How much of a cash machine is Harvest Minerals Ltd (AIM:HMI, OTC:HMIFF) likely to become?
The market is only just beginning to latch on to the potential, not least because there have been a couple of disappointments in recent years.
But if all goes according to plan, 2022 should be a year of substantial growth for Harvest, as sales of the KPFertil fertilizer it produces from its Arapuá project in Brazil soar away.
The expectation is that this year the company will sell 150,000 tonnes of KPFertil, as against 85,000 last year, with further growth on the cards in subsequent years.
“The business is going well and looking very bright,” says Harvest’s executive chairman Brian McMaster.
“We’ve found a resource, developed it, got a mine built and put up a processing plant.”
The basic dynamic is that it takes a production level of around 40,000 tonnes for Harvest to breakeven. Last year it went past that by some margin, and this year it looks like hitting it out of the park.
There has been some recognition of this bright future in the market, but not much. The shares are currently consolidating above 7p, as against 3p this time last year, and a subsequent dip even lower.
The recent upward movement looks an awful lot like the beginning of a major correction of the more precipitous fall that took place between the middle of 2018 and August 2020 after the company missed those earlier targets.
Now that it’s operational, though, its not really clear where any downside risk to Arapuá might lie.
It actually ticks a lot of boxes that investors want ticked these days: the product’s organic, it doesn’t require additives, it doesn’t require any chemical processing, it doesn’t contain arsenic or chloride – which can be a drawback from the farmers’ perspective, a lot of the power required is drawn from a recently-opened solar plant, and it’s priced competitively.
And crucially, as a fertiliser, it works at least as well as any of the major well-known NPK alternatives.
All of which means that Harvest has been able to find a ready market locally to Arapuá amongst Brazil’s plethora of coffee growers. Uptake has been incremental rather than all at once, but is now beginning to spread into the even larger sugar-growing sector.
This market is huge, as McMaster emphasises.
“Even if we could sell everything we could produce we’d still only be meeting a single digit percentage of the market demand within 300 kilometres. Brazil, is after all, one of the great farming nations of the world.
So, how big might Harvest’s production numbers go?
That remains to be seen, and will partly depend on how this crucial year of consolidation and growth goes. But hypothetically, if production went up by several further orders of magnitude to 400,000 tonnes of KPFertil per year, that would still leave a mine life at Arapuá of over 100 years.
This is a company that, once it’s established a track record of operational success, will be able to boast of significant strength in depth.
That potential strength has already allowed Harvest to look up and make a couple of greenfields acquisitions. If the cash really starts rolling in, then funds will likely be found for the development of analogous operations. The first of these, says McMaster, has the potential to double Harvest’s revenues.
There’s also a limestone business inside the portfolio that could benefit from an injection of funds and which could be turned to account relatively quickly.
To this point, Harvest has been reluctant to earmark money to anything other than Arapuá, partly in a laudable effort to minimise dilution. Because, while it’s true to say that Harvest has disappointed the market by missing targets, at least it didn’t then compound the error with a dilutionary fundraising.
As a shareholder himself, McMaster is acutely conscious of the sensitivities around this issue.
“We raised £9.7mln four years ago,” he says, “and our share price rose to over 20p. We missed some deadlines and fell six months behind, but everything we said we were going to do we have actually now done.”
Arguably, he says, Covid-related issues were responsible for a further six months’ delay.
“But we didn’t contemplate any further dilution,” he adds. “We’ve never harmed shareholders in that way.”
The flip side to that minimising of negative impacts is a desire to provide fitting rewards to shareholders.
“We’re interested in paying a dividend as quickly as possible,” McMaster says.
How realistic is all this, given the mixed track record?
Well, one plus point is the straightforwardness of the proposition.
“Harvest is really simple,” says McMaster.
“It’s a quarry-type operation that produces a product that’s in high demand in an area that has an insatiable appetite for fertilisers. We dig, we put it in a truck, and we sell it. It doesn’t get any more basic – it’s kind of like a glorified sandpit. And we sit on the doorsteps of these farmers. The company’s starting to generate cash. Eventually it will be overrun with cash.”
If that doesn’t sound like a healthy proposition, nothing does.