Is Phosphate Rock Sexy? Yes! Arianne Phosphate Is Looking Hot

October 27, 2021

Source: Peter Epstein for Streetwise Reports   10/25/2021

Arianne Phosphate has a very advanced stage, shovel-ready, phosphate rock project in mining-friendly Quebec with two off-take agreements signed, a BFS and cooperation agreement with nearby First Nation groups, writes Peter Epstein of Epstein Research.

Investment growth

Severe shortages of critically important commodities are highly likely this decade. For instance, there are legitimate concerns about the supply of copper and lithium. If demand is too strong, prices will reach a point where users try to substitute less expensive materials. Either that, or higher prices get passed on to consumers.

Admittedly, not being able to buy an all-electric Ford F-150 pickup truck is not the end of the world. However, reliable access to some commodities can mean the difference between life and death. Water and food, for example. Or, consider the case of fertilizers. NPK stands for Nitrogen, Phosphate, Potash.

While farmers can fiddle with the ratios applied each season, all three are essential macronutrients. Reduced yields or diseased/failed crops due to deficient levels of NPK can lead to food shortages, famine, starvation. Soaring food prices can spark violence and food riots.

Readers might be familiar with giant agriculture/fertilizer companies like Nutrien or Mosaic. They, and a few others, are vertically integrated, controlling an estimated 85% of all NPK production. In the past year, several trends are coming together to make that vertical integration even more crucial.

On-shoring (obtaining materials from, and selling products in, the same region) is incredibly important for a number of reasons. The practice facilitates speed, accuracy and reliability from raw material procurement, to manufacturing, to sales and delivery of finished goods.

It cuts shipping costs and transport times, both of which have soared, with no easy answer or short-term workaround. Perhaps more important, it fosters the urgent need for security of supply. In addition to on-shoring, there’s also ESG – Environmental, Social, Governmental initiatives.

ESG mandates for industrial companies and miners require adherence to minimizing CO2 emissions, tailings, chemical use and fresh water in each step of the supply chain and through delivery to end-users. Moreover, investment funds increasingly have their own ESG criteria.

While there are >800 gold and silver juniors, in North America, how many nitrogen juniors are there? There are fewer than a dozen North American-listed juniors focused mainly on N, P or K. Yet the fundamentals of macronutrient demand are strong and incredibly consistent.

Arianne Phosphate Inc. (DAN:TSX.V; DRRSF:OTCQB; JE9N:FSE) has a world class asset that’s larger, cleaner and more pure than almost any NPK project on earth. The company’s Lac à Paul phosphate rock project in Quebec, Canada, is at BFS (bankable feasibility study)-stage; in fact it’s been at BFS-stage since 2013.

In the above chart, Arianne’s 100%-owned Lac à Paul is the largest and has the highest concentrate grade phosphate project not owned by a major. It’s also one of the most advanced (shovel ready), with two long-term off-take agreements in place and good relations with local communities and First Nations.

I mentioned security of supply and on-shoring — look at the countries some of the other projects are in — the DRC, Guinea-Bissau, Angola… I’ll take Canada over those three. Quebec is well situated to serve both Canadian and U.S. farming interests, especially farms on both sides of the border near the Great Lakes.

With Lac à Paul management proposes to produce and sell 3million tonnes/year into a 200 million tonne market that’s growing by 1.5%-2.0%/year {perhaps 2.0%-2.5%/yr. with LFP battery demand}.

Nutrien, CF IndustriesMosaic, Archer-Daniels-Midland Co. and Yara Intl. have operations around the globe, including in Canada. These companies should be very interested in Arianne’s project.

Despite a market downturn from 2012-2019, then prolonged somewhat by COVID-19, very substantial de-risking of the story has occurred. Management continued to advance Lac à Paul, most notably by:

Nutrien, Mosaic, CF IndustriesBunge Limited and others need continued access to long-term supplies of NPK, the closer to their own facilities and customers as possible. World-class, advanced development assets, be they copper, gold, uranium … are few and far between.

If Arianne can deliver a growing volume of products into specialty applications, project margins could be expanded. One area of great interest in the P in LFP batteries. Tesla made the LFP chemistry, a version of a Li-ion battery, famous in China for smaller, entry-level vehicles.

A year ago, pundits thought LFP was just a niche market. However, Elon Musk changed that view by announcing last week plans to expand its use of LFP batteries across more models and regions of the world. Some pundits now believe LFP batteries could capture a quarter of the global market for EV batteries by 2030.

China’s BYD (a top-selling EV manufacturer), battery manufacturer CATL (China’s largest battery maker), Tesla and Stellantis have announced plans to use LFP cathodes. Volkswagen and Ford are also pursuing LFP.

If the LFP battery chemistry really takes off, where will the EV market get all the phosphate it needs? This is a very new development worth watching, how big a part of the market could batteries become? How large a premium could be obtained vs. selling phosphate concentrate to the fertilizer majors.

Will other phosphate producers be able to make suitable material to sell to LFP companies?

A main takeaway here is that Arianne delivered a strong BFS in 2013, but the economics are meaningfully better today. Leaving pricing the same, recoveries are up and op-ex is down 15%.

The concentrate grade has been improved and trucking logistics streamlined to save on costs and lower traffic emissions. Arianne has key ESG credentials, sourcing power from a green hydroelectric grid and a cooperation agreement with First Nations groups.

That BFS, if updated for today’s reality, would generate a notably higher net present value and internal rate of return. A hidden gem in the financial workings of the BFS model is that the USD$/CAD$ exchange rate has moved significantly in the project’s favor. How much of a move?

Like the decline in op-ex, (down 15%) the improvement in the FX rate is currently +15% (this could change). These enhancements would increase the NPV by hundreds of millions of dollars. Better recoveries and a higher concentrate grade would also help the economics. Management believes the project will be in the bottom (best) quartile on the cost curve.

Near-term catalysts include new off-take agreements, plus updates on funding discussions (debt + royalty / streaming) and possible upfront payments for off-take, perhaps equipment financing. These options are being pursued to keep the equity component of a construction funding package manageable.

If these and other milestones are met in coming months, I imagine the share price could move much higher than today’s C$0.49. The company’s enterprise value {market cap + debt – cash} is currently ~C$112 million. The company has a moderate amount of net debt, but it’s not due until 2026.

With a strong strategic partner, Lac à Paul could be in production by 2024, in time to repay and/or refinance this debt.

The province of Quebec, and various agencies and investment funds there, are known to be very supportive of major metals and mining projects. Arianne Phosphate (TSX-V: DAN) / (OTCQB: DRRSF) is in the right place, at the right time, with the right team and the right products.

Peter Epstein is the founder of Epstein Research. His background is in company and financial analysis. He holds an MBA degree in financial analysis from New York University’s Stern School of Business.

Disclosures / Disclaimers: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about Arianne Phosphate, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Arianne Phosphate are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this article was posted, Arianne Phosphate was an advertiser nbsp;on [ER] and Peter Epstein owned shares in the Company.

Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.

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