Resource Investor
By Brian Ostroff
Several months ago I penned a piece for Resource Investor entitled “Let Them Eat – The Case for Phosphate Mining”. With the San Francisco Hard Asset show upon us (where I will be speaking), I thought it timely to see where things currently stand in the world of phosphate.
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As a quick review, phosphate is one of three components in fertilizer with nitrogen and potash being the others. The major difference however is that phosphate is the only component in which North America is not completely self-sufficient. This deficit is made up by imports from North Africa in general and Morocco in specific. In fact, when it comes to phosphate, Morocco is the be-all and end-all accounting for roughly 35% of the entire world’s export market. This makes Morocco almost four times larger in phosphate markets than Saudi Arabia is in oil markets.
I must say, I find it intriguing that while we wish to end our reliance on the rest of the world when it comes to energy and specialty metals; there is little discussion when it comes to phosphate. I have read report after report over the last few years talking about the pending calamity in the rare earths, graphite, tungsten and many other commodities which North America lacks and all have resulted in interesting investment concepts with handsome profits for those who have understood North America’s predicament. Well, can there be anything more basic and essential than food? Phosphate/fertilizer is the basic building block for growing crops (and thus feeding livestock) and we are dependent upon imports for this, however, there is little said about this and a strong investment case has yet to be made.
Over the last six months, I would argue that the dynamics for North American phosphate have continued to deteriorate. The only Canadian phosphate mine (Agrium’s Kapuskasing Mine) will be closing within the next six to nine months and environmental issues have, and will, continue to plague Florida’s phosphate operations. All of this will result in a greater dependence on outside sources to make up this shortfall. Certainly, the geopolitical situation in North Africa doesn’t look like it will be getting better any time soon and continued population growth in developing nations will bring about greater competition for existing phosphate supplies. There also exists the potential for shocks to the system such as continued political unrest in phosphate producing countries (Egypt, Tunisia, Syria) and climate issues such as the drought here in the United States.
To me the investment case is quite simple: North American phosphate. This however is easier said than done because unlike potash, which for a while was the flavor of the month, there are very few North American phosphate plays and even fewer that are advanced. For the few that do exist, we at Windermere (as well as me personally) are investors.
With that, I would like to focus on one of our portfolio names: Arianne Resources (TSX-V: DAN; OTCBB: DRRSF). Six months ago, I briefly mentioned the company here at Resource Investor but a lot has gone on subsequently. The company has a very large world class asset in North America (Quebec, Canada) and should produce the purest form of phosphate concentrate (39%), matching that of Russian producer PhosAgro. At the end of May, Arianne published its enhanced prefeasibility study giving its asset (the Lac a Paul project) a $1 billion NPV. Of interest is that the study used a sale price of $175/ton, some $100/ton cheaper than the current market for a 39% concentrate so, at current prices, the project is approaching a $3 billion NPV. Arianne has also met with continued drilling success, doubling the size of its resource and, on a management level, has added personnel with a track record of building out mining assets. Looking forward, the company is performing additional metallurgical work to optimize its production and has hired Worley Parsons to complete its bankable feasibility report, due out by the end of Q2 2013.
What hasn’t changed is the company’s market cap which, at roughly $100 million, sits where it was six months ago and roughly half of where it was a little over a year ago. The analyst community has started to wake up to the story with several firms having initiated coverage on Arianne but obviously the investment community has yet to understand and embrace the story.
Owning a $1-$3billion world class strategic asset for $100 million (or even $300 million) makes a lot of sense to me. I suspect it will make a lot of sense to other people too, namely those who require a secure supply of phosphate for their fertilizer production. Agrium will require an additional 1 million tons of phosphate from Morocco to make up for its pending shortfall and Mosaic is already dependent on imports. Other companies as well are not fully integrated and India alone imports over 8 million tons a year. It’s really quite simple, if you are not fully vertically integrated, you are not in full control of your own destiny; not enough phosphate means not enough fertilizer. Mosaic has already publically said that they are looking to purchase additional phosphate rock supply and the math supports that thought for them and others. It would be roughly $100/ton cheaper for someone to own the Arianne production rather than buying phosphate rock from a third party producer (Morocco) and at Arianne’s projected 3 million ton/year production, that’s $300 million a year in savings with the benefit of secure supply as well.
The investment case is clear. So, is anyone listening?
Brian Ostroff will speak as part of Keynote Panel on “Up & Comers” on on Friday, Nov. 16, during the San Francisco Hard Assets Investment Conference.
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