Looking for a play on the global demand for Fertiliser? Think Harvest Minerals
“…Right now though Harvest is focused on ramping up production at Arapuá to help meet Brazil’s urgent demand for fertiliser. Global producers are scrambling to address the deficit as best they can…”
Russia’s aggression against Ukraine is having a profound economic impact beyond the surge in energy prices: the cost of agricultural production is soaring too as a fertiliser supply shock hits farmers.
Harvest Minerals (AIM:HMI) is riding the surge in demand, selling KPFértil, a ‘direct application’ organic fertiliser that doesn’t require significant processing or chemical alteration, to Brazil’s immense market. With its abundant land, sun, and water the South American giant is the world’s largest producer of agricultural commodities, which account for a third of the country’s GDP and nearly half of its exports. But it buys more fertiliser than any other country, able to meet only some 15pc of its demand from native supplies.
HMI produces KPFértil at its wholly owned fertiliser plant at Arapuá, in the state of Minas Gerais. The company also has exploration licences for a phosphate prospect at Mandacaru, 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, close to Brazil’s only producing potash mine at TaquariVassouras. Last year it 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, acquiring exploration rights some 168km from its flagship project, where it is planning a preliminary assessment of the site’s geological potential.
The potash supply crunch
Right now though HMI is focused on ramping up production at Arapuá to help meet Brazil’s urgent demand for fertiliser. Sanctions against Russia and Belarus have slashed the global supply of potash, a mineral rich in water-soluble potassium required for the production of food staples such as corn, soy, rice and wheat. The two countries, which had supplied two-fifths of the world’s potash, are now able to sell only a residual amount, mostly to China. Prices have soared in Europe by 240pc to €875 a tonne, and in Brazil by 185pc, hitting record levels of more than $1,100 a tonne.
Global producers are scrambling to address the deficit as best they can. Mining giant BHP has an option to bring forward a $5.7bn potash project in the western Canadian province of Saskatchewan, which would double international production to 8 million tonnes a year, and Australian miner Highfield Resources is close to securing a €312.5m financing package to start development of a potash project in Spain this year. The Brazilian state may force through a $2.5bn potash project in the Amazon against fierce objections from environmentalists and indigenous peoples. But the Russian and Belarusian shortfall cannot be easily addressed: most of the world’s most profitable and accessible potash deposits were developed during the China-driven commodities boom of the early 2000s. And new plants take several years to come on stream.
Today’s sky-high prices may fall, quickly. Belarus is likely to find new buyers beyond Western customers, and some kind of ceasefire may allow customary trade patterns to reassert themselves. But even if the war does not drag on as long as feared analysts believe that the market will take some time to completely recover, and that prices will settle above their long-term average for many months and perhaps years to come. At a recent conference a new floor price of $500 a tonne was mooted – half the current spot price but double the average price of the previous decade.
HMI achieves lift-off
Market conditions, then, seem set to give HMI considerable time to establish itself as a significant supplier to Brazilian market. As we have previously reported HMI has spent the past two years laying the groundwork for its current position. In 2020 the company secured permits to expand Arapuá’s mining area to 78,894 square metres and its storage capacity to 30,000 tonnes, giving it the flexibility to begin to step up production to a targeted 400 kilo tonnes per year. Last year it began construction of a solar power facility to meet the plant’s power requirements at Arapuá. Its modular design allows capacity to be increased as production is ramped up, and has the potential to cut the company’s power bill by 8pc a year. The plant helped HMI burnish its environmental credentials with the receipt of the London Stock Exchange’s Green Economy Mark, awarded to companies deriving more than half of their total annual revenues from products and services that contribute to the greening of the world economy. And this year Brazil’s Ministry of Agriculture, Livestock, and Food Supply (MAPA) approved the registration of the company’s organic, multi-nutrient KP Fértil as a simple mineral fertiliser, a major breakthrough allowing HMI to reach larger customers that require MAPA certification as a requirement for purchase.
HMI had begun to record significant sales growth last year, allowing it to move into profit. The company’s most recent interims, for 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. A further update said it had exceeded its total 2021 sales target of 80,000 tonnes of KP Fértil more than two months ahead of schedule, achieving accumulated sales orders of 80,701 tonnes through January to October, an increase of 104pc against the same period in 2020.
But this year sales have really taken off. A March trading update reported January and February KP Fértil sales 1,070pc higher than forecast: 30,161 tonnes against a previous estimate of 2,574 tonnes. Sales for those first two months of the year were equivalent to 35pc of total sales for all of 2021, and to 20pc of the sales guidance for 2022 of 150,000 tonnes. Given the historic expectation that approximately 80pc of sales are seasonally placed in the second half of the year – modest sales at the start of the year typically ramp up before tapering off in the wet season at the end of the year – HMI said it was ‘advancing its plans to meet production of 200,000 tonnes.’ The company indicated sales might be further boosted by the Brazilian government’s plan to introduce various stimulus packages for agricultural production.
A subsequent update reported that during the three first months of 2022 HMI had continued to experience record breaking performance, achieving a total volume of 70,200 tonnes of sales representing a 689pc increase over the same period in 2021. Total sales orders in 2022 have so far reached 82pc of all the sales performed in the entire year of 2021, and 47pc of the 2022 sales guidance of 150,000 tonnes. Chairman Brian McMaster said ‘2022 has started with a bang … These are exciting times and never before has the saying that we are “in the right place, with the right commodity at the right time” being more accurate.’ This year’s strong sales should have a significant impact on the company’s gross profit, which for the six-months to 30 June 2021 was $376,111, up from $113,481, and on its reported loss, which was $1,067,707, down from $1,843,743. Cash stood at $2,237,583.
HMI’s share price has ignited this year, rising from just over 4p to just over 16p at the time of writing, taking the company’s market cap to nearly £32m. The price more than doubled in the days after the war broke out. With H2 2022 sales figures due soon that seem likely to confirm HMI’s momentum the company’s value may continue to rise sharply, though a more modest increase in its stock over the past couple of months indicates that those expectations are to some degree factored into the price. But as it establishes itself in the huge Brazilian market the company is now looking like a sound long term bet, not just an immediate opportunity. HMI has an established and growing consumer base, has secured all the certification it needs to reach bigger clients, and has an operating plant with capacity to handle rising demand. We think HMI is one to watch now, and for the foreseeable future.