WARNING: Market Shock Imminent

Join us on September 29 at 4 p.m. ET at the Market Shock 2022 event to find out what’s coming and how to profit.

Thu, September 29 at 4:00PM ET
 
 
 
 

Behind the Wall: Elon Musk Needs This Phosphate Miner On Speed Dial

Editor’s Note: This article is part of Joanna Makris’ Behind the Wall series, where she provides retail investors with the insider scoop on the hottest technologies and trends from today’s business leaders, industry experts and money managers. Today’s discussion is with Brian Ostroff, CEO of Arianne Phosphate (OTCMKTS:DRRSF).

a precious metals mining operation
Source: Shutterstock

As the new year kicks off, there’s no better time to go Behind the Wall and get a close-up look at my entry into InvestorPlace’s Best Stocks for 2022 contest. Speculative growth investors take note: hovering around a $70 million market cap, this microcap stock could be the one of the biggest breakout stories of the year.

My pick for 2022’s contest is Arianne Phosphate (OTCMKTS:DRRSF), a development-stage phosphate mining company trading on both the Toronto Stock Exchange and OTC markets. Arianne manages one of the largest phosphate reserves in Canada and its assets are both bigger and cleaner than almost any other project on Earth right now.

Phosphate is a necessary ingredient in two of my favorite things: food (via fertilizer) and electric vehicle (EV) batteries. As I mentioned in my writeup of Arianne at the end of 2021, you can buy Arianne stock now as a great long-term investment on the growing demand for agricultural phosphate. But the stock is also a play on another potentially massive opportunity: electric vehicles.

Arianne’s phosphate has all the high-purity qualities necessary for use in LFP (lithium iron phosphate) batteries. In November, the company announced that its 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. An EV opportunity would be a game-changer for the stock.

So we sat down with Brian Ostroff, CEO of Arianne Phosphate, to get down to the nitty gritty of phosphate supply and demand. Ostroff, a director at Arianne since 2014, brings more than 30 years of experience in both capital markets and the mining sector. We talked about China’s dominance in the raw materials supply chain, why farmers are hurting right now and why Elon Musk should put Arianne on speed dial. Here’s what happened.

DRSSF Stock: Agriculture Under Siege  

Let’s start with the big picture. About 85% of the world’s phosphate is used for fertilizer. But supply is tight and as a result, prices are soaring right now. The main reason: China, the largest exporter of phosphate, suspended all phosphate exports until at least June 2022. Russia also followed suit, imposing a six-month quota on various fertilizer exports.

The impact of global phosphorus scarcity on food security is well documented and has been the focus of sustainability research for more than a decade. Simply put, if phosphate fertilizers are inaccessible to farmers, this will seriously dampen global agricultural productivity (not to mention farmers’ livelihoods). “This isn’t something that’s going away,” says Ostroff. “We’ve always wanted to eat. We’re going to want to eat in the future and we need to see that supply chain is protected.”

The recent export ban has made matters a lot worse — particularly for domestic farmers. Those global customers that combined purchase roughly 30% of China’s phosphate are now direct competitors with the U.S. for whatever phosphate supplies remain available. As Ostroff points out, “it is your first domino in the food chain that is falling.” And even outside of China, approximately 75% of the traded phosphate rock in the world is being mined in relatively politically unstable countries.

Dishing the Dirt on Phosphate

No sooner would a chef omit the key ingredient from his signature dish than would a farmer farm without phosphate. Phosphorus is a vital component of the plant life cycle, and the alternatives are difficult to scale. “A lot of times I’m asked, ‘is there a substitute for phosphate?’, says Ostroff. “And yeah, the substitute is starvation,” he quips.

And not only is phosphate in scarce supply: a lot of it isn’t very clean. Over 90% of the world’s phosphate comes from sedimentary deposits which contain impurities like radioactive elements, heavy metals and other deleterious elements. If you’re in the business of growing clean food, dirty phosphate is a big problem.

Enter Arianne Phosphate, which operates one of Canada’s cleanest — and largest — phosphate reserves. Whereas most sedimentary phosphate rarely contains more than a 28 percent concentrate grade of phosphate, Arianne’s Lac à Paul project is based around igneous deposits that have been confirmed in independent tests to produce a 39 percent concentrate.

The other key thing to point out is that Arianne is “shovel ready.” That means the company’s operations are fully permitted and funded, no simple feat. “Getting to a producing mine is a long process,” says Ostroff. “It’s 10 years, it’s 15 years. You’ve got to find the deposit. You’ve got to drill it out.”

Electric Vehicle Battery Opportunity 

Arianne is producing a high-purity phosphate, which is great news for agricultural producers. “A lot of people throw around the concept of world class but at the end of the day, when you’re looking at Arianne and the Arianne deposit, you are looking at the world’s largest, the world’s purest, the world’s safest.” says Ostroff. 

But the high quality of Arianne’s phosphate is important for another reason. It can theoretically be used for applications outside of fertilizer. One of the most exciting areas of growth for Arianne is the use of its phosphate in both electric vehicle batteries and hydrogen fuel cells. 

If you’ve been watching the EV space lately, you’ll notice that there’s been a resurgence in LFP (lithium ferrophosphate, AKA Lithium Iron Phosphate) batteries. Tesla (NASDAQ:TSLA), the big daddy of LFP chemistry, has already designed an LFP battery in China for smaller, entry-level vehicles. Then in October, Tesla announced it would switch to LFPs for all of its standard-range vehicles (Tesla will still use nickel-cobalt-aluminum batteries in its longer-range vehicles).

Musk isn’t the only automotive executive to signal a return to the LFP battery recipe. Earlier this year, Ford (NYSE:F) CEO Jim Farley said the company would use LFPs in some commercial vehicles. Volkswagen similarly announced during its inaugural battery day presentation that LFP would be used in some VW entry-level EVs.

That means demand for phosphate is about to jump.  The question is whether battery makers outside of China will be able to keep up with demand. As Ostroff astutely points out, China’s decision to lock down its phosphate supply likely has to do with its goal of dominating the EV market.

“So I think ultimately what [China is] looking at is, how are they going to be the player in the automotive market? Well, if 90% of the cars 10 years from now are electric and 90% of those cars run off of these LFP batteries and 90% of the LFP batteries are produced in China, well, who owns the automotive market? It’s not Tesla, it’s not BMW (OTCMKTS:BMWWY), it’s not Ford, it’s China.” 

Dig This

Given the tightness of global phosphate supply, Arianne has caught the attention of several electric vehicle battery makers. In November, the company announced it was sending out product samples for further evaluation. And while not all phosphates are battery-grade, Ostroff is feeling confident about Arianne’s position in the battery world right now.

“We’ve signed some NDAs [Nondisclosure Agreements] and MOUs [Memorandums of Understanding], which has progressed us to a point where we have specifications from a battery company’” says Ostroff. “They want to see [what] everything looks like again… [but] because of the nature of our phosphate. It should be no problem.”

Ultimately, Arianne appears well-positioned in multiple supply-constrained growth markets: “So with Arianne, because our stuff works across the spectrum, I can do my offtakes with fertilizer guys, I can do them with battery guys, I can do it with food guys, animal feed guys. And so at the end of the day, [that] means it’s more likely that I’m going to get my customers and demand should be robust.”

With the Arianne shares trading well below a dollar, I’d say the stock is well worth a look. For reference, Arianne is trading at roughly 5% of NPV [Net Present Value], which is “something you might see in early stages but once you’re fully permitted, I mean, you just don’t see that,” according to Ostroff. ” If you take a look historically single asset development companies, when they announce that their financing is fully in place, they’ll usually trade to at least one times first year’s projected EBITDA, which would put [Arianne stock’s valuation] at $400 plus million. “ And Elon, let me know if you need Brian’s number. 

Read on and watch the video and share with me your take on Arianne’s story at jmakris@investorplace.com.

Joanna Makris: I think a lot of our viewers may not be aware of what’s going on in the phosphate industry. Most of us know that a good chunk — I think 85% — of the world’s phosphate is used for fertilizer. But prices are soaring right now. So talk to us about the macrotrends. What’s going on and why has this become a bit of a crisis, so to speak?

Brian Ostroff: Thanks for having me. To your point, 85% of the world’s phosphate is used in fertilizers. And look, I think we all understand that fertilizer is food. But it’s something that’s just kind of taken for granted. And I don’t think most people understand where the phosphate comes from and maybe what that means.

Just so your viewers know, most of the world’s phosphate comes from the Middle East and North Africa. Jurisdictions here like North America, South America, Western Europe, a lot of areas of Asia — we’re all in deficit. And that deficit continues to grow because our demand for phosphate grows every single year. So we’re reliant on the Middle East and North Africa. Morocco is by far the world’s largest. It’s a good address, but it’s an address in an area where… [shrugs] You know, Tunisia used to be number two and Arab Spring took care of that. And Syria was a producer…

Look, I appreciate the audience here, because we go to the supermarket, we get our food, all’s good. But I’m not sure people understand the supply chain and how all could not be good pretty quickly.

What’s been the impact of China’s ban on phosphate exports? How has that impacted the Ag [agriculture] industry?

Where the Middle East and North Africa are kind of the big players in the phosphate concentrate — the ingredient that goes into phosphate fertilizer — China is a big player in the actual phosphate fertilizer market. That would be guys like MAP [monoammonium phosphate] and DAP [diammonium phosphate]. And they represent 30% of the market. So, just thinking about that — [the] Saudis are 13%, 14% of the oil market — you could just imagine what would happen if we came in one morning and heard that the Saudis weren’t going to ship any oil. You’ve got China at twice that size in the phosphate fertilizer market and they’ve removed themselves from the market. On top of that, you [have] Russia that has now put on export quotas on fertilizers.

To me, I see those who have this stuff making sure that they will continue to have this stuff and have what they require for their populations to feed their populations. And then there are those who don’t… It’s disruptive to the market. It is your first domino in the food chain that’s falling. And again, just bringing it back to North America, we are not self-sufficient. And that deficiency grows every single year.

So, to your point, prices are moving up quite a bit. But the other thing about a lot of these Ag commodities — fertilizer, phosphate — they run pretty long cycles. So, for an investor to understand this, the last cycle [for] phosphate topped out in 2012 and didn’t bottom until the end of 2019. So you had seven-plus years. And we’ve been in this uptrend since about summer of 2020. So, to your point, yes, we’ve had a pretty nice move off of bottom. But historically we’re only a year and a half into it. So we’re probably looking for a lot more.

Talk to us a little bit about the company specifically. You kind of have some interesting advantages of location and quality — not all phosphate is created alike. Talk to us a little bit about how you perceive your assets and how they might be uniquely positioned.

Some of your investors maybe… are more familiar with things like gold or copper. When you dig that out of the ground, if you’re digging your gold out of the ground in Nevada or Argentina or Siberia it’s all the same and it all trades for the same price. [But] when it comes to phosphate, you will get differences deposit to deposit. Most of the world’s phosphate comes from sedimentary deposits, which is over 90%. And the challenge with those types of deposits are there’s other deleterious elements mixed in there. So you’ve got radioactive elements, you’ve got heavy metals and depending [on] your application — mostly food — this isn’t good. And we try and manage. A lot of times, I’m asked, “Is there a substitute for phosphate?” And yeah, the substitute is starvation. So we need the phosphate and we try and deal with these deleterious elements.

Now, to your point, Arianne [is] very fortunate. We have an igneous deposit. They’re pretty rare, there’s maybe a dozen in the world. And that allows us to make a very high-purity phosphate concentrate… In terms of food or other applications, which we’ll probably get into a little bit, we are ideally suited. So, in terms of the project, we’re igneous. It allows us to make an extremely pure concentrate. It also means that we can sell it at a premium price… Again, gold is going to trade the same price everywhere all the time. Phosphate, you will get paid a premium based on that quality. So, we’ve got a good high-purity concentrate that can be made. We’re situated in the province of Quebec in Canada. So, in terms of security of supply, access to a market, ideally suited. And the deposit is extremely large. In fact, today it is the world’s largest greenfield deposit.

A lot of people throw around the concept of world-class. But at the end of the day, when you’re looking at Arianne and the Arianne deposit, you are looking at the world’s largest, the world’s purest, the world’s safest. And so, at the end of the day, I would argue that it is world-class. And also it’s fully permitted. The project is shovel-ready.

What does that mean? Most people may not know what that means.

Sure. So the mining — getting to a producing mine — is a long process. It’s 10 years, it’s 15 years. You’ve got to find the deposit. You’ve got to drill it out. The metallurgy, the economics, all the way through. And that’s a long process. You go through a preliminary economic assessment and a pre-feasibility, feasibility study, bankable feasibility study. It is a long process. And, of course, you need your permits, your environmental permits. Particularly in Western jurisdictions, that [has] become an extremely strict process.

So, to get all the way through that is lengthy. It’s expensive. And of course, there’s no certainty of success that, at the end of the day, you’ll find something that’s economic that the government will then turn around and give you the okay to mine it. Arianne has been able to go through all of these steps… What that means today is we are fully permitted and with funding. We can stick a shovel in the ground and we can start to build this thing out and produce the phosphate concentrate that the world truly needs.

You alluded to China’s dominance of the phosphate industry… China has control over a number of very important metals and substances across a number of industries, you know, thinking about the lithium-ion space [and] their dominance there. Do you see more Western companies looking for alternative sources of supply? And is this becoming more of a national security issue as companies look to be more self-reliant?

That’s a great question. As you alluded to earlier, most phosphate does wind up in fertilizer, 85%. But more and more is making its way into specialty applications. And that could be specialty agricultural applications like animal feeds and things like that. But also industrial applications… One area that I think [has] taken the world by storm here over the last year, year and a half, has been the lithium-iron phosphate battery.

As the name implies, you need phosphate. And, of course, you need a high-purity phosphate. So, I think ultimately China, what they’re looking at is how are they going to be the player in the automotive market? Well, how are they going to be the player in the automotive market?.. If 90% of the cars 10 years from now are electric and 90% of those cars run off of these LFP batteries and 90% of the LFP batteries are produced in China. Well, who owns the automotive market? It’s not Tesla, it’s not BMW, it’s not Ford. It’s China.

So, yes, I think that to your point you’re seeing a lot of car companies starting to think about how do they control more of their supply chain. How do they get vertically integrated? And of course a Western supply of phosphate is important, just like a Western supply of lithium or some of these other important materials. Graphite, cobalt — although cobalt you’re really not going to find in a Western jurisdiction. But yeah, I think that people are really waking up to the importance of these minerals and these mineral deposits.

Again, phosphate — it kind of lives in two worlds. It’s nice to figure out and make sure you can get a Tesla in your driveway. But it’s also nice to know that you’re going to have food in your fridge. And so with that phosphate, having it in a Western jurisdiction, having the type of phosphate that’s going to work for food and power really illustrates the importance of this deposit.

Talk to us a little bit about that opportunity. I think the company made an announcement a month or so ago that your phosphate is being tested externally or validated externally. Talk to us a little bit about what the timeline could be and the evaluation process and in terms of an EV battery manufacturer or other related battery maker looking at your product.

Sure. I guess a few weeks back, five [or] six weeks ago, we had announced that we were moving forward on late-stage testing surrounding our phosphate and its use in phosphoric acid that’s used by the battery companies. So we’ve been working with a bunch of battery guys and some automotive guys now for some time — eight, nine months.

Again, because of the nature of our phosphate, we’ve shown up on these guys’ radars. It makes a lot of sense. [And] we’ve signed some NDAs and MOUs which has progressed us to a point where we have specifications from a battery company. They want to see [what] everything looks like. [And] again, because of the nature of our phosphate, it should be no problem. So we have sent off our stuff for final testing. We should be getting results back — I’m kind of hoping end of January, February — that will substantiate that, yes in fact, our phosphate is going to work just fine for the EV space.

And what could be potential next steps from there?

I think the next steps would be… and just the next steps even for Arianne as a whole… our economics are pretty robust. It’s a very large project. And of course, like a lot of large projects, it’s going to be heavily reliant on debt.

The numbers are extremely supportive of taking on a fair amount of debt. But phosphate’s one of those commodities that… If you’re building a gold mine, it trades on an exchange, the gold. You can build, you know you’ll have customers because you can always sell into the exchange. Phosphate, like most commodities — again like a lithium, a niobium, a cobalt — they don’t trade on an exchange. And so you enter into offtake contracts with potential customers that will commit to buy your product. That’s the stage that Arianne is at now. So, what these positive tests will mean is that a bunch of battery guys would be then willing to enter into agreements with us to purchase our product.

With Arianne, because our stuff works across the spectrum, I can do my offtakes with fertilizer guys, I can do them with battery guys, I can do it with food guys, animal feed guys. And so it just, at the end of the day, means it’s more likely that I’m going to get my customers and demand should be robust, prices should be good and I should be able to get what I need to unlock my financing and ultimately much higher valuations in our company’s stock.

Given [that] you’re in the development stage, pre-revenue, help our viewers get a sense for what the financial model looks like. What are margins at a normalized level? What does the business model look like at a normalized level of production?

In our bankable, we had a 26 year life of mine at 3 million tons a year of our finished phosphate concentrate. Now, subsequent to that, we’ve done a bunch more drilling. And although not 43-101 compliant, we are kind of comfortable that we are pushing 50 years.

Now, at 3 million tons a year, we are projected to be a pretty low-cost provider. And I would say that at today’s prices, you’re probably looking at gross profits in the neighborhood of $450 million a year.

It’s very easy, I guess, for someone to take the other side and say, “Oh, well look how much prices have run.” And to a degree that’s true. So let’s even take a worse case scenario. Let’s go back to December 2019 when those prices were at a low that they hadn’t been [at] in an extremely long time. Even at that level, we’d have gross profited to the tune of about $150 million. And so today, again, we’re $450 million.

I think that as tightness in the market continues, as food inflation continues, as other applications continue, as disruptions to the supply chain like China or Russia continue, I’m very much of the feeling that prices are going higher. Again, we’ve got a lot of commodities that have gone to all-time highs. We’ve got equities that have gone to all-time highs. Real estate [has] gone to all-time highs. It’s hard for me to believe that that food prices and food-related aren’t going to all-time highs.

And again, now you pepper on things like the LFP battery and some other work and you’re just going to have more demand for supply that, just for all of it, has not grown much over the last seven to eight years. Arianne [is] really the only large-scale project that, during these bad times, has been able to move forward. And now as the macros change, the industry has changed and people have woken up to the fact of, “Wow, where do we get this stuff from?” I think it definitely brings a lot of attention to Arianne and a lot of opportunity.

Right and you have kind of the trifold — location, quality, jurisdiction. All of those factors–

Size. I mean, we are an answer certainly to some of the world’s problems. Certainly here in North America — we run a deficit.

It’s great to have wonderful soil in Saskatchewan, in Canada, or the Dakotas or Nebraska. But if you don’t have the fertilizer, how are you going to really work that soil and get what you need? And again, it’s not only just from food. Decarbonization — we all want biofuels. Well, you need corn for ethanol and you need soybeans for biodiesel. How are you going to get that? You need to grow it.

So this isn’t something that’s going away. We’ve always wanted to eat. We’re going to want to eat in the future and we need to see that that supply chain is protected.

You’re obviously managing a company and not the stock. But when we think about relative valuations, what do your peers trade at in terms of an EBITDA number? Where do you see the valuation trends going forward?

Producers in the space and the market in general, those multiples will move up and down. But 6, 7 times EBITDA on the low end [and] 11, 12 times EBITDA on the higher end. Those are the valuations that you see for companies in production. Obviously, we’re not there yet. But again, if you kind of take a look at north of $400 million in EBITDA — of course we’ve got to go through our financing and take on debt and what have you. But today we trade at roughly, in U.S. dollar[s], an $80 million market cap.

I can tell you as a 35-year veteran of mining, mining finance, capital markets — I mean it’s almost unheard of. Our NPV [net present value] of our project is $2 billion. We’re trading at 5% of NPV, which is something you might see in early stages, but once you’re fully permitted, I mean, you just don’t see that.

So, if you take a look historically — single-asset development companies, when they announce that their financing is fully in place, they’ll usually trade to at least 1 times first year’s projected EBITDA. Which again, for us, would put us at $400-plus million. So risk-reward, necessity of the products, limited competition, as well as everything you had said earlier about the size, scope, security — I think an argument could be made for why this thing is pretty cheap.

What’s the next milestone for you? What’s keeping you up at night and what’s the next kind of bogey that the company needs to hit to get things going?

Yeah. What keeps me up at night? Well, right now the macro [has] gotten a lot better, so nothing keeps me up too much. I do like where we’re sitting. But to your point, what do we need to do?

So, as I mentioned, the banks are good with this project. They want to make sure that we have customers. So that’s really what my role is now — to just get those offtakes that we need. And I think the process is going well. Certainly, I love these other applications because, as I said, it expands my potential customer base. So, for me, what gets this thing across the line is, maybe over the next two, three quarters, bring home the rest of those offtakes and stick my shovel in the ground.

Now, I should also note that large, independent phosphate mines don’t really exist. There’s a few. But most of them are owned by large integrated guys. And that’s to the tune of roughly 85%. That 15% that’s not vertically integrated — again, because of all of these challenges, China, Russia, the guys who have the excess phosphate concentrate building out their own operations — that 15% is getting harder and harder to find, to secure. And you’re paying more and more.

So, does it make sense for someone not only to get an offtake, but maybe a piece of the project? That’s a possibility as well. I often joke, “Investors right now are just starting to learn who we are.” But certainly in the corporate world and in the fertilizer world, most of the corporates know who we are. And fortunately we’re on their radar. We’re having those discussions. And a whole lot of value unlocks as we sign up a couple more customers.

Your comments and feedback are always welcome. Let’s continue the discussion. Email me at jmakris@investorplace.com.

On the date of publication, Joanna Makris did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

Click here to see her Behind the Wall series, where she gets up close to CEOs, industry experts and money managers and gets answers that are normally heard by institutional investors.


Article printed from InvestorPlace Media, https://investorplace.com/2022/01/behind-the-wall-elon-musk-needs-this-phosphate-miner-on-speed-dial/.

©2022 InvestorPlace Media, LLC