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Verde Agritech PLC: DEEP DIVE
OVERVIEW

Verde Agritech has cash flow, huge expansion plans, and a high quality product that is being lapped up by Brazilian farmers

Backed by a 3bn tonne resource, Verde Agritech looks like playing a central role in Brazil's farming future
Verde Agritech has cash flow, huge expansion plans, and a high quality product that is being lapped up by Brazilian farmers
OVERVIEW: NPK The Big Picture
Verde has an extremely high quality product

In a way, the market positioning of Verde Agritech PLC (TSE:NPK)(OTCQB:AMHPF) couldn’t be better.

“We are the biggest potash mine in Brazil,” says chief executive Cristiano Veloso.

“Brazil is the largest importer of potash and the second largest consumer of potash. And we have enough potash in our mine to last for generations.”

777.28mln tonnes, to be precise, at 9.78% potassium oxide, and that’s just the reserve. The overall resource stands at over 3bn tonnes.

What’s more, the company is already in production, with product selling out fast, and very much looking towards coming expansions.

It’s a strong position to be in, especially since the quality of the company’s product is second to none.

The production will be sold into the local Brazilian market at around US$38 per tonne, according to assumptions used in recent pre-feasibility study.

But a small portion will make its way into the export market, where shipping costs will boost the price significantly, to the point where the US$3,000 price tag in the US is prohibitive for most every day users.

But not all. There are some premium food growers out there in the US who really will pay that price. And that’s a measure of how good the product really is.

“The product is disruptive because it has no salinity, no chloride, it doesn’t leach, and there’s no waste,” says Veloso.

That immediately puts it ahead of potassium chloride, and the newer, relatively untried polyhalite that Sirius Minerals (LON:SXX) is trying to put onto the market. But there’s more.

“It’s multi-nutrient and addition you get silicon and magnesium,” continues Veloso.

And with all that in its favour it’s not surprising that Brazilian farmers lapped up all of Verde’s output in 2018, helping to justify the company’s ongoing plans for expansion from the current rate of 200,000 tonnes per year up to 800,000 tonnes next year, and then on to five million tonnes and ultimately up to 25mln tonnes.

Veloso thinks the market can support this output, partly because the Brazilian farming industry generates such huge demand in and of itself, and partly because the increasing world population means that consumption can only grow. By his reckoning Verde would need to be producing at a rate of around 60mln tonnes to make Brazil self-sufficient in potash.

BHP Group PLC (LON:BHP) recently announced that it was going to press ahead with construction at its huge Jansen mine in Canada for this very reason. That’s a multi-billion dollar call on potash from one of the world’s largest miners that only serves to underline the way sentiment towards potash is improving rapidly.

For Verde though, with markets already at hand and production up and running, cashflow from potash is already a reality and the margins are attractive.

“Ours is a very large mine with very low costs,” says Veloso.

“In the pre-feasibility study for the expansion work the selling price was set at US$38 per tonne, with a production cost of around US$6.77 per tonne.”

That’s attractive enough on the current 200,000 output, but when you come to multiply that out to match Verde’s expansion plans, the likely cash flow becomes sizeable indeed.

The net present value in the study is set at US$2bn, and the internal rate of return works out at over 280%.

What’s more, on current thinking all the expansion is likely to be paid for out of cash flow, keeping dilution to a minimum. As it stands there are only 42mln shares or so on issue, and Veloso is keen to keep the number as low as possible.

Not that he’d have too much trouble raising money if he wanted to.

The company is backed by Alysson Paolinelli, billed as “the father of tropical agriculture” in the Verde literature, and described by Veloso as “the most respected leader in the Brazilian agriculture sector.”

Paolinelli is a former winner of the UN food prize, which Veloso characterises as the “Nobel Prize of agriculture.”

So this is a company with a huge resource of highly attractive and saleable product, which is already in production and generating cash, and which is run and supported by some of the best names in the business.

Not only that, it can make legitimate social claims too.

“Verde is improving the world,” says Veloso.

“The more we sell, the healthier you get and the better the environment becomes.”

He has three reasons for making this claim.

The first is that the company’s glauconite product can replace potassium chloride products, which can kill soil organisms that store carbon dioxide.

The second is that the chloride in potassium chlorides can be take up by some crops like sugar cane which then releases carcinogenic dioxins in processing.

And the third is that because of the 70 or so trace elements in the Verde product, the nutrient quality of the food is significantly improved.

It’s not always easy to make money and make the world a better place at the same time. But it looks like Verde Agritech has found a way of doing it.

 

 

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