conference callConference Operator
Thank you for standing by. This is the conference operator. Welcome to the MBAC Fertilizer Third Quarter Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions]
At this time I would like to turn the conference over to MBAC management team. Please go ahead.
Operator
Good morning, ladies and gentlemen, and welcome to MBAC Fertilizer's Conference Call to discuss financial results for the three and nine-month period ended September 30, 2014. The corporation’s results including MD&A and financial statements were issued on November 12 and are currently available via the company's website or SEDAR.
Before turning the call over to Cristiano, listeners are cautioned that today's presentation and responses to questions may contain forward-looking statements within the meaning of the Safe Harbor provisions of Canadian Provincial Securities laws. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements.
Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions implied in making forward-looking statements, please consult the MD&A for this quarter, the Risk Factors section of the Annual Information form and MBAC's other filings with Canadian Securities regulators. Except as required by Canadian Securities law, MBAC does not undertake to update any forward-looking statements. Such statements speak only as of the date made. Listeners are also reminded that the call is being recorded and broadcast live via the internet for the benefit of individual shareholders, analysts and other interested parties.
I would now like to turn the call over to Cristiano Melcher, CEO for MBAC Fertilizer.
Cristiano Melcher - President and CEO
Good morning, ladies and gentlemen. Thank you for joining us today for our Q3 2014 results conference call and update. Before we begin, I would like to point out that we will be following a presentation this morning. A copy can be found on our website or via the webcast link included in the press release. Also with me is Rodrigo Pinto, MBAC’s CFO.
Our goal for today is to provide an update on our Itafós SSP Operation and review our Q3 2014 performance. We will also discuss more recent developments, including our efforts to address our liquidity requirement. Finally we will also share details on the measures we are taking to preserve our working capital and to position ourselves to capitalize on the strong agricultural market fundamental. At the conclusion of our remarks, we will open up the call for questions.
I will start with a brief overview of markets and basically Brazil’s fertilizer industry continues to benefit from a very favorable environment. This is due mainly to our continued increase in planting area and also intensity of use of fertilizers, which has driven demand. Statistics from ANDA, the National Fertilizer Association in Brazil, show that consumption of all fertilizers in the country from January to September 2014 was up by 7.2% compared to the same period last year.
Consumption in the MaPiToBa Region, which is our region of influence, was up by over 15%. The compounded annual growth over the last five years is approximately 6.5%, which is one of the strongest performances globally. ANDA is currently forecasting Brazilian fertilizer consumption of 32.1 million tons in 2014, which will again be a record year. The company has also witnessed a decrease in SSP imports in Brazil in Q2. As you may recall imports increased last year due to potential supply concerns in the Brazilian market.
While overall fertilizer demand and consumption continued to grow ANDA forecasts that Brazil’s imports of SSP will decrease to approximately 470,000 tons in 2014 from approximately 870,000 tons in 2013. It is worthwhile mentioning that Brazil has the objective of reducing its dependence on imported fertilizer, given the strategic importance of fertilizer for the Brazilian agriculture, one of the largest sectors in the Brazilian economy and one of the country’s principal export engines.
Talking a little bit about our Q3 performance, whilst we had a number of challenges in Q3 primarily related to working capital constraints, we also had a number of achievements both on the operational and financial front. On the financial front, the main highlight is related to the conclusion of the debt extension agreements with our senior, an achievement that gave us breathing space in the next two years.
On the production side, in September we produced approximately 22,000 tons of SSP, a volume very close to commercial production. We also established a daily production record of 17,00 tons of SSP surpassing Itafós design output by more than 13%. Our total SSP production for Q3 was 30,722 tons and we produced 16,488 tons of sulphuric acid. Combined this generated $6.3 million of pre-commercial revenue.
When we look at Q3 production of Itafós there are two key points to take into consideration. First our totals were greatly impacted by liquidity constraints we faced for much of July and August. With insufficient working capital, we were unable to purchase adequate supplies and spare parts necessary to keep Itafós in continuous operation. And in fact, we are only able to produce limited quantities of SSP for much of July and August largely as a result of limited cash.
And second, even with liquidity constraints we were able to establish new production records. In fact the production record [we have had], and the customer feedback we received provide significant validation for the design of our operation and the quality of our output. This validation sends a very positive signal as we look towards 2015.
When reviewing our Q3 performance, it is also important to consider that it coincided with Brazil’s main planting season. The key takeaway is that we had – is that if we had more working capital we would have produced more SSP during the height of the selling season. As we now head into the low selling season, we have implemented measures to preserve our working capital. I will elaborate on this point later in our discussion.
Talking a little bit about liquidity initiatives. Throughout Q3 and into recent weeks, a major thrust of our effort has been concentrated on addressing our liquidity requirement. In addition, a significant amount of time was spent on working with our senior lenders to extend the maturities of our debt. This exercise was completed several weeks ago and represented a major milestone. Rodrigo will get into the specifics of the debt extension in a couple of minutes.
At a high level, our senior debt, which totals approximately $170 million has been extended for another 24 months, deferring interest and principal payment, and therefore enabling management to focus more attention and effort on initiatives that will help accelerate our production ramp up, optimize operations and identify strategic partners.
To preserve our working capital, we also undertook a number of measures to cut cost. In Q3, we announced a company-wide reorganization that resulted in the elimination of 15% of our workforce. These cuts will lead to annual cost savings of approximately $4 million. More recently we introduced a new initiative that allows our to purchase phosphate concentrate from third parties. The initiative is meant to optimize the utilization of the plant at our industrial complex, accelerate the production of our SSP product and maximize cash flow generation and affect the purchase of our goods to take advantage of the advanced stage of ramp up of some of our plants, notably sulphuric acid plant, acidulation plant and granulation plant.
And given that these plants have already demonstrated the ability to produce above initial nominal capacity levels of 500,000 tons per year, longer term this initiative is likely to enable total production levels above the plant capacity.
Talking a little bit about our action plan, I mean earlier this year we unveiled a strategic plan consisting of five key elements that range from strengthening our balance sheet to positioning MBAC for future growth. I want to take the time to briefly provide an update on our progress so far.
The first element, which is to put our balance sheet on a solid footing certainly has been a priority of the management team in Q3 and into recent weeks. While the timing of some developments took longer than expected, we have made progress on this objective. The delays we experienced unfortunately had a bearing on other elements of our action plan, particularly on maintaining continuous operation.
And the second element, which is related to the optimization of our ramp up, we were not able to achieve commercial production in Q3, primarily again due to working capital constraints. Production total for September, however, there was encouragement that the plant can operate as designed. We also made steady progress with our efforts to improve our operational excellence. More specifically, we refined a number of processes that resulted in a reduction of both fixed and variable costs.
In terms of positioning MBAC as a supplier of choice, I want to mention that we already are producing products of recognized quality. I will return to our outlook in my closing remarks.
In summary, while we had to live with significant financial constraints, we still managed to make steady progress on many of our objectives in Q3 and are confident that the company is moving in the right direction.
I will now turn the call over to Rodrigo for the review of our financial results and a more detailed status of our liquidity initiatives.
Rodrigo Pinto - VP, Finance and CFO
Thank you, Cristiano and good morning everyone. As you have heard, the company had working capital constraints that impacted our operations and financial performance for much of Q3. Beginning September, we were able to ease some of this working capital constraints as we secured a new working capital facility of $17.4 million of which $10.6 million was dispersed at the end of August. This allowed us to produce 22,000 tons of SSP in the month of September alone.
Although accounting rules do not allow the company to recognize revenues and costs until we declare commercial production, we have been selling SSP for several quarters now. We generated $6.3 million of pre-commercial revenue in Q3 and over $50 million for the nine months ended September 30, 2014, but again because of how accounting rules are applied under IFRS, we cannot treat any of this amount as revenues on our income statement.
Looking at our income statement more closely, for the nine months ended September 30 MBAC’s SG&A was $7.7 million, which represents a reduction of 23% to the same period in the last year. This is a consequence of the cost reduction program implemented by management during 2014.
Our net loss for the quarter was $18.7 million, up from $6.6 million in Q3 2013. the increase was largely due to unrealized foreign exchange loss of $12.3 million associated mainly with revaluation of intercompany loans and debt. Excluding the impact of non-cash and non-recurring items, we incurred an adjusted net loss of $2.2 million or $0.01 per share in Q3 2014. This compares to a loss of $4.5 million or $0.03 per share in the same period last year.
During the quarter we saw a significant devaluation of the Brazilian real, which is an important factor that could benefit the company given most of our costs are real based, and our revenue is closely linked to the US dollar. Therefore a devaluation of the Brazilian real will lead to increased margins. To give you a sense, for every 10% devaluation of the real, our margin increases by over 5%. In addition, it is also beneficial to the company’s debt position as approximately 75% of MBAC’s debt is denominated in Brazilian real. Between the end of Q2 and today the Brazilian real devalued approximately 16%, and the overall expectation is that it will continue to devalue.
I would like to now turn to the balance sheet. Due to certain liquidity initiatives being outstanding at the end of the quarter, we ended Q3 with bank indebtedness of $0.6 million. Subsequent to quarter end, we received 5.4 million from new working capital loans from our senior lenders. We still expect to receive additional $1.8 million in the next few weeks.
I also would like to highlight an important item in our balance sheet. We have over $26 million in realizable tax credits. We have already started to work with the Brazilian tax authorities and although timing is still uncertain, we do believe that the company will be reimbursed for a significant portion of this amount in the first half of 2015.
MBAC achieved a major milestone subsequent to quarter end. We executed that extension agreement with our senior lenders whereby principal and interest payments were extended for a period of two years. Important to say as well, that the interest rate of these loans were impacted minimally, so the cost of our debt will remain very similar to what we have seen in the past.
This is very important for a number of reasons. First, it demonstrates a strong commitment to our company and operations. Second, it will allow us to reclassify debt from current to long-term on our balance sheet and third, the deferral will provide a major relief to MBAC’s cash flow for the next two years.
The senior debt extension also includes an extension of the current [maturity] to date of the existing working capital facilities previously provided by the senior lenders. Once again although this debt extension took longer than we originally expected it is now finalized and represents a major step for the company’s medium to long-term liquidity requirements.
We do continue to see conditional financing to address our immediate liquidity issues and earlier this month in collaboration with our senior lenders, we selected and started working with a financial adviser with the objective of finding a definitive solution for the company’s capital constraints. This solution may include sales of assets or other strategic arrangements.
I will now turn it back to Cristiano for his concluding remarks.
Cristiano Melcher - President and CEO
Thank you, Rodrigo. Looking ahead, our efforts in the near term will continue to focus on cost reductions and on working capital preservation while we prepare ourselves for 2015. For the balance of the year, we will prudently align our operations with the seasonality of SSP sales in our target regions.
Although this action will [Indiscernible] our ability to the commercial production, the need to be pragmatic and to ensure our long-term strength and potential takes precedence. We would like to remind everyone that based on our progress to date, the plants have already demonstrated that they meet the required technical specifications and have the ability to be ramp up when the seasonal sales demand starts rising in 2015.
Our efforts to secure working capital will also continue on an ongoing basis and we are confident that the effort that we’re undertaking with the help of our financial adviser and in co-operation with our senior lenders will result in a more definitive to the financial requirements of the company going forward. Over the longer term, we remain very enthusiastic about our outlook as market fundamentals in Brazil remain very strong and our potential to capture value from this opportunity given the quality and location of our asset is unique.
Thank you for listening. I would now like to open up the call for questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Joel Jackson of BMO Capital Markets. Please go ahead.
Joel Jackson - BMO Capital Markets
Hi, good morning. I had a few questions. So looking at your 2015 sales volume guidance, talk to me about how much of the 325,000 to 350,000 tons you are going to produce or hope to produce you expect to come from purchasing third party’s rock concentrate first? Thanks.
Cristiano Melcher - President and CEO
Yes, yes, Joel. Basically I mean we – we plan to continue with this strategy of buying phos rock to achieve this production volume, and currently we are planning to have at least half of the volume coming from phos rock concentrate. We are currently in negotiation with potential suppliers of this phos concentrate and our objective is really to have a balance of purchased concentrate and own production.
Joel Jackson - BMO Capital Markets
Cristiano can you help us understand what is going on here when you built Itafós, when Itafós was built here it was built because of where the rock was, and now we are talking about not great utilization next year, half using phosphate rock concentrate is this beyond working capital, what is going on with the [Indiscernible] plant or with the processing of the ore body here because this is a little bit concerning.
Cristiano Melcher - President and CEO
Now that is a good question Joel, and I am glad that you give me the opportunity to clarify that. I think the main issue here is really working capital. As we – as you know our industrial complex has four different components, four different plants as such, and then we have the mine as well. And we throughout 2014 had an objective of going ahead with our ramp up at a given pace and unfortunately that was not possible due to working capital constraint.
Now if you look at the four different plants, we have different levels of ramp up at the four different plants. So three of the plants, the sulphuric acid plant, the acidulation plant and the granulation plant, are already pretty close to full capacity levels – to [nominal] capacity levels.
The ramp up [Indiscernible] plant naturally is a more difficult one, and therefore is not at the same level at all the three plants. Given this delay in the ramp up caused by working capital, we thought about a way to optimize the usage, the utilization of our industrial complex as a whole. And therefore, we realized that we are able to use the downstream plants of our process with phos rock and continuing with the ramp up of the beneficiation plant and therefore optimizing our industrial complex as a whole.
Joel Jackson - BMO Capital Markets
Okay, and finally before I pass the baton here, who you will be buying phosphate rock from, will it be a domestic supplier, will you be importing it and then what are the current costs right now for you to get phos rock to sites? Thank you. Like the price you pay plus the freight, what is the cost you buy phos rock today?
Cristiano Melcher - President and CEO
Yes. Joel, I think we are currently talking to a number of potential suppliers. At this stage we obviously cannot disclose the names of the suppliers for competitive reasons and neither can we talk about pricing. But what I can tell you is the following. We will bring
phos rock to our site still at levels that will make our end product competitive. The phos rock obviously has a higher grade than the SSP, so it is cheaper to transport phos rock on a point of to our five bases than it is to transport SSP.
And therefore we will be able to have a competitive business on the purchase of phos rock. Obviously going forward we expect to have lower cash cost at our own production site, but I think it is important to mention that three of our plants, sulphuric acid, granulation and acidulation have already demonstrated capacity to produce above the 500,000 ton volume that we envisage from our initial design.
So even – I mean going forward we even have the possibility to produce above the 500,000 tons per year by using a combination of purchase phos rock and phos rock produced at site. So even in the longer term we still expect to continue with this combination of purchased concentrate and on production.
Joel Jackson - BMO Capital Markets
Thank you.
Operator
The next question is from Keith Carpenter of Canaccord Genuity. Please go ahead.
Keith Carpenter - Canaccord Genuity
Thank you. Good morning guys. A couple of questions here, the contracted tonnage for 2014 was 139,000, you say your sales are guided between 95,000 and 105,000 for the year. So the question on that part is what is happening – what is happening with the 40,000 tons that you aren’t able to ship this year and if they are pushed into ’15, will they be at the $180 a ton roughly that price, which was agreed upon earlier this year and how many of those tons if any have you received prepayments on?
Cristiano Melcher - President and CEO
Good morning Keith. Keith that is a good question and I think basically the majority of this tonnage, I mean as we had our bottlenecks with our production, we were in contact with our clients and basically throughout the year actually cancelled some of this tonnage. So, basically the suppliers – the size when to other suppliers and those tonnages were cancelled. So, in the end we will effectively meet production and sales volumes.
Keith Carpenter - Canaccord Genuity
Can I ask you also on you received of that 17.4 million credit facility that was executed in the third quarter, when do you expect – do you have a sight of line on when you would expect the remaining 6.8 million?
Cristiano Melcher - President and CEO
Yes, Keith, as per the agreement we expect to receive the second tranche early January 2015.
Keith Carpenter - Canaccord Genuity
Perfect. Thank you.
Operator
[Operator Instructions] The next question is from Gordon Lawson of GMP Securities. Please go ahead.
Gordon Lawson - GMP Securities
Hi, I have a quick question on your debt, so including all working capital and mezzanine loans, what is your current estimate of principal and interest payments in 2015 and 2016?
Cristiano Melcher - President and CEO
For 2015, we expect roughly – sorry just let me – okay, for 2015 we expect roughly $25 million and for 2016 because we start repaying September, we expect approximately $55 million.
Gordon Lawson - GMP Securities
That’s both principal and interest?
Cristiano Melcher - President and CEO
Both principal and interest.
Gordon Lawson - GMP Securities
Okay. Can you break that out?
Cristiano Melcher - President and CEO
Yes. I have about $20 million of principal in 2015, $5 of interest and approximately $30 million of principal in 2016 and $25-ish million of interest.
Gordon Lawson - GMP Securities
Okay. Thank you very much.
Operator
[Operator Instructions] The next question is from [Indiscernible]. Please go ahead.
Unidentified Analyst
Thank you. Good morning. Gentlemen you talked about how the market is generally heading in the right direction for SSP and the dynamics in the Brazilian fertilizer consumption market are good. If I understood it correctly could you give us some sense of first of all do you think of the business, you report in dollars, do you think of the business in real and where I am going on this is what is an acceptable margin and do you think it's possible to attain that in ’15?
Cristiano Melcher - President and CEO
Yes. I mean starting with the question about the currency, effectively the sales are dollar-denominated so effectively it's a dollar business. The majority of our cost, however, are in real so the company obviously takes advantage of the depreciation of the real on an ongoing basis. Basically going to your second question I guess the margins that we are forecasting for 2015 are aligned with our production volumes obviously if we are at full production, we are able to dilute the entirety of our fixed cost and the margin increases going forward.
Gordon Lawson - GMP Securities
And certainly as you presented it 2015 you will in commercial production as you hopefully work through these working capital constraints, I guess [Indiscernible] coming from is, in North America soybean prices have been rather volatile and it is intriguing to hear when you deal with customers in your market, I assume that SSP is priced on worldwide phosphate prices but the farmers I guess that you settle in real, you don't settle in dollars, do you, or depending…?
Cristiano Melcher - President and CEO
No, we typically settle in dollars. So – no I mean we base the price on our dollar value, and then obviously we settle in real, but always on the current dollar rate. So, the business is denominated effectively in US dollars.
Gordon Lawson - GMP Securities
So if there is devaluation in Brazilian currency, Brazilian farmers selling international commodities could look to a better year next year, there could be more money in the farmers' pockets?
Cristiano Melcher - President and CEO
That's exactly right. I mean although prices of soybean and corn, which are the main commodities are I mean have not – have even decreased a little bit the currency effect offsets this to a large extent and the currency effect is a huge benefit to the agriculture and to the farmers.
Gordon Lawson - GMP Securities
Okay. Thank you. That helps me understand a little bit more of your optimism. Thank you.
Cristiano Melcher - President and CEO
Okay. I just want to clarify one point just going back a little bit to Joel’s question about the purchase of phos rock I just want to highlight that the quality of our reserve and the quality of the concentrate that we produce is exactly as planned originally, and we still continue to believe that is the high quality product.
Okay if there are no further questions, I would like to thank you all for participating and I do look forward for the next quarterly call update. Thank you very much.
Operator
Thank you everyone for participating. You may disconnect your lines and have a pleasant day