SUPPLY SECURITY : WHY VERDE IS WORTH A LEAST $5 / SHARE NOWMine Accident Shows a Potash Market Nervous About Outages
https://www.bloomberg.com/news/articles/2018-03-16/mine-accident-shows-a-potash-market-nervous-about-supply-shocks
The above article highlights concerns about supply potash disruptions. For Brazil, however, this is a much more critical issue which touches on national security in that the country needs to import 95% of its potash consumption for its strategically crucial agricultural sector.
This issue is becoming more pressing in an age of heightened political tensions, embargoes and increased uncertainty. Consider for instance the cases of the World's reliance on Oil from the politically unstable Middle East or Cobalt from the DRC or Rare Earths from China or of the US on Russian Uranium or even the case of Phosphates from the Western Sahara where 2 ships were arrested and cargoes impounded last year.
Incidentally one of those shipments belonged to Agrium who has merged with Potash Corp to form Nutrien. As such the Nutrien combo is now the single largest buyer of phosphates ( about 1 MT ) from Western Sahara despite coming under heavy criticism and its constituent components being blacklisted by Norway's huge state pension fund and dozens of others for (lack of) ethics as far back as 2011 for Potash Corp. One can only wonder why Brazil should continue to allow the disproportionate reliance of its most important sector on a supplier with such questionnable behaviour and the implications and consequences thereof.
When countries worry about supply security, the most common practice is to build up a strategic stockpile that would help smooth out disruptions. With Oil supplies for countries such as China and the US, a strategic petroleum reserve typically runs at about 10-12% (45 days) of national oil consumption but when combined with private sector stockpiles the goal is to target a 60-90 day buffer. This is the norm for countries with significant oil production such as China which produces 1/3 of its oil or the US at 2/3. In the case of countries with substantial energy deficits of over 80% the stockpile is typically much higher such as a MINIMUM of 90 days (25%) for the European Union and as high as 40% for Japan !
Of course this practice is not restricted to oil only as can be clearly seen in the case of China and its well documented zinc, copper and iron ore stockpiles, just to name a few.
An additional method of improving supply security is to encourage local production through various means and incentives as I have shown in a previous post outlining the recent case of the Nigerian cement industry where the country managed to become completely self-sufficient in less than 10 years. More aggressive practices would also include the instigation of quotas or tariffs and duties as has been recently favored by the new US administration to the dismay of much of the rest of the World although this would tend to be in contravention to WTO rules and would also engender retaliation.
A strategic reserve of Potash for Brazil should therefore be the preferred route to supply security in combination with an increase in local production. Because of the very high reliance on potash imports similarly to japan's oil situation, a stockpile equal to 40% of annual consumption would be ideal with a minimum 25% at the lowest. That would equal at the very least about 1.5 million tons.
Super Greensand is the ideal strategic stockpile of potash fertilizer for Brazil because, being chlorine-free, it is suitable for all Brazilian crops including specialties and organics, unlike MOP, and is a lot cheaper than SOP. It can be used as a base with the simple addition of required extra nutrients when targeting specific crops such as, say, coffee, sugar cane or tobacco, if necessary. Verde would be the lowest cost supplier since stockpiling would have to be done in the Cerrado right where the production is and close to where the biggest consumption occurs. Therefore a Cerrado C&F price would play into Verde's strengths as well as provide the lowest cost solution.
A 1.5 MT reserve of potash would translate into an equivalent of about 9-10 million tons of Super Greensand at a total cost of some $380 million or less. Brazil would purchase say 20-25% of annual production as Verde ramps up through Phase1, 2 and 3 or alternatively just buy up any surplus production every year until it reaches the desired stockpile over the next 7-10 years. Now if they wanted to be really nice the government could even provide Verde with a substantial upfront downpayment on future deliveries to get the ball rolling.
This startegy would be like killing 2 birds with 1 stone as was the case of the Nigerian cement industry. Since no quotas, tariffs or duties are levied in contravention to WTO rules and no one can question a sovereign nation's right to build a strategic reserve for national security reasons, there are no grounds for any objection. This way, Brazil acquires a much-needed strategic reserve of potash AND helps build up a significant domestic production to reduce import reliance AND creates a lot of new much-needed direct and indirect jobs in the process. Win, win, win !
This scenario is not a fantasy, it is real because, as I have shown, it has happened many times before and is happening again as we speak elsewhere.
The net benefit to Verde would be about $240-$310 million ( CAD$ 325-$400 million ) depending on final pricing, costs and quantities i.e. around C$7-9 per share fully diluted. Discount that at 8% and you get an NPV of at least C$5 per share today. And this could actually be added over and above the NPV of the PFS. You could also double that $5 value should the stockpile reach 40%.
All of which shows how severely and ridiculously undervalued Verde is today which could be leaving itself open to a silly lowball takeover bid attempt, even at $5/share. By technical analysis alone it's worth at least $14 and probably around $21-25. As per the PFS it's C$58 per share on a fully diluted basis assuming no further issues.
With the undisputable recognition from world class scientists that pulverising nutrient-rich silicate rocks like Super Greensand works wonders in tropical soils in conjunction with Verde's own exhaustive trials and results as proof as well as the start of production we can finally say that, with the de-risking process completed, Verde is now well on its way on the road to success. Any way you look at this issue, Brazil MUST also acquire a strategic reserve of Super Greensand / potash and so it should facilitate Verde's success.
This is quite something for a little company that could have gone bust 10 times over, but didn't.
And for this we must give credit where credit is due, wether by intention, sheer stubbornness or pure serendipity. So kudos to Cristiano Veloso !
Just like in Homer's Illiad after the 10 year Trojan War, with lots of casualties, losses and pain to all of us who have been around, Troy has finally fallen. And just like Odysseus under the protection of the Godess Athena in Homer's Odyssey we have now started the long 10 year journey back home to Ithaca; and despite some twists and turns along the way, we will get there.
As China's Deng Xiaoping once famously said: " The Middle East has oil, China has rare earths " ... and now Brazil has Super Greensand !