EV Demand Drives Phosphate Rock Market

A number of components are pushing fertilizer (and significant part phosphate rock) costs increased and better. One want look no additional than grain costs like wheat, corn, and soybeans.

The previous 12 months has been nothing in need of transformational for Québec’s Arianne Phosphate Inc. (DAN:TSX.V; DRRSF:OTCQB; JE9N:FSE) After a seven-year downtrend (2013-2019), phosphate rock costs turned decisively constructive from April 2020 because the remedy for low costs is … low costs.

Extra just lately, demand from a selected electrical automobile (EV) battery sort, lithium iron phosphate (LFP), has sparked the potential for aggressive stress between auto/battery makers and fertilizer firms.

Along with Tesla and various Chinese language OEMs, Volkswagen, Daimler, BMW, Ford, GM, Stellantis, Volvo, and Hyundai are utilizing or have expressed curiosity in LFP batteries. With Tesla main the cost, analysis and improvement into enhanced LFP formulations and makes use of is bound to comply with.

Furthermore, Arianne’s high-purity product may additionally be helpful in a spread of hydrogen gas cell applied sciences. Some imagine that gas cells will takeoff (for heavy-duty vans) later this decade.

Equally thrilling, administration introduced a analysis program in collaboration with an environmental ​and ​biotechnology analysis group aimed toward creating a brand new breed of fertilizers utilizing natural waste ​and​ Arianne’s high-purity, low-contaminant phosphate focus.

Though in early days, if profitable, this initiative would reduce out the intermediary. Arianne may bypass firms like Mosaic and seize extra of the economics of the fertilizer worth chain.

This could possibly be a game-changer for the corporate or for potential acquirers and companions, particularly firms trying to enhance their ESG credentials with a greener product providing. From the Feb. 8 press launch:

“The trade follow is to ship phosphate focus to a phosphoric acid facility, the place it’s mixed with sulphuric acid and different components to make fertilizers like MAP ​and DAP. By working with each analysis and​ business organizations, Arianne is trying to alter the method and mix its focus with natural waste or different micro organism, permitting its focus to successfully be utilized in farming with out the requirement of acidulated fertilizer merchandise.”

The safety of phosphate rock provide has not been an enormous concern for fertilizer firms. When feedstock costs are falling (like in 2013 to 2019), few fear concerning the origin of, or long-term sustainability of, provide.

For many years, phosphate rock has come primarily from China, northern Africa (Morocco, Algeria, Egypt, Western Sahara, and Tunisia) and the Center East (Saudi Arabia, Jordan, and Israel).

Within the chart, discover that 74.6% of 2021’s manufacturing got here from these three areas (plus Russia), and 86.3% of complete reserves are held in these international locations (plus Russia). Talking of Russia — PhosAgro, a significant phosphate fertilizer firm primarily based in Moscow, has suffered a larger than 75% decline in its valuation previously two weeks.

The horrific conflict in Ukraine will change the geopolitical panorama in ways in which nobody can absolutely predict. Suffice it to say that this conflict underscores the important significance of safety of provide, not simply relating to phosphate rock or fertilizers from Russia, however all important commodities across the globe.

Discover additionally that 38.6% of manufacturing got here from China and 70.4% of reserves are contained in a single nation: Morocco. Phosphorous in fertilizers is among the most important commodities on the planet. There’s no substitute, it’s a finite useful resource. With out sufficient of it, we get meals riots and hunger.

Though clearly not as tragic because the conflict’s influence on the individuals within the area, there’s the commentary that international power costs will improve and stay excessive, probably for an prolonged interval.

With power costs hovering, the will to supply uncooked supplies nearer to finish markets to reduce GHG emissions is even larger. Arianne’s 100%-owned Lac à Paul mission is in Québec, proximal to North American markets for fertilizer, EVs and Li-ion batteries.

Québec is well-known for its shut collaboration with funding funds, provincial companies, first nations, and universities on wide-ranging R&D initiatives, plus funding packages and mortgage ensures for pre-revenue know-how and mining firms.

The province plans to be a major regional EV and Li-ion battery manufacturing/recycling hub. Québec’s hydroelectric energy is among the many lowest price and greenest on the planet, making Lac à Paul an much more compelling alternative versus many peer tasks.

I may go on and on about demand and safety of provide, however a better strategy to show these dynamics is by pointing to commodity costs.

Administration believes that the benchmark value of high-purity rock is up $50+/Metric tonne in February. Since Arianne’s rock is of upper high quality than the benchmark, I estimate the Firm may probably obtain a value of ~US$280/Mt.

That’s a far cry from the 2020 COVID-19 low of $70.75/Mt. Readers are reminded that Arianne’s Financial institution Feasibility Examine (BFS) used a value of $213/Mt. In response to the BFS, every $1 improve within the long-term value assumption equates to ~$17M in after-tax NPV. So, larger than $1 billion in incremental NPV (all else equal) is on the desk.

And that doesn’t account for a major transfer within the US$/CA$ FX fee in favor of the mission’s economics. Marking the FX fee to market would add lots of of thousands and thousands of {dollars} to the NPV.

Importantly, not solely are phosphate costs up an incredible quantity, meals commodities are up as nicely. Within the chart under, one can see the 10-yr value charts of corn, soybeans, and wheat. Notice additionally crude oil at $100 a barrel. Ukraine and Russia are high exporters of a number of grains and vegetable oils, together with wheat, corn, and sunflower oils.

The celebs are actually aligned for Arianne Phosphate. It’s tough to think about a extra bullish backdrop for administration to safe new off-take agreements and organize mission funding.

I imagine we may see new off-takes within the coming months and a considerable portion of the funding package deal introduced just a few months later.

Arianne has two off-take preparations, a fully-permitted mission and a signed Cooperation Settlement with the Innu First Nations. This can be a shovel-ready mission that could possibly be in manufacturing inside three years.

Administration believes that as much as 75% of the mission’s cap-ex will be raised by a mixture of debt, royalty/streaming, tools financing, and superior funds (ahead gross sales) of merchandise.

As well as, a strategic companion may be discovered to take a position on the mission degree (no new shares issued) or on the company degree (new shares can be issued). Why is Arianne so enticing to an acquirer? The 18 firms listed above commerce at a median EV/EBITDA a number of of 10.3x (trailing 12 months EBITDA).

At right this moment’s phosphate rock costs, Arianne’s 3 million tonnes per 12 months would generate greater than CA$500 million in EBITDA. But its enterprise worth (market cap + debt – money) is simply CA$110 million.

By inviting a powerful companion, Arianne’s fairness requirement can be drastically decreased. A companion may cowl some and even all of Arianne’s share of upfront cap-ex in change for a direct financial curiosity within the mission or an fairness stake within the firm.

As an alternative of a dozen international fertilizer/Ag firms doubtlessly fascinated about partnering with, acquiring off-take from, or buying the entire Lac à Paul mission, there are actually a handful of LFP battery makers and maybe one other handful of worldwide OEMs within the hunt.

Speak about aggressive stress, it’s going by the roof.

Regardless of these undeniably constructive fundamentals, and what seems to be fairly good visibility into the way forward for phosphate rock and grain commodity costs, Arianne’s share value has barely moved. It’s down 4% previously three months. Against this, Soybeans, wheat, and corn are up (on common) almost 30% over the identical interval.

Make no mistake, Arianne Phosphate is a high-risk funding alternative, however an organization with numerous the heavy lifting behind it, and having fun with some danger mitigation by being within the Tier-1 jurisdiction of Québec.

There are nicely over 1,000 (gold, silver, copper, lithium, and uranium) juniors throughout Canada, the U.S., and Australia, however just a few dozen fertilizer juniors. Half are solely listed in Australia, many are potash performs.

Arianne presents wonderful diversification from the standard pure assets portfolio and substantial blue-sky potential that might play out as quickly as this 12 months.

Peter Epstein is the founding father of Epstein Analysis. His background is in firm and monetary evaluation. He holds an MBA diploma in monetary evaluation from New York College’s Stern Faculty of Enterprise.


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