NPK on AOTH
Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most successful man in life is the man who has the best information
Today I’m speaking with Cristiano Veloso. Cris is the founder, President & CEO and a Director of Verde Potash Plc TSX.V – NPK (formerly Amazon Mining Holding Plc).
Mr. Veloso is a Brazilian entrepreneur born and raised in South America’s mining capital, Belo Horizonte. Cris has a business management and law degree and worked for two of the most prominent companies in Brazil, CEMIG and Banco do Brasil, before starting Verde alongside a successful group of geologists.
Rick: Cris can you give us some background on how you got started with Amazon Mining, now Verde Potash, and your ThermoPotash fertilizer?
Cris: Amazon was founded in 2005 as the first truly Brazilian conceived, managed and led exploration company. In 2008, Ysao Munemassa, one of Brazil’s most renowned geologists, convinced me to look for fertilizers. In the ‘80’s, Ysao had led one of Brazil’s largest fertilizer exploration programs and was therefore a big step ahead of the competition. We decided to focus on potash and reviewed every single opportunity available in Brazil.
After considerable research and analyses we selected Cerrado Verde Potash as our choice. You can walk our potash deposit. It’s right at surface; it’s a bright green rock so it’s very easy to see we have hundreds of millions of tonnes of it, all amenable to strip mining.
We had read a number of studies done in the late ‘70s and early ‘80s about Brazilian agronomists testing a new fertilizer, ThermoPotash. The results achieved were very good, but it wasn’t quite ready for commercialization because of high costs. So we focused our work on the processing/production technology far more than anything else.
We endeavored to apply the latest metallurgical and pyro-metallurgical processing knowledge to the existing production process to make the flow sheet as efficient as possible.
What’s important to emphasize here is that over our journey we’ve had only the best and brightest in each field working for us. As an example, on the scientific development side we were joined by Professor Derek Fray from the University of Cambridge. We enlisted Professor Fray after hiring a consultant who we gave a very specific mandate to: identify who, worldwide, were the most successful and respected scientists in regards to new pyrometallurgical processes.
We followed the same strategy for every single aspect of production. If, or rather when, we succeeded, we wanted people to look at the accomplishment and be able to say that “Verde’s ThermoPotash is not some chemical experiment done on a small scale at some never heard of before lab in an obscure part of the world. It’s real.” So what we have done, over the last three years, is to bring in every leader in their respective fields to work with us.
The expertise we’ve brought in has paid off. We are successfully advancing the development of our slow release ThermoPotash pellets and have just announced a further milestone: the successful production of Potassium Chloride (KCl) from our Cerrado Verde potash deposit using our continuous rotary kiln pilot plant.
Rick: From my research I firmly believe Brazil is going to be the world’s major breadbasket.
Cris: I think you’re right but if we’re to feed the world’s current and future population Brazil will have to significantly increase its share of food production. There are three major reasons why Brazil is going to increasingly becoming the world’s breadbasket: Brazil has about 1/5 of all land available for agriculture in the world, it has the world’s largest renewable fresh water resources, and Brazilian climate allows farmers to have up to three growing cycles per year. No other place on earth can match Brazil for its food production potential.
Usually when people talk about future potential their current scenario isn’t very robust, but in Brazil’s case the current market size is already impressive and the future one even more so.
Brazil is already a leading producer and exporter of some of the most important agricultural commodities in the world. Consequently Brazil currently needs vast amounts of fertilizer, volumes that will only grow in future years.
Brazil is already one of the largest fertilizer markets and this year is expected to be the world’s largest potash importer at an estimated 7.5 million tonnes of KCl for 2011 - from January to October Brazil had already imported 6.4 million tonnes of KCl.
Rick: Where does most of that come from Cris?
Cris: Good question. Brazil imports more than 90 percent of its potash. Here’s the breakdown from Brazil’s two biggest suppliers for this year up to September: Brazil imported 2.1 million tonnes from Belarusian Potash Co (BPC) and two million tonnes from Canpotex. (Canpotex Ltd. and BPC. control two-thirds of the global market - Canpotex markets potash produced in Saskatchewan by Potash Corp., Mosaic Co. and Agrium Inc. while BPC is an arm of Belaruskali and Russia’s Uralkali – Rick)
Rick: The cost of that must be through the roof.
Cris: It is, it is. As I said, this year Brazil is expected to import over seven million tonnes of KCl. At current prices that’s $4.5 billion worth of potash, for the past few years KCl has been ranked by dollar value as one of the top ten items on the Brazilian import balance sheet. That’s a lot of money leaving the country.
Rick: Potash has to be railroaded, loaded on ships and sent to a port in Brazil. Things start to get very interesting when the potash finally arrives in Brazil.
Cris: Yes, the first big challenge is the current waiting period to unload. Anywhere from 30-45 days, the average waiting time at the port of Santos is 41 days. Also, it is very expensive to unload at Brazilian ports.
Rick: There’s a very small window in Brazil to apply the fertilizer, does the waiting time to unload affect that?
Cris: It does. It puts a lot of pressure on the fertilizer blenders and on the farmers themselves. Unless the blenders place an order well in advance they cannot bring in enough potash and the farmers risk missing the fertilizer application window.
Rick: When you talk about the blenders, how does the potash get from the port to the blenders? Is this where the infrastructure problem really starts happening?
Cris: After the potash is finally unloaded logistics continue to be chaotic. You need to transport this product from the ports to where it’s blended and eventually consumed. This transportation is predominantly done by truck.
Unfortunately it’s faster for you to walk from a Brazilian port to Minas Gerais in the Cerrado region than the time it takes for your goods to get there by train. Brazil’s rail service is expensive, limited and very congested, there are a number of reasons why but one of the biggest reasons is the train has to travel through favelas (shantytowns or slums) in some very large cities so it’s speed has to be brought down to a minimum and interruptions are very common.
The state of Minas Gerais is currently the largest iron ore producer in Brazil. The state is also one of Brazil’s most important agribusiness regions. Since 2007 there have been several new major iron-ore projects announced (Anglo American and others) but none of these iron ore giants could afford to build a new railway. Instead, they all opted for building slurry pipelines at almost US$ 1M/km. So even when you look at Brazil’s king of mineral commodities, iron–ore, it’s not economic to build new rail infrastructure and even the federal government will not step in to do so.
Rick: But isn’t Verde Potash positioned in the ideal place, right in the heart of Brazil’s main agriculture sector?
Cris: Yes. Even if Brazil’s infrastructure problems get resolved in a couple of decades you cannot beat our location. We are in the Cerrado region, right in the heart of the main fertilizer distribution channels, without all the logistical headaches of being nearer the coast.
This year Minas Gerais State will have an expected GDP of $70 billion from agribusiness alone. Remember that’s just one state - the state where Verde is located - 60% of that $4.5 billion worth of imported potash comes to Minas Gerais State and its other landlocked neighbor states.
Uberaba, a town in Minas Gerais State, consumes more than half a million tonnes of KCl per year. That is one town, 250 km away from us, that consumes about half billion dollars’ worth of KCl per year.
Rick: Why is the fertilizer market different in Brazil from the US?
Cris: U.S. farmers do not apply a lot of blended fertilizer. The market exists, but it’s small. A lot of US farmers apply single nutrients, for example KCl, or DAP, or super triple phosphate. The levels of nutrients stored in most US soils is very good, so it’s not every year that they will need to apply each of the nutrients.
When you look at Brazil’s soil it’s a totally different story. Because the soils in Brazil are so weathered and poor in nutrients farmers need to apply every single nutrient every year. So in contrast to the US, about 90% of all fertilizer applied to the soil in Brazil is applied as NPK blends. Only 10% of the Brazilian market accounts for direct single nutrient application.
Rick: There is so much more to what’s going on in Brazil with the potash and the agriculture than just throwing some fertilizer on a field.
Cris: As we’ve discussed, there are a number of peculiarities about the Brazilian fertilizer market that makes our position extremely attractive; the sheer amount of potash we need to import, the waiting time to unload, the infrastructure, and the poor soils. Here’s another; recently we were talking to one of the country’s largest blenders and they were telling us their biggest problem is the time they need to lock up their capital in inventory.
The big problem all blenders in Brazil have is that from the time a blender places an order with a Russian or a Canadian supplier, the amount they are paying for that KCl is on their balance sheet, as inventory, as working capital, and the average time that capital will be locked up is 160 days. Shipping, port waiting time, transportation to the blenders, manufacturing, getting it sold and paid for, that’s almost half a year the blenders’ money is tied up.
For people with a background in borrowing money and looking at returns that is a nightmare. It’s even worse for an industry like the blending distributors because the players try to be as leveraged as possible. In Brazil, where the official interest rate is 11%, working capital finance can cost as much as 25% per year.
Rick: Okay, let’s get into Verde’s slow release fertilizer product your calling ThermoPotash.
Cris: How nutrients are made available to the plants is one of the many advantages our product has. Plants take up nutrients as they need them but 25% of applied KCl is lost in Brazil because the torrential rains wash it away. So, 1/4 of KCl applied to the soil is washed away.
ThermoPotash is a combination of a potash-rich rock and limestone in a slow release pellet form which will not be washed off the fields. The pellets break down over time, so that nutrients become available to plants when they need it.
If you want to visualize what ThermoPotash production looks like, think about two open pit operations. One pit is mining potash rock and the other limestone, which we also have. Both the limestone and the potash rock are ground up. After being ground, they are fed into a rotary kiln for one hour at a temperature of 1,250 degrees Celsius. When the mixture comes out of the furnace it is cooled down quickly. Then it’s agglomerated and eventually blended with nitrogen, phosphate and KCl to make the final product that will be sold to farmers.
As a raw materials supplier, Verde is only going to agglomerate the product and supply it to the blenders. It’s their business to manufacture the needed blends and sell it to the farmers.
Of course our test pilot plant has shown it’s capable of producing traditional KCl so that’s another potential market for us.
Rick: How competitive are you against Russian and Canadian imports?
Cris: When you are looking at the financial data a key number is the sales price per tonne. A British group specializing in potash market research came up with an average price for KCl at $511 freight on board (FOB) Vancouver.
If $511 is the FOB Vancouver potash price, then the potash price in the Brazilian Cerrado, where we are, is $150 more, given your transportation costs. That’s the price that Verde Potash is …..
Rick: Competing against.
Cris: Yes, we’re competing against the $500. Our location is a phenomenal advantage if the industry decides to increase production to record levels.
Rick: You’re not competing against a $500 per tonne potash price. You’re competing against a $650 potash price and of course you’ve got enormous advantages in timed release, possible local KCl production and the blenders will not have all their money tied up in inventory for 160 days, at an exorbitant financing cost, when dealing with Verde Potash.
And of course Verde has its own potential phosphate and limestone supply, also necessary additions to Brazilian applied fertilizers.
Cris: Phosphate is a key component of agricultural fertilizer formulations and Brazil is the world’s second largest importer. We should have some news concerning our phosphate project early in the New Year.
Limestone is another important fertilizer for Brazilian farmers, especially ones in the Cerrado region. In addition to Brazilian soils being poor in nutrients, they are also very acidic. Limestone helps to neutralize soil pH levels to optimize the potential of planted crops. Farmers need to lay down a significant amount of limestone in order to reduce levels of acidity in the soil and to foster productive land. Sometimes the amount of limestone necessary to correct the problem can rival the amount of fertilizer. Brazil consumed approximately 21 million tonnes of limestone last year, a number that is rapidly increasing due to high agricultural demand and cement production.
We should receive results from our limestone project drilling by the end of the year.
Rick: Compare Verde’s open pit operation to conventional potash mining.
Cris: When you look at a conventional potash operation, either an underground mine or solution mining, most people focus on the capital cost as the key hurdle. But where that number really impacts the profitability of the company is on the scale up. That’s the key term and it’s something that’s not normally discussed by the industry. For example, Mosaic has taken over ten years to ramp up their initial solution mine production to reach full forecast production. The other big hurdle you have from convention mines is scalability. The diameter of your shaft will dictate how much material you are going to be able to dig out or, if solution mining, how much liquid you are going to be able to pump.
When we examine Verde Potash’s project, we start seeing what a great opportunity it is in addition to all those marketing aspects which we discussed. In terms of scalability, our potash deposit is right at surface. We have over a billion tonnes of potash, or potash rock at around a 9% grade, that starts at surface and extends down to between 40-50 meters.
You just scoop it out and that’s your ore. Strip mining has a much cheaper cost then underground mining, but equally as important, it’s easy and cheap to scale up. You can start small or you can start big. By starting small, with a modest capital cost, current investors are not too badly diluted. You can grow your business very aggressively with cash flow and debt.
Ramp up for a conventional operation can take anywhere from six years and up. In Verde’s case ramp up is pretty much nonexistent. Equipment manufacturers have indicated that within 30 days we would be operating within a minimum of 95% of the forecast production rate.
If you look at the financial models from conventional operations you will see a 20%-30% production start-up and slow growth from there. For Verde, by the end of the second month, we can be running at 100% production capacity.
Rick: Thank you Cris, it’s been a pleasure.
Cris: Thank you, it is my pleasure.
Richard (Rick) Mills
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