Amazon’s Cerrado Verde: a game changer?

Any company whose stock has moved from 93¢ per share to a high of $8.00 over the course of a year deserves a closer look, and so it is with Amazon Mining Holding (amz-v).  

The company plans to develop ThermoPotash from the shallow potash-rich rock at its Cerrado Verde project in Brazil. ThermoPotash is a slow-release, non-chloride multi-nutrient fertilizer component. Amazon is also studying making conventional potash salts from Cerrado Verde.

The main potash-bearing minerals in the rock — known locally as verdete (green) slate — are glauconite (a hydrated potassium-iron silicate) and sericite (a monoclinic, basic potassium aluminosilicate of the mica group), with K₂O or potassium oxide content ranging from 5% to 14%. (That compares with 60% K₂O for potassium chloride or KCl.)

Last October Amazon released a preliminary economic assessment that estimated a net present value of US$455.5 million for a 1.1-million-tonne-per-year operation and US$858.1 million for a 2.2-million-tonne-per-year operation at a 10% discount rate and a 40-year mine life.

Newsletter writer John Kaiser holds a buy recommendation on the stock at $4.81 per share with a $20+ price target by the end of 2011 and $50+ during 2012, “if Amazon does not disappear in a bidding war before then,” he writes in the Dec. 21 issue of his Bottom-Fish Action report.

On Dec. 2, Amazon filed a patent application in the United Kingdom for the production from verdete slate of conventional potash products: muriate of potash or KCl and sulphate of potash. The technology was developed by Derek Fray, a professor at the University of Cambridge.

Cambridge University’s department of materials science and metallurgy, sponsored by Amazon, invented a method for reacting verdete slate with a simple mixture of salts to form water-soluble potash. The reactions occur at moderate temperatures of 800-1,000 degrees Celsius and most reagents are regenerated in the process. 

“This patent has ‘holy mackerel’ implications,” Kaiser writes. “The patent application for a simple process that cost-effectively converts glauconite into conventional forms of potash such as potassium chloride or potassium sulphate is a game changer at many levels if the process works and the patent is granted.”

Kaiser adds that BHP Billiton (bhp-n, blt-l) spent $350 million on its failed bid for Potash Corp. of Saskatchewan (pot-t, pot-n) and argues BHP “should double that bet and set the stage for some future payback by making a snap $10-per-share takeover bid for Amazon before its competitor Vale (vale-n) does (the stock will be $20 before this idea hits their radar).

“If the process works and the associated cost is reasonable, Amazon could be in a position to convert the 10-15 billion tonne glauconite resource within the Verdete slate belt that grades 5.5% to 14% K₂O into potash products that would not only eliminate Brazil’s need to import potash from Canada, Russia and a handful of others who dominate potash supply, but it could enable Brazil to become a net exporter of potash,” Kaiser argues. 

“If Amazon has the potential to become a $10-$20 stock just on the basis of providing ThermoPotash as a 1-2 million-tonne-per-year supplement to Brazil’s existing fertilizer blenders, what would the stock be worth if Amazon turns out to have a process for converting glauconite into conventional potash products at a cost competitive with South American brine operations and the deep sylvite deposits in Saskatchewan?”

News of Amazon’s patent application was followed by results from potassium leaching tests unveiled on Dec. 17 demonstrating that ThermoPotash suffers only minimal nutrient loss as a result of leaching. 

Results of a study at the University of Uberlandia in southwestern Minas Gerais state indicate that the amount of potassium leached from ThermoPotash was very low compared to that of KCl for both of the soil compositions tested. In each sample, 26% of the potassium chloride was leached while the corresponding figure for the ThermoPotash was just 0.3%.

Other good news before Christmas included the announcement of a private placement via a syndicate of underwriters that could raise up to $10 million and fully fund Amazon up to construction phase. Amazon also announced on Dec. 22 that the Minas Gerais state government is granting special tax treatment to the Cerrado Verde project, which will reduce the company’s capital and operational expenditures and even reduce sales tax on ThermoPotash. 

The special tax treatment includes suspending a tax on the import of foreign goods destined to fixed assets including machinery and equipment and the suspension of a tax payable on imports of foreign raw materials such as petroleum coke.

At presstime in Toronto, Amazon was trading at $6.49 per share.