Verde Agritech Ltd T.NPK

The Armenius Group Verde Agritech Coverage

[Dougisgood]

This was an interesting read and where I nabbed the David vs Goliath analogy. 

Verde Agritech, the David of potash in Brazilian lands – The Armenius Group, LLC

This post is about an interesting case. A case of David and Goliath so to speak. David is represented by the company at the center of our discussion today, Verde Agritech. Verde is a small agrotechnology company that operates the largest potash mine in Brazil. The company is led by its founder and CEO, Cristiano Veloso.

Verde’s story started far from potassium. Cristiano’s initial project was to explore for gold in Brazil. To finance the project, Cristiano managed to raise C$ 16 million via IPO on the TSX, a Canadian mining stock exchange. Unfortunately, the project didn’t work out. A lot of money was spent, little gold was found, and to make matters worse, the 2008 financial crisis came just a year after the IPO. Shares that traded at C$1.20 dropped to C$0.10. Without access to capital to continue financing the projects and under pressure from shareholders who wanted the dissolution of the company, Cristiano Veloso had to look for an alternative.

The alternative came in the form of fertilizer and, more specifically, potassium. The choice for potassium was not in vain. Potassium is the most used nutrient in Brazilian agriculture and the country imports over 95% of all the potassium it uses. In addition, potash price in 2008 was at its all-time high. Cristiano saw an opportunity there and then redirected Verde’s focus.

Cristiano’s idea was to focus on the traditional potassium chloride (KCl). In partnership with Professor Derek Fray, from the University of Cambridge, Verde began working on a technology to develop potassium chloride from its mines in So Gotardo.

The work continued for a few years until a risk common to commodity companies hit Verde. A misunderstanding between the largest global potash products made the price of the commodity plummet and made the company’s project unfeasible. Verde then had to reduce its size and think, once again, of a new alternative.

The solution was found in the midst of research by Professor Derek Fray and came through glauconitic siltstone, a sedimentary rock present in the So Gotardo mines and rich in glauconite. Reportedly, glauconite is one of the oldest potassic mineral fertilizers in the world and was already used in the United States around 1760. However, years of exploitation made the glauconite commercial mines extinct.

To help in the research on glauconitic siltstone, Verde was reinforced by the renowned Mr. Alysson Paolinelli, who joined the company as a director in 2014. Mr. Alysson Paolinelli was the founder of EMBRAPA and is one of the most influential names in history of agriculture in Brazil, having recently been nominated for the Nobel Peace Prize.

A few more years of work and studies followed until, in 2017, Verde was finally able to launch its flagship product, the K Forte.

About the products…

Known as Super Greensand in the United States, K Forte is a fertilizer source of potassium, magnesium and silicon. One advantage of K Forte production is that it does not rely on a billion-dollar project as traditional potash mining projects do. This allows Verde to scale up little by little, financed in part by its own cash generation.

K Forte started to be produced in a pilot plant in 2017. The sales success led Verde to build its own plant, with greater capacity, as early as 2018. The success continued and the plant needed to be expanded in 2019, increasing capacity output to 500,000tpy. Today the company is preparing to build its second plant, this one with a capacity of 1,200,000tpy.

Strong K faces competition from none other than potassium chloride. This is where the Goliath of our plot comes in. The global supply of KCl is concentrated in a limited number of producers in Canada, Russia and Belarus. It was even due to a misunderstanding of the Russian cartel that the potash price reached its peak in 2008, attracting the attention of potential competitors. Currently large producers keep the price of potash between $200-$300. A value high enough to guarantee good margins and small enough to avoid the development of competing projects.

Returning to K Forte, the obvious question then is “why would a farmer switch from KCl to K Forte?”. There are a few reasons:

1- Chlorine. The presence of chlorine makes an application of 1kg of KCl the equivalent of pouring 8 liters of bleach on the earth. The absence of chloride in K Forte helps to preserve soil microorganisms.

2- Salinity. KCl is very saline and can even kill plants. K Forte, on the other hand, has low salinity.

3- Application. As the high salinity index is harmful to the planting, KCl applications must be divided in installments. Coffee planting requires up to 4 KCl applications per year. With K Forte, the application can be done only once a year.

4- Proximity to the farmer. As we said, almost all potassium used in Brazilian agriculture is imported. Already produced in Brazil, K Forte becomes a convenient alternative for farmers.

Source: Company presentation

In addition to K Forte, Verde has a new product that began to be marketed in 2021, the BAKS. BAKS is a composition of K Forte with other essential nutrients for agriculture, mainly sulfur. The farmer also has the option to define the amounts and types of nutrients that are part of the blend. It is an attempt by Verde to satisfy customers who prefer to purchase as many nutrients as possible from a single source. The company’s expectation is that BAKS will represent at least 10% of total sales in 2021.

About management…

Verde is one of those cases where the investor needs to be comfortable with the control that a single person has over the company. Founder, CEO and now chairman of the board, Cristiano Veloso is Verde’s main name. And for that he is very well paid.

In 2019, Veloso received C$420k in salary and C$508k in share-based payments, totaling C$928k. Put another way, Cristiano received the equivalent of 15.4% of Verde’s total revenues. In 2020 Cristiano received a salary of C$420k in addition to a performance bonus of C$551k. Here, a total of C$971k which corresponded to 10.6% of the company’s total revenues. Without a doubt, remuneration incompatible with Verde’s size and stage.

When asked directly about the size of his compensation in the last call, Cristiano gave an unsatisfactory answer: “I think the short answer to this question is that my compensation is handled by the compensation committee with three independent members who then make the recommendation to the Board of Directors.”

As expected, the situation generated discomfort among shareholders. But on the other hand, it is important to recognize the importance of Cristiano for Verde. Cristiano not only founded but reinvented Verde over time to ensure the company’s survival. During the most difficult period, he gave up cash compensation to receive in company stock. Not only has he never sold a single share, he has a habit of reinvesting in the company. Altogether he owns almost 20% of Verde.

Cristiano’s remuneration is exaggerated, but it is true that we are talking about a resilient founder with skin in the game and who had a great impact on building the company. It will be up to the investor interested in Verde to assess whether it is worth it.

About the most recente numbers…

The last few quarters give hope that Verde has reached an inflection point. The company finally reported positive operating cash flow and profit, as a result of good revenue growth with more cost-effectiveness. Numbers achieved despite the drop in the price of potash in 2020. The result is even more encouraging when we consider the growth in sales volume:

Today, Verde plans sales of 350,000 tons for 2021. Later this year, Verde also expects to advance in the construction of its Plant #2 and obtain a mining concession for 2.5 million tpy in its mine shaft 2.

It is the beginning of a road to reach the dream goal of an annual production of 25 million tpy. Someday maybe?!

About the risks…

Verde’s big challenge is to convince farmers to use its products and forget about KCl. If the quality is higher and the price is competitive then this should be easy, right? Not so much… The truth is that farmers are already used to using potassium chloride and are not even dissatisfied with it. When we talk about potassium chloride we are also talking about a habit. Potassium chloride has been used for years, it has been incorporated into the planting routine and farmers already know what to expect. More than that, farmers grew and prospered using potassium chloride. Anyway, it’s a hard habit to break.

Furthermore, the K Forte retention index is not ideal for a product that is intended to annoy an oligopoly. Only 65% of customers who bought K Forte in 2019 returned to buy in 2020. The good news is that this index has been rising. Verde sought to map the reason for the low retention and has been disclosing the data periodically and with transparency. Cristiano Veloso did not hide, he made his mea-culpa by taking responsibility for the poor numbers of the past and apparently, he has been taking steps to improve this customer service.

In the end, Verde is not for any type of investor. It is a growth story, with all its risks and opportunities. Recent developments are promising and the potential market is huge. In 2019 alone, Brazilian farmers spent C$5.4 billion on potash, almost everything imported. But the real opportunity lies in farmers willing to give Verde’s products a chance, and there may not be many. Perhaps this is the reason why the growth, despite being good, is far below the forecast in the preliminary feasibility study so vaunted by Verde in 2017.

Those who decide to invest in the company must expect high volatility, as former shareholders of the company can attest. Verde has already lived moments of glory at a time when it received coverage from several analysts from major financial institutions. Currently, the company is a little forgotten, which for us is even welcomed. It’s often too late when a small business receives institutional attention. But if Verde continues at this pace, the institutions will certainly return. Even more so in a world hungry for growth and increasingly concerned about environmental issues.

[Ciao]

Welcome to the board. Interesting coverage, how did you come across it?

[Dougisgood]

Google

[Ciao]

For a newcomer, you come with an attitude :-)  Yeah, I just happened to Google "Verde Agritech Armenius Group" and found the article as well.

[Dougisgood]

Not sure how the reply was with an attitude Ciao. It literally was through utilizing the google search engine.  I am unsure how you utilize search features but if it will assist you I will describe some of mine. The first important thing to realize is different search terms result in different search results, multiple pages of them. I vary my search terms routinely. Some common phrases I

[Ciao]

My apologies. Sometimes I'll go down the rabbit hole on a Google search and find that gem.  That was a great find and thanks for sharing.  quote=Dougisgood]Not sure how the reply was with an attitude Ciao. It literally was through utilizing the google search engine.  I am unsure how you utilize search features but if it will assist you I will describe some of mine. The first