Everyone knows the best gifts come in small packages. At the top of my list to buy for 2022 is a microcap sleeper stock: Arianne Phospate (OTCMKTS:DRRSF), a Canadian mineral exploration company.
Hovering near a $90 million market cap, Arianne is focused on phosphate mining at its Lac à Paul greenfield project in Quebec. The company manages one of the largest phosphate reserves in Canada, estimated at 590 tons. Its assets are also larger, cleaner and more pure than almost any project on earth right now.
For those less familiar with phosphate, it’s an essential ingredient in two growing product categories: fertilizer and electric vehicle (EV) batteries. The phosphate market is projected to reach $45 billion by 2030 and presently growing at a healthy 2.8% CAGR.
Fertilizers represent around 87% of the world’s phosphate. While it sounds like a sleepy industry, recent trends have severely tightened the world’s fertilizer supply. Fertilizer prices have steadily risen this past year and agricultural economists anticipate per-acre fertilizer costs will be about $100/acre higher for corn and $50/acre higher for soybeans compared to last year.
At the same time, soaring world population statistics require agricultural production to increase by 60% by 2050 in order to support growing food and feed demand. As North America battles to find the supplies to fuel its corn and soybean crop, agricultural producers will need to turn to new phosphate suppliers. And Arianne — the only large-scale source of independent phosphate rock from a “low-risk” jurisdiction — is looking very appealing right now.
You can buy Arianne stock now as a great long-term investment on the growing demand for agricultural phosphate. But you can also buy the stock also as an option on another potential upside surprise.
Arianne’s phosphate has all the high-purity qualities necessary for use in LFP (lithium iron phosphate) batteries. In November, the company announced that it’s working with an independent testing facility and a major battery maker to process, refine, and optimize its phosphate concentrate for potential use in LFP batteries.
With Arianne shipping under 50% of its output, an EV opportunity would be a game-changer for the stock. Here’s a closer look.
Tightening Global Supply
As an independent Canadian phosphate supplier, Arianne Phosphate has become increasingly attractive owing to geopolitical and agricultural safety concerns. The main reason: China, the largest exporter of phosphate, has tightened its control over fertilizer exports, suspending all phosphate exports until at least June of 2022. Russia also followed suit, imposing a six-month quota on various fertilizer exports.
The China embargo and tariffs imposed on phosphate from other countries have immensely pressured the global phosphate trade. Outside of China, most of the world’s phosphate reserves are in Morocco (which accounts for approximately 70% of the total reserves), followed by Syria and Algeria. Other projects are located in Congo, Angola, Trinidad and Tobago, Egypt and Jordan.
The supply crisis means that those global customers, which combined purchase roughly 30% of China’s phosphate, are now direct competitors with the U.S. for whatever phosphate supplies remain available. Then consider the geopolitical tensions that exist between most Western agricultural producers and the countries that supply phosphate. Approximately 75% of the traded phosphate rock in the world is being mined in relatively politically unstable countries.
A Clean, Safe Place
Adding to geopolitical concerns are safety issues — that is, known contaminants in the phosphates produced in many of these countries. Roughly 90 percent of the world’s phosphate is located in sedimentary rock deposits, which are relatively “dirty” (due to the presence of elements like uranium, cadmium and thorium) and rarely contain more than a 28% concentrate grade of phosphate. In contrast, Arianne’s Lac à Paul project is based around igneous deposits confirmed to produce a 39% concentrate.
As a Quebec supplier, Arianne is well-situated in a friendly government more aligned with Canadian and U.S. farming interests. The company has also been proven to meet higher ESG (Environmental, Social, and Corporate Governance) mandates for industrial companies and miners, which require adherence to standards on safety, carbon dioxide emissions, chemical use and pollutants in each step of the supply chain.
Finally, the company is also one of the most advanced (shovel-ready) high-quality projects, with two long-term off-take agreements in place. Taking all of this into consideration, it’s easy to see why having a reliable, long-term domestic phosphate producer is important to agricultural producers.
The LFP Opportunity
Arianne’s agriculture opportunity is fairly straightforward, although at first glance, it may not be sexy enough for growth investors. But, if you look closer, you’ll see that the company’s very high quality phosphate concentrate is getting attention for another, sexier reason: its potential use in electric vehicle LFP batteries. Not all phosphates are battery-grade, but Arianne has one of the largest, cleanest, highest grade phosphate projects in the world.
I don’t need to convince you when it comes to the growth trajectory of the EV market. What’s important is this: supply disruptions are the primary stumbling block for ramping up electric vehicle production. The pandemic also exposed the overdependence of the world on China for key raw materials. And while solid-state batteries are definitely cool, they aren’t really being manufactured cost-effectively at scale (yet).
As a result, EV manufacturers are increasingly turning to phosphate (LFP) batteries for their cost and performance characteristics. And they’re turning to new suppliers outside of China to support their lofty growth projections. Tesla (NASDAQ:TSLA), the father of LFP chemistry, has already designed an LFP battery in China for smaller, entry-level vehicles. But in October, Tesla announced it would change the battery chemistry to LFPs for all of its standard-range vehicles (Tesla will still use nickel-cobalt-aluminum batteries in its longer-range vehicles). This shift means that LFP batteries could grow from around 15% global penetration to over 30% by 2030.
For Arianne Phosphate, this shift could represent another leg-up for the company’s long-term growth. Even though phosphate demand for LFPs will remain a small percentage of the total market, Arianne is in an excellent position to sell a meaningful portion of its concentrate to battery makers.
The Bottom Line
Arianne Phosphate offers investors a stable, discounted play on a phosphate project in a reliable and politically stable country. Notably, agricultural suppliers like Mosaic (NYSE:MOS), CF Industries (NYSE:CF) and Intrepid Potash (NYSE:IPI) have experienced strong moves on a tightening world food supply. Most importantly, shares aren’t pricing at all for the option on a growing market for LFP batteries.
Your comments and feedback are always welcome. Let’s continue the discussion. Email me at email@example.com.
Disclosure: On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.
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