Is Harvest Minerals a buy following major results sell-off?
Fertiliser firm Harvest Minerals saw its share price plunge at the end of March after revealing that its 2019 revenues are expected to come in 25pc below analyst expectations. The business put this down largely to several, unbudgeted one-off payments and the early closure of its strategic alliance with Geociclo. However, it went on to issue a highly bullish outlook for its future, highlighting its established operational base in Brazil, improving monthly sales rates, and strong cash balance. Here, we look at whether the organisation looks like a buying opportunity at 6.85p a share.
Fertiliser opportunity
Harvest is an AIM-listed fertiliser firm focused on developing a long-term, profitable, sustainable business. The organisation believes that the market is set for strong growth over the coming decades as a result of ongoing global population growth. As demand for food continues to grow, Harvest believes more arable land will be required, and fertiliser use will rise to improve crop yields.
The company’s flagship asset is the Arapua project in Brazil, where it produces its Government-approved organic multi-nutrient fertiliser KPfértil, which contains many of the essential nutrients required by plants. Arapua has a JORC indicated and inferred resource of 13.07MT at 3.1pc K2O and 2.49pc P2O5 and is operating under a rolling four-year trial mining licence that allows it to mine in 50kt instalments.
Agriculture is a driving force in the Brazilian economy, accounting for 29pc of GDP and 46pc of exports. Indeed, the country is the world’s largest exporter of soybeans and coffee. Moving forward, Brazil is expected to account for 70pc of the world’s new arable land by 2050. With the country currently importing 76pc of its fertiliser, Harvest believes that its on-the-ground presence will position it ideally for exposure to this upside potential. What’s more, it says that the area immediately surrounding Arapua is particularly prospective, with the local industry for coffee alone representing a potential market for KPfértil of over 3Mtpa.
After securing its first sales in H2 2017, Harvest acquired several major fertiliser orders for the project in 2018. Following a £9.7m placing in June, the business also spent much of last year completing its mine at Arapua as well as its associated processing plant expansion. This work facilitated increased production of up to 320Kt of fertiliser a year, allowing Harvest to service both existing customers and new sales contracts.
The organisation has also increased its marketing activities to include local advertising, demonstration trials, attending trade events, and strengthening key relationships with local customers and cooperatives. Finally, the business took a significant step forward in July last year when it received approval from Brazil’s Ministry of Agriculture to register KPfértil as a remineraliser, opening up new sales opportunities.
Mixed results
Harvest’s share price collapsed by 38.5pc from 11.8p following the release of its results. It now sits at 6.9p, which gives it a market cap of £11.8m. The company’s decline was likely driven by the revelation in its results that 2019 full-year revenue figures are expected to come in 25pc below current analyst estimates. On the day of the results, analyst Arden gave the company a buy rating and a target price of 32p, a downgrade from its previous 39p target price.
Harvest said that, while it believes it has been very successful, it has had some outcomes that have fallen short of its expectations. Most notably, its highly-touted strategic alliance with Geociclo, which could have aided the firm in its expansion plans, was cut short when the business fell into insolvency. Furthermore, the organisation said it had experienced some unbudgeted one-off costs that have impacted its profit before tax in H1 2019. However, it added that it does not expect these to repeat in H2 2019 or after that.
Harvestminerals.net/media/1307/harvest-corp-presentation-q2-2019.pdf
Despite this economic hit, Harvest’s chairman Brian McMaster remained highly positive on the company’s long-term prospects in his statement. For example, he highlighted the business’s improving month-on-month sales rates and the fact that – to date – all of its customers have either purchased KPfertil again or indicated that they would buy it again. Critically, he said that with its improving sales run rate and repeat customers, Harvest can only grow.
‘We have entered the phase of building a profitable, sustainable business for the long term. There are many moving parts to achieving this and the timing and scheduling of achieving our objectives will not always fit the schedule of all shareholders or the timing of 6 monthly reporting. Building the business up to capacity will take months, not weeks and there will be periods where the communication with the market may be thin. This should be interpreted as a good thing; it means we are busy building the business,’ he said.
‘As we report on the closing of the 2018-year, Harvest is well placed to move forward. The macro fundamentals that brought investors to Harvest remain as strong as ever: the very significant demand for fertiliser product in Brazil, the attractiveness of our product compared to alternatives, our proximity to customers, and our extremely attractive economics are all in place and bode well for a profitable and exciting future.’
Importantly, Harvest also revealed a cash balance of £6.4m as at 28 March this year in an updated presentation released several days after its results. The company says that this gives it a significant cash runway, meaning no additional working capital is likely to be required for the foreseeable future.
It is also worth noting that while Arden reduced Harvest’s target price, it also had plenty of positive things to say about operations. Indeed, it highlighted the substantial progress made by the firm last year before pointing to the positive impacts that its increasing marketing and sales efforts are having in getting the KPfértil brand name out to market.
‘Harvest is getting farmers in the region aware of KPfértil and its benefits compared to traditional fertiliser,’ the broker said. ‘Farmers know what results they can achieve from fertilisers and certain fertiliser blends. KPfértil is a unique product and educating the market to its benefits over traditional fertiliser is key to Harvests strategy in Brazil.’
The company also continues to enjoy support from institutional stalwarts like Miton (9.8pc), River & Mercantile (3.6pc), Chelverton (3.4pc).
Discussing Harvest’s plans for the coming year, chief operating officer Mark Heyhoe added to Total Market Solutions: ‘Now we have our operations all up and running, so we don’t have any more significant capex expenditure forthcoming. Sales are growing, revenues are growing and we want to keep on focusing on continuing that growth while simultaneously bringing costs down – as this is a fixed cost this will decrease as we ramp up producing.
Last year was all about using distributors, who usually sell a number of different products, but now the focus is on building our own sales team. We now have six sales guys plus a sales manager, and we now have a marketing team on board so we can promote the product ourselves.We have a new product, so we need to push it out and make the relevant people aware of it. Plus, when we sell ourselves, we save on the additional costs we previously had to pay distributors.
After building up our processing lines, we will always have excess capacity, so it is all about how quickly we can grow sales. We are our talking to end users, to consultants who advise farmers on what fertilisers they should be using, we have trials in place, and we registered with the Institute of organics at the end of last year as well. So, we are getting into lots of groups and making a big push as well for sugar cane, which is potentially going to be huge for us.’
So, while the market was disappointed by Harvest’s results, the company’s ongoing confidence in its future and the continued backing of institutional investors is undoubtedly encouraging. If the business can meet these lofty expectations, then its shares could soon advance from their currently-depressed levels.
Dr Mark Heyhoe COO joined Jeremy Naylor at IGTV studio here
