Brazil has a fertilizer problem and a company called MBAC Fertilizer (MBC-T) is looking to capitalize on it by transforming a small phosphate mine, in a growing agricultural region of central Brazil, into a sizeable value-added operation by mid-2012.
Agribusiness accounts for 25% of the Brazilian economy, and it’s one of the few places in the world where farmland is growing, so the need for fertilizer is steadily increasing. However, Brazil imports 70% of the fertilizer it consumes. As the world’s third-largest potash consumer and fourth-largest phosphate consumer, that adds up to a lot of fertilizer.
In 2006, Brazilian farmers used 3.5 million tonnes of potash (K2O), after China with 5.6 million tonnes and the United States with 4.7 million tonnes. As for phosphate (P2O5), Brazil consumed 3.1 million tonnes while China used nearly 12 million tonnes, India 5.5 million tonnes and the U.S. 4.1 million tonnes.
The Brazilian government has taken note and is targeting to become self-sufficient by 2015; it’s offering tax incentives to local producers and is even considering starting its own state fertilizer company.
Many believe the country has the mineral potential; the resources just haven’t been developed. This is something that Antenor Silva, president and CEO of MBAC, knows first hand. And Silva has big plans to make the most of the opportunity.
Silva, a director and former president and chief operating officer for Toronto-based Yamana Gold (YRI-T, AUY-N, YAU-L), created MBAC about a year and a half ago, rounding up a savvy team of mining and fertilizer types from both Brazil and Canada.
MBAC’s chairman is Peter Marrone, chairman and CEO of Yamana. Also on the board is Alexander Davidson, former vice-president of exploration for Barrick Gold (ABX-T, ABX-N), Greg Thompson, president and CEO of Wellington West Capital Markets and Denis Arsenault, former CFO for Desert Sun Mining.
Silva knows what he’s doing. A Brazilian with more than 40 years experience in the mining business, he was involved in the development of four of the five major phosphate mines and the only potash mine in Brazil.
The first phosphate mine began production in the 1970s. A new process had to be developed back then, because the phosphate deposits in Brazil are a type of carbonatite that’s different from the sedimentary phosphate mines in places like the U.S., Morocco, Russia and Canada.
“I was involved in this project since the beginning as a young engineer,” Silva said, at MBAC’s Toronto office, in the spring. “Then after that, using the same metallurgical process developed for the initial plant, through an engineering company, we started as a team to develop the other Brazilian mines.”
Those mines are the biggest operations in Brazil today, and several are now owned by Brazilian powerhouse Vale (VALE-N), which has plans to become a leading global player in the fertilizer business. Through acquisitions and organic growth, Vale expects it would be near the top within seven years, with an estimated output of 3.3 million tonnes of phosphoric acid and 10.7 million tonnes of potash.
MBAC listed on the Toronto Stock Exchange in December 2009, after completing a reverse takeover of Sandwell Mining, followed by a private placement of nearly $57 million at $3 per share.
MBAC had already gotten started before that, by acquiring a few potash and phosphate exploration projects and a small phosphate mine called Itofas, in southeast Tocantins state, in central Brazil. Right now, it’s just a small open-pit operation where ore is crushed and ground and then sold to farmers for direct application.
Silva wants to take Itafos from being a small phosphate producer to one that produces a value-added phosphate fertilizer called single super phosphate (SSP), by the second quarter of 2012. SSP, which helps phosphate and sulphur-deficient land, is used mainly in Brazil, India and China, but not so much in North America.
Meanwhile, the company plans to produce about 100,000 tonnes of the crushed phosphate rock per year for the next few years, while it works on getting the SSP operation up and running.
A National Instrument 43-101 report released in April looked at building a beneficiation plant that would generate 330,000 tonnes of phosphate rock concentrate per year at 28% P205. The phosphate concentrate would be used to produce 500,000 tonnes per year of SSP, by adding 170,000 tonnes of sulphuric acid, which would also be produced onsite.
Total capital costs to reach production (including reclamation) have been estimated at US$126 million, plus US$24 million in taxes, part of which would be refunded and US$19 million in contingencies.
Using a discount rate of 10%, the internal rate of return on the project is 26.3% while the net present value is US$140 million. The payback period is 3.45 years after startup, using an SSP price of US$249 per tonne as the base case, which increases by 2% inflation per year.
MBAC is also looking into the potential for growth beyond that, increasing production to 1.08 million tonnes of SSP per year plus 100,000 tonnes of sulphuric acid and 190,000 tonnes of F160 (16% P2O5) by 2015. The largest operations in Brazil produce about twice that.
Measured and indicated resources at Itafos have more than doubled since the last count in November, now standing at 28.3 million tonnes grading 4.3% P2O5, which translates to reserves of 24.4 million tonnes of 4.4% P2O5. Wardrop Engineering, which calculated the resource, used a cutoff grade of 2.8% P2O5.
Other inferred resources have been identified in five zones outside of the pit, but adjacent to the Near Mine Block, amounting to 56.9 million tonnes grading 6.05% P2O5.
“We certainly have enough resources to warrant the engineering and acquisition of equipment and we certainly have the payback phase guaranteed,” says Luiz Bizzi, vice-president of exploration.
The company continues to explore the area to expand resources and plans to release another report in the coming months with a more concrete plan.
In mid-June, MBAC reported some additional infill drill results from the inner part of the Near Mine Block known as the Canabrava and Domingos areas, confirming phosphate ore is continuous and extends north and south of the existing mineralization.
Canabrava highlights include intercepts of 21 metres grading 10.03% P2O5,20 metres of 17.11% P2O5,31 metres of 5.23% P2O5 and 19 metres of 10.27% P2O5 (from four separate holes).
Over at Domingos, drilling returned 24 metres grading 14.85% P2O5,27 metres of 9.06% P2O5 and 23 metres of 11.55% P2O5 (from three separate holes).
The company has been negotiating with various government groups to coordinate fiscal incentives for the project. Discussions with various lenders about financing Itafos are underway. Management says that its current cash balance plus the proceeds from any debt facilities would be enough to fund the project into the second half of 2011.
Aside from the potential of government incentives, MBAC is also looking forward to having a cost advantage over imported fertilizer products. Itafos is about 1,000 km from the Itaqui port in Maranhão state, and imported fertilizer is typically subject to freight costs around an extra US$40 per tonne.
Itafos is in the Cerrado region, which is much like an African savannah. A lot of land is being converted into cropland. The soil, however, is low in both phosphorus and potassium, so fertilizer is necessary.
“It’s one of the few places where you can dramatically grow cropping space,” says Steve Burleton, vice-president of corporate development. “A lot of
countries are losing cropping space to urbanization.”
But not in Brazil. It’s estimated that there is another 700,000 sq. km of cropping land in the Cerrado alone — and right now, there’s about 500,000 sq. km of permanent crops planted in Brazil, so the potential is there to double cropland.
It’s a slow process though, because of the lack of infrastructure. But the government is investing heavily in it because it wants to see this land being used productively, Burleton explains.
“It’s an untenable situation and the government doesn’t want to be reliant on Morocco for phosphate or Canada’s Canpotex for potash,” Burleton says. “So domestic producers have an advantage… and Brazil is very fortunate as a country — it actually has the resource in the ground, it just hasn’t been developed historically.”
MBAC isn’t the only Canadian junior looking to capitalize on Brazil’s fertilizer situation. Amazon Mining (AMZ-V), founded by some Brazilians in 2005, is developing the Cerrado Verde open-pit potash project in Minas Gerais state. Talon Metals (TLO-T) is working on the Sergipe potash project near Vale’s Taquari-Vassouras potash mine in Sergipe state. Atacama Minerals (AAM-V) has the Salvador potash project in Bahia state near the port city of Salvador.
And while the prospects for fertilizer producers in Brazil look good over the long term, MBAC’s share price has been tumbling downward ever since it listed on the TSX. Starting at $3 a share, the stock peaked at $3.95 on Jan. 25, but is currently near its all-time low reached on June 10 of $1.46 per share. The company has 72 million shares outstanding.
Holding 25% of MBAC, management and directors are bearing the pain alongside any shareholders who bought their shares at a high point. Director Leonardo Marques da Silva indirectly holds 7.95 million MBAC shares while chairman Peter Marrone directly owns 7.03 million shares. They are two of MBAC’s three largest shareholders. The third is not directly related to the company.
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