MINIMUM VALUATION CORRECTED FROM $2 TO $4 (BASIS $0.20 EPS)In my previous minimum valuation scenarios I have omitted to take into account the ongoing export sales to the US. Clearly this is wrong in view of the fact that export sales are actually already happening and expected to expand further, especially with the new Amazon agreement.
The big US market cannot be ignored due to the fact that a lower quality greensand from various suppliers has been used for over 100 years and is available through a vast retail network in a country whose population of over 300 million is more than 50% larger than Brazil. Also some sales are likely to come in the future from other areas such as South America, Europe, etc...
Furthermore we can see that although Super Greensand is a far superior product, it is selling at similar pricing to the competition of around $1 per pound so Super Greensand is sure to grab some market share from competitors as well adding new ones from all the target markets discussed in the past by Cristiano Veloso.
It therefore stands to reason that a percentage of the known minimum production scenario of 150,000T from my previous post MUST be allocated to US sales. The question is, how much ?
I think that to answer this question with any degree of certainty is going to be difficult.
However, considering the amount of time and effort Verde management has spent on this issue, they obviously see a potential that is not insignificant and, for a man that likes to think big by targeting at least 40% market share in Brazil, you would think that Cristiano Veloso has solid reasons to believe that the reward would be substantial. In fact I suspect that the decision for Verde to proceed with their own production plant immediately is due to the fact that the contract manufacturer will not be able to fully supply the expected growth in local demand and, eventually, might have to be dedicated to produce for the export market exclusively.
The reasons are twofold. First, by building its own capacity Verde will be able to better control and reduce the costs of production for the price-conscious local farming market and second by redirecting all export sales to the contract manufacturer, the company will save the significant CAPEX cost of a dedicated bagging installation for the 20kg bags. In addition, and importantly, by keeping all production dedicated to local demand in-house, it will also enable the company to avoid disclosing to third parties, at this crucial early stage, very sensitive proprietary information about local customers, quantities, production schedules, shipment details, etc.
Nevertheless and despite the significant potential of export sales, I prefer to err on the side of caution by picking a very conservative number of only 3% of sales, I repeat, only 3%.
This translates into 4,500 tons per annum, which at about 22-25 tons net payload per 40 foot shipping container is equivalent to only180 to 200 containers per year, which sounds reasonable.
At a retail price of US$ 2,200 per ton I will allow a very generous 50% margin to the retailer and deduct $100/ton for transport, another $100 for distribution and handling costs and up to $50 for production, packing and palletizing, which leaves a profit of $850/ton. Surely some promotion and marketing costs would be incurred, so I will also deduct another $50 to obtain a net profit of $800.
So 4,500 tons per year @ $800/ton net profit would yield US$3.6 million or CAD$4.6 million.
This is about C$0.10 per share on a fully diluted basis.
Adding this 10 cents profit from the export market to the 10 cents of the local sales derived from the past calculations, we get $0.20 / share.
Plugging this 0.20 number into the perpetuity formula @ 5% discount from my previous post we get a present value of C$4 which is 2X the valuation without the export market.
I find it very interesting that a minuscule 3% in export sales increases the bottom line by 100%.
... and we have not even discussed the likely 600,000 ton phase1 scenario coming next year !