The gold price is doing everything we could have asked of it, rising to record highs. That is consistent with our view, espoused for several months, that gold is the best commodity to be focusing on. Whilst everything else (except uranium) has been in the doghouse, gold has gone from strength to strength. Even the suggestions that interest rates might not fall as soon as previously believed has not dampened the enthusiasm.
Last week I was in Brazil getting a better handle on Aguia’s phosphate and copper projects. (Recall that I was appointed to Aguia’s board in September last year). In summary, I have seen how the proposal to develop the valuable phosphate can be sharpened up to significantly improve the outlook and the potential earnings. Read below for a detailed assessment.
Food security is a growing concern
From time to time the food security thematic is elevated in the minds of investors, causing a focus on fertiliser companies involved in phosphate and potash. More recently the Ukraine War and the interruption of grain supplies out of that part of the world has caused a strengthening of prices of these commodities. However, there is often a disconnect between what is happening globally and share price movements of ASX companies. Too often these companies run out of puff before they are able to develop commercially viable operations. The cycle of enthusiasm and promotion, followed by non-delivery and disappointment, seems ever too regular.
So how do investors improve their odds? Logistics and transport costs tend to be the deal breakers when ASX companies try to compete globally. Aguia is in a unique position sitting smack bang in the middle of its market in Brazil, with buyers all within a 300 km radius.
Brazil’s position in global food supply
BTG Practual Global Research recently released a detailed research report titled “Has Brazil’s time finally arrived?” It states that Brazil is the largest net food exporter in the world with US$123bn worth of net exports in 2022. The next largest is Argentina, with US$45bn. I was reading this whilst driving through hundreds of kilometres of highly productive farmland producing rice and soy beans in Rio Grande do Sul, the southernmost State in Brazil. I have never seen anything quite like it. The agricultural productivity seems amazing.
Only 16% of available arable land in Brazil is cultivated (vs. 60% in Russia, 70% in the US, and 100% in China and India). As demand for global food production rises, Brazil is uniquely positioned to meet these needs.
Aguia is set to benefit from the food thematic
It is with this background in mind that I spent last week in Brazil, coming to grips with Aguia’s phosphate projects. Its 100% owned Tres Entradas Phosphate Project looks great on paper with 105 Mt at 10% P2O5, with an IRR of 54%, but it has been obstructed by NGOs seeking an injunction aimed at delaying the project construction, for about two and a half years. I learnt last week that the injunction hasn’t actually been granted yet. It is still in the application stage. The problem has been that no-one in the Brazilian system has taken the bull by the horns and made a decision … so it has just dragged on, much to the chagrin of shareholders. The local advice is that injunction proceedings like this are normal in Brazil. It is as much a part of doing business as dealing with trade unions is in Australia. The Brazilian companies continue with a development regardless while the lawyers deal with the proceedings. Eventually the project gets to the point where it has happened, and there is nothing to injunct. The Public Prosecutor, something akin to an ombudsman, moves onto something else.
From what I can tell Aguia has been too cautious in trying to clear the application for an injunction. It has given the applicant too much oxygen. It has tried to resolve it in the Australian way, on the belief that the opposing parties could come to some sort of reconciliation. However, the NGOs will always be disingenuous in the endeavour. All they want to do is delay a project as long as possible. Trying to negotiate with them will always be futile.
The Australian way is to resolve the matter. The Brazilian way is to proceed regardless. Australians need to think and act more like Brazilians when doing business in that country i.e. be more flexible and less rigid.
To be fair to Aguia management, the spectre of litigation will always make project financing problematic. A cloud of uncertainty is not what motivates financiers or investors. So, the new management is invoking lateral (Brazilian) thinking to overcome the impasse and is currently working on Plan B.
Plan B. Smaller scale, lower cost, faster development
Rather than construct a new 300,000 tpa operation at Tres Entradas, there appears to be an opportunity to lease or purchase a processing facility within trucking distance of the orebody. The one in mind has exhausted its supply of limestone and it is ready to be repurposed. Its nominal capacity on limestone has been 100,000 tpa, but given the softer material from Aguia’s organic phosphate mine this capacity could be twice that of limestone. Some plant modifications will be necessary, such as the installation of a drying facility to reduce moisture content from 18% to 8%, and a bagging facility, but the cost of this could be as low as A$3m. Compare that with the A$26m estimate for a 300,000 tpa new facility, as estimated in the DFS 2-3 years ago. Plan B is all about reducing up-front capex and minimising dilution for shareholders whilst simultaneously circumventing the effect of an application for an injunction.
If Aguia can negotiate a repurposed processing plant it can be up and running in half the time at around 10% of the capex. Starting at 100-200,000 tpa is an easy entry level that gives time to develop market acceptance of the product.
Like any industrial mineral, you have to be able to sell your product. Aguia is located in the heart of prime farming country that is mostly dependent on imported superphosphate. While this runs at grades of 30% P2O5, it is much more expensive at about A$400 pt, a price that takes into account import and transport costs. It also comes with undesirable chemicals introduced in the processing stage.
Aguia’s natural organic rock phosphate is only around 10% P2O5, so the selling price is adjusted accordingly. Recently the market price has been in the range of A$140-$160 pt. According to the DFS, direct mining and processing costs of less than $40 pt will lead to a very healthy gross profit margin. With Plan B at 100-200,000 tpa that suggests EBITDA of $10-12m. More work is required to firm up these numbers, so treat them with a little caution.
The Company has been advised by local selling agents that it will be able to sell all of its intended output within a 300 km radius of the mine. Thus one of the biggest killers of phosphate projects - transport to markets - is not an issue here. Import replacement for Brazil is a big motivator. The market has enormous depth potential for a supplier like Aguia.
The Tres Estradas phosphate project will be a free-dig mining operation with minimal processing of the saprolite material, generally to maximum depths of 40-50m. At 300,000 tpa the Phase 1 project will have an 18 year life. The carbonatite continues into the fresh rock horizons at depth and a lower grade but it is not necessary to consider that now.
Tres Estradas ore will need to be trucked about 105 km to the repurposed plant, at a cost of around 15¢/km tonne, but by the time that plant has been modified we could well see that the Mato Grande phosphate deposit is ready for mining. That is literally across the road from the plant, only 4.5 km distant. However, suitability is subject to drilling and further assessment.
Cash flow from the repurposed plant could be used to finance a stand-alone operation at Tres Estradas or as collateral for a prudent mix of debt. Exploration potential on other carbonatites on the licences could lead to ore being sourced from a number of mines for a multi-decade operation.
The Bottom Line
Aguia looks like a great turnaround story. After being punished in the market for lack of progress with the Tres Estradas Phosphate Project, the prospects of an effective Plan B should restore the markets faith in the company. Positive cash flow and earnings suddenly look much closer. At the same time the merger with Andean Mining will deliver a high profit margin gold mine at a time when the gold price is hitting record highs. Both projects will require minimal capex and therefore minimum dilution from equity issues. In fact, the gold mine could be capable of financing the phosphate projects. Happy days lie ahead for shareholders.
NB: None of the above should be interpreted as any form of guidance. The opinions expressed are those of the analyst and do not constitute company projections or forecasts.
Disclosure: Interests associated with the author owns shares in Aguia and has received capital raising fees. The author is chairman of Aguia and Andean. He has accepted the takeover bid for Andean Mining
