VANCOUVER — With a prefeasibility study in hand and a major funding deal arranged with the Brazilian government, Verde Potash (TSX: NPK; US-OTC: AMHPF) is pushing its Cerrado Verde project in Brazil towards production.
The intended product, however, is not conventional potash. Instead, Verde intends to produce ThermoPotash.
“The mineral we have at Cerrado is different from what is in your normal mine in Saskatchewan,” Cristiano Veloso, president and CEO of Verde Potash, says in an interview. “There it’s a potassium salt. In our case, it’s a potassium silicate. Our rock, our ore, can be used to produce two different potash fertilizers: ThermoPotash and potassium chloride.”
Farmers add potash fertilizers to their soils for the potassium, but it comes bound to something else. The most common potash fertilizer is KCl, a salt of potassium and chloride. Chloride, however, is not always good for soils. For those soils, potash producers developed potassium nitrate (NOP) and potassium sulphate (SOP), which are known as premium potash products.
Brazilian farmers have to use premium potash products because Brazil’s soils are already full of chloride. Premium or not, all conventional potash fertilizers are salts of potassium. The problem is that salt is highly soluble in water.
“Farmers pay a lot of money for expensive premium potash fertilizers and then when it rains a big chunk of that is lost,” Veloso says.
ThermoPotash is far more resistant to leaching: in a field test only 0.3% of ThermoPotash leached away after 18 days of heavy rain, compared to a 26% potassium loss from KCl fertilizer. ThermoPotash also releases its potassium slowly, making it more durable and effective than potash salts.
Brazil’s soils are also quite acidic, a condition that farmers address by applying limestone. Since ThermoPotash is made with limestone, it counters soil acidity and reduces limestone requirements.
So ThermoPotash is a good product. Now a prefeasibility study has shown that the mine Verde has planned at Cerrado could be an economic way to produce it.
The Cerrado project study examined a phase-one operation producing 1,000 tonnes of ThermoPotash per day from an open-pit mine. After a few years of operation Verde would expand Cerrado, adding the processing circuits to also produce KCl.
“The reason we also want to produce KCl is because we can,” Veloso says. “Our deposit is very, very large, so there is a lot of mineral to process.”
The Cerrado prefeasibility highlights another one of ThermoPotash’s advantage: capital costs. It is expected to cost just US$113.6 million to get Cerrado into production. Low costs are a virtue of simple processing requirements: to produce ThermoPotash, potassium silicate and limestone are heated in a rotary kiln.
By contrast, to produce KCl the output from the rotary kiln is dissolved, purified, evaporated and recrystallized. Since ThermoPotash does not require that second set of steps, the phase-one plant at Cerrado is pretty straightforward — and therefore inexpensive.
“The reason we’re starting with ThermoPotash is that the capex to build the ThermoPotash plant is much lower than the capex to build the KCl plant,” Veloso says.
The operation could produce a tonne of ThermoPotash for US$55.29, compared to a projected free-on-board sale price of US$187.74. Those metrics give Cerrado phase one an after-tax net present value of US$146 million, using a 10% discount rate.
The mine should generate a 23.5% after-tax internal rate of return, which means Verde could pay back its capital requirements in five years. The operation offers an initial mine life of 31 years.
That mine life is based on proven and probable reserves totalling 7 million tonnes grading 10.8% K2O. The resource count at Cerrado is much larger: 1.5 billion measured and indicated tonnes averaging 9.2% K2O, plus 1.9 billion inferred tonnes grading 8.6% K2O.
Paradigm Capital follows Verde and in their research note, the firm’s analysts says the prefeasibility study shows “robust economics for phase one.”
“We believe this is a positive start to this project, which is essentially fully funded by the Brazilian government,” Paradigm writes.
Indeed, a funding deal with Inova Agro, a governmental program that funds innovative projects in the agricultural sector, has Verde Potash lined up to receive US$105 million, or 90% of the amount needed to build Cerrado. The money will come via loans with subsidized interest rates, an equity investment and non-reimbursable grants from the Brazilian Development Bank and the Financing Agency for Studies and Projects.
It has taken Verde five years to advance Cerrado, and ThermoPotash, to this point. There have been many challenges along the way but Veloso says the biggest has been managing the company’s share count.
“For a development company, one of the biggest challenges is actually managing your capital structure,” Veloso says. “It’s no good for a company to get to production and cash flow if your shareholders make no money, because you issue too much paper in the process. We’re proud that Verde — after being public since 2007 — only has 37 million shares outstanding.”
Another challenge has been proving the parameters of ThermoPotash. As a new product, production has not been tested on a commercial scale and there is no current market for the product.
Phase one at Cerrado is designed to address those questions. The initial 1,000-tonne-per-day facility would prove the viability of the production process. Meanwhile, Verde would market output from phase one, in the expectation that the product’s attributes will create a swell of demand.
Much of that demand would likely be local: Cerrado is located in western Minas Gerais, a highly agricultural state. Thirty years ago the Cerrado area was considered unproductive because its soils were acidic and nutrient-poor. In recent decades, however, farmers have tilled tonnes of limestone into Cerrado’s soils to counter the acidity, but fertilizer is always needed.
Chloride-based fertilizers would boost acidity levels, so premium potashes are the only option. Premium products are also important for several specific crops that are highly sensitive to chloride levels, including coffee, potatoes, tobacco and pineapple.
More generally, Brazil is the world’s largest producer of sugar, coffee, beef and orange juice, and the second-largest producer of soybeans. It takes a lot of fertilizer to feed all those crops but Brazil has only one potash mine, which meets a mere 6% of demand.
Verde has worked hard to establish ThermoPotash as a viable and desirable potash product. In June the Brazilian government approved ThermoPotash for sale after tests involved 12 different crops. In November ThermoPotash received organic certification, which KCl lacks.
In September Verde announced that a 30-month field test showed ThermoPotash was more efficient than KCl in delivering potassium to coffee plants, after a third as much ThermoPotash as KCl generated an equivalent amount of coffee. Moreover, a subsequent test showed that ThermoPotash produced higher-quality coffee than that grown with KCl.
“Over one-third of the world’s coffee production is grown less than a 10-hour drive from the Cerrado Verde project,” Veloso notes. “On average, coffee requires up to three times more potash than soybeans and two times more potash than corn. ThermoPotash can potentially supply this market.”
In March Verde shares rose from $1 to $1.65. They stayed there on news of Cerrado’s prefeasibility study.
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