Harvest Minerals (HMI) - BUY Healthy Apatite

Transcription

1 Initiation 25 th October 2016 Mining Sector Rating BUY Price Target 36.5p Upside/downside 100% United Kingdom Bloomberg: HMI LN Reuters: HMI.L Current Price (24/10/2016): 18.25p Market Capitalisation: 18.1m 52 Week Range: 3.6p 24.5p Share Price Source: Bloomberg Roger Bade +44 (0) Mining Analyst WHITMAN HOWARD PAN-EUROPEAN EQUITY RESEARCH Harvest Minerals (HMI) - BUY Healthy Apatite Harvest Minerals is developing a Direct Application Natural Fertiliser (DANF) project at Arapuá in Brazil. The company has built a portfolio of traditional potash and phosphate rock development projects in country, but is advancing Arapuá first as it offers the prospect of rapid cash flow generation. Brazil is an important producer of agricultural commodities and is the world s fifth largest consumer of fertilisers. However, domestic production of potash provides only 10% of requirements. The country s 50% sufficiency in phosphate is obviously better, but domestic production of fertilisers could be very attractive as current imports including freight costs and import taxes are expensive. The compliant scoping study on a trial project at Arapuá was encouraging. Operating costs are forecast at a low of $4.77$/t mined and processed, or $7.34/t including additional selling costs and general and administrative expenses. Assuming a realised product price of $50/t, a post-tax Internal Rate of Return was estimated at 408.8%, with a $15m post-tax Net Present Value, assuming a discount rate of 10%. However, this small scale project is really the starter for something that could be quite significant. They have already outlined a compliant inferred resource of 883,000 tonnes of direct dig weathered material which covers only 3% of the estimated mineralisation; hence the potential to scale up the operation. They will spend US$800,000 to build a mine and plant capable of producing 100,000 tonnes per annum for seven years. The idea is to dig the material up, crush and mill it and sell it as a DANF or a stonemeal soil conditioner. An application to have the material registered as such has been entered. The company has applied for a trial mining permit, it has obtained an Environmental Licence, and secured landowner permissions while it has undertaken an agronomic study as part of the stonemeal soil conditioner registration process. Recent share warrant exercises also help fund the construction of the mine, something that is allowed to commence immediately under the Environmental Licence. They expect to have first output this year and this will build up in Subject to demand and permitting, they could expand operations significantly and generate significant amounts of free cash flow. Success at Arapuá either with volume and/or pricing only has to be modest in order to justify, along with a tiny credit for their longer term potash and phosphate projects, an overall valuation approaching double the current share price. This document is a marketing communication and is not independent research prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to a prohibition on dealing ahead of the dissemination of investment research. Please see disclaimer for further information.

2 Introduction Harvest Minerals is a Brazilian fertiliser project developer with a mix of potential near production from an at surface Direct Application Natural Fertiliser project, two longer term traditional underground potash project opportunities and a similarly longer term phosphate rock prospect. The Australian incorporated company was reversed into an Australian Stock Exchange listed shell company in June 2014, with the first Brazilian project acquired a couple of months later. The company s name was changed to Harvest Minerals in December 2014 and was introduced onto AIM in September The company removed itself from the ASX in July 2016 and has continued to advance its Arapuá project over the summer. The fertiliser sector in Brazil is the world s fifth largest; the country is the world s largest exporter of sugar, coffee and orange juice and the second largest exporter of soybeans. Up until the recent recession, the Brazilian fertiliser market was forecast to grow twice as fast as overall global demand until The domestic financial crisis coupled with low agricultural commodity prices has stymied growth in recent years, but a new Government, plus a recovery in agricultural commodity prices is likely to form a more positive backdrop going forward. Approximately 90% of Brazilian potash demand is met through imports, with 10% coming from Vale s (VALE5-BZ) Taquari-Vassouras mine. Around 50% of phosphate demand is imported. Anglo American has just sold its niobium and phosphates business to a Chinese group for US$1.5bn, while there are a number of other domestic producers. Harvest s Arapuá Direct Application Natural Fertiliser project is situated within the Brazilian Cerrado and consists of near surface weathered igneous rocks that contain minor, but potentially important concentrations of potassium and phosphates. Harvest s Capela Potash project is located almost next door to Vale s only potash mine, with seismic and borehole indications that it may form a northerly extension of the almost mined out deposit. The company s Sergei Potash project is located slightly further away in the same evaporite basin and benefits from a compliant resource of 62 million tonnes (Mt) grading 25% potassium chloride and a compliant scoping study which showed a 32% pre-tax internal Rate of Return on a $649m project that would produce 600,000 tonnes per annum (tpa) of K60 potash. Reprocessing of past data has led to a resource estimate at Harvest s Mandacaru Phosphate project of 1.47 Mt grading 5.30% phosphorus pentoxide (P₂O₅). The company currently has around A$2m of cash (just over 1m) which fully covers the US$0.8m cost of developing trial mining at Arapuá. Developments at Capela, Sergei and Mandacaru are on hold pending funding. 2

3 Arapuá Fertiliser Project Exhibit 1 Location of Arapuá project, Minas Gerais Brazil Source: Harvest Minerals The Arapuá Fertiliser project is located in the State of Minas Gerais around 400 kilometres south east of the Brazilian capital Brasília and 360 km north-west of the state capital of Belo Horizonte and within one of the country s major agro-industrial centres, the Brazilian Cerrado. It comprises eight mineral properties covering almost 15,000 hectares and is divided into three blocks Arapuá, Pindaibas and Maximus blocks. All three projects cover weathered apatite rich rocks that are horizontal and heavily weathered. Harvest acquired Arapuá in July 2014 for US$1.0m cash, plus a 2% net smelter return royalty to the Brazilian vendor RV2, but only upon commercial production. Geological mapping at Maximus has identified a continuous kamafugite rock layer containing both phosphate and potassium of an area of almost 1.7 square kilometres (Sq. km). Kamafugite is a carbonate rich igneous rock common in Brazil, West Africa and in China. 3

4 Exhibit 2 Maximus, Pindaibas and Arapuá project locations Source: Harvest Minerals Arapuá Scoping Study The compliant Scoping Study on the Maximus part of the Arapuá Direct Application Natural Fertiliser project was good, with a post-tax Internal Rate of Return (IRR) of 44% under their worst pricing scenario of US$15 per tonne ($/t). This small scale open pit project, with simple crushing and milling, is really the starter for something that could be quite significant. They have already outlined a compliant inferred resource of 883,000 tonnes of direct dig weathered material grading 4.21% potassium oxide (K₂O) and 3.53% phosphorus pentoxide (P₂O₅), estimated using a 3.5% K₂O cut off. This covers only 3% of the estimated mineralisation; hence the potential to scale up the operation, once the concept is proven is very large indeed. They intend to spend US$800,000 of current cash reserves to build an open pit mine and a processing plant capable of producing 100,000 tonnes per annum (tpa) for seven years. The material is dug up, crushed and milled and then sold as a DANF or a stonemeal soil conditioner. An application to have the material registered as such has been entered. A wide range of price scenarios has been utilised in their Scoping Study with $50 per tonne ($/t) used for the base case. Operating costs are forecast at a low $4.77$/t mined and processed, or $7.34/t including additional selling costs and general and administrative expenses. At $50/t the post-tax IRR is estimated at 408.8%, with a $15m post-tax Net Present Value (NPV), assuming a capital cost or discount rate of 10%. At $65/t, the IRR is 562.8% and the NPV $21m. Such is the demand for fertiliser in Brazil and its high cost, a $120/t scenario has even been modelled, with plus 1,000% IRR and a $42.8m NPV. The company has applied for a trial mining permit, has obtained an Environmental Licence, has secured landowner permissions and has undertaken an agronomic study as part of the stonemeal soil conditioner registration process. 4

5 Solubility of potassium and phosphorus has been found to be better than any other product currently in the market, while the material is of neutral ph, which supports the soil conditioner description. Wet sieving has shown that a number of different products, with varying levels of phosphorus and potassium can be produced, thus offering the ability to market different grades. They initially intend to sell the product as a stonemeal/remineraliser, but subsequently could deliver it as a more expensive Potassium & Phosphorus fertiliser. Recent share warrant exercises also help fund the construction of the mine, something that is allowed to commence immediately under the Environmental Licence. They expect to have first output this year. Underground Potash projects in the Sergipe Alagoas evaporite basin Exhibit 3 Location of Taquari-Vassouras Potash mine and Harvest s Sergei and Capela potash projects. Source: Harvest Minerals AIM Admission Document Capela Potash Project Capela is a green-field potash project 13 kilometres (km) from Vale s Taquari- Vassouras conventional underground mine which is expected to struggle to maintain production from next year. Located in the Sergipe Alagoas Basin it is prospective for sylvinite and carnallite mineralisation. 3D seismic indicates that Capela could be a northern extension of the Taquari-Vassouras deposit. One hole has indicated over 16 metres (m) of high grade sylvinite as part of a 79m intersection of multiple evaporite horizons from a depth of m. 5

6 Harvest acquired 100% of Capela in August 2014 for A$120,000 plus 8 million (m) shares in Harvest. Subject to the achievement of certain milestones Harvest is required to issue A$2.2m worth of shares to the vendor. In addition, Harvest must pay the vendor a final payment of A$5m before the end of August 2017, or it will be diluted to 51% of the project. Sergi Potash Project Harvest s Sergi Potash project is located in the same Sergipe evaporite basin 40 km south of Taquari-Vassouras. In June 2015, a compliant Inferred Mineral Resource of 62 Million tonnes (Mt) grading 25% Potassium Chloride (KCl) in the Sylvinite Zone and % KCl in the Carnallitite Zone was outlined, using a cut-off grade of 13% KCl. A number of deep drill holes offer encouragement with 8.27 m from 1,189.38m grading 20.94% KCl in the Upper Sylvinite Zone, 8.46m from 28.98% KCl in the Lower Sylvinite Zone, 12.81m from 16.70% KCl in the Upper Carnallite Zone and 5.56m from 21.11% KCl in the Lower Carnallite Zone. A compliant Scoping Study modelled a USA$669m underground mine producing 600,000 tonnes per annum of K60 Potash. An estimated pre-tax Internal Rate of Return of 31.2% and a pre-tax Net Present Value of $469m, assuming a 10% discount rate, offer encouragement. Harvest acquired the Sergei project in June 2015 paying A$100,000 of cash, plus seven tranches of $100,000 cash at the end of years inclusive and will issue in total 18 million shares in three equal tranches, with the last tranche to be issued at the end of An extra 18m shares could be issued and A$6m paid on the successful achievement of certain milestones. The vendors of Capela and Sergei, KMINE Holding and Americas Investment & Participation retain 13m shares each in Harvest. Potash Market Outlook The Brazilian fertiliser market is vulnerable to sharp potash price rises as the country is so import dependent. The global potash price has been depressed following a free for all amongst Belarusian and Russian producers. However so far this year the market has started to tighten up and the recent pricing deal between the various producers and China, one of the largest customers, has tentatively called a bottom. Further perhaps more significantly bullish news was provided by suggestions that the Chinese were negotiating with Canpotex, the large Canadian supplier, to lock in prices and supplies for The cost of fertiliser transport to Brazil and import taxes mean that although global prices are currently depressed, they are still very high to Brazilian consumers. Currently benchmark Potash as K60 is around $220/tonne ($/t) and Phosphate rock (Phosrock-33% P₂O₅) is about $130/t, however locally in Cerrado Mineiro where Arapuá is located, K60 is currently the Brazilian real equivalent of $468.75/t and Phosrock is $312.50/t. Brazil s potash import dependence has long been an investment theme and is often mentioned by Elemental Minerals (ELM-ASX) who have a number of conventional potash projects in the Republic of Congo, a location that could have the shortest shipping distance for existing, or potential potash projects to Brazil. An improving potash market is good news for companies looking to develop conventional or unconventional potash projects in Brazil. 6

7 Mandacaru Phosphate Project Harvest acquired the Mandacaru phosphate project in December 2015 for a 2% Net Smelter Royalty capped at an aggregate US$1m. Following the conversion of three licence applications into full exploration licences, Harvest have reprocessed historic geological work which included a 2,141 metre drill programme to estimate a compliant resource which amounted to an Indicated Resource of 1.47 million tonnes (Mt) grading 5.30% phosphorus pentoxide (P₂O₅) and 15.88% calcium oxide (CaO) in one layer imaginatively called Layer 3. In addition, Inferred Resources from Layers 1 to 4 aggregated % P₂O₅ and 15.36% CaO. Deleterious uranium and thorium in the Indicated Resource amounted to parts per million (ppm) and ppm respectively, while in the Inferred Resource they amounted to ppm for uranium and ppm for thorium. As yet metallurgical tests have not been undertaken on the collophanite (sometimes colophanite) and it is not clear if a Direct Application low grade phosphate fertiliser could be forthcoming. Processing trials elsewhere with Chinese collophanite have produced a rock phosphate concentrate grading plus 32%, but an expensive double reverse floatation process was required. Phosphate Market Outlook The outlook for the phosphate market in Brazil is perhaps slightly less interesting than potash, as on one hand there has been little sign of any recovery in global demand or prices and on the other Brazil is less import dependent for phosphate than for potash. Brazilian Political Situation The Brazilian political situation is stabilising following an impeachment vote that removed the Workers Party President following allegations of mismanagement of the economy and corruption. The former Vice President a centre rightest has stepped up to serve the Presidential term until the end of As yet the new President has not introduced any new radical policies, but it is anticipated the next budget will cut spending on social issues, while at the same time be more business friendly. A successful Olympics (and Paralympics) plus the removal of the former President has given business and markets a boost to optimism. Consumer confidence rose for the fifth consecutive month in September and according to the Financial Times is at its highest level since January Inflation recorded its lowest monthly rise in September in twenty seven months thus offering scope for the central bank to bring its benchmark rate down from its current 14.25%. The recent FT article forecast that this year s 3.5% contraction in the economy would revert to growth of 1.5% in Analysts argue that Brazil is the most promising market in Latin America right now, given low valuations and the policy direction. Another source suggest that agriculture is now a key growth industry in Brazil, possibly replacing mining and was the only business sector to achieve positive growth last year with soybeans the largest export by value, overtaking iron ore. Brazilian Mineral Rights Tenure Brazilian mineral exploration permits are valid and legally in force for a minimum of one year and a maximum of three years from the date of issuance. A permit can be successively renewed at the discretion of the National Department of Mineral Production (DNPM), the Brazilian Mining Regulator, upon the request of the titleholder. The renewal permits combined, however, cannot exceed the total period 7

8 granted for the original period and the titleholder will have to submit a fresh application for the permit. In order to renew a permit, the DNPM takes into consideration the development of the work performed to date as well as reasons justifying continued work. Harvest s Financial Position In the year to end June 2016 the company spent A$3.5m of cash on its various ventures in Brazil. Having raised a net A$4.8m of cash in a placement and a rights issue during the year, the company had A$2.7m of cash at end June 2016, with nominal receivables being offset by equally nominal current liabilities. At the end June Australian dollar exchange rate of 1=A$1.787, this cash amounted to 1.51m. At the current exchange rate of 1=A$1.599 it would amount to almost 1.7m. Subsequent to the end of June, a number of warrant exercises have occurred variously at prices of pence per share with around 455,000 of cash raised in that fashion. There are still around m warrants outstanding, which if exercised at 8.8p/share would raise a further 1.05m. Trial mining at Arapuá is forecast to cost US$0.8m up front. With strong cash flow from Arapuá and expansion there, subject to permitting, could be self-funding. Valuation With a number of recent warrant exercises Harvest Minerals share capital now amounts to just over million shares in issue. At a share price of pence per share the company is therefore capitalised at 18.1m. If we assume a US$50/t sales price for the Arapuá Direct Application Natural Fertiliser project the post-tax NPV amounts to $15m or 12.3m at 1=US$ This improves to $21m or 17.3m if a price of $65/t for DANF is achieved. Hence, attributing zero value for their Capela Potash, Sergei Potash and Mandacaru Phosphate projects, the current share price is assuming Arapuá is developed as a small scale 100,000 tpa Direct Application Natural Fertiliser project that could sell its product for around $80/t. At present as we don t yet know the sales price for DANF and we don t know how large Arapuá could become, it is very difficult to be precise with regard to the scale or the timespan of the company s operations, hence its valuation. This difficulty is set against a background of a shortfall of domestic fertiliser production in Brazil. In addition we have already noted that production from the country s only potash mine is set to fall, if not close completely next year, thus suggesting that Harvest s two nearby potash exploration projects have considerable value in their own right, while there is significant scope for Arapuá to develop beyond its trial mining and sales numbers, particularly as prices for the DANF could turn out higher than expected. Success at Arapuá only has to be modest in order to justify, along with a modest valuation for their longer term potash and phosphate projects, a valuation approaching double the current share price. If we assume the fully funded Arapuá is currently valued at around $25m, a doubling of size of Arapuá implies a doubling in value, as any expansion can be funded from cash flow from the trail mine. A rise in DANF sales price to $120/t has already been shown to increase the project value to $42m, with no expansion in trial volumes, so imagine what a doubling in output plus a plus $100/t sales price could do to one s valuation. The valuation of the company s two potash projects in the Sergipe basin is also potentially very significant. We have already mentioned how important Brazilian 8

9 demand is to the potential development of Elemental Minerals projects in the Republic of Congo. Like many potash projects Elemental s project have been mainly dormant for a little while, however following a A$50m placement in early September with strategic partners with existing potash exposure, a plus $40m jump in valuation was ascribed by the share market. Elemental s projects are perhaps more advanced than Harvest s, but the pull of the closure of Vale s Brazilian mine is similar. Under the right scenario both Sergei and Capela could be worth $10m each, just for locational attraction alone. Shareholders As of 24 th October 2016 and assuming just over 99.3m shares in issue, Edwards Family Holdings amounted to 30.4m shares or 30.6% of the shares, Americas Investment & Participation hold 13.1%, KMine Holding another 13.1%, Minton Group 7.64% and Hargreaves Lansdown (Nominees) 5.79%. Directors & Management Executive Chairman Brian McMaster has 20 years experience in the mining industry with an emphasis on corporate reconstruction and turnaround. He is currently a director of a number of Australian Stock Exchange listed companies. Executive Director Matthew Wood is founder of Garrison Capital Pty Ltd a venture capital and advisory firm and has 20 years experience in the resource sector with extensive experience in the technical and economic evaluation of projects throughout the world. Executive Director Luis Azevedo is both a licenced lawyer and geologist with over 25 years experience of resource projects in Brazil. Non-Executive Director Mark Reilly is managing Director of Forte Energy NL and Black Star Petroleum. Non-Executive Director Frank Moxon is managing Director of Hoyt Moxon Ltd a corporate finance consultancy. Company Secretary Jack James is a partner of Palisade Business Consulting which provides accounting, secretarial and advisory services. Conclusion Harvest Minerals offers exposure to the Brazilian fertiliser market which although it is the world s fifth largest is almost completely dependent on imported material. Domestic production thus has an obvious attraction and potential valuation premium. Their first project Arapuá is making rapid strides towards initial production. Success at Arapuá either with volume and/or pricing only has to be modest in order to justify, along with a tiny valuation for their longer term potash and phosphate projects, an overall valuation approaching double the current share price. 9

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