|Thanks to a poster on SH ...|
Bottom-Fish Comment - December 18, 2009: Amazon reports initial drill results for Cerrado Verdete potash project in Brazil
Amazon Mining Holding Plc has made a new all time high after a bobbled news release on December 14 temporarily confused the market. Trading was halted at the open on Monday because the TSXV deemed the news to be material and an analyst had not yet reviewed it by the opening "bell". The news consisted of assays for the first hole into the Cerrado Verde potash project in southern Brazil, which yielded 11.8% K2O over 45 metres from surface. When trading resumed a couple hours later the stock started to drop, possibly because a market used to seeing 22% K2O assays for sylvite from Saskatchewan potash plays concluded that the stock had been halted to allow proper dissemination of bad news. The situation was compounded by the presence of a persistent seller during the past couple weeks. Since then, however, the situation has been brought under control as management explained the geological context to investors worried about the "low" grade. Management had in fact decided to make a news release out of the first drill hole because the grade was better than the 10% it had been expecting. The potash bearing mineral at Cerrado Verdete is a silicate called glauconite, unlike the sylvite mined in Saskatchewan which is a salt called potassium chloride (KCl), the form most commonly used as a fertilizer. As would be expected, a silicate is not water soluble as would be a salt, which prevents glauconite in its natural form from being useful as a fertilizer. Glauconite also by nature tends to have a lower grade than the 18-22% K2O typical for sylvite. KCl can be produced from glauconite, but this first requires "cracking" the silicate with a pyrometallurgical process, which results in an insoluble product that must then be leached with hydrochloric acid to produce potassium chloride, all of which costs much more than mining potassium chloride bearing sylvite which must merely be upgraded into pure KCl. The extensive Brazilian glauconite potash resource has been known about since the eighties, but could never be commercialized because of the low starting grade and the cost of processing glauconite into potassium chloride. Despite the high capital cost associated with mining the richer 1,000-2,000 metre deep sylvite deposits in Saskatchewan, glauconite for decades could not compete. However, in recent years as soaring agricultural demand has pushed up the price of KCl fertilizer, Brazil's glauconite deposits have attracted renewed interest, particularly from agri-businesses in Brazil itself, which imports 90% of its annual consumption of 3.4 million tonnes of potash fertilizer. While my rare earth bottom-fish pick Quest Uranium Corp has awed most people with its steep price gains during 2009, Amazon Mining has been a stealth performer with a similarly steep chart patern which I suspect will at the end of the day be a much bigger winner than Quest, and not because Quest has no price upside left.
Amazon's coup during 2008 was to stake much of the "green slate" belt in Minas Gerais state on speculation that high KCl prices were here to stay and that the special needs of the "cerrado" farmland in southern Brazil could benefit from a slow-release fertilizer derived from glauconite through commercialization of a "ThermoPotash" product invented during the eighties when Brazilian scientists first tried to turn glauconite into a useful fertilizer product. Amazon has picked up this project after a 20 year hiatus and is working to prove that glauconite is a feasible source of fertilizer for Brazilian farmers. This project involves four important milestones: two will be delivered in Q2 of 2010, work on the third is underway and will take a couple years, and initiation of work on the fourth milestone is contingent on the second milestone. The drilling news release relates to one of the first two milestones, which is the establishment of a 43-101 glauconite based potash resource. The glauconite deposits outcrop at surface, as is evident from the roadside photo of participants in a November project tour organized by Amazon. Earlier this year Amazon prospected and mapped the green slate belt in order to identify the best location for a low cost, quarrying operation, and is now drilling off a resource that can be the basis for the other important milestone on which it is working, a scoping study on what it would likely cost to produce ThermoPotash. Because the essense of this story is cost control, every small saving counts, which is why management thought an 11.8% K2O grade was newsworthy. To put this into an economic context, K2O represents 60% of KCl, which is priced by total weight, not contained K2O. The pyro-metallurgical treatment contemplated for the glauconite basically melts the rock, followed by rapid cooling to produce a pelletized "glass", which delivers 100% recovery of the K2O. So to convert 1 tonne of glauconite into potassium chloride you divide the K2O grade by 0.6, or 0.118 divided by 0.6, resulting in 0.2 tonnes of KCl, which at US $400 per tonne KCl would be worth $80. If the glauconite came in at only 9% K2O, the KCl equivalent would be worth only $60. So it is a big deal that the initial hole graded 11.8% rather than 9% K2O, which somebody accustomed to sylvite based potash stories might not immediately appreciate. It now is actually worthwhile to pay attention to upcoming drill results to see if this higher grade holds up for the rest of the area Amazon has chosen to turn into a 43-101 resource estimate. Assuming Amazon publishes a map with drill locations it should be possible to calculate a back-of-the-napkin resource well before the company publishes such as resource.
The more important milestone expected in Q2 of 2010 is the outcome of the scoping study, which will be based on small scale tests that produce ThermoPotash. The small batches of ThermoPotash being produced as a result of these tests are being supplied for the third milestone, which is the demonstration that this semi-soluble, non-chloride based, slow-release fertilizer is in fact more effective than a similar volume of traditional KCl fertilizer. During the past year Amazon has announced several deals with agri-businesses who are eager to test the ThermoPotash on small crop plots as soon as the sample fertilizer is available. The agronomic cycles in Brazil are quite short, typically 180 days, and often allow three crop plantings per year, so it would only take a couple years to confirm the effectiveness of ThermoPotash, with the likely trend evident after the first test crop. These effectiveness tests are important because it is unlikely that a glauconite derived fertilizer can be competitive with KCl on a volume price basis. What has attracted the interest of Brazil's agri-businesses and government officials to Amazon's revival of an abandoned project is the fact that southern Brazil's acidic soils and torrential rains wash away a good portion of soluble applied KCl fertilizer before plant roots have had a chance to tap the nutrients. So the competitive value of ThermoPotash will be in part based on the nutrient impact per volume of fertilizer applied to crops. In other words, ThermoPotash is expected to have a much higher efficiency in the southern Brazil farmland setting than KCl based fertilizers, which would offset the unit cost difference. In addition, of particular interest to the Brazilian government are the security of supply implications of reducing the 90% dependency on potash imports by a country whose GDP is dominated by the agricultural sector which is expected to remain an engine of GDP growth. This "strategic logic" could outweigh the "economic logic" of importing currently cheap potash from Canada and eastern Europe. Whether or not Amazon will need to tackle the fourth milestone depends on the outcome of the first three milestone.
The fourth milestone involves establishing commercial feasibility for the production of ThermoPotash, which requires construction of a pilot plant to process glauconite into ThermoPotash. In a recent interview Amazon's new chariman Peter Gundy, who worked for Potash Corp during the seventies and spent the last 15 years developing the rare earth processing business of Neo Material Technologies Ltd, suggested that the pilot plant stage would cost tens of million dollars. In other words, within six months Amazon will be at a stage where it will need to do a major equity financing to establish the feasibility of its potash story. In this regard Among the key questions management is trying to answer is what size of pilot plant is needed to establish commercial feasibility, and how much sample material will it need to produce for agronomic crop tests. The latter is an issue because the energy intensive per unit cost of ThermoPotash produced at pilot plant scale will be high and will be an operating cost that adds to the pilot plant construction cost. Amazon is very similar to the advanced rare earth juniors which will also have to invest considerable money in establishing optimal recovery processes for the rare earth metals in their deposits, though in the case of ThermoPotash it appears that the process is already understood but needs optimization and engineering. With only 30.5 million shares fully diluted, and sufficient funds on hand to deliver the initial 2 milestones by Q2 of 2010 along with preliminary findings in hand with regard to the third milestone, the current market capitalization of $50 million for Amazon has plenty of room to expand, and the reason for doing so is quite simple. Amazon has control of a near "infinite" supply of glauconite for a potentially "infinite" Brazilian demand for ThermoPotash, and by demonstrating the feasibility of delivering one to the other it is sitting on a potentially very large business