More DD data and thoughts -
Yesterday Pr, conversation with management, here are some more thoughts:
- One of the KEY risks in Verde has been, in our eyes, Rampup and acceptance by Farmers. While the product's beneficial effects are proven academically, it is a WHOLE different game penetrating the market and CONVINCING farmers to change proven methods - THAT process is Slow and frustrating. This is why we have been carefully looking for proof of acceptance: will farmers realize the benefits (one-time application => less expansive/effort) + less chlorine + more micronutrient are much greater compared to the same cost as imported Potash?
- Today we learned that the company is Fully soled out to the end of the growing season as in 24/7 production, and will deliver 40 tonnes - 10X 2017 quantities.
- It would seem demand is over what the company can produce and they are turning customers away.
- Here is an important bit we dug up: is seems a significant part of 2017 farmers who ordered K Forte (=Super Greensand) Reordered, with some of them ordering as much as 10X their initial order. This spells retention and expansion.
- for 2019, the company thinks about 200K Tonne with a facility expansion of to 800K pa (well above our forecast).
- We like the fact that so far, Cristiano, the owner, CEO, showed great skill in completing the expansion plans underbudget and in time. We are sure the fact that he is such a significant owner with so much skin in the game ensures he will continue to watch expenses and investment like a hawk.
- two factors will impact the ability of the company to make money - price of potash and cost of buildout. The third, Demand, seems, as this point in time, to be assured.
-Potash prices are held down artificially by Russia. If ever they were to jump up to their higher range, this will all but insures Verde makes a lot more money.
- This is a very simple business (if demand exists): scoop up well exposed available dirt. Grind it. bag it. ship it. collect money. rinse. repeat. It's easy to make lots of money operating this type of business. Its hard to compete with the availability and accessibility (unless tomorrow someone finds other similar resources. Harvest minerals (LON) is a competitor, but it is not the same quality materials, and the management is not local (nor friendly to shareholders). We are not concerned about competition at this point in time / Prices (0.5-0.7$ / ~30 mill market cap).
- Cristiano (CEO/Owner) told us his intention is once the company is profitable, he intends to send back most of the profits to shareholders as Dividends. This remains to be seen, but we think there is ground to plan for this investment to be seen as a dividend growth holding, bought very very cheap and very very early.
- Cristiano continues to accept payment in stock rather than cash - signifying deep belief in the prospects. Stock outstanding remains in a very low 40-ish million, even after complex history and a long path taken to get here (meaning investors still hold a significant claim on future cash flows).
Summary:
Today we think about 40% of the risk has just evaporated from the thesis and even after 20% run-up to 0.77$, July 2014 prices (on the back of a steady drop in price over the recent weeks) - the company is cheap relative to the potential. Management has proven itself to be highly competent and aligned with shareholders. Most importantly, the market agrees with the marketing/sales claims. We like the fact that there is little to no chatter about the name.
Yesterday, about 10 percent of the market cap exchanged hands, which we think shows that traders who do not understand the business or are very short-term in their time horizon provide liquidity for sellers who want to join the ride just on time. We continue to use that liquidity to increase our position at what we see as compelling valuations.
DeepDive.
