How to get exposure to Brazil’s booming fertiliser market
Recent years have seen a number of UK businesses enter the market to try and take advantage of an anticipated increase in global fertiliser demand at the hands of population growth and declining levels of arable land. Several of these firms focus in particular on Brazil, where efforts to reduce an over-reliance on imported fertiliser are expected to create a gap in the market as the country’s agricultural sector continues to thrive. Here we look at several of the opportunities available to investors looking to add exposure to the fertiliser trend to their portfolio.
The rationale for operating and investing in the fertiliser market comes down to several key factors creating a favourable supply/demand dynamic that is expected to last for many decades.
On the demand side, the global population, which currently sits at around 7.6bn people, is forecast to rise to 9.8bn people by 2050. According to some estimates, the world will need to produce as much as 70pc more food than it does at the moment to meet this added demand. Indeed, food imports across Asia and MENA are forecast to rise by 50pc and 45pc respectively within just three years.
Likewise, ongoing urbanisation across many historic emerging and frontier markets is expected to result in global middle-class growth of 76pc between 2015 and 2050. As the wealth of these individuals increases, they are expected to move towards higher calorie and higher quality diets that require quality soil.
Against this backdrop, the amount of arable land per capita available on the supply side is expected to fall by 15pc by 2050. In the absence of land, many believe that one of the only ways to meet the increasing demand for both food quantity and quality is to rely increasingly on quality fertiliser products that maintain or increase crop yields. The fertiliser is already essential for between 40-60pc of the global food supply. Firms operating in the market expect this figure to grow even further as the world grows and its tastes change.
While an increasing reliance of fertiliser is a global issue, several firms have zoned in on Brazil as a key market. There are several reasons for this.
Firstly, thanks to its abundant land, sun, and water, Brazil’s agricultural sector has been growing rapidly since the turn of the millennium. Indeed, the country’s planted land grew at 2.2pc per annum between 2000 and 2016, while fertiliser use grew by 4.9pc a year from 2005 through 2016. The country is now one of the world’s largest exporters of agricultural products, with the sector contributing to 29pc of its GDP and 46pc of its exports.
In line with this, it is also one of the world’s largest consumers of fertiliser. However, due to a severe lack of domestic production, it is also the second largest importer of fertiliser globally. Indeed, domestic fertiliser production declined by 9pc between 2012 and 2014 and the country currently imports 70pc of its potash from Canada, Belarus and Russia – an expensive and lengthy process.
With more cultivated land and higher crop yields needed over the coming years to continue meeting the requirements of its growing agricultural sector, Brazil is focused on cutting its reliance on fertiliser imports. Indeed, its government has set a target to be self-sufficient in fertilisers by 2020. Here are three companies looking to support the country in its goal.
Emmerson is a fertiliser firm focused on the production of a particular type of fertiliser called Muriate of Potash.
Its flagship asset is the Khemisset potash project in Morocco, which a scoping study last year gave a market-leading EBITDA margin of more than 60pc and a post-tax NPV10 of more than £1.1bn. These figures were based around Khemisset’s large JORC Resource Estimate of 311.4Mt at 10.2pc K2O with significant exploration potential.
Alongside Africa and Europe, Khemisset’s location gives Emmerson easy export access to Brazil, and the market is currently one of the firm’s biggest targets. Indeed, it signed heads of agreement in April for the offtake of 100pc of Khemisset’s production with a leading global fertiliser trading, distribution and marketing player with a large footprint in Brazil. Likewise, in a recent interview with TMS, the firm’s chief executive said ongoing trade disputes between China and the US were forcing many areas of the global agricultural market towards Brazil.
Emmerson is currently completing a feasibility study for Khemisset and recently received a formal indication of up to $230m of debt financing from a major European commercial bank to fund the project’s construction. With such a strong footing and important news on the horizon, could the business continue to rise from its current 4.5p share price after a stellar start to the year?
Harvest’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.
Harvest believes that its on-the-ground presence will position it ideally for exposure to the upside potential offered by Brazil’s agricultural sector. 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.
Harvest suffered a considerable sell-off in April, falling from 11.8p to 6.4p. The trigger was likely the release of the firm’s results, which saw it announce that its 2019 full-year revenue figures are expected to come in 25pc below current analyst estimates.
However, as we highlighted at the time, there is an argument to be made that the sell-off was an over-reaction and presented a buying opportunity. Indeed, the result also saw Harvest reveal a healthy £6.4m cash balance while chairman Brian McMaster remained highly positive on his company’s long-term prospects. 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. Elsewhere, the firm also continues to enjoy support from institutional stalwarts like Miton, River & Mercantile, and Chelverton.
Aside from a Q&A document earlier this month, the business has released little to the market since April and it has not recovered much of the ground lost in its sell-off. If McMaster can deliver on his ambitious plans, could Harvest’s current 5.6p share price soon look cheap?
The final stock we will look at in this piece, and the most recent of the three firms to enter the Brazilian fertiliser market is Sirius Minerals.
Sirius will be best-known to investors as the developer of Woodsmith, the world’s largest and highest-grade deposit of Polyhalite, a fertiliser that can be used to increase balanced fertilisation around the globe. The project involves sinking two 1.5km shafts below a national park on the North York Moors to access the large deposits. Ore will then be extracted and transported to a processing facility where it will be granulated and exported to overseas markets.
Last September saw Sirius sign a supply agreement with a company called Cibra for the supply and resale of up to 2.5Mtpa of POLY4 – its fertiliser product – into Brazil and certain other areas of South America. The company also took a 30pc equity interest in each of the Cibra group of companies for a total of 95 million fully paid ordinary shares of Sirius.
With a market cap of £1.1bn, Sirius represents a much larger vehicle than Emmerson (£27.2m) and Harvest Minerals (£10.4m) for those looking to get exposure to the fertiliser sector. However, it is also a much less direct play on the Brazilian fertiliser trend, with the country makes up a small fraction of the organisation’s total operations. Although this diversification could reduce risk, it may also fall short of the requirements of those investors who really want to invest in the global fertiliser trend.
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The author was remunerated but does not hold shares