Feeding the World
In one of the more interesting screen shots I have ever taken, CNN posted a piece at 1:45 PM yesterday, a mere 15 minutes before Chopper Ben painted himself into a corner by announcing no taper. The piece was titled “Yes, the Fed is going to taper.” Nice timing.
In other words, dollars are going to be printed to the moon and dumped out of choppers until investors are up to their ears in paper assets worth near nothing. It might be a good time to own real assets. Gold responded to Bernanke’s action by leaping higher by $56. Some people get it.
I had an interesting chat a week or so back about a phosphate company that will soon be bought out. I lived in Lakeland Florida forty years ago and phosphate mining is big in the area. I thought I understood phosphate. After the briefing on Arianne Phosphate I realized I didn’t.
Phosphate is a rock that is chemically treated to become phosphate fertilizer. It takes almost two tons of phosphate rock to make one ton of fertilizer. Peak oil is real. Peak oil also means peak food. We have to increase the food grown on limited land to feed the increase in population. That means more use of fertilizer. Phosphate is desirable because of it’s phosphorous content needed for food production.
The world’s largest producer is Morocco and they have stated publically that they know they are the swing producer. They will cut production in order to maintain prices. Most phosphate in the world comes from North Africa. Instability there will lead to higher prices for phosphate.
But all those low-grade phosphate deposits are sedimentary in nature. They formed in basins. While easy and cheap to mine, they have limits. In 1990 the US produced some 46 million tons, by 2010, production was down to 28 million tons. Permitting issues in Florida have increased costs to the point producers are looking elsewhere.
Arianne Phosphate has an igneous phosphate deposit in Quebec. While this type of deposit only represents about 20% of world deposits, the lower impurities in the rock allow a higher concentration of phosphate in the final product with fewer nasty elements such as uranium or heavy metals common to most sedimentary deposits.
Phosphate, like coal and iron is an industrial mineral. Transportation costs are a large part of the total cost. By allowing a higher concentration of phosphate in the final product, Arianne will be selling material with a higher value. Demand is increasing in North America at the same time supply is decreasing.
Arianne’s deposit in Quebec at Lac a Paul is estimated to produce 3 million tonnes of 39% concentrate per annum for twenty-five years. The global demand for phosphate is growing at 2% a year or 4 million tonnes per annum. After the pre-feasibility came out, Arianne announced an upgrade in their M&I resource to 347 million tonnes. Their figures showed a 3.9 year payback of total capital cost and a 23% IRR with a NPV of $985 million. Expect the Bankable Feasibility Study to be released in the next three months.
A NPV of $985 million for a company with a market cap of $100 million? Are you kidding me? These guys are going to get taken out and soon. I have no doubt they have a hand full of CAs signed and some major is waiting for the price of the shares to go up so they won’t look so stupid by going to their board and making an offer. In this case, a low market cap is a barrier to a buyout. They are going to go higher.
As Kinross learned with their $2.5 billion dollar disaster in Ecuador, country risk is getting greater and greater. It would be easier for me to list the safe countries around the world to operate in than to list the countries that have gotten both greedy and stupid at the same moment. Canada is not only one of the best environments to operate in around the world; Quebec is the best province to make a mine.
For the last two years, investors washed their hands of resource shares so they could go over to the Dow and the S&P and capture the final high before those markets crash. Resource shares didn’t decline on their merits, they crashed because of the mob rushing into Big Board stocks. That situation is changing as I write and resource shares are going to be the next big thing.
Arianne is an advertiser. I don’t own shares but I am very biased on the company. It looks pretty much like a slam-dunk to me; someone is going to buy them out at a price a lot closer to their NPV. You have the safety of owning a real asset worth real money while having the upside potential of a penny-dreadful shooting craps in Las Vegas. It doesn’t get any better than that.
As always, I don’t share in your profits so I don’t share in your losses. Only you can be responsible for your own investment decisions. For more information, visit their website or read their excellent and current presentation.
Arianne Phosphate Inc.