Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2022 contest. Joanna Makris’ pick for the contest is Arianne Phospate (OTCMKTS:DRRSF) stock.
No need to bore anyone with the details: it’s a tough macro. Yet, my top pick for the InvestorPlace.com Best Stocks for 2022 contest — Arianne Phosphate (OTCMKTS:DRRSF) is sitting in the driver’s seat right now. In fact, DRRSF stock is up nearly 53% year-to-date (YTD), versus a 5.3% decline for the S&P 500 over the same period.
As I’ve mentioned in the past, the investment thesis is straightforward. Arianne sits right in the center of two shortages right now: food and electric vehicle (EV) batteries. And as a development-stage phosphate mining company, Arianne manages one of the largest — and cleanest — phosphate reserves in Canada.
However, these are the facts: there’s a real tightness in the phosphate market right now. China and Russia, the two largest producers, are off the market right now. China has halted exports until at least June 2022, and Russia is off-limits for obvious geopolitical reasons. And with farmers looking for organic, green fertilizer, Arianne is getting a lot of attention lately for its friendly location and high-quality phosphate.
Then, of course, there is a clear urgency within the EV ecosystem to vertically integrate the supply chain. Battery and carmakers are racing to pump out cars. To get ahead of the pack, they’re increasingly looking to secure an ample supply of critical minerals — one of which is phosphate.
Agriculture Under Siege
As we’ve mentioned before, phosphate is an essential component of fertilizer. And more farmers want fertilizer — but they also want organic, green fertilizer. That’s not easy to find, since most phosphate is dirty. And while the U.S. doesn’t buy much phosphate from China, it does account for approximately 30% of the world’s phosphate trade. The ripple effect is that there is not enough phosphate to go around.
At the same time, the world population is growing. According to the United Nations, the world’s population is expected to increase by 2 billion people in the next 30 years, from 7.7 billion to 9.7 billion in 2050.
Nonetheless, supply shortages can be lucrative for well-positioned phosphate suppliers like Arianne. An incremental $50-$60 a ton for phosphate can translate into $150 million in profits.
Furthermore, in recent news, Arrianne announced a collaboration with Northern Nutrients of Saskatchewan, Canada to “advance the use of its high-purity phosphate concentrate in alternatively derived fertilizers.” With that, testing of this new fertilizer is starting now, and the results will be available “through late summer and fall of 2022.”
If successful, Arianne’s high-quality phosphate would simplify manufacturing by eliminating the need for an extra acidulation process. In turn, this opens up more potential customers. The bottom line, though, is that this collaboration is an encouraging first step toward a supply contract.
Building a Clean Energy Supply Chain
Adding fuel to the fire is the price of oil. And if there’s anything that says “the time for electric vehicles is now,” it’s the price of oil, which now hovers at $97.63. By now it’s clear that every EV maker, big or small, is hustling to get more vehicles in production.
Of course, you can’t build EVs without batteries, as Tesla (NASDAQ:TSLA) CEO Elon Musk acknowledged years ago when he announced plans to build the first of Tesla’s “Gigafactories.” That said, industry experts estimate that the world will need several dozen battery gigafactories once EVs begin to be produced in serious volume.
Given the lofty expectations for EV production in the coming years, it’s clear that the limiting factor is EV batteries. Despite the fanfare around solid-state batteries, please, forget them for now. They are nowhere near commercial volume production or mass-market price points. So, to drive the point home, the industry needs batteries –and now.
With every major EV maker trying to get their hands on battery ingredients, the need for phosphate is driven by a bigger initiative: security of supply. As the war in Ukraine makes clear, we are too reliant on Russia for many core commodities. Meanwhile, alternative reserves continue to deplete. As a result, phosphate is increasingly being viewed as a “critical mineral” by EV vehicle and battery manufacturers.
That said, there is a clear strategy outlined to reduce its dependence on Asian battery cell imports. In fact, Europe is set to host around 35 gigafactories by 2035, according to the latest predictions.
As a result, EV makers will need to secure high-purity phosphate. And already we have seen Tesla ink “secret” deals with nickel suppliers, given a large portion comes from Russia. For the record, though, the price of nickel has more than doubled over the last 12 months.
Overall, this eventual need for high-quality phosphate puts Arianne in a great spot to benefit. And that means DRRSF stock can climb even higher in the coming quarters.
Bottom Line on DRRSF Stock
Since the start of 2021, Arianne stock has indeed made a strong move. However, shares of DRRSF stock remain deeply discounted at a fraction of the asset’s NPV (net present value). The size and quality of the asset alone could make Arianne conservatively worth $500 million-$600 million, versus the shares’ current $100 million market capitalization.
Therefore, we remain buyers. The biggest risk here, of course, is the timing. Whether Arianne strikes this cycle or next, the pieces are all in place. So, DRSFF stock remains a stock to buy.
On the date of publication, Joanna Makris held a long position in DRRSF stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joanna Makris is the Head of Equity Research at Boardroom Alpha. A strategic thinker and fundamental public equity investor, Joanna leverages over two decades of Wall Street experience covering emerging trends in Technology, Media and Telecom at several global investment banks, including Mizuho Securities and Canaccord Genuity.