Harvest Minerals Ltd

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Comparing Salt lake Potash with Harvest Minerals is like comparing chalk with cheese.

 

“…Harvest has comfortably exceeded the sales number of 80,000 tonnes it set at the outset of the year. Since commercialisation less than two years ago Harvest has extended its product’s reach and secured repeat orders from key clients…”

 

With demand for agricultural commodities surging and prices soaring opportunities abound for fertiliser companies able to take their chances. Success isn’t guaranteed, as the taking into administration of ASX-listed Salt Lake Potash Limited last month highlighted. But Brazil-focused Harvest Minerals (AIM:HMI) has made robust progress this year in meeting its goals for 2021.

Harvest is seeking to take KPFértil, a ‘direct application’ organic fertiliser that doesn’t require significant processing or chemical alteration, to Brazil’s huge market. With its abundant land, sun, and water, the South American giant is the world’s largest producer of agricultural commodities, the sector accounting for a third of the country’s GDP and nearly half of its exports. But Brazil depends on other economies for its fertiliser, importing more than any nation other than China.

Harvest produces KPFértil at its wholly owned plant at Arapuá, in the state of Minas Gerais to the south east of the country. Though the company is currently focused on producing and promoting its flagship fertiliser product, it also has exploration licences for a phosphate prospect at Mandacaru in the state of Ceara to the north of the country, which has a JORC (2012) compliant total resource of 4.38Mt at 4.55pc phosphorus pentoxide, and has plans for a potash project in the Sergipe Alagoas Basin, also to the northeast, and close to Brazil’s only producing potash mine at TaquariVassouras.

The small cap agricultural sector reverberated last month when Salt Lake Potash Limited (ASX:SO4), which aspired to produce sulphate of potash, a source of low-chloride potassium favoured by growers of chloride intolerant crops went into administration. The company completed the construction of its processing plant this summer, but its efforts to build sustainable production from the salt lakes of Western Australia, and make inroads into a market growing at a CAGR of 6.5pc, were thwarted by disappointing geological and processing results. After conducting six separate equity capital raisings in the year to June the company failed to secure the funds it needed to restart production.

Laying foundations for growth

 

Harvest Minerals, however, after weathering its own challenges last year, has succeeded over the past 12 months in meeting and surpassing expectations for KPFértil sales. Led by Executive Chairman, Brian McMaster, founder of Highfield Resources, another Australian potash company, Harvest had hoped 2020 might be the year in which it would make a significant breakthrough into Brazil’s sprawling market.

Those aspirations were delayed by the onset of the pandemic, which put the country’s economy into lockdown and imposed restrictions on production. But Harvest was able to lay the foundations for the products rapid rollout this year. As we noted when we last wrote about the company, Harvest secured permits to expand Arapuá’s mining area four-fold to 78,894 square metres, and its storage capacity three-fold to 30,000 tonnes, giving it the flexibility to begin to step up production to a targeted 400 kilo tonnes per year.

The company also completed a series of agronomical tests designed to prove KPFértil’s suitability for cultivating a much wide range of crops. Last December agronomic tests found KPFértil demonstrated superior yield performance in sugarcane plantation areas compared with the widely used Bayóvar fertiliser, opening the way for Harvest to sell to the country’s world-leading sugar market. And earlier this year tests showed KPFértil produced carrot yields that compare favourably with standard applications, nurturing a significant increase in soil nutrients. A major breakthrough was the approval of the product as a source of potassium and phosphate for coffee plants, confirming it can be used to replace conventional coffee fertilisers.

In anticipation of entering these new markets Harvest secured agreements with the Government of Minas Gerais – a key region for Harvest – to establish ties with local suppliers, and with the Banco do Brasil – the country’s largest provider of credit to Brazilian farmers – which will allow each of the company’s clients to access the bank’s credit lines to fund orders of KPFértil up to a total of $1m. The company entered 2021 seeking to take advantage of a strong upturn in demand in its target markets, the Federation of Agriculture and Livestock of the State of Minas Gerais reporting that production in the region hit a new record in last year of $18.7bn, 24.3pc up on 2019.

Progress through 2021

 

And this year Harvest has indeed been able to record significant sales growth. The company’s most recent interims, to the half-year ended 30 June 2021, reported sales of 26,726 tonnes of KP Fértil, a 171pc increase over same period for the previous year. An update last month it said it had exceeded its total 2021 sales target of 80,000 tonnes of KP Fértil more than two months ahead of schedule, recording accumulated sales orders of 80,701 tonnes from the beginning of January to 16 October, an increase of 104pc against the same period in 2020. The company has specified 40,000 tonnes as its breakeven point.

Increased sales were facilitated by the rollout of a higher margin 25kg bag option tailored for small to medium sized farmers and resellers, and a marketing campaign supported by a dozen agronomists split into two regional teams – supported by a third-party network comprising 20 resale centres – that highlighted the product’s suitability for coffee, sugarcane, and other crops. Harvest also started to promote KP Fértil in regions beyond its immediate markets in Minas Gerais and Sao Paulo.

In addition to the sales push the company took its first steps towards engaging with the agriculture limestone market, a soil input used by regional producers of different crops to neutralise soil acidity. Harvest acquired the mineral rights over an area prospective for the exploration of agriculture limestone some 168km from the Arapuá project, where it is planning a preliminary assessment of the site’s geological potential with a view to carrying out an exploration programme that would follow the same strategy used to define and advance the now producing Arapuá deposit.

The company has also burnished its environmental credentials, receiving the London Stock Exchange’s Green Economy Mark, which recognises companies that derive 50pc or more of their total annual revenues from products and services that contribute to the global green economy. In September it commenced construction of a solar power facility that will meet all the power requirements at Arapuá. Harvest expects the facility, which will have a modular design allowing capacity to be increased as production is ramped up, to be commissioned within five months, and to reduce its power bill by 8pc a year.

Sales helped boost revenue for the six-months to 30 June 2021 from $299,449 to $790,224, and its gross profit from $113,481 to $376,111. 

Experiencing turbulence

 

Harvest is seeking to make inroads into a hugely lucrative but turbulent market. The Brazilian economy, never noted for its stability, is going through a particularly rocky phase, as the regime of populist President Jair Bolsonaro struggles to bring Covid under control and contemplates breaking the country’s fiscal rules ahead of elections next year. Brazil’s stock market and currency tumbled last week over fears that the so-called ‘fiscal ceiling’ designed to keep budget increases in line with inflation, regarded as a pillar of the country’s economic credibility, will be breached. Last month the Brazilian central bank announced its biggest interest rate rise since 2002, as the country’s consumer prices increased by 10.3pc in the 12 months to early October, more than analysts had expected and well above an annual target of 3.75pc for 2021.

Brazil’s agricultural sector has also had to weather its worst summer drought for nearly a century, followed by a freakish spell of cold temperatures. Indeed there are concerns that climate change may be bringing new weather patterns that will present persistent challenges. The farming belt is braced for a resurgence of the La Niña phenomenon, a cooling of the Pacific Ocean that last year brought drought conditions in the US and Latin America and increased rainfall in Australia. And this year’s lack of rainfall has been linked by some scientists to a microclimate generated by the clearing of the Amazon rainforest. Initial estimates of production losses for next year’s crop range from 10 to 50pc of previous forecasts, threatening a continued surge in coffee and sugar prices. This summer global food prices soared by the biggest margin in a decade, the year-on-year rise in the UN Food and Agriculture Organisation’s monthly index spiking 40pc in May. The world’s consumer price inflation for food had already risen 6.3pc in 2020, up from 4.6pc, due to the impact of the pandemic on global supply changes for the production and distribution of food.

But although a smooth ride for participants is not guaranteed, the sheer size of Brazil’s agricultural market offers huge opportunities for those who can grasp them. A major study published by the Brazilian Ministry of Agriculture this summer, charting the country’s commodities sector over 20 years, noted the country is now the second-largest grain exporter in the world, supplying nearly a fifth of the international market. Brazil is the top exporter of sugar, supplying one third of the world’s produce, and of coffee beans, accounting for more than a quarter of the world’s exports. Since the turn of the millennium the country has established itself as the world’s fourth largest producer of rice, barley, soybeans, corn and wheat. It supplies nearly 10pc of the world’s corn and 50pc of its soya beans. And Brazil is the second biggest exporter of beef, pork and poultry meat, meeting 13.4pc of the world’s supply, and the third largest fruit producer.

The outlook for Harvest

 

Harvest’s solid progress in rolling out higher sales this year has been partially reflected in its share price. Sitting at just under 3p when we last wrote about the company, the price touched 4.5p in June as positive sales figures rolled in. It has since fallen back to around 3.75p at the time of writing, leaving the company’s market cap at $7m.

There will of course always be debate among analysts and shareholders regarding the sales targets companies set themselves. But Harvest has comfortably exceeded the figure of 80,000 tonnes it set at the outset of the year, itself double the company’s breakeven point. Since commercialisation less than two years ago Harvest has extended its product’s reach and secured repeat orders from key clients. As we have seen it is operating in a febrile market. Perhaps, however, rising inflation will work in the company’s favour, making its home grown organic product more attractive to than more expensive imports. With rising sales, an operating plant with capacity to handle higher demand, proven environmental credentials, and a seeming bottomless market to reach out to, we see no reason to revise our view that Harvest Minerals is one to watch.

 

To listen to the latest interview with Harvest Minerals Exec Chairman Brian McMaster, please click here

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