It's a new year and investors are looking for exciting new places to put their money. I am feeling bullish about the prospects for a number of mining concerns this year, as well as for many of the markets overall. One especially interesting story to watch will be Arianne Resources (DRRSF.PK), a Quebec-based junior mining company that is focusing on the development of a significant phosphate project that has more than 450 million tons of high-quality phosphate resources that should prove crucial to North America's ability to remain an agricultural powerhouse.
- Phosphate (in the form of phosphoric acid), potash and nitrogen are the three key nutrients in the fertilizer that makes our crops grow
- 90 percent of the world's phosphate is located in sedimentary rock deposits, which are relatively "dirty" due to the presence of elements like uranium, cadmium and thorium and rarely contain more than a 28 percent concentrate grade of phosphate
- The remaining 10 percent of phosphate is in much "cleaner" igneous rock deposits that can generate as much as a 39 percent phosphate grade concentrate
- The higher the concentrate in a product, the less pricey sulfuric acid required to create phosphoric acid - which produces a superior product and a higher price can be obtained for the rock
The politics of phosphate
- North America is self-sufficient in potash and nitrogen, but not phosphate - without phosphate, the "bread basket to the world" cannot produce abundant crops
- North Africa and the Middle East supply most of the world's phosphate
- Morocco by itself accounts for 40 percent of the entire global export market for phosphate, and Tunisia, Egypt and Syria are also significant exporters - all of these countries are marked by civil unrest that can cut off supply at any time. Morocco sells 4 times in Phosphate compared to what Saudi Arabia sells in oil.
- Saudi Arabia, South Korea, China, and India are becoming nervous about their future food supplies. In fact, South Korea imports more than 70% of its grain and China imports more soybeans than all other countries combined. Additionally, a global "land-grab" is well underway to provide food for their people. (Source: Earth Policy Institute)
- Arianne is currently developing the Lac à Paul Phosphate Project in Quebec, which contains igneous deposits that have been confirmed in multiple tests by Jacobs Engineering, the leader in phosphate processing, to produce a 39 percent concentrate
- Lac à Paul has a strong infrastructure to support mining efforts, including a nearby power-generating dam and oversized roads as well as access to ports and rail for shipping
- Studies conclude that Lac à Paul has more than 450 million tons of phosphate-rich igneous resources
- A strong management team and board are in place, and cooperative neighbors that support the new employment opportunity, including the First Nations and Saguenay Communities
- Market capitalization is below $100 million; cash reserves are more than sufficient to last through the end of 2013
- Highlights of the Pre-Feasibility Study Update ($US) from July 31st 2012
- Annual production will average 3 million tons of 38% P2O5 apatite concentrate with low impurities
- 17 year mine life at 50,000 tons ore/day production rate with average mill recovery of 90%
- Average concentrate price of $175/ton FOB rail
- Cash operating cost $80/ton concentrate mine site ($90/ton FOB rail)
- Total Direct CAPEX Cost: $583.3 million
- Indirect CAPEX Cost: $136.1 million and Contingency: $94.5 million
- Total Initial CAPEX: $813.9 million
- Pre-tax IRR: 23.2%
- Pre-tax NPV 8%: $985.1 million
- Pre-tax Capital payback: 3.9 years
Compare: Arianne v. Russian producer PhosAgro
- Both Arianne and Russian producer PhosAgro can produce phosphate rock at 39 percent concentration. A 39% concentrate is truly best-in-class, the highest concentrate in the world. PhosAgro is the only company in commercial production currently producing this superb grade material.
- PhosAgro is a vertically integrated fertilizer manufacturer, and uses much of the phosphate it produces
- PhosAgro expects to stop selling phosphate rock to outside customers by 2015; Arianne expects to complete mine construction by early 2016
- PhosAgro phosphate sells for $280 per ton - $100 per ton more than the 30 percent concentrate from Morocco!
In sum: The Arianne advantage
- As a Canadian company, Arianne is well situated to provide phosphate to Canadian, American and Mexican fertilizer manufacturers via surface or coastal transportation
- A purchase of Arianne and capital investment to bring the Lac à Paul Phosphate Project to full production of 3 million tons annually will cost less than $1 billion and yield the buyer a source of high-concentration igneous phosphate rock that costs one-third as much to produce than it would cost to buy from a company like PhosAgro!
- The recent drilling program and expanded resource calculation (forthcoming) could extend the mine life to 50 years. The deposit size has likely doubled in size since the October, 2011 drilling.
- There are very few pure plays in Phosphate-this is one of the largest and best undeveloped projects in the world. The criticality and geopolitics of food scarcity and security is a rapidly emerging concern.
- The Company launched its Feasibility Study (FS) by contracting with Cegertec WorleyParsons. Significant progress has been made, with the completed FS expected in the second half of 2013.
- Metallurgical testing of Paul and Manouane Zone ores advanced significantly. Jacobs Engineering has been contracted to validate all previous metallurgical work and further optimize the design of the proposed Lac-a-Paul facilities. Jacobs has received over 50 tons of ore samples and is expected to complete bench scale testing by year end. Completion of pilot scale testing and the final engineering report is expected mid -2013.
- Current estimates in the prefeasibility study used only a selling price of $175/ton. Current price from PhosAgro is $280/ton which is significant additional upside on a plant capable of 3M tons per year.
Companies like Mosaic (MOS), Agrium (AGU), CF Industries (CF) and Potash (POT) are all nearing yearly highs based on the knowledge that world food supplies are only going to be further strained in the years ahead. As sources of high quality phosphate like PhosAgro produces are no longer available alternate sources will become in much higher demand. Prior to the final Feasibility study being completed it is highly likely a major producer will take over the project and make the investment to take this project into production. For a potential cash cow that this property will become a multiple several times the current $100M market cap should be expected when Arianne is bought out.
Disclosure: I am long DRRSF.PK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.