The quest for improved agricultural productivity spurs investor interest
By: Henry Lazenby
11th September 2014
TORONTO (miningweekly.com) – Rising demand for protein and more sophisticated diets in developing countries were spurring investors to get excited about investing in fertilisers.
The ‘protein story’ was still providing a good thesis for investment, as the developing world continued to consume more meat and dairy products, which required exponentially more agricultural inputs than traditional staples, which in turn, required improved nutrients to ensure better-yielding crops.
“It bodes well for phosphates, nitrogen and potash,” Brazilian entrepreneur, and founder in 2005 at the age of 23 of fertiliser junior Verde Potash, Christiano Veloso told Mining Weekly Online in an interview.
He said that the protein story was still evolving, with much of Africa still to follow the route Asia had gone in recent years. This would mean increased demand for quality fertilisers to achieve improved agricultural output, driven by the need for increased productivity owing to the scarcity of arable land, climate change, scarce water supplies and labour, among other factors.
In Asia and Africa, protein consumption per capita was still far below the norm in Europe and North America.
The development of Brazil into what could very well be the world’s food basket for numerous generations to come, augured well for TSX-listed Verde Potash, which was developing the largest potash mine in the country.
Brazil is currently dependent on importing about 67% of its fertiliser needs from abroad and, with the agriculture industry estimated to grow by about 5% yearly, the need for fertiliser imports would only widen the market, even when taking into account new fertiliser plants expected to start operating in the future.
Brazil’s government had set a target to become ‘fertiliser independent’ by 2020.
The country currently had one operating potash mine, diversified miner Vale’s Taquari-Vassouras mine, in Sergipe, which produced about 8% of Brazil’s potash needs. That mine was due to be exhausted by 2016. MBAC Fertilizer Corp last year started single super phosphate powder production at its Itafós Arraias project, becoming the first large-scale fertiliser producer in the agricultural Cerrado area.
Veloso said Brazil’s government had set a target to become “fertiliser independent” by 2020.
He pointed out that a critical advantage to Verde Potash was that the Cerrado Verde project was located in the heart of Brazil’s agricultural hub, which was responsible for about 25% of the country’s gross domestic product, and about 36% of the country’s exports.
Veloso said Brazil’s agricultural exports had increased by 400% in the last decade, owing to the development of the Cerrado and other agricultural advances.
Verde’s market advantage was rooted in the bounty of traditional potash, or potassium chloride (KCl) located at its Cerrado Verde project, and in that it had developed a proprietary fertiliser product called ThermoPotash (TK), which provided a suite of critical minerals to crops.
Among the benefits of TK was improved productivity, which piqued the interest of local commercial farmers. “They understand that increased productivity means improved margins,” Veloso said, who had been on an aggressive marketing campaign this year.
TK contained an array of nutrients including potash, calcium, magnesium and silicone.
It also comprised less salt than traditional fertilisers, with the added benefit of being more environmentally sustainable.
Verde’s TK is a controlled release, non-chloride multi-nutrient potash fertiliser, which the company aimed to produce in the first phase of its Cerrado Verde potash project, in Minas Gerais, Brazil.
Veloso said the company would aim to sell TK to the local Brazilian organic crops market, which was selling its produce at premium pricing. This spurred organic farmers to devote significant resources to accredited crop inputs that would drive higher yields.
The market for Brazilian organic products in 2012 was valued at about $385-million, according to Instituto de Promocao do Desenvolvimento (IPD). IPD predicted sales growth for this market of 20% to 25% a year over the next five years, with 2014 sales of $440-million. Brazil’s main organic crops included sugar, palm oil, coffee, fruits and juices.
Verde Potash this year released test results that had established that TK resulted in better-quality coffee than when compared with plants fertilised using only KCl.
The company reported that when compared with an identical test crop fertilised with KCl, the TK-fertilised coffee reached the standard of specialty coffee, a category that commanded premium prices.
“Farmers see the benefits of TK. They are ready to buy our product, especially among the organic and niche crops producers,” he said.
Verde Potash had also obtained approval from IBD Certifications, the largest certifier in Latin America and the only Brazilian certifier of organic products with global credentials, to use TK on organic crops.
Traditional potash was not certified for use on organic crops and was, therefore, not an option for organic farmers, which set TK up to participate in a niche market, which Veloso pointed out, had the potential to grow very large.
Veloso also noted that TK was more environmentally sustainable than any other traditional fertilisers. For example, the traditional method of correcting soil pH entailed using limestone in the ground, which reacted to give off significant amounts of carbon dioxide. TK did not do this, paving the way for various environmental certifications to follow that would allow TK to be used in the supply chains of several environment-friendly product lines.
These included a plethora of certified organic and environmentally sustainable products, and could also boost the credentials and public perception of the ethanol market, of which Brazil was the most significant producer globally.
Verde in March announced that about $105-million in government funding for its its $113-million Cerrado Verde project had been confirmed.
This capital would be provided through loans with subsidised interest rates, equity investment and nonreimbursable project investment grants from the BNDES and/or the Financing Agency for Studies and Projects, both of which are branches of the Brazilian government that operate Inova Agro.
Veloso stressed that the company had the potential to grow significantly over the coming decade, however, he refused to ‘waste paper’ in doing so. “I often see companies growing at all expense, as if they are in a race to get to the finish line (starting production), but in the process they lose a lot of shareholder value by diluting stock for capital.
“We are focused on developing a scalable project in phases, which would require the least amount of capital input, while securing free cash flow from an early stage,” Veloso, which owns about 7% of the company, said.
The company expected to launch its environmental permitting application by the end of the year. Once that was granted and in hand, the company would be able to produce and sell the first TK within about two years.
The 1 000 t/d TK plant would cost about $113.6-million to build, including a $14.7-million contingency, and would have an internal rate of return of 23.5%, with an estimated payback of the initial capital after five years.
Over the 31-year mine life, sustaining capital would total $31.5-million.
An April prefeasibility study had pinned an estimated after-tax net present value of $145.7-million (at a 10% discount rate) to the project.
Verde Potash’s TSX-listed stock on Thursday rose 13% to C$0.70 apiece, having gained 24% so far this year.