Verde Agritech Ltd (NPK)

[value1008]

Two interesting articles on NPK yesterday late in day.... Kip Keen, author of the first one, has reported in-depth on NPK before. He gives a balanced view here from the two analysts.

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http://www.mineweb.com/mineweb/view/mineweb/en/page72102?oid=144534&sn=Detail&pid=102055

In major course change Verde goes all-in on conventional potash
Verde Potash looks to take on conventional potash giants in Brazil with its Cerrado Verde project.

Author: Kip Keen
Posted: Wednesday , 01 Feb 2012

For now, Verde Potash (TSX-V: NPK), long a junior explorer bent on bringing to market an unconventional potash product from its atypical potash deposit in Brazil, is going mainstream.

Until today, the course Verde had plotted was twofold. First, it was to develop a slow-release potash product, "ThermoPotash", at its Cerrado Verde project for the Brazilian fertilizer market. Then, based on a new technique called the "Cambridge Process", Verde was to try to milk conventional potash from its unusual source of potassium, converting water insoluble potassium silicate in its Cerrado Verde deposit into one of the main potash fertilizers sold and shipped around the world: potassium chloride or KCl.

Now consider those phases reversed. On Tuesday Verde released the results of a scoping study detailing the outlines of a conventional potash producing operation based on successful pilot-testing of the Cambridge process on a non-industrial scale. News of the big change in direction for Verde came in a short note near the end of the press release about the scoping study results. Verde stated it was putting development of its heretofore chief program, ThermoPotash, on hold in favour of going after conventional potash.

"In view of the results of the PEA (scoping study) for KCl, Verde intends to focus its efforts on a KCl product and has therefore decided to temporarily suspend its ongoing feasibility study work on ThermoPotash," Verde said.

While Verde did not expand much on the rationale for shelving ThermoPotash for the time being - a major shift in strategy for the junior - the reasoning appears to be a case of pursuing the path of least resistance and, arguably, maximum reward. With ThermoPotash Verde faces the task of pushing an unfamiliar fertilizer product on Brazilian farmers. But with conventional KCl - a product used by the million of tonnes per year in Brazil - no such marketing dilemma would come to bear. It would only be a question of beating or meeting the competition - chiefly Belarussian and Canadian producers - on price.

In its scoping study Verde proposes to ramp up a KCl operation from 600,000 tonnes to 3 million tonnes per year (and also look at 1 million and 4 million tonne per year scenarios) at a 30-year mine that would initially cost $654 million to build. According to Verde the first 600,000 tonne stage could come online in 2015. Then the operation would jump to 1.6 million tonnes per year in 2019 and then to 3 million tonne per year in 2024, with the final capital cost tally coming in at $2.4 billion.

But can it make money as modeled? Mackie Research analyst Jaret Anderson last told Mineweb that he was intent on $300 per tonne operating costs as the magic number for Verde, what he reckons as the cost of producing and getting conventional potash to Brazil from typical producers, such as those in Canada. According to Verde's scoping study, it has that number beat.

Verde says it can produce KCl at an operating cost of $274 per tonne during the first five years of operation. Life of mine, the figure climbs somewhat to $292 per tonne. All told, assuming granular potash goes for $540 per tonne, Verde estimates a 24 percent after-tax internal rate of return and a $2.3 billion net present value, also after-tax and discounted at ten percent, on the KCl project.

For Anderson, who characterized the scoping study as positive in a note to clients, the impact was clear. He called it a "major de-risking event for NPK (Verde)."

In building his thesis Anderson noted on Tuesday that Verde's estimated capital costs per tonne of potash produced were in line with development projects in Saskatchewan - the centre of the potash universe: $1,081 per tonne in Saskatchewan versus $1,090 per tonne Verde gets based on a 600,000 tonne per year project.

As for Verde's operating costs Anderson was particularly bullish: "These opex numbers would appear to make Verde the lowest cost producer on a delivered cost basis to the Cerrado region of Brazil." To emphasize just what kind of market Verde might access, Anderson then noted, "Recall that Brazil was the largest importer of potash globally in 2011 at 7.5 million tonnes."

Given the scoping study findings, Anderson suggests Verde will be re-rated on the upside, implying "more value for NPK (Verde) from the Cambridge process than we had been baking into our $12.00/share target previously.

"We will be reviewing our valuation, but at first glance, we expect the Street to begin valuing NPK on the basis of its Cambridge process, as opposed to just the value of the ThermoPotash process."

Octagon Capital analyst Max Vichniakov, however, was less rosy about the scoping study's impact. Vichniakov remained neutral on news of the scoping study, and changed his buy rating on Verde to a speculative buy ($10 target) based on what he argued was increased risk for the junior now that ThermoPotash - a more advanced project - had been put on the back burner.

Notable perhaps, Verde's shareprice dropped heavily on news of the scoping study - down 19 percent to C$6.90 as of presstime - after a solid run-up in recent weeks. In an email to Mineweb Tuesday afternoon Vichniakov said that after some anticipation for positive news there might have been "disappointment in fact that (Verde) is re-focusing its strategy on KCI production and away from its previous strategy on ThermoPotash."

Vichniakov also argued that the change in course "basically questions the whole viability of the ThermoPotash as a real commercial-level revenue generating opportunity for Verde going forward."

Verde's KCl testing is still in the early stages, Vichniakov pointed out, "and all questions regarding costs of production and scalability of the process still remain. So, while the company announced (a scoping study) on a KCI production scenario, we think the risks actually increased at this point."

But Verde's President and CEO Cristiano Veloso does not see it that way. In answer to an emailed question about divergent analyst views on the impact of the scoping study, Veloso said: "It is a choice between two excellent projects." He continued, saying, "KCl is a better option for our shareholders as it is a larger project that best allows us to monetize our large, at surface potash deposit in Minas Gerais. We still intend to develop our ThermoPotash project, but will do so once we have brought our first 600k tonnes of KCl capacity."

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http://www.mining.com/2012/01/31/black-day-for-verde-as-investors-see-red-over-brazil-potash-project-preliminary-economic-assessment/
Black day for Verde as investors see red over Brazil potash project preliminary economic assessment
Frik Els | January 31, 2012

Verde Potash shares fell $1.66 or 19.4% to $6.90 on Tuesday, recovering from even steeper losses earlier in the day, after the company released a preliminary economic assessment report for its Brazil project.

The company, founded as Amazon Mining in 2005, reported capex of US$654 million and opex of US$263 per tonne for 600,000 tonnes of the soil nutrient a year during its Cerrado Verde project’s first five years. Starting in 2015 production is expected to be ramped up to 3 million tonnes annually by 2024 at a cost of $291/tonne.

Investors didn’t like the numbers deeming them on expensive side and beat the stock down 20% on massive volumes of almost 9 times the daily average. Verde is worth $223 million on the venture exchange in Toronto.

Cristiano Veloso, Verde CEO defended the report saying: “We believe that the estimated operating expenses presented in the PEA are competitive with the world’s lowest cost potash producers for buyers in Brazil when importation and distribution costs are included.”

The fertilizer market – worth some $150 billion a year – seems to be heading for an uncertain 2012. Current pricing is around the $500/tonne level after strong gains the past two years. Prices ran up from $100/tonne in 2004 to almost $900/tonne before the 2008 recession when the boom went bust and prices rapidly fell back to $350/tonne.

Earlier in January the Globe & Mail quoted Canada’s National Bank Financial analyst Robert B. Winslow as forecasting that global potash supply will increase more than demand through 2020, which will put a damper on “medium-term” potash prices.