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 Fri Oct 28, 2022
KW Excerpt: Kaiser Watch October 28, 2022: Verde Agritech Ltd (NPK-T)
    Publisher: Kaiser Research Online
    Author: Copyright 2023 John A. Kaiser

Verde Agritech Ltd (NPK-T: $2.280)

Kaiser Watch October 28, 2022: Slump Reversals & Premium Financings?
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(0:00:00): Verde Agritech has recovered from its slump. Is the alternative potash story back on track?
Verde Agritech has reversed the slump created on September 9 when it announced that, just when Plant 2 had been commissioned to produce K Forte at a nameplate capacity of 1.2 million tpa shipments with only a month of the primary March through September application window left, production had to be suspended for 4-8 weeks because the access road had developed groundwater problems. At the same time NPK reverted to its January guidance for 2022 which projected 700,000 tonnes of production for 2022 representing CAD $87 million in revenues and $31 million in EBITDA cash flow. The company had expanded its guidance in May to 1,000,000 tonnes production with $109 million revenue and $49 million EBITDA cash flow. The caution in January was based on uncertainty that Plant 2 would be operational in time to produce K Forte during the primary application window. Given that the rainy season doesn't begin until November, the market was unhappy that NPK was blindsided by access road problems in early September. On October 19 NPK announced that 22 km of road had been upgraded with asphalt laid on 14 km and a new bridge built so that commercial scale shipments could resume. A week later on October 26 NPK announced that phase 1 nameplate capacity had been achieved at Plant 2 but that shipments had to be postponed because the company was "sold out".

What that really meant was that NPK had shipped what it could from Plant 1's 600,000 tpa capacity but was unable to fulfill orders that counted on Plant 2 production. November through February is a slow period, and because NPK has not built warehousing capacity, Plant 2 is only operating at a level to meet the less conventional demand during this window. What this means is that while one thinks of a mine operating 24/7 all year, which would suggest a grinding capacity of 200,000 tonnes per month, Plant 2 actually has a physical capacity of grinding close to 400,000 tonnes per month. Farmers do not store fertilizer; they expect delivery just in time for application to their fields ahead of planting. However, this is consistent with the reverted guidance so not fresh negative information. In fact, the lull will allow NPK to complete the phase 2 installation and commissioning which will bring Plant 2 capacity to 2.4 million tpa output for the 2023 season for which NPK is still guiding 2 million tonnes of sales. The real question facing the market is if this expanded supply capacity will be matched with Q1 2023 demand.

The seasonal production lull is allowing NPK to repurpose Plant 1 to provide the specialty versions of K Forte like supplementing K Forte with nutrients such as sulphur as well as N Keeper which reduces nitrogen loss in the fields. Plant 2's larger footprint is also allowing NPK to develop its supply of Bio Revolution which loads K Forte with microbes chosen to rehabilitate depleted soils. The company also dropped the name of Cambridge Technology which prompts one to wonder if NPK is experimenting with the Cambridge Process developed with the help of Derek Fray during 2010-2012 when it worked to deliver a bankable feasibility study for converting the glauconite into conventional potassium chloride (KCl). The stock crashed and burned when the FS could not be declared bankable because larger pilot plant studies were needed to support the required equipment scale, which would have cost another $10-$20 million. By then the potash price was falling, and, given that NPK needed a $400/t KCl price for the Cambridge Process to be viable, this approach was doomed as potash settled into a $200-$250/t range. With cfr Brazil potash still around $600/t one can't be blamed for wondering if NPK will revive the Cambridge Process. But Cris Veloso explained that NPK is only deploying IP developed as part of the Cambridge research which deals with mechanical modification of the glauconite so as to manipulate the potassium release schedule. NPK wants to preserve the branding of its K Forte product as a natural material that does not require chemical processing and does not introduce salt to Brazilian fields.

With the disappointment of the reverted guidance out of the way, and evidence that NPK has its road access problem under the control, the market can focus on the contrast between the projected 2022 results and those of 2021, which involved shipping 400,133 tonnes of K Forte for revenues of CAD $27.7 million and EBITDA of $6,450,000. We are talking about a greater than 200% increase in revenues and 400% increase in cash flow. That is the really story driving the slump reversal. The bigger picture story is the May PFS which presented scenarios for expanding output to 50 million tpa by 2030, which would represent more than 50% of Brazil's potash consumption. That is a monster game changer scenario. It is not reflected in the current stock price because the market wants to see that farmer demand tracks the expansion of supply capacity expansion. That is the big test for 2023 and we hope to see the order book start filling in Q1 of 2023. The big picture scenario, however, is why I project a future price in the $50-$100 range, which assumes that NPK can fund expansion with cash flow and keep its current 54.3 million fully diluted stable.

The wild card heading into 2023 which Brazilian farmers are not thinking about is how Russia's invasion of Ukraine will play out during the winter. Sanctions against Russia have avoided including potash supply from Russia and its ally Belarus, and the Belarus problem in Q1 when Lithuania shut down its country as a transportation corridor seems to have been solved by diverting potash through Russian ports. Putin has underestimated Ukraine's resilience and the willingness of the United States and Europe to provide support, but Putin is counting on the spinelessness of poodles at both ends of the political spectrum to force a dirty deal which sacrifices the Ukrainians. He has even floated the preposterous idea that Ukraine will detonate a dirty bomb within its own country, which smells a lot like he has plans to make that happen instead of explicitly using a a nuclear weapon which could cause NATO to get serious about curtailing Putin's megalomania. Should it come to that, it is likely that shipping logistics will get disrupted and cause global potash prices to spike in H1 of 2023. At 3 million tpa K Forte capacity NPK can only supply 500,000 tonnes of KCl equivalent which is less than 10% of Brazil's potash consumption. So not a solution for Brazil's ensuing potash supply problem, but certainly an end to skepticism that NPK will generate the sales needed to meed its 2023 guidance.

Plans to secure a NASDAQ listing have been delayed for technical reasons, but Cris Veloso thinks a listing could be achieved in January 2023. Such a listing would greatly expand the audience for this phenomenal and transformational growth story, so the last two months of 2022 could sustain an uptrend that delivers new highs in Q1 of 2023.

K Forte Application Windows in Brazil

Optimistic May and Reality Check September Guidance for 2022

Brazil's Potash Demand and Supply History in 1961-2019

*JK owns shares in Verde Agritech Ltd


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