Brazil Potash

At the beginning of this note, I highlighted fertilizer as one of the economic inputs that has been disrupted by the war in Iran. While the closure of the Strait of Hormuz has disrupted mostly nitrogen-based fertilizers (i.e., not potash), at times like these, it just becomes sooooo glaringly obvious that Brazil needs to decrease its reliance on foreign imports for something as integral to its economy as fertilizer. In terms of potash, Brazil imports over 90-95% of the potash it uses in agriculture, with no significant domestic source. This is an unnecessary level of dependence on outside sources and it presents a natural arbitrage for local producers who can save massively on shipping costs relative to foreign sources. Meanwhile, GRO has an absolutely massive potash resource – less than 10 kilometres from a major river (think: transportation corridor) – that can truly be called a "nation building" project. The stock has been rising in sympathy with the sector (.e.g., have a look at NTR) and I think that a little more "belief" is starting to seep into the name. The knock on GRO is that its market cap is so small relative to the circa $2B in capex required to build this. To that, I say, "meh". The markets are conduits for capital and capital ultimately flows to where it is needed. I had a chance to sit down with the GRO CEO, Matt Simpson, earlier this month and I came away thinking that Matt is a CEO who knows what he needs to do and what the steps are to get it done. Matt Simpson is an engineer who came out of Hatch, a well-respected global engineering firm and I think he has a real shot at putting this all together while focusing on minimizing shareholder dilution at the same time. When fertilizer stocks go nuts, they really go nuts, so here's hoping that interest in GRO continues to grow as the company communicates its story to 1) the market, 2) the fertilizer industry, 3) the financial industry, and 4) the Brazilian government.

Earlier this month, GRO gave a corporate update detailing the progress and initiatives it is undertaking with respect to moving its Autazes Potash Project forwards in Brazil. The company was granted a 10-year water license for drawing water from the Rio Madeira, received proposals for associated project infrastructure builds, and progresses financing discussions with governmental and financial institutions, as well as major equipment suppliers. I plan to meet with GRO's CEO, Matt Simpson, during the PDAC conference in early March and will get more details on his view of the project then. In the meantime, given the upside potential and strategic nature of the asset for the Brazilian agricultural industry, I'm content to be patient with a modest position here.

Not much has happened in terms of share price performance since my initial comments, but a large seller was cleared out earlier this month and the company is positioned to move its gigantic Brazilian potash project forward. This has a very small number of shares outstanding and a tiny market cap relative to the potential value of the project, so buckle up if/when this gets lit.

I would echo my prior comments on this one: this is strategic, large-scale, and makes a lot of economic sense.

Another offtake deal was signed since my last writing on this one, taking spoken-for volumes to 91% of projected production. This is a massive asset strategically located in one of the biggest agricultural markets in the world. The offtake agreements will give potential financial and industry partners confidence to move forwards with figuring out how to get this project built. With a low share count and a massive project in hand, if a few more things click here, little GRO's share price could grow a lot.

This is a U.S. listed potash (a.k.a, potassium chloride, a key fertilizer) story that could be called a "fallen angel" in that it has fallen substantially from where it was when it started trading about a year ago (it was US$13.50 last November). The stock has been "basing" (trading more or less sideways in a relatively narrow trading range after a big fall) for about seven months and, from a fundamental perspective, nothing has really changed in terms of the story. As it stands today, the company has drilled out over 20 years of potash resources at its contemplated mining rate. The scale of the resource is absolutely massive — there are likely decades upon decades of additional resource potential beyond the currently defined resource. Located with excellent proximity and access to the agricultural heartland of Brazil, this asset makes a lot of sense economically and fundamentally.

As recently as 2021, Brazil imported some 95% of its potash needs from abroad. Why would you import potash from umpteen thousands of miles away if you had a huge potential domestic source? It makes so much fundamental sense for the country, its banks, and its industry to back the construction of a project of this world-class scale, right? So why the big fall from its IPO levels last November? Nothing fundamental. It had some weak shareholders, selling for non-fundamental reasons, who basically abandoned the story on the side of the road. Well, sometimes one man's trash is another's treasure, and I'm running with that theory here. I perked up earlier this year when GRO signed a $200 million Memorandum of Understanding for power line construction to the project, followed by an off-take agreement for 900,000 tonnes per year of potash, taking its total committed volumes to 1.45 million tonnes out of a total contemplated project production level of 2.4 million tonnes per year. Off-take agreements are key in that they provide revenue assurances to the banks or industry players who could/would eventually finance a project like this.

In rough numbers, the project is expected to cost something around $2B to build and would generate something like $1B annually in EBITDA — this is massive for a company of this size. With GRO's market cap hovering around US$100 million his is a huge project within a tiny company — and while there a lot of unknowns here, the company could be one or two off-take agreements away from having all of its contemplated future production spoken for, at which point banks and/or industry players could start lining up to finance the project. Having just completed a US$28 million financing, GRO is financed well into 2026 and I'm willing to have a bet on this one given the strategic nature of the asset and the associated outsized upside potential for this little minnow. If a few things fall into place, GRO could multi-bag from current levels, and it isn't far off its all-time lows, so here's hoping.