The Future of Fertilizer In The Heart Of Global Farming – Verde Agritech PL (TSE:NPK, FRA:AZA)

Palisade Research November 3, 2017
Category: Research

Cristiano Veloso grew up spending weekdays in the city and weekends and holidays on the farm.

He vividly recalls learning how to drive tractors, helping with the harvest, and hanging out at the local rodeos.

But Cristiano never wanted to stay on the farm. He had a flare for business and an entrepreneurial mindset ever since his earliest days. He studied hard and at the age of 15 was granted admission to a new high school in Brazil that focused on business and entrepreneurship.

After high school, Cristiano received his law degree from Brazil’s best school (UFMG).  His rationale: people who understood the complex systems of Brazil possess a competitive edge in business. And to hone his business skills, Cristiano went overseas to obtain his Masters in International Business Law from the University of East Anglia in Norwich, England.

Maybe not coincidentally, Cristiano found himself in a part of England known for its agriculture. His tactical mind began churning. He began to imagine an international trade opportunity, especially with his connections in Brazil.

Cristiano compiled a list of import/export companies in the region and began cold calling. One company he spoke to needed help with their numbers, so Cristiano delved into their books. Next, he aided the company with a successful capital raise, and ultimately, an acquisition.

As part of his job, Cristiano constantly spoke to investors – not just investors interested in import/export, but the resource space as well. This was his first exposure to exploration, and his entrepreneurial mind began to stir once again.

Cristiano went back home to Brazil, intent on finding a project in the resource sector. He tapped his network, and eventually garnered financial backing. He was ready to launch his first company—A gold exploration company focused on Brazilian projects—and managed by a Brazilian team. This was in stark contrast to the norm; most exploration companies were internationally owned, with imported management teams that couldn’t speak Portuguese.

By 2007, his company had a formidable team of Brazilian geologists and 10 highly prospective gold projects. Cristiano took the company public, raising $16 million dollars; at 26 years old he was the youngest CEO of a TSX-listed company to raise over $10 million.

While timing for the financing was point-on, as soon as the company began drilling the market crashed. As the board waited anxiously on the sidelines, the market got worse. And worse. They wanted to tap out and become a shell; with $10 million in the bank they had more than enough to weather the storm.

Cristiano did not just want to be a shell and fought. He didn’t come this far to retreat into an empty company. He started hunting for projects that were recession proof. And what he found, once again, brought him back to his roots.

Brazil’s economy is based on agriculture; it is the world’s largest exporter of agricultural commodities, including coffee, soybeans, beef, and crop-based ethanol.

Cristiano’s salvation? Potash—an apparently recession resistant resource that quickly found support with his investors as well as Bay Street.

(From the lulls of 2008 to its peak in 2011, Verde Agritech’s share price went from 10 cents to C$10.77)

Verde Agritech held off the resource bear for as long as it could. But even the “recession-proof” potash eventually succumbed – a spectacular crash compounded by the fall of the Russia’s potash cartel, OAO Uralkali. That news struck every potash company on the planet; they fell like rocks. Uralkali would sell its product at a discount, increasing the world supply, further exacerbating their already bleak condition.

Prior to the crash, Cristiano raised C$60 million for Verde through a series of financings. He doubled down and parleyed his bet into Super Greensand – an innovative and disruptive fertilizer.

The bet paid off, and Verde Agritech is once again poised to takeoff.

Disrupting An Old, Old Sector

Verde Agritech PLC is at the forefront of agricultural technical research and innovation of potassium fertilizers in Brazil. The company’s disruptive product is its Super Greensand, a multi-purpose and multi-nutrient with more than $30 million in research and development.

The company is currently producing, and has a clear path to ramp-up and fully utilize its 3-billion-tonne-resource to produce 25 million tonnes of Super Greensand per year.

Super Greensand is disrupting a very archaic farming sector. Farmers simply do not like change. However, due to the multi-beneficial characteristics of the fertilizer and the marketing efforts, farmers are are flocking to Super Greensand in droves. After years of research, the product is legit:

(Super Greensand vs. traditional KCl, Source: Corporate Presentation)

The nutrients provided by Super Greensand are not lost by leaching, and remain for subsequent harvests by the plant enriching soil.  It also improves composting by retaining ammonia and nutrients while promoting mineral supplementation to microorganisms, maximizing the effects of organic matter in the soils.

Verde plans on having 20,000 tonne-capacity in 2017, 100,000 tonne-capacity in 2018, and 600,000 tonne-capacity in 2019. Their 233,000-tonne permit can easily be expanded to achieve the 600,000-tonne target, as the impacted area falls within the original Environmental Impact Assessment. Verde plans on ramping up production in phases, with the first phase to 600,000 tonnes to cost $US2-$4 million.

Phase 2 increases output from 600,000 to 5 million, and will cost US$15-$20 million, which will be confirmed in the PFS. We expect Verde to fund this internally.

Phase 3 is the ramp-up from 5 million tonnes to 25 million plus. This will require extensive capex because a railroad connection will be needed.

According to our research, Verde can sell its product for R$129/tonne, justifying its price exclusively against KCl, and not charging farmers for the other nutrients. We estimate costs at a conservative $R80/tonne. Costs will decline as production ramps up; however, to be prudent, our projections are based solely on phase 1. Verde will have US$9.5 million in cash flow per year at 600,000 tonnes, and will act essentially as a utility with stable cash flow.

Phase 1 will generate incredible cash flow for Verde Agritech. The company is based in Brazil, managed by an all-Brazilian team, which could account for the lack of attention its been receiving. Regardless, in the last bull market the stock topped at C$10.77 and was covered by 11 analysts. The potential is still there, and Verde has advanced to the point of production. Phase 2 alone has the potential to make Verde into a billion-dollar company.

Moving Forward

Farmers are tricky beasts, but Cristiano knows them well. It also helps to have the World Food Prize winner, Dr. Alysson Paolinelli, serving on the Board and standing by the product. Dr. Paolinelli has held positions as the Brazilian Minister of Agriculture, the President of the National Confederation of Agriculture, and the Secretary of Agriculture for Minas Gerais State. As the Minister of Agriculture, Dr. Paolinelli established the Brazilian Agricultural Research Corporation (EMBRAPA), the world’s leading tropical agriculture research institution. His reputation and input into Super Greensand have been invaluable.

(Cristiano Veloso & Dr. Alysson Paolinelli, World Food Prize Winner)

Verde Agritech currently has an M&I mineral resource of 1.47 billion tonnes at a grade of 9.2% K2O, and an inferred mineral resource at of 1.85 billion tonnes at a K2O grade of 8.6%.

The company has begun a prefeasibility study (PFS) for the expansions to its Super Greensand production. As mentioned earlier, the company has broken down the expansion into phases, and will rely on mining and industrialization contractors, all of which will significantly reduce upfront capital costs.

The PFS will analyze the production schedule broken down into three phases: 600,000 tonnes, 5 million tonnes, and 25 million tonnes.

The PFS will confirm the enormous disconnect between market cap and intrinsic value. The company has been able to raise C$60 million in financings, C$30 million of which went into developing its flagship product. Testing and independent field trials all have validated Super Greensand’s advantages over traditional fertilizers. The market has been slow to recognize this.

The PFS is scheduled to be released by the end of Q4 2017. In the mean time, Cristiano will be hitting the road to re-tell his story. Now’s the time to bet on Cristiano and his Super Greensand.

Palisade Global Investments Limited holds shares of Verde Agritech. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence.

 

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