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

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