All Eyes On Verde Potash

Dec.12.11 | About: Verde Potash (AMHPF)

A majority of potash production comes from the “potash cartels” of Canpotex and the Belorussian Potash Company. Canpotex is made up of Agrium (NYSE:AGU), Mosaic (NYSE:MOS), and Potash Corp (NYSE:POT). Verde Potash (OTCPK:AMHPF) is developing a technology that could disrupt the major potash producer’s cartel-like grip on the industry. Verde announced two weeks ago it has successfully produced KCl using the company’s patented Cambridge Process from its potash rich rock resource. A Preliminary Economic Assessment (PEA) is expected in Q1 2012 showing CapEx and OpEx requirements. Analysts say if the PEA shows an economically favorable outcome, it could upturn the potash markets, as Verde’s resource is large enough to supply all of Brazil’s demand.

Over the next decade Brazil is expected to become an agricultural super power, thus making it one of the largest users of potash fertilizers on the planet. Brazil has 500 million hectares of potentially arable land of which 100 million are currently under cultivation. This compares with the United States' 350 million, Russia's 300 million, and China's 200 million if they used every hectare available. Brazil imports 90% of its potash, and is expected to be the biggest importer of potash globally by the year 2020. The Brazilian government is not sitting around waiting for this, as it has made it a goal to financially back domestic projects so that the company can become fertilizer independent.

Verde Potash was founded and is led by Brazilians. The company is developing the Cerrado Verde project in Brazil, a potash-rich rock (bed of slate rock) uniformly covering a 1000 km2 area from which the company plans to produce a unique potash fertilizer product called ThermoPotash. Unlike conventional potash projects, the Cerrado Verde is made up of high-grade outcrops, which allow for a low cost strip mining approach. The resource itself is over a billion tons, and analysts expect the tonnage to double again when more drill results are announced over the next few months. Verde’s project is located in the state of Minas Gerais, right in the heart of the farming belt in Brazil.

Verde Potash has two phases planned for the future. Phase One is to sell ThermoPotash into the Brazilian market place. ThermoPotash has a minimal CapEx requirement ie: under $200 million for a 1.1 million ton per year operation. ThermoPotash has received numerous third-party validation tests showing equivalency to KCl. As I relayed in my prior article, the reason there are so few small potash players in the world is the capital-intensive nature of the business. On average it takes 8-10 years and $4 - $6 billion to develop a conventional 2-million-tonne greenfield mine and mill. Most if not all other potash juniors have CapEx requirements of at least $750 million (most are $1 billion+), which make it very hard if not impossible to finance. Verde’s ThermoPotash CapEx requirement is a fraction of the norm making it very likely Verde could push the project into production, thus financing further capacity increases with internal cash flows. The Brazilian government has also stepped in to verbally back this project and financially support it moving forward.

ThermoPotash is very exciting in its own right, but analysts and investors are most excited about a potential Phase 2, producing conventional potash (KCl), from Verde’s potassium rich rock via the Cambridge Process. Verde sponsored production studies starting in 2008 through Dr. Derek Fray of the University of Cambridge to devise a way to produce conventional KCl from Verde’s resource. Verde has made great strides with the Cambridge Process in large part due to an Engineering Consortium of 5 companies: SRK, Hatch Consulting, GEA Messo, FLSmidth, and Hazen Research. Two weeks ago, Verde announced it has successfully produced KCl from its pilot plant, filed additional patents, and expects to complete a PEA in Q1 2012. Analysts believe that if Verde can produce conventional KCl at or less then $300/ton OpEx utilizing the Cambridge Process, it is a game changer for Verde Potash and the industry as a whole. Not only would Verde’s resource be big enough to supply potash to all of Brazil for decades to come, but its patented Cambridge Process could be licensed out and used in other parts of the world with similar glauconite rock.

Many analysts believe that on a positive PEA announcement, Verde Potash becomes an immediate takeover candidate by VALE or by one of the potash cartel companies mentioned above. These companies cannot afford to have such a disruptive resource and technology out there free to roam in such a strategically important area in the world such as Brazil. Verde could potentially supply 6 million tons per year, virtually all of Brazil’s demand, which represents over 10% of worldwide production. Due to current demand imbalances, KCl currently sells for $660 per ton in Brazil (highest in the world), so my guess is Verde is worth far more than its current $250 million market cap on a positive PEA outcome.

See the Verde Potash Presentation (pdf).

Disclosure: I am long OTCPK:AMHPF.