge" process. Although market interest in potash development plays has soured since the mid-2013 breakdown of the cartel operated by UralKali and Belaruskali, which has dropped the Vancouver KCl price to $300/t from $450/t, NPK is a special situation created by its ownership of the Cerrado Verde potash deposits in Minas Gerais, and Brazil's intense dependency on potash imports for its agricultural industry. Government support for NPK's ThermoPotash plan reflects Brazil's awareness of its future as the world's biggest crop developer of arable land, and thus the most important growing potash consumer with the highest vulnerability to a devastating price shock a decade from now if the current price war kills greenfield and brownfield potash supply expansion plans around the world. Unlike conventional potash deposits such as the deep evaporite beds in Saskatchewan which consist of a potassium chloride (KCl) mineral easily upgraded to the commercial form of KCl preferred in fertilizer blends, NPK's potash mineral is a silicate whose K2O is not available for plant absorption unless it is heat treated in a rotary kiln. Unlike Saskatchewan's sylvite which can grade 20%-30% K2O, the Cerrado silicate grades 8%-11%. NPK has an open-pittable M+I resource of 1.47 billion tonnes at 9.2% K2O plus 1.85 billion tonnes of 8.6% K2O inferred, representing 295 million tonnes of contained K2O (Brazil's annual K2O consumption is 4.9 million tonnes). In a worst case scenario where potash imports become impossible, the Cerrado Verde deposits could in the long term make Brazil potash self-sufficient. When the silicate is heated in a rotary kiln with limestone and quenched it creates a "shattered glass" style whole rock product with a slow-release character initially intended to supplement conventional KCL applications. The agronomic study done on coffee suggests that a single ThermoPotash application is competitive with multiple growth equivalent effect KCl applications, which, coupled with the organic and specialty status ThermoPotash can bestow on coffee beans, opens a new niche within Brazil's coffee growing industry that could absorb all of the Flex Plant's output. The real prize, however, is converting the huge Cerrado Verde silicate potash resource into conventional KCl at a rate of 3 million tonnes annual output. A 2012 PEA indicated this could be done profitably at $300/t KCl (FOB Vancouver) largely thanks to transportation and handling cost differences (see SVH Comment: Mar 27, 2012). NPK planned to release a bankable feasibility study for the KCl conversion business in 2013 but could not do so as a "bankable" study because the prior pilot plant study scale was too small to get a performance guarantee from the equipment maker for the 8,000 tpd rotary kilns needed to make the business feasible (see SVH Comment: May 14, 2013). The $50 million cost for the required 200 tpd pilot plant study was prohibitive, and the stock price collapsed, but NPK came up with a two stage plan whereby it could temporarily shut down the ThermoPotash plant to do the KCl conversion study (see SVH Comment Dec 3, 2013). The upcoming PFS is thus an upgraded but scaled down version of the 2010 ThermoPotash PEA, and a version of the unpublished 2013 KCl "BFS". The first part will tell us what NPK would be worth on the basis of the ThermoPotash business alone, and the second part will tell us what the big league KCl business might be worth to a fertilizer production giant such as Vale. NPK has only 41 million shares fully diluted, and sufficient cash to fund its operations through 2014 until an environmental license is obtained and the Inova Agro funding for the ThermoPotash plant kicks in. The stock, which is up over 200% from the recommended price, will be volatile until the PFS has been released and the market has digested it. Any future price target will have to await a PFS based valuation which treats the 2 stages as separate businesses with different timelines, but if the 2012 PEA is any guide, the upside from the current price level could be several times higher before the market settles into waiting for the ThermoPotash permit and construction, neither of which is expected before 2015. The stock still remains a Good Relative Spec Value Buy at $1.55 ahead of the PFS, but should only be pursued by Spec Value Hunters willing to make the assumption that the PFS will justify the current valuation on the basis of the ThermoPotash business plan alone, and show that at $300/t KCl the KCl conversion business plan represents substantial added value.
*JK owns shares in Verde Potash plc