morning notes january 31, 2014 - stocks and speculations€¦ · morning notes arianne phosphate...

MORNING NOTES 1 OF 15 1/30/2014

Arianne Phosphate Inc. (DAN:TSXV, DRRSF:OTCBB)

Well Positioned to Feed a Hungry World

The fertilizer business is characterized as an oligopoly.

Our thesis maintains that new entrants are critical.

Arianne Phosphate is a substantially de-risked advanced stage development

phosphate play with several competitive advantages which should allow the company to

compete in the high purity phosphate market

In this report, we focus on the company’s unique attributes. Regarding full disclosure, I am a

shareholder and advisor to the company.

Executive Summary Globally, population is increasing by approximately 80 million people per year while arable land is decreasing (both on a net basis).Fertilizers, in particular phosphate, present a compelling investment opportunity worthy of further analysis. We recently published a primer on the phosphate market supporting this thesis1. A theme we have presented in recent years is that of security of supply. Phosphate is a 200 million tonne per year market. Approximately 70% of phosphate production is vertically integrated leaving a mere 30M tonnes available on world markets. In addition, approximately 70% of global phosphate supply originates in challenging geopolitical jurisdictions, including Northern Africa, known most recently as the birthplace of the “Arab Spring.” As the major phosphate producers attempt to become more vertically integrated, this presents an opportunity for de-risked phosphate development opportunities in reliable geopolitical jurisdictions to join the global phosphate value chain.

1 The primer can be found in the Morning Notes archives dated January 16, 2014. http://www.discoveryinvesting.com/Notes.html

MORNING NOTES January 31, 2014

Chris Berry, MBA www.discoveryinvesting.com

Ticker DAN:TSX,

DRRSF:OTCBB

Recent Price $1.38 CAD

Shares Outstanding 84,300,000

Fully Diluted S/O 100,900,000

Market Cap $116,334,000

Fully Diluted Mkt Cap $139,242,000

Cash $8,200,000

Debt $11,200,000

Enterprise Value $119,334,000

http://www.discoveryinvesting.com/Notes.html


Arianne Phosphate Inc. (DAN) is one such opportunity. It will be the focus of this report. Company Overview DAN is a development-stage junior mining company focused on developing its 100%-owned phosphate project known as Lac a Paul. The company began development of the project in 2008 due to favorable market conditions for fertilizers. The project is located in the Canadian province of Quebec and offers a strong economic profile based on a recently completed bankable feasibility study (BFS). DAN is targeting production of 3M tpy of P2O5 (phosphorous pentoxide, more commonly known as phosphoric acid) at an average grade of ~39% and a 90% recovery rate by 2017. This is a key differentiator for DAN – the high grade apatite concentrate the company plans to produce should command a premium price on world markets. Lac a Paul is an igneous deposit. These types of deposits are known for lower levels of impurities when compared to sedimentary deposits. The relatively low processing costs and premium price of the concentrate (to be discussed in the BFS section) are key advantages that DAN holds over many of its peers and established phosphate producers. Company management has substantial experience in the capital markets, the fertilizer markets, and in Quebec which help mitigate risks as the project moves forward. Please see the Management and Board of Director bios in the Appendix for further detail. The financial sustainability of the company, so often a concern these days with many junior mining and exploration companies, is sound with over $8 million in cash on the balance sheet and a manageable debt structure. Project Overview Lac a Paul is DAN’s major focus. The property is approximately 200 km north of the town of Sanguenay in Quebec. It covers more than 25,000 hectares.

Source: Company Presentation


Infrastructure is sound with deep water port availability in Sanguenay allowing for access to major shipping routes. Additionally, reliably cheap Quebec Hydro power is nearby with 115 MW available from the Chute des Passes power plant located 30 km south of the proposed mine. Another plus adding to the de-risked nature of the project is the fact that the Lac a Paul project contains multiple zones of mineralization and only two of them have NI 43-101 resource estimates completed – the Paul and Manouane Zones. Shown below are zones and the resource estimates:


The key takeaway here is that there is significant upside for resource expansion across multiple zones. The BFS calls for a mine life of 25.75 years. It is important to note that this mine life estimate only focuses on the Paul Zone. Any expansion here or within the other aforementioned zones has potential to increase the mine life demonstrably. Additionally, the geology of the Lac a Paul project is a key differentiator. Phosphate deposits are generally grouped into two types: sedimentary and igneous. The majority of phosphate deposits today are sedimentary in nature. Lac a Paul is an igneous deposit and while these types of deposits are lower grade in-situ, they lend themselves to easier beneficiation when compared to sedimentary deposits. This is due to the lower level of contaminants in igneous phosphate deposits. Below, I include a side-by-side comparison of igneous and sedimentary deposits:

Paul Zone Reserves (cut off grade of 3.5% P2O5)

Tonnage (MT) Grade (% P2O5)

Proven 313.71 6.92%

Probable 158.38 6.80%

Paul Zone Resources (cut off grade of 4% P2O5)


Measured 337 7.22%

Indicated 253 7.02%

Manouane Zone Resources (cut off grade of 2.43% P2O5)


Measured 137 5.93%

Indicated 27 5.64%



Finally, and not to be overlooked, is the geographic location of Lac a Paul. Much of the phosphate rock on world markets today is mined in jurisdictions with increased geopolitical risk. While no jurisdiction is completely risk-free, the fact that DAN’s project and sole focus is in Quebec, one of the top mining jurisdictions in the world, adds to the de-risked nature of this project. Bankable Feasibility Study Results In October 2013, DAN released the results of its BFS completed by Cegertech Worley Parsons. The study documented that Lac a Paul is a big project with a solid economic profile and ample room for resource expansion. Given that the ability to produce a high quality concentrate of ~ 39% has been verified on a pilot scale, DAN has potential to rival other global high grade P2O5 producers for market share. These competitive advantages will help DAN break into this oligopolistic market structure. It is true that the initial capital expenditure is large, however when viewed in the context of other phosphate or potash projects coupled with anticipated future demand for a secure supply, this concern is mitigated. We think investors will ask themselves if they would rather invest in a project with a large initial capital expenditure that can supply the world a superior product from a stable jurisdiction for many years or invest in projects located in more challenging jurisdictions.


The highlights of the BFS, which models an open pit mine, are listed below (all figures are in USD):

NPV of $1.9 billion (at 8% discount rate)

Gross revenue of $16.125 billion and operating cash flow of $7.379 billion

IRR of 20.7% with a payback time of 4.4 years before taxes and mining duties

25.75 year mine life –this only represents the Paul Zone and does not include other zones

Annual phosphate rock production of 3 million tonnes with a grade of 38.6% P2O5 and an

average mill recovery of 90%

Initial capital expenditure of $1.214 billion comprised of $982.5 million for the mine and

$232.2 for the concentrate transport system

All in cost to board the ship in Sanguenay is $93.70 per tonne. An average selling price of

$213 per tonne at the port is anticipated. This yields an operating margin of 56%

A breakdown of the operating costs:

($/tonne)

Average Extraction Cost 27.3

Average Processing Cost 48.1

Average G&A Cost 4.3

Average Shipping Cost 14

TOTAL OPERATING COST 93.7

Source: DAN BFS

A breakdown of the capital costs for the mine site (accuracy of + or – 15%):

(USD M)

Mill 470.8

Project General 108.5

General Mine Site 65.3

Mine Development 42.5

Open Pit Mine 29.6

Temporary Construction Facilities 23.1

Construction Support 57.7

EPCM 61.7

Contingency 73.9

Owner's Cost 49.4

TOTAL 982.5

Source: DAN BFS


A breakdown of the capital costs for transport (accuracy of + or – 25%):

(USD M)

Off Site Facilities/Infrastructure 167.9

Temporary Construction Facilities 7.7

Construction Support/Equipment 3.3

EPCM 20.9

Contingency 18.1

Owner's Cost 14.3

TOTAL 232.2

Source: DAN BFS

One of the keys is the estimated $213 per tonne that DAN will receive from end users. According to many in the industry, this is not an unreasonable price. PhosAgro (PHOR:LN), the number one producer globally of high grade phosphate rock, received $230 per tonne for its phosphate rock concentrate in 2013. PhosAgro’s P2O5 product is approximately 36%. This places DAN in a small group of current and potential P2O5 producers globally. The projected operating expense per tonne at Lac a Paul is high relative to its peers and established producers, but this is somewhat misleading as igneous deposits are typically lower grade in-situ, but can be beneficiated at a lower cost versus sedimentary deposits. Industry figures indicate that the phosphate rock production cost curve can vary widely from $30 per tonne in Western Africa to over $100 per tonne in India. All of this production will not receive the $213 per tonne mentioned above. This implies that at current lower grade P2O5 prices of approximately $100 per tonne, some portion of global production is uneconomic. The potential high selling price for concentrate from Lac a Paul is due to the high P2O5 grade and the low level of contaminants. The byproducts will contain non-hazardous gypsum. Less sulfuric acid will be necessary to produce P2O5 which will help manage costs. The concentrate composition:

P2O5 % 39.1

CaO % 52.1

MgO % 0.96

Fe2O3 % 1.67

Al2O3 % 0.84

Na2O% 0.28

K2O% 0.15

F % 1.7

Cl ppm (water soluble) 108

Cl ppm (total) 860

SO3% 0.12

CO2% 2.38

INSOL% 1.75

LOI% 0.51

Source: DAN BFS

Constituent Content

Total SiO2% 2.49

Acid Insoluble SiO2% 1.81

Acid Soluble SiO2% 0.59

Organic C% 0.91

H2O% 0.3

CaO/P2O5 Analytical Ratios 1.33

F/Soluble SiO2 2.88

F/(SiO2+Al2O3+MgO) 0.4

(Fe2O3+Al2O3)/P2O5 0.064

MER 0.089

Cd ppm <.5

Hg ppm <.02

As ppm <.05

U mg/l <.02


A final note on impurities. The MER is known as the Minor Element Ratio and is what many in the fertilizer industry focus on when gauging the relative strength of a phosphate deposit. Another way think about this is the ratio of impurities in the ore to P2O5 content. A larger number is a negative. Generally, a MER above .1 can significantly increase the cost of producing DAP, one of the main fertilizer end products of P2O5. DAN’s MER of .089 puts the Lac a Paul deposit in line with other high quality P2O5 producers including PhosAgro and ahead of several others. Competitive Landscape Though the focus of this Note is on DAN, it is nevertheless important to get a sense for the current producers and group of junior mining enterprises who hope to achieve commercial production in the coming years. What follows below is a partial list of publicly traded2 companies involved in phosphate rock mining, exploration, and development. Phosphate Rock Producers:

Company Ticker Share

Px Mkt Cap

Acron Group AKRN-LI 3.25 1.31 B

Agrium AGU-US 87.32 12.54 B

CF Industries CF-US 229.57 13.15 B

China Blue Chemical 3983-HK 4.34 20 B

Hubei Yihua Chemical Ind 000422-CH 5.71 5.12 B

Israeli Chemicals Ltd ICL-IT 2953.00 37.58 B

Jordan Phosphate Co JOPH-JR 7.35 551.3 M

Ma'aden MAADEN-AB 30.60 28.30 B

Mosaic MOS-US 44.68 19.03 B

PhosAgro PHOR-LI 10.35 4.02 B

Potash Corp POT-US 31.83 27.41 B

Vale VALE-US 13.57 70.25 B

Yara International YARO-NO 257.20 71.63 B

Yunnan Yuntianhua Co 600096-CH 8.79 9.92 B Source: Bloomberg, Google Finance, Company Presentations; Data as of Jan 29, 2014

2 Several of the world’s largest producers of phosphate are private companies including OCP based in Morocco which supplies over

30% of the export market.


Phosphate Development and Exploration Companies:

Company Ticker Share Px Mkt Cap

Aguia Resources Ltd AGR-AU 0.06 11.40 M

Celamin Holdings CNL-AU 0.05 9.62 M

Chatham Rock Phosphate CRP-NZ 0.30 43.20 M

Eagle Star Minerals EGE-CN 0.24 20.50 M

Focus Ventures FCV-CN 0.23 9.2 M

GB Minerals GBL-CN 0.12 8 M

Glen Eagle Resources GER-CN 0.17 8.2 M

Great Quest Metals GQ-CN 1.30 62.3 M

Jourdan Resources JOR-CN 0.04 2.8 M

Korab Resources KOR-AU 0.03 4.3 M

Krucible Metals KRB-ASK 0.06 5.0 M

Legend International Hldgs LGDI-US 0.04 15.5 M

MBAC Fertilizer Corp MBC-CN 1.21 184 M

Minbos Resources Ltd MNB-AU 0.01 1.8 M

Minemakers Ltd MAK-AU 0.13 32.2 M

Phoscan Chemical Corp FOS-CN 0.29 46.3 M

Phosphate Australia POZ-AU 0.01 2.1 M

Rum Jungle Resources RUM-AU 0.14 53.4 M

Stonegate Agricom ST-CN 0.20 38.85 M

Strata Minerals Inc SMP-CN 0.11 888.8 K

Sunkar Resources SKR-LN 4.75 16.2 M Source: Bloomberg, Google Finance, Company Presentations; Data as of Jan 29, 2014

Financials Because DAN is a development-stage company, a current focus on revenue or cash flow is misplaced. Instead, attention should be centered on the financial sustainability of the company as well as institutional and insider holdings. The current cash position of just over $8 million will allow the company to push forward with oncoming catalysts discussed below. I include the most recent balance sheet and income statement from the company filings dated 30 September 2013 in the Appendix. There is debt on the balance sheet and this consists in part of a $2.5 million credit facility with Mercury Financing Corp and a $1.5 million loan backed by exploration tax credits from 2011, 2012, and 2013. DAN management’s ability to raise capital through a myriad of sources in a challenging resource market should add credibility as the team moves forward with development at Lac a Paul. Share dilution is kept to a minimum - a welcome accomplishment in current resource markets. Though many (myself included) decry the use of debt to fund mining exploration and development projects, the structure of the debt is a key consideration. A convertible preferred, for example, has very different implications than a credit facility.


The largest shareholder is Windermere Capital, a fund based in Montreal. The top holders are listed below:

Source: Bloomberg

DAN has also recently retained National Bank Financial and Wells Fargo Securities Canada, Ltd as strategic and financial advisors to aid in guiding the company forward through its development stage. Risks A balanced appraisal of any company must include the risks faced in its development. Ultimately, the company’s ability to navigate and mitigate these challenges helps ensure the ultimate success of the project. The list below is intended to draw attention to several of these areas, all of which vary in impact.

Financing Risk – Arguably the biggest risk facing the mining sector today, DAN must find

creative ways to attain financing for both project construction and to remain a going concern

while minimizing dilution.

Permitting Risk – DAN has submitted the Environmental Impact Statement to Quebec

authorities and must receive approval as well as approval for additional permits in the coming

years before commercial activities can commence.

End User Agreement Risk – As is the case with other agricultural or industrial metals and

minerals, phosphate is typically bought and sold based on contracts between miner and end

user. DAN must continue to engage in discussions and procure an end-user agreement. This


will also help mitigate financing risk as banks are more likely to lend to a mining company that

has a committed customer.

Social Issue Risk – DAN must continue to engage with the First Nations communities in the

Sanguenay region and establish a formal understanding of the benefits and impacts of the Lac

a Paul project to all involved. A great deal of work has already been done here.

Currency Risk – DAN is a company based in Canada using CAD as its base currency.

Transactions will presumably take place in the future with companies who utilize a different

base currency. DAN must factor this into future calculations of revenues and cash flows.

Next Steps Much has been accomplished to de-risk the Lac a Paul project and DAN as an investment proposition. However, there is still more progress to be made. One of DAN’s main objectives going forward will be agreements with the First Nations in the Sanguenay region. DAN has been in extensive communication with the three First Nations tribes in the region since 2008. These include the Mashteuiatsh, Pessamit, and Essipit. Negotiations are ongoing and the company is hopeful it will have a memorandum of understanding in place this year. Permitting is also a major focus for DAN in 2014. The company submitted its Environmental Impact Assessment (EIA) last year and it is currently under review by the authorities in Quebec, the MDDEFP3. DAN is hopeful the EIA can be approved by Q4 2014 which will allow for a new phase of development for the company. This is a key catalyst for DAN in 2014. Additional catalysts include on-going end user discussions, potential additional drill programs to extend the mine life, and optimization of the already promising metallurgy. Summary The issue here isn’t that there isn’t enough phosphate globally – there is. I pointed this out in the phosphate primer I published recently. The issue is that population increase, shrinking arable land, food as fertilizer, and other issues are all set to slowly coalesce. These forces are set to collide in a market characterized by phosphate supply being concentrated in unstable parts of the world. The overwhelming investment proposition for DAN is security of supply. It is this secure supply of high quality phosphate rock that will become increasingly important to end users. Another factor in favor of additional phosphate rock supply is that much of the existing supply is vertically integrated and this is only anticipated to increase, meaning that there is room for new supply

3 Ministère du développement durable, de l’environnement, de la faune et des parcs


to come on stream to complement existing operations where MAP, DAP, and other products are produced. Additionally, current P2O5 producers could look at DAN as an ideal take out target given its high quality product and attractive economic profile. Clearly there are several ways that DAN can fit into the fertilizer oligopoly. The backdrop described above dovetails nicely with a company profile that is substantially de-risked based on a published BFS demonstrating strong economics, a sound balance sheet, strong insider and institutional holders, and a deposit in a favorable jurisdiction. Numerous catalysts await DAN in 2014 and beyond and I will be reporting on them as they unfold.


Appendix Balance Sheet 9 Months Ended 30 September 2013 (all figures CAD)

ASSETS

Current Assets

Cash and Equivalents 4,294,770

Marketable Securities 5,363

Receivables 57,788

Taxes Receivable 611,866

Tax Credit 2,094,153

7,063,940

Non-Current Assets

Tax Credit 1,225,200

Investment Property 456,009

P,P,&E 89,556

Mining Properties 1,241,360

Exploration Assets 24,738,309

27,750,434

TOTAL ASSETS 34,814,374

LIABILITIES

Current Liabilities

Accounts Payable 2,835,700

Flow Through Shares Liability 4,350

Loan Payable 1,426,837

Credit Line 594,260

4,861,147

Non-Current Liabilities

Credit Line 9,180,110

Deferred Income Taxes 2,243,261

TOTAL LIABILITIES 16,284,518

EQUITY

Capital Stock 31,620,946

Warrants 5,811,196

Contributed Surplus 8,756,221

Deficit -27,658,507

TOTAL EQUITY 18,529,856

TOTAL LIABILITIES & EQUITY 34,814,374


Income Statement 9 Months Ended 30 September 2013 (all figures CAD)

EXPENSES

Salaries 617,768

Share-based Compensation 366,345

Professional & Consultant Fees 865,122

Management Fees 217,500

Registration & Listing Fees 121,704

AGM 31,487

Communications 216,791

Travel & Promotion 293,000

Insurance 31,334

Rent & Office Expense 87,273

Impairment of Properties 66,083

Impairment of Exploration Assets 174,838

Bank Charges 9,127

Depreciation of PP&E 1,038

OPERATING LOSS 3,099,410

OTHERS

Interest Income -18,509

Interest Expense 22,151

Loss on Exchange Rate 1,590

Loss on Disposal of Securities 12,877

Loss on Disposal of Property 20,926

Loss (gain) on Investment Property 92,896

Change in Fair Value of Marketable Securities 61,189

193,120

LOSS BEFORE INCOME TAX 3,292,530

Deferred Income Tax 2,060,261

NET LOSS 5,352,791


Management Bios Management


Board of Directors

The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In

particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are

intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events

and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review

investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and

perform your own due diligence before considering any companies mentioned in this informational bulletin.

The information in this note is provided solely for users’ general knowledge and is provided “as is”. We at Morning Notes make no warranties, expressed or implied,

and disclaim and negate all other warranties, including without limitation, implied warranties or conditions of merchantability, fitness for a particular purpose or non-infringement of intellectual property or other violation of rights. Further, we do not warrant or make any representations concerning the use, validity, accuracy,

completeness, likely results or reliability of any claims, statements or information in this note or otherwise relating to such materials or on any websites linked to this

note.

The content in this note is not intended to be a comprehensive review of all matters and developments, and we assume no responsibility as to its completeness or

accuracy. Furthermore, the information in no way should be construed or interpreted as – or as part of – an offering or solicitation of securities. No securities commission or other regulatory authority has in any way passed upon this information and no representation or warranty is made by us to that effect. I own shares in

DRRSF and am an advisor to the company. This report should be read with that bias in mind.

morning notes january 31, 2014 - stocks and speculations€¦ · morning notes arianne phosphate...

Documents