Verde Potash heats up on Brazilian thermopotash - Ahead of the Herd

AUTHORIZEDREPRINTwww.northernminer.comAugust 1-7, 2011 • VOL. 97, NO. 24 • SINCE 1915<strong>Verde</strong> <strong>Potash</strong> <strong>heats</strong> <strong>up</strong> on BrazilianThermopotashPhoto by Ian Bickis<strong>Verde</strong> <strong>Potash</strong> president and CEO Cristiano Veloso (left) and geologist Mario Viegas at the Cerrado <strong>Verde</strong> potashproject in Minas Gerais, Brazil.S i t e V i s i tBelo Horizonte,Minas Gerais, Brazil— There is awhole lot of verdeteslate at <strong>Verde</strong> <strong>Potash</strong>’s(npk-v) unconventionalpotashplay in Brazil. Standingatop a hill of theBy ian bickischalky green rocks,you can see the same rocks poking conspicuouslyfrom the many grass-coveredhillsides in the distance. The rocksare so plentiful they are used as aggregateon roads, and so near-surface thattermites have gone and made homes outof the stuff.The numbers being thrown about onlyreinforce the size of the company’s Cerrado<strong>Verde</strong> project. An initial resourcecovering a small section of the 120-kmlongtrend came in at 160 million inferredtonnes, with the overall potential notedin the billions of tonnes. A preliminaryeconomic assessment, based on a highercut-off inferred resource of 105.1 millioninferred tonnes grading 10.3% potassiumchloride, outlined a potential137-year mine life.Such plenitude helped draw <strong>Verde</strong> tothe project in 2008, president and CEO,Cristiano Veloso, explains during a visitto the project.“It was a property where there was noreal exploration risk,” Veloso said. “Youcould see it had lots of potash. So wewouldn’t be getting into a scenario of crisiswhere we would need to invest moneyon exploration with a high risk, it was1

AUTHORIZEDREPRINTwww.northernminer.comAugust 1-7, 2011 • VOL. 97, NO. 24 • SINCE 1915more market development.”The company needed to develop a marketbecause, while this plentiful resourcehas been known since the 1960s, no onehas actually managed to sell any of it.But <strong>Verde</strong> hopes to change that bytransforming the otherwise useless glauconite-basedrocks into potentiallyvaluable “Thermopotash.” Decades ago,Vale (vale-n) looked into the potassium-richrocks at Cerrado <strong>Verde</strong> as apotential source of fertilizer, and found itcould create a potash alternative by cookingthe rocks at high temperatures, andadding limestone. In this way, Thermopotashwas born.The product has a lower potassiumoxide grade than more conventional potash,but it is alsolow-chlorine, requiresfarmers use less limestone on their fields,and its low solubility means the nutrientsare released slowly and not washedaway by Brazil’s heavy rains.But the cost of roasting the verdete over1,000°C was high, and local demand wasrelatively low, so Vale abandoned theproject and let the claims lapse.The situations in Brazil and the potashmarket have since changed dramatically.The agricultural sector has exploded, andfertilizer prices have followed suit. Andthere, in the middle of this boom, sits<strong>Verde</strong> <strong>Potash</strong> and its sizable resource,waiting to reap the benefits of a welltimedland play.A PEA and market studies confirm that<strong>Verde</strong> could make a respectable profitfrom Thermopotash. A second technologicalbreakthrough — currently in theworks, and patent-pending — couldradically change the company’s fortunes.Humble beginnings<strong>Verde</strong> <strong>Potash</strong>, which recently changed itsname from Amazon Mining, did not beginas a potash company.When Veloso started the company in2005, he was intent on finding far morealluring gold. A native of Brazil’s miningcapital Belo Horizonte, he was familiarwith the country’s one-time status as theworld’s largest exporter of gold (albeit inthe 18th century), and wanted to makethe most of his local experience to advanceprojects.His experiences as a 24-year-old,however, were somewhat limited. Butfresh from completing an advanced degreein international business law, followingtwo earlier degrees, Veloso gatheredseed capital for the private venture, andwas ready to spread his entrepreneurialroots.“I’ve always been a bit of an entrepreneur,”Veloso says, recounting how heended <strong>up</strong> running a mining company atan age when most are trying to get hiredby one. “Mining was a part of my lifegrowing <strong>up</strong>, and it just came as naturalwhen I started.”The company found limited successwith early properties, but debuted on theTSX Venture Exchange with a $16-millioninitial public offering at $1.20 in late2007. A year later, the company tradedat barely 20¢, and change was afoot.Lured by a steep increase in potashprices, which in Brazil peaked at aroundUS$1,000 a tonne in 2008, Veloso ledthe company out of gold and into potash.He encountered strong resistance, butwith the company having already abandonedthree gold projects in 2008, Velosofought for the change in direction,and won. So the team got to work.“When potash prices started going <strong>up</strong>,”Veloso says, “we sat down with our explorationteam, and we carefully lookedat every single opportunity on potash inBrazil.”Veloso said the team found environmentaland social problems with the obviouspotash prospects in the AmazonBasin, and obstacles for properties surroundingVale’s Taquari-Vassourasmine in Sergipe state, the only active potassiummine in Brazil.The most interesting project turnedout to be a potassium silicate propertythat Ysao Munemassa, <strong>Verde</strong>’s currentexploration manager, had worked onwith Vale long ago. Munemassa pointed<strong>Verde</strong> to the property’s still unrealizedpotential, and helped identify the bestground. In return, he got a 3% royalty onthe property, which <strong>Verde</strong> can buy for$3 million at any time.<strong>Verde</strong> went on a staking rush to secureas much choice land as possible, evenclaiming some areas as diamond andphosphate licenses to avoid suspicion.The efforts proved wise. Vale swoopedin shortly after, and staked a large landpackage adjacent to <strong>Verde</strong>.On Nov. 24, 2008, <strong>Verde</strong> announced ithad amassed a 1,650-sq.-km land packagethat represented a “major Brazilian potashopportunity,” and a new direction forthe company. Shortly after, the company’sshare price hit an all-time low of 7¢.Out of NecessityThe next year was one of patience.<strong>Verde</strong> worked to prove <strong>up</strong> a resource, andprove to investors that verdete slate —and the Thermopotash made from it —were indeed worthwhile commodities.The company amassed a who’s who ofresearch and development partners. TheBrazilian government-sponsored Centrefor Mineral Technology signed on, as didthe research program Agrominerais. Embrapa,Brazil’s main agricultural researchcorporation, the University ofUberlandia, and the University of Lavraswould also all eventually research thepracticability of Thermopotash.The government of Minas Gerais,meanwhile, fully endorsed the idea, andpromised preferential tax treatment,s<strong>up</strong>port in financing the project and helpwith the approval process.Later in 2009, ArcelorMittal (mt-n)signed <strong>up</strong> to test Thermopotash, as wouldAgrifirma Brazil, a UK-based agriculturefirm, while Sekita Agronegocios, a leadingBrazilian agribusiness, signed on in2

AUTHORIZEDREPRINTwww.northernminer.comAugust 1-7, 2011 • VOL. 97, NO. 24 • SINCE 1915Grazing at <strong>Verde</strong> <strong>Potash</strong>’s Cerrado <strong>Verde</strong> potash project in Brazil.Photo by Ian Bickisearly 2010. Sekita, a major vegetablegrowerin the country, planned to testthe product in “real world conditions,”which led to rather unwelcome results.The pedigree of parties interested in<strong>Verde</strong>’s science project was a testamentto their curiosity in the product and, ina way, their desperation. Brazil hasquickly become one of the world’s leadingconsumers of fertilizers, importingover 90% of its potash. The country isexpected to be the world’s largest potashimporter by 2020.The demand has been sparked by theagricultural revolution of the Cerrado.Thanks to early research by Embrapa, anda healthy dose of limestone and fertilizer,the once-barren expanse has been transformedinto one of the world’s greatagricultural regions.The country is now the world’s largestexporter of coffee, sugar cane and ethanol,to name a few, which comes as nosurprise after seeing endless lush greenfields filled with cash crops on a driveacross Minas Gerais. Veloso has witnessedthe transition first-hand.“Back in the seventies and eighties . . .there was nothing, they couldn’t growanything in the Cerrado region of Brazil.It was a very different scenario to whatit is today,” Veloso says.Brazil’s agricultural industry has littlestopping it from growing much bigger.The country has the world’s largeststores of renewable fresh water, a dynamicand educated workforce, a climatethat allows <strong>up</strong> to three growing cycles ayear and, thanks to the Cerrado, by farthe most potential new arable land in theworld.All Brazil lacks is fertilizer.Milestones<strong>Verde</strong> is proposing to help fill the fertilizergap by using Thermopotash as a 15%blend in existing nitrogen-phosphoruspotassiumblends, or NPK blends. Twosignificant studies help validate its plan.A market study that looked at potentialpricing of the Thermopotash estimateda price in Minas Gerais of US$182.31per tonne, or US$160.04 delivered, whilewith delivery to other states, the adjustedprice ranged from US$63.68 toUS$130.13 per tonne. Minas Gerais hadan estimated market of 896,000 tonnes,while the total market potential was 4.4million tonnes at a weighted averageprice of US$112.82 delivered.Delivery costs are high because Brazilhas a serious infrastructure deficit. Mostfreight moves around the country bytrucks, as was evident by the two-lane3

AUTHORIZEDREPRINTwww.northernminer.comAugust 1-7, 2011 • VOL. 97, NO. 24 • SINCE 1915highways clogged with the slow-movingmachines.Transportation is also a key part of<strong>Verde</strong>’s competitive edge compared withimports. Veloso explains that, when localblenders order potash from Saskatchewan,they must wait three months for theship to arrive, <strong>up</strong> to a month more to unloadthe cargo in Brazil’s severely congestedports, and then haul it by truckanywhere from 600 to 1,000 km inland.Total transportation costs for importsrun from $150 to $200 per tonne, while<strong>Verde</strong> is looking at $20 to $70 per tonne.“Literally being down the road fromwhere the blenders are in Brazil, immediatelydown the road from the biggestblending district in Brazil, it just makesit a very simple proposition,” Veloso says.<strong>Verde</strong>’s capital costs also set it apartfrom most potash projects, which oftenrun into the billions. A PEA released lastfall estimates capital costs of US$196.8million for a 1.1-million tonne a year operation,and US$269.4 million for doublethe output.For the smaller, base-case model, operatingcosts are estimated at US$41.80per tonne, with a capital payback in 2.4years. The scenario generates a net presentvalue (NPV) of US$455.4 million ata 10% discount rate, and an after-taxinternal rate of return (IRR) of 32.9%.A doubled 2.2-million-tonne optioncuts operating costs by US$5.44 pertonne, payback by half a year, andboosts the NPV to US$858.1 million,and the IRR to 40.2%.Veloso says the PEA, along with themarketing study, have gone a long wayin validating the Cerrado <strong>Verde</strong> story.“We had big expectations that itcould be a success, but those were thetwo independent milestones that helpedconfirm it,” Veloso says.Down to the detailsWith the basics established, <strong>Verde</strong> is nowperfecting the processing, and provingit’s possible on a large scale.For the roasting, <strong>Verde</strong> initially conductedtesting on a 100-kg-per-hour facilityon the outskirts of Belo Horizonte.Now, it is moving to a 100-tonne-a-dayoperation a little farther out of town.John Kaiser of Kaiser Research Online— who recommended <strong>Verde</strong> to his readerswhen it traded under 20¢ in 2009— was on the same site visit, and sees theramp-<strong>up</strong> as one of the remaining uncertainties.“There are always risks thatthe processdoes not scale <strong>up</strong>cost effectively,”Kaiser says. “What happens to yourresidence times? How long do you haveto keep a certain volume of material inthe kiln, to get the right temperatureand the right chemical reaction?”<strong>Verde</strong> has refined the process duringthese trials. Pedro Ladeira, VP of engineering,has extensive experience in thecement industry, which uses a verysimilar process to what <strong>Verde</strong> plans. Heintroduced an air-mist cooling systemas an alternative to water, as well as usinga powder rather than pellets in the initialstages, with both potentially yielding costsavings in the <strong>up</strong>coming prefeasibilitystudy.Capital costs will likely go <strong>up</strong> in thenext study. Robert Winslow, an analystat Wellington West who covers <strong>Verde</strong>,writes in a recent note that the exchangerate alone is increasing anticipated capitalcosts. Winslow is projecting a capitalcost for the 2.2-million-tonne-peryearoperation of US$318 million. Henotes that <strong>Verde</strong>’s assumptions includea U.S. dollar to a Brazilian real exchangerate of 1.8, but the real has appreciatedaround 15% against the dollar since thePEA was released.Winslow writes that any increasedcapital expenditure will likely not beoffset by higher fertilizer prices, especiallybecause Thermopotash is a newproduct that hasn’t received governmentcertification. He has reduced histarget share price for <strong>Verde</strong> to $10.50from $11, but is looking at positive developments,such as an <strong>up</strong>dated resourcefor Cerrado <strong>Verde</strong>, Thermopotashproduct certification and a resource forthe company’s Apatita phosphate project.<strong>Verde</strong> could also get a boost when aresource estimate comes out on its limestoneproject, 100 km away from its Cerrado<strong>Verde</strong> project. The company recentlyreleased drill results from thetarget that showed an average thicknessof 36 metres grading 53% calcium oxide,and less than 2% silicon dioxide. The statisticsfit perfectly with the limestonerequirements for producing Thermopotashand, like the verdete, its proximityis a key benefit.“It’s just another industrial material,”Veloso says of the limestone project.“It’s all about location.”The new resource at Cerrado <strong>Verde</strong>will come from 26,000 metres of drillingthat <strong>Verde</strong> is conducting to <strong>up</strong>grade theresource to indicated. Early results areencouraging.Killer carrotsWith several milestones reached, <strong>Verde</strong>is convincing investors of the story’svalidity. The company’s stock priceclimbed from 60¢ in mid-2009, to a highof $10.95 in April 2011. But the climbhasn’t been easy.“Every time someone tries to dosomething that no one has done before,everyone thinks, oh, it’s not going towork,” Veloso says. “If it could work,why isn’t someone else doing it?”Low potash prices and sated local demandare key reasons it hadn’t beendone, but so was the risk of trying somethingnew, which was seen when resultsfrom Sekita came out. Conducting “realworld” tests on carrot crops, the resultswere inconclusive, with similar productivityand quality results using potash,Thermopotash or no fertilizer at all.<strong>Verde</strong> slipped the information at the4

AUTHORIZEDREPRINTwww.northernminer.comAugust 1-7, 2011 • VOL. 97, NO. 24 • SINCE 1915bottom of an April 21 release about thecompany’s name change, and investorswere spooked, dropping the company’sshare price $4.01 in two days to $6.76.<strong>Verde</strong> hastily released a second releaseemphasizing the uncontrolled conditions,and the likelihood of residual fertilizerin the s<strong>up</strong>posed unfertilized controlcarrot plot.“I think that bobbled news release thatthey had, that was a bit of a shock tothem, about how easy it is to destroythe momentum of the story,” Kaiser says.<strong>Verde</strong> later released results showingThermopotash was as much as 17% moreeffective than potassium oxide, and morethan twice as effective as the controls, butmarket reaction was muted. After a toughJune, the company’s stock recoveredsomewhat, closing at $7.65 on 32.3 millionshares outstanding.With a volatile market and lessonslearned, Veloso seems to have adopteda cautious approach to managing expectations.This was especially apparentwhen he talks about, or rather, hardly talksabout, <strong>Verde</strong>’s potential blockbuster development— the Cambridge Process.Developed by Derek Fray in conjunctionwith the department of materialsscience and metallurgy at the Universityof Cambridge, the process converts verdeteinto a conventional potash productusing heat and a mixture of salts. A patentwas filed in December, covering theproduction of muriate of potash and sulphateof potash from the verdete.Further details of the innovation arescarce, but the possibility of convertingverdete into standard potash significantlyincreases the potential market, and couldbe a game-changer for the company. Kaiseralso notes it could add significantvalue.“The Thermopotash suggests a $10 to$15 price target eventually,” Kaiser says,“but the other stuff is the one that couldtake it to $50 or more.” He notes that<strong>Verde</strong> belongs in a select category ofcompanies looking at non-traditionalsources of raw materials, by “using researchand development, and out-of-thebox-typethinking.”Veloso says that if testing and developmentgo well, there could be a scopingstudy out on the process by the end ofthe year. But the company’s near-termfocus is very much on starting Thermopotashproduction.“We are determined to get into production,and help Brazil address itsissue with fertilizer imports,” Velososays. He has high praise for the company’smanagement team and board whoare working to make it happen, and expressesa deep confidence in the company’sfuture.“We will certainly become one of themost successful Brazilian fertilizer companies,”he says.5