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Harvest Minerals - It Remains All About Cashflow

Writen by Sam Catalano

It Remains All About Cashflow

The key attraction for investors here is significant, near-term, cashflow generation. The simple, low cost, low capex Arapua fertilizer project has begun production on a trial mining basis. We believe the company can generate free cashflow yields of between 30-80%pa from Arapua, based on a range of reasonable sales price & volume assumptions. The most likely outcome being around ~55%pa FCF Yield (based on US$55/t sales price). The same assumptions generate a project [email protected]% of ~£60m for this project (compared to a current market cap of ~£18m).  We note that the company has no debt, and should not require any fundraising to develop this project further, in our view.

POSITIVE NEWS HAS KEPT FLOWING

Since our last update in March, it has been largely positive news for Harvest Minerals:

  • Continuing product commercialisation: The company has submitted an application to the Brazilian Agriculture ministry for registration of unique Arapua natural fertilizer product (KPfertil) as a ‘re-mineraliser’. As part of this process, Harvest has also completed multiple agronomy trials which indicate the effectiveness and efficiency of KPfertil. The registration process is expected to be completed by the end of this calendar year.
  • Further development of sales channels: Harvest has announced first sales of the KPFertil product, and its order book for pre-registration sales stands at ~US$80,000. While investors will of course be hoping for a material step-change in sales in CY2018, this response from customers prior to official registration of KPfertil as a re-mineraliser is testament to the market’s recognition of the product’s quality.  Harvest has disclosed that it has advanced agreements with over 20 customers for KPfertil, further demonstrating the broad appeal of the KPfertil product. The volume of orders is expected to increase materially once the re-mineraliser registration process is completed.

MANAGEMENT STRATEGY SENSIBLE

The company is well funded, having recently completed a £1.2m placing which was over-subscribed, this is in addition to the $1.4m in cash as at June 2017. With such significant cashflow potential, management have previously made clear that they would only add bolt-on projects where value accretion is clear, and are not averse to becoming a significant and sustainable dividend payer in future.

OVERALL

Overall, we continue to believe the near-term cashflow generation potential for Harvest Mineral shareholders is compelling. We believe the Arapua project is relatively low risk, given its low capex nature, and the simplicity of the mining. The key risk remains the pace of sales volume growth, and the level of pricing the product will attain as the operation is scaled up (given it is a unique product). Accordingly, newsflow on the re-mineraliser registration process, and any further uptake of the product will be critical.

ARAPUA FERTILIZER PROJECT BACKGROUND

The Arapua Fertiliser Project is located in the State of Minas Gerais, approximately 400 kilometres south east of the Brazilian capital city Brasilia and within one of the major agro-industrial centres of Brazil.

PROJECT

The project consists of a shallow, flat lying deposit, which produces a ‘direct application’ multi-nutrient product. No processing is required, other than crushing. Accordingly, initial infrastructure required for such a project is minimal, with the major capital items being general infrastructure and space for Run of Mine (ROM) stockpiles. Given the company expects to contract mine the project for the foreseeable future, purchase of mobile mining equipment will not be required. Accordingly, low initial capex in the region of $300K has already been sunk, and should allow flexible production up to ~400-500ktpa.

The site of the project is surrounded by coffee, soybean and sugarcane plantations, so it is expected the product will be sold locally, as would be appropriate for a relatively low-value product (compared to high value seabourne fertilizers). There is no direct comparable product to the potential Arapua product, although Harvest’s LOI with a coffee producer, for 45kt of sales @ $60/t is a strong starting point. We also understand a similar product (with higher potassium, lower solubility and no phosphate) sells for ~US$70/t in Brazil.

SCOPE

We do not anticipate meaningful additional capex being required for any move towards 400ktpa, given the first phase infrastructure already allows for 50kt of production in 40 days. We have conservatively assumed a slow ramp up to 400ktpa by 2020, and expect the project to have operating costs of <US$10.00/t. accordingly, we see material value upside (driven by production rates) from current levels if the company can achieve a US$55/t sales price.
We see total project valuation and free cashflow figures for varying sales prices as per the table below. Even at the lowest assumption of sales price, NPV valuation is materially ahead of the current company market cap.

OTHER PROJECT OPTIONS

We flag that no material work has progressed on the company’s other projects at Sergei and Capella (which are not included in the valuations above), but note that we had previously advised potential investors to focus on the Arapua potential for now, which should provide meaningful upside on its own.

The Company has additional projects including the Sergi and Capella potash projects, which are located next to Brazils only producing potash mine. Harvest would plan to develop these using the cash flow generated from Arapua.

 

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