Description

Disclosure: Small-cap, jurisdiction risk (Brazil), commodities (fertilizers) – Currently fertilizers are at peak prices => The write-up is mostly suited for small funds and PA's.

*The functional currency is CAD and all amounts are in CAD unless explicitly mentioned. 

We are long Verde Agritech (NPK.TO), a Brazilian producer of potash, which serves mostly internal demand (95% of Potash is imported in Brazil). Verde produces mostly Gluconite which contains 10% K2O (Potassium Oxide) as opposed to the 60% grade of traditional potash. The products that Verde sells are substantially better than traditional potash, as it does not contain chloride or salts (which kill all the microorganisms in the soil), and some of the products come with a combination of extra nutrients. This has enabled Verde to expand rapidly in the last several years, going from producing around 100K tons in 2020, to more than 440k tons in 2021, and production is estimated to be 1M tons in 2022. The only drawback is that farmers require more product for the same quantity of K2O, to be precise they need 6 times more of Verde’s product, given the 10% grade. As a result, Verde’s price before discounts is ⅙ that of traditional Potash per ton of Verde’s product.

The company is already profitable, has very low CAPEX needs that do not require external funding, and is managed by an intelligent fanatic. Cristiano Veloso, Verde’s CEO, has transitioned the company’s focus from a failed gold deposit project into potentially the largest potash producer in Brazil.  Cristiano owns almost 20% of the company. The shares trade at $6,93 CAD which corresponds to a 7,9x 2022 (4x/2023) earnings multiple if we are to take the latest company’s guidance (Mkt cap CAD 345 million). The guidance assumes a potash price of $500 USD per ton, which is less than half of the current market price, and assumes 1m tons of production in 2022. We know that the company has the potential to produce 35% more than the given guidance in 2022. We understand that currently, we are at peak potash prices, all our assumptions are between potash prices of $368.65 USD (PFS) and $500.00 USD (company guidance). For a starter position, we are comfortable with the risk.

Important to mention Brazil has not had any problem importing potash, in fact, May 2022 was a record month in terms of imported tons in Brazil, and this includes imports directly from Russia, so Verde is not selling as a result of scarcity, the exact opposite is happening.

The company has had minimal dilution, given Cristiano’s reluctance to issue shares, which can be seen throughout the company’s history. Verde is not an exploration company, Verde is already producing and cash flow positive, with excess cash/profits enabling the company to start distributing earnings to shareholders.  From the guided earnings in 2022 EPS 0,87 CAD, the company has announced $0,2 CAD per share to be distributed to shareholders, via dividends, buybacks, or a combination of both.

If the company manages to keep executing, Verde can be producing yearly cash flow equal to the current market cap as early as 2024/2025. We are aware the blue-sky scenario is too optimistic, so we are focusing on the immediate years for a more grounded perspective.

Fertilizer Overview:

All the way back in the year 1798, respected English Economist Thomas Robert Malthus made a famous prediction. He believed that “short-term gains in living standards would inevitably be undermined as human population growth outstripped food production, and thereby drive living standards back toward subsistence. We were, he argued, condemned by the tendency of population to grow geometrically while food production would increase only arithmetically.”

Thomas Robert Malthus would have likely already been proven right, had it not been for the dramatic advances in agritech. One of the oldest and most significant agritech technologies today is fertilizer. The invention of synthetic N fertilizer occurred in 1903 and its commercialization began after the invention of the Haber-Bosch Process in 1910. Ever since then, the use of synthetic fertilizers has been substantially increasing, likely helping to feed around half of the world's population today (extrapolating previous trends). In other words, without synthetic fertilizer, Planet Earth’s population would likely be constrained today to about 4 billion people instead of the current roughly 7.9 billion people.

Today’s fertilizers are more complex and effective than those of the early 20th century. Yet, even today, fertilizers only have three primary components: Nitrogen (N), Phosphorous (P), and Potassium (K). Nitrogen is responsible for “overall growth, color, photosynthesis and seed production”, phosphorus for “photosynthesis and root development”, and potassium for “building protein, photosynthesis, traffic tolerance and disease prevention.” In combination, these elements have been crucial in the continuous increase of crop yields over decades.

Potash Overview:

Potash (what Verde produces) is the general term used to describe potassium-based fertilizers (the K element of NPK). Potash can come in various forms, yet the primary form is KCL. KCL (potash) has a 60% grade of K20.

In 2020, worldwide potash production was about 70M tons or 43M K2O tons equivalent (60% grade). Production is highly concentrated with the top 6 players accounting for over 90% of the global market: Canada (primarily Nutrien) has a 32.6% market share, Russia (primarily Uralkali) a 17.7% market share, Belarus (primarily Belaruskali) a 17.0% market share, China (primarily Qinghai Salt Lake Potash) an 11.6% market share, Germany (primarily K+S) a 7.0% market share, and Israel (primarily Israel Chemicals) a 4.7% market share.

Brazil is the 6th largest overall agricultural producer in the world and the largest coffee producer, 2nd largest soybean producer, 5th largest cotton producer, 2nd largest cassava producer, and 3rd largest corn producer; all of which are crops that require significant amounts of potash. Despite this, Brazil currently has almost no domestic potash producers - the country imports 95% of its potash. Brazil only has two significant potash producers. The first is an old conventional potash mine that was built by Vale in the 1970s and is today owned by Mosaic. Our understanding from Cristiano Veloso (Verde’s CEO) is that the mine’s current capacity is about 400k tons per year, which will shortly be doubled by Mosaic for a few years before becoming fully depleted. The second is Verde’s non-conventional potash mine, which likely has enough potash to supply all of Brazil’s demand for 60 years and can rapidly scale up production with low CAPEX.

Verde Agritech History & Management:

In 2008, Verde Agritech (then known as Amazon Mining Co.) went public on the Toronto Venture Exchange with various gold and base metal projects in Brazil. The company raised over $7M to finance the exploration of the projects.

The company is founded by Cristiano Veloso, who is still the CEO of the company. At the time of the Toronto Venture Exchange listing, Cristiano, 26 at the time, was the youngest ever person to list a company on the Toronto Venture Exchange. Through Cristiano’s deep roots in Brazil’s agricultural sector, he was aware of an 80km belt of Potassium Silicon rocks (this material is called “Glauconite”) in the state of Minas Gerais that had originally been found and studied by various organizations in the 1970s and 1980s as a potential potash resource. This resource was deemed as uncommercial by the Brazilian government, yet that was at a time when potash prices were around $100/ton and technology was far inferior to that which exists today. In 2008, however, potash prices were at $1000/ton (due to a commodity super cycle), therefore Cristiano decided to geologically explore the area using the previously raised $7M+. The exploration results suggested that there were billions of tons of rock containing 8-11% K2O (basic form of potassium) concentrations (compared to traditional potash that has a 60% K2O concentration).

Verde then decided to revisit a technology that the Brazilian government had come up with (where the rock would be heated in a thermal kiln to make the glauconite less insoluble, so that it could be better mixed with water to produce potash). Using this technology, Verde’s glauconite would be a slow-releasing potash supplement, unable to compete with traditional potash (due to high costs and inferior effectiveness levels). Yet, the company struggled to produce the proper agronomic studies to prove the effectiveness of its potash supplement. The company then decided to shift its focus, and instead partner with Cambridge professor Derek Fray to find a process to convert glauconite into potassium chloride. They were successful in inventing such a process and proceeded on to do a definitive feasibility study. This study, however, ended up being unbankable (due to both potash prices sinking to $300 compared to a $400+ production cost and equipment providers refusing to provide performance guarantees).

The company then revisited the thermal kiln method but eventually discovered that simply grounding the potassium silicon to less than 0.7 millimeters and spreading it on-farm plots releases a meaningful amount of potassium into the soil (certain plant root secretion chemicals interacting with soil microorganisms to make the potassium from the glauconite available to the soil). This production method is extremely low-cost: only several tens of dollars per ton. The following two diagrams demonstrate Verde’s cheap and simple glauconite-based potash mine vs. Nutrien’s potash production process:

Glauconite is actually not that rare. The following diagram shows where glauconite is found across the world:

Glauconite actually used to be widely used as a fertilizer. For example, during the 1700s and 1800s, naturally occurring glauconite in New Jersey was spread over farmers’ fields. With the advent of widespread synthetic fertilizer in the early 1900s, however, nearly all farmers switched to potassium chloride.

To understand why, we need to examine the effectiveness of each of these potash sources. Traditional Potash (potassium chloride) contains 60% K2O, while almost all glauconite globally contains only between 4-8% K2O. This effectively means that a farmer would need to apply between 20-60x the amount of glauconite to reach the same level as applying 1 unit of potassium chloride fertilizer. This is, of course, a huge amount of additional labor for the farmer: enough to make buying such glauconite a non-option for the farmer. Shipping is also expensive: glauconite providers need to ship 7.5-15x the amount of glauconite for every one ton of traditional potassium chloride fertilizer that is shipped. And, to remain competitive, these 7.5-15 tons need to be sold for a lower price than 1 ton of potassium chloride-based potash (a lower price to compensate the farmer for the very high amount of additional labor needed to distribute low-K2O potash on fields).

Verde’s potash mine is unique, in that it is the only mine to have been found with a relatively high concentration of K2O – about 10% on average. This does mean that farmers need to spread 6x as much of Verde’s potash (called Super Greensand or K Forte) on their fields as they would for traditional potassium chloride-based fertilizer. However, K Forte is superior to traditional potassium chloride potash in several ways. First, because of glauconite’s much lower solubility in water than traditional potassium chloride-based potash, the traditional potash is much more likely to experience chemical runoff, which is especially problematic in Brazil due to the combination of torrential rains and acidic soils. As a result, although farmers need to apply six times as much of Verde’s potash as traditional potash (because of Verde’s 10% K2O concentration compared to traditional potash’s 60% concentration), farmers in Brazil may only need to apply Verde’s potash once for every 2-4 times (up to 2x for Sugar Cane, up to 3x for Soybeans/Corn, and up to 4x for Coffee) that they would need to apply traditional potash to their fields (Verde 2018 Investor Presentation), which is a major benefit. As an example, an international corporate client who farms in Brazil mentioned: “just the fact that the farmer is reducing the risk of an accident for him and the plant is already priceless. If there is an accident, it is a nightmare (having to redo certifications, losing part of the labor force temporarily). Some of the other farmers are more focused on buying the lowest-cost potash. Verde is also prepared to meet these farmers’ needs, as the company is the lowest cost provider of potash across nearly all of Brazil.

Another important advantage is that Verde’s Super Greensand is considered organic, whereas traditional potassium chloride fertilizer is not. This is significant because consumers’ willingness to spend for organic produce is typically substantially higher than for non-organic produce. Furthermore, K Forte contains 4 vital plant nutrients: K (Potassium), Si (Silicon, which increases plants’ resistance to pests, diseases, and abiotic stress), Mg (Magnesium), and Mn (Manganese), while KCl fertilizer only contains K, has a much better water holding capacity (crops need to be watered less frequently), and helps soil microorganisms to thrive (leads to healthy soil, unlike KCl, which kills soil microorganisms). It is also worth noting that nearly all of the farmers in Brazil spread lime on their fields (necessary because of the low levels of pH, and acidity of Brazilian soils) and can use the same equipment that they use to spread lime to spread K Forte. Therefore, it is arguable that, despite farmers needing to apply 6 times the amount of K Forte as KCl potash, K Forte offers the stronger value proposition (assuming 6 tons of K Forte are being sold for a price equal to one ton of KCl, as has been the case). And, despite, Verde needing to mine, ship, and sell six tons of product for the same price as every one ton of traditional KCl potash, the company is still the lowest cost producer of potash for almost all of Brazil’s farmers (due to being nearly the only Brazilian domestic potash producer – shorter shipping distances, and to Verde’s open-pit mining instead of the 2km underground mining of traditional potash):

(2021 Verde Investor Presentation Slide 26)

K-Forte was academically proven to be a strong substitute for regular potash. Yet, it is one thing proving these results in a lab, and a completely different matter convincing farmers, who have been using traditional potash for decades, to switch to Verde’s offerings. At first, this was challenging, with the company supplying only 28 clients and only 29.17% of clients ordering repeat purchases in 2018. This was mainly due to Verde’s poor customer relationship management, as well as the company’s poor ability to educate farmers about K Forte (the Brazilian name for Super Greensand). Both of these areas were greatly revamped (primarily with the help of Salesforce CRM) and in 2020 the company served 787 clients with a repeat order rate of 65.07% (the company sold to 1,352 clients in 2021). It is important to mention that a non-repeat order does not necessarily mean that the farmer was not satisfied with Verde’s product. A non-repeat order can also happen due to soil nutrients being adequate for next season’s productivity expectation, a natural peculiarity of a particular crop that leads to different fertilization requirements, crop growth that does not require annual fertilizer, and adverse climate impact, etc. Therefore, a 65% repeat order rate is high. Tons of K Forte sold increased from 119,000 in 2018 to 400,000 tons in 2021, and the sales CAGR from 2021-2030 is expected to be even more significant.

Buyers of Verde’s products have two delivery options. With CIF Verde transports the product to the farmer, whereas, with FOB farmers arrange the delivery themselves. Verde gets to realize the delivery fee charged for CIF clients as revenue, so for an equivalent tonnage sold Verde would have a higher revenue for a higher CIF mix. However, whether the farmers choose FOB vs. CIF does not affect Verde’s profitability, which is more important. This is because the marginal revenue from CIF over FOB is meant to exactly offset the marginal shipping cost for Verde. This can be seen in the table below: CIF Price - Freight = FOB Price for both regions. 

(Slide 25 of Verde’s 2022 Annual Presentation)

Key Management:

● Cristiano Veloso (CEO) –  Key to the company’s vision, mission, and execution. Already largely discussed previously. He currently owns 19.3% of the company and has about 1.3M options outstanding. 

● Alysson Paulinelli (Director) – “Mr. Paolinelli is the President of the Brazilian Association of Corn Producers (“Abramilho”). Mr. Paolinelli held positions such as the Brazilian Minister of Agriculture, President of the National Confederation of Agriculture, President of Minas Gerais State Bank, Congressman, Secretary of Agriculture for Minas Gerais State, and Professor and Dean of Lavras University. In 2006 he was awarded the World Food Prize. Mr. Paolinelli has been nominated for the 2021 Nobel Peace Prize.” He owns 0.14% of the company and has 226,538 options outstanding.

Verde’s Operations Today:

Today, Verde Agritech operates in an environment that is characterized by not only high potash prices but also by high oil prices (a key cost – fuel used in the transportation of potash). While our thesis does not rely on today’s unsustainably high potash prices, the current operating environment is a nice temporary tailwind for Verde. Although rising energy costs, trade duties, and supply chain disruptions are all likely contributing somewhat to high potash prices, we believe that the primary driving factor for higher potash prices today is the 2022 Russian invasion of Ukraine. Although fertilizers are not part of the sanctions on Russia and Belarus (40% of world Potash production), the difficulty these countries are currently experiencing in their shipping ports and in getting components for mining extraction is severely affecting their ability to produce potash. An example of this was highlighted by Nutrien’s Chief Economist & Head of Market Research - Jason Newton, in Nutrien’s latest conference call (Page 13):

“In terms of quantifying the impact, if we compare to the sort of base operational capability in Belarus, around 13 million tons, operational capability in Russia, around 15 million tons. We think Belarusian supplies will be down around 6 million to 8 million tons this year and Russia in the range of 2 million to 6 million tons this year. Going forward, it will take some time to rebuild those export capabilities and we believe Belarus will continue to be most restricted going forward as they have 14 the need to rebuild or build port capacity, which takes time, especially in the face of sanctions. And then, we also know that that region makes up about 60% to 70% of the capacity additions that we expect to come forward over the next five years. And we believe those will also be delayed going forward. So, in any case, we have a tighter supply-demand outlook going forward than we would have previously.”

Additionally, the European Union’s 6th round of sanctions is now also targeting companies such as Belaruskali, Belarus’s main potash producer, and its export arm, Belarusian Potash Co.

So, while this potash environment is temporary, the market is unlikely to return to normality for at least a few years. Verde is utilizing this elevated potash price environment to temporarily increase the company’s discounts to clients (to further undercut competitors in an attempt to convince farmers to switch to Verde’s offerings). Verde gives clients a variety of discounts, typically including a 10-30% discount on the price of conventional potash for first-time buyers and a 5-15% discount (compared to the price of conventional potash) to repeat purchases.

Verde currently sells two types of fertilizers and one add-on product that can be applied to either of the two base products. The first is K Forte. K Forte is comparable to traditional potash and is priced at 1/6 the price of traditional potash (minus some discounts that the farmers receive, which were mentioned earlier.) The second type of fertilizer is BAKS. The price of BAKS to farmers is 30% more expensive than K Forte, yet the additional costs to produce it are almost negligible (high incremental gross profit margins). Currently, BAKS makes up only 10% of total sales, however, this is not because of a lack of demand from farmers. Quite the contrary, BAKS has been sold out ever since the product was launched. The true reason for BAKS currently being only 10% of sales is that Verde does not currently have the capacity to produce more than this amount of BAKS. However, as the company grows production in the coming years, this constraint will be eliminated. BAKS is a strong value proposition for farmers, as it allows the farmer to buy S (Sulfur-based fertilizer is widely applied in Brazil and is especially important there as the soils there tend to be sulfur-deficient) for crops plus two other plant nutrients of the farmer’s choice at a cheaper price than it would cost the farmer to just buy Sulfur:

Verde’s add-on product is called Bio-Revolution. The product currently costs an additional $10/ton for a farmer and has a marginal cost to Verde of $0.80 per ton. Cristiano believes that the price of Bio-Revolution could be raised to $20-$25 in the future.. This is because Verde’s current studies demonstrate that applying Bio-Revolution leads to about a 50% increase in crop yields, which is massive. In contrast, the cost of potash is relatively small to the farmer (typically 20 to 30% of total costs). Therefore, even at a $25 price for Bio-Revolution, the cost-benefit proposition to the farmer is incredibly strong.

Verde has gone from serving 28 clients in 2017 to 136 in 2018, 355 in 2019, 787 in 2020, and 1,352 in 2021 (Page 5 of May 2022 Investor’s Report).

Outlook for Verde:

Verde’s management recently upgraded the company’s 2022 forecast:

It is worth noting that Verde pre-contracts the majority of its sales for market prices (the company is currently completely sold out of capacity until August), before actually selling that potash several months to one year later. This means that Verde will have a mismatch between the realized revenue per ton sold in a given quarter and the potash average market price of the period.  Q1-2022 is an example of the inflection point Verde just crossed, Q1 had the highest oil prices in a decade, which is a direct cost and  Verde still could not benefit from the record potash prices printed in the quarter. Verde’s realized revenue per ton was USD $480 Potash equivalent, way lower than the average of USD$750 throughout the quarter. Despite that, Verde recorded almost CAD $4M in EBITDA in Q1 alone.

2023 guidance was also raised from a 1.4M tons sales volume to a 2M tons sales volume. We believe that even the company’s recently updated sales volume guidance for 2022 and 2023 may prove to be far too conservative. The company currently holds all of the necessary permits to mine 2,833,800 tons per year (Q1 2022 Investor Presentation Slide 27) and currently has an annual production capacity of 600,000 tons (from Plant 1). Management is guiding for a total capacity of 1.8M tons by August 2022 (from Plant 2) and 3M tons by Q4 (from the expansion of Plant 2). This indicates that production could be up to 1.35M tons in 2022 (0.5*600k+0.16667*1.8M+0.25*3M) and 3,000,000 tons in 2023 (assuming that the appropriate permits are received). This is considerable upside from management’s guidance. 

Assuming that in 2023 Verde’s potash is sold at the same guided price as in 2022 (USD $500) and that Verde sells 2M tons in 2023, Verde’s EPS in 2023 would be $1.74CAD ($0.87*2). This is about $90M CAD ($52.7M USD) of Net Income, substantially more than the $70M CAD needed to fund Plant 3’s expansion. So Plant 3, which has a 10M ton capacity and is set to be constructed by the end of 2023, can be entirely funded from internal cash flows. 

In 2026, Plant 4 will be completed and the company will have a production capacity of 23 Million tons and be able to generate $800M+ of annual FCF (using the PFS assumptions). The CAPEX needed for Plant 4 is USD $129,8 Million (CAD $162,5 Million).  Verde will have a production capacity of 13Mtpy from 2024, using the PFS assumptions of a $368.65 USD CIF Brazil potash price, annual free cash flows can easily be over $500M CAD. Hence, only one year of production of 13Mtpy produces multiple times the CAPEX needed for Plant 4.

In 2030, Plant 5 will be completed and the company will have a total production capacity of 50Mtpy, using the PFS assumptions, will be able to generate $1.4B+ of annual FCF (with all plants having the technology to produce BAKS, except for Plant 2 and about most of Plant 1). The cost of CAPEX needed for this final expansion is USD $554M (CAD 692M). This large investment is predominantly for a railway that Verde would need to build to transport quantities of potash above 23Mtpy. If Verde is producing 23Mtpy, once again assuming a Potash Price of $368.65, Verde will be able to fund this final expansion exclusively with internal cash flow.

We understand that these projections of future free cash flow are extremely high compared to the current market cap. However, given the already excellent execution demonstrated by Cristiano, we do believe that these high levels of sales and free cash flow can materialize. Any delay in licenses, permits, or the construction and operation of the plants would likely cause us to revise this estimate.

It is also worth noting that the company is planning for a NASDAQ or NYSE listing for Q3 of 2022.

Financials:

The business has seasonality due to the Brazilian raining season (November to March), making Q2-Q3 the strongest quarters.

Gross margins have been consistently above 75% over the last quarters. In terms of costs, distribution costs have notably increased because of the higher oil price and the company selling to regions outside Mina Gerais, in addition, the company is investing heavily in marketing and sales agents, these costs should be expected to continue given the expected ramp up in sales with the opening of plant 2 in August.  despite those increased costs and the fact that the company realized potash price was $480 vs the average potash price of the period of $750 USD the company managed to show a meaningful profitable Q1, which indicates a much better result than guidance in Q2 and possibly Q3.

Verde has reached the inflection point of profitability and is beginning to experience substantial cash flow generation through economies of scale. For Q1 2022, the company had $3.284M CAD Operating Net Cash Flow compared to $3.435M CAD of CAPEX (nearly all growth CAPEX).

Verde Agritech’s financial position is strong. The company has transitioned from collateralizing receivables to securing financing backed by future sales contracts with major banks (Santander Bank and Bank of Brazil). Currently, the company’s weighted average loan rate is approximately 12%, which is good compared to the current 12-12.5% paid by the Brazilian government bond. 

As of Q1 2022, Verde’s total debt stands at just over $9M CAD (all of which is short-term debt) and net debt at just under $4.5M CAD. This is easily manageable and less than Verde is expected to earn in Q2 2022 alone. Most of this debt is for working capital. The company has $17.618M CAD of receivables compared to $10.071M CAD of payables. Verde’s management is confident enough in the company’s forecasts and current financial position to have recently committed to returning at least $10M CAD of capital to shareholders for FY2022.

The company does occasionally (as seen by the receivables) give credit to farmers to finance their purchases of Verde’s offerings. The duration of the loan can be up to 12 months but is typically between 48-60 days. The interest rates charged are the market rates and the percentage of uncollected payments is less than 0.1%. So, the company is extremely selective when deciding which farmers to provide financing to.

An important point is that previously, Verde’s financing was only able to be secured by invoice discounting or guaranteed by capital goods. Today Verde’s future sales contracts are accepted as debt collateral. This is because Banco do Brasil has recently granted Verde a line of credit through the Agribusiness Certificate of Credit Rights program. This is an instrument used by established Brazilian agricultural businesses, which is a freely traded credit bond that represents expected cash payments originating from farmers and third parties. It can only be used in the agricultural sector and is granted only to producers of broadly traded and accepted commodities and goods. Verde’s loan is for a 36-month term with an interest rate of CDI (based on SELIC, the Brazilian Central Bank overnight rate) + 2.92% per annum, with a 6 months grace period. The first loan to Verde was for R$10M.

Valuation and Conclusion:

We view long-term CFR potash prices of $250-$600 USD as somewhat feasible but believe that a $350-$400 USD CFR price is most likely (aligned to $368.65 USD used in the PFS). 

For the next assumptions, we are using potash prices of $ 500 USD => With the shares trading at $6,9 CAD, Verde is trading at 7.9x 2022 earnings and 4x 2023 earnings and the blue-sky scenario with plant 3 could be trading at even 1x 2024 p/e.  Without counting plant 4 and plant 5, as the cash flow generation can become silly, we are comfortable initiating a starter position at current prices given the margin of safety, the de-risk the business model has had ( Verde still of course has a lot to prove at higher levels of production), the enormous of internal demand that even with tens of new mines discovered will be enough for Verde to supply Brazil potash needs for decades.

Despite the risks mentioned below and with the awareness that the company needs to prove the sustainability of the business model at a much more normalized potash price, we think the risk-reward is extremely attractive at the current valuation. With Potash prices substantially above the ones provided in the guidance, the potential of bio-revolution, the imminent opening of plant 2, a management team completely aligned with shareholders and years of high growth ahead, we believe the margin of safety is more than enough.

Important to mention that unexpected negative news with the opening of the plant, feedback from farmers that Verde’s products do not offer the benefits promised would make us reassess the thesis.

Optionality - Licensing:

Verde has a variety of proprietary technologies and patents. The company has been granted one patent and has another eight patents pending. These include patents relating to the company’s Cambridge Tech, 3D Alliance, MicroS Technology, N Keeper, and Bio Revolution Technology. The company is the first to commercialize a fertilizer with added microorganisms. Although the company is not currently thinking about licensing any of these technologies, this is a form of optionality that exists for the distant future. 

Risks:

● Lower potash prices in Brazil would significantly and adversely affect Verde Agritech’s free cash flows and fair value.  

● Oil is a key input to the transportation of Verde’s potash. Therefore, higher oil prices translate to significantly higher transport costs for Verde and would, ceteris paribus, decrease Verde’s margins significantly. This is unlikely, however, as potash prices tend to be pushed higher by higher oil prices (higher cost per ton would be offset by higher revenue per ton). But, in the unlikely scenario that potash prices crash while oil remains high, Verde can still maintain strong profit margins by selling smaller quantities of potash. This is because Verde can focus exclusively on selling to farmers relatively close to the mine (minimizing transportation, including fuel costs). For example, by selling to farmers in the state of Minas Gerais instead of those in Bahia, Verde can have a freight per ton cost of slightly above $20/ton (slightly above $30/ton all-in costs) instead of slightly above $40/ton (slightly above $50/ton all-in costs) (pages 252-253 of the 2022 PFS). Discounts for farmers could also likely be reduced if Verde focuses on selling primarily to its existing customers in a low potash price environment, rather than expanding to new farmers (as first-time clients get a larger discount on Verde’s potash compared to traditional potash).

● Any delays in securing production permits from the Brazilian government would likely inversely affect the NPV of Verde’s projects. This is especially relevant because of the high levels of bureaucracy in the Brazilian government. Verde permanently being denied such permits would be far worse, yet we have no reason to think that this will happen.

● Although Verde's overall execution to date has been excellent, there is still substantial execution risk. For example, any delays in constructing and starting the operation of the additional production facilities (i.e. plants 2 and 3) would likely decrease the NPV of Verde’s mine. 

● Geopolitical risks can become of major concern, especially if Brazil elects a left-sided president. Such a president may attempt to nationalize Verde (similar to Brazil’s pre-1990s nationalization of companies or the nation’s control over Petrobras today). 

● Regulatory risks: According to Cristiano, it is basically a formality to renew a mining concession in Brazil. However, adverse regulatory conditions could negatively impact Verde’s ability to renew its mining concessions. We think it unlikely that such laws would be passed.

● As we discussed earlier, at first it was necessary to educate farmers about the superiority of Verde’s glauconite to conventional potash. The high demand for Verde’s glauconite (it is typically sold-out months in advance) decreases the education and adoption risks for Verde’s glauconite, yet such risks do exist for Verde’s new Bio-Revolution and BAKS products.

● Key person risk:  CristianoCristiano is key. The company is largely run according to his ideas, passion, and vision. Much of the company’s pristine execution is also likely due to him. Therefore, his departure would likely be problematic for the company.

●  A tax windfall similar to the UK’s oil production tax windfall scheme would adversely impact Verde’s FCF and NPV. We believe that this is unlikely to happen, as it would be illogical for the government to disincentivize Verde from producing, as Verde’s production helps Brazil to achieve domestic security of potash, a key ingredient for the nation’s agriculture-heavy economy.

● Harvest Minerals mines in the same jurisdiction as Verde Agritech (Minas Gerais). The company mines a rock called Camafugites, which consists of 2% K2O5, 2% K2O, calcium, and magnesium. The result of this rock composition is that farmers need to use 20 tons of camafugite potash from Harvest (3% K2O concentration) for every one ton of regular KCl potash (60% K2O concentration). This is a major inconvenience for farmers and results in high shipping costs for Harvest. As a result, Harvest can only sell to farmers that are close to Harvest’s mine in Minas Gerais. Additionally, Harvest’s reserves are small compared to Verde’s: 13M tons of rock at a 3% K2O grade vs. 1.47 billion tonnes at 9.28% grade. Regardless, it is likely that there would be a few small areas of Minas Gerais that are close to Harvest’s mine where Harvest can undercut Verde on potash price.

● Potássio Do Brasil has a massive non-producing KCl potash mine in the heart of the Amazon Rainforest without proper permits. Not only is it likely that there would be serious environmental consequences to operating a potash mine in such a sensitive and ecologically important area of the world, that area of Brazil is also recognized as an indigenous territory. Furthermore, Potássio Do Brasil would need to dig through this indigenous tribe’s largest aquifer. The project has been lacking an environmental permit (necessary for production) for the last 5 years. However, if the project does eventually produce, it would be mostly selling in direct competition with Verde.

● Additional mines: The discovery of Verde-like potash mines being discovered in Brazil in the future. For example, when a major metals reserve is discovered, exploring around it can be a way to find other smaller mines of that same metal. Verde has tried to minimize this chance by already engaging in such a process itself.

Additional Resources:

- K Forte Current Prices: https://loja.verde.ag/collections/produtos-em-big-bag-1-tonelada/products/fertilizante-k-forte-em-big-bag 

- Current North America Potash Prices: https://fertilizerpricing.com/priceindex/

- Calculator for allowing Brazilian farmers to calculate the implications of buying K Forte vs. traditional potash: https://cloud.marketing.verde.ag/calculadora

Catalyst

Plant 2 launch in Q3-2022

higher levels of production

US listing