(Image: Zen Buddha Silence, by Marilyn Barbone)
January 2, 2022
Verde AgriTech (AMHPF) is an agri-tech company founded in 2005 by Cristiano Veloso. Veloso comes from a family of farmers. He is highly educated and intellectually curious.
Verde owns the first Brazilian potash mine in 33 years. Brazil imports 94% of its potash. Verde is the lowest cost potash producer—its cost is $170 per ton of potash—for two mains reasons:
- Because Verde produces its potash in Brazil, that makes it lower cost than most potash producers who exist outside of Brazil and have to pay additional shipping costs;
- Verde’s production process does not use any water or chemicals, and no tailings dams or waste generation is needed. The company’s deposit is at the surface, while most potash mines are deep.
Because Verde is the lowest cost producer, it has a sustainable competitive advantage that should allow it to earn high margins—and high return on invested capital—for many years.
Furthermore, traditional potash has high salinity and is therefore bad for the biodiversity of the soil. The world uses 61.5 million tons of potassium chloride each year, which is equivalent to 460 billion liters of bleach.
Verde’s product—K Forte—is a salinity and chloride free potassium specialty fertilizer. Verde produces K Forte by using the naturally occurring glauconite in the Alto Paranaiba region in the state of Minas Gerais in Brazil. Whereas traditional potash contains potassium and chlorine, K Forte contains potassium, silicon, magnesium, and manganese. As a result, K Forte is better for the soil and leads to healthier plants and ultimately healthier food. K Forte also improves the carbon capture capacity of the soil. The company’s mission: “Our purpose is to improve the health of people and the planet.”
Verde currently has only Plant 1 running. It is maxed out at 400,000 tons per year (tpy). The company has already maxed out Plant 1’s production. Plant 2 is expected to start producing in Q3 2022 and it will be able to produce 800,000 tpy. Plant 3 will be even larger.
Potash prices could remain high for much of 2022. See: https://www.dtnpf.com/agriculture/web/ag/crops/article/2021/12/17/sanctions-affect-world-potash-supply
More importantly, potash prices could be high for much of the next decade if it turns out to be a commodities bull market. See: https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-supply-shock-and-its-everywhere
The current market cap of AMHPF is $110.57 million, while the stock price is $2.20. The enterprise value (EV) is $114.47 million. Assuming that production is maxed out for Plants 1 and 2, that would be 1,200,000 tpy. Assuming a potash price of $400, that would be $66.67 per ton ($400 for 6 tons of K Forte). Revenue would be $80.00 million.
Operating cost per ton is $28.33 ($170 for 6 tons of K Forte). So operating costs would be $34.00 million. That means operating profit would be $46.00 million. Net profit would be $41.00 million. EBITDA would be $47.00 million. (That puts the EBITDA margin at 58.8%. If potash prices are higher, the EBITDA margin can reach 70-80%.) Operating cash flow can be estimated at $47.00 million.
Using these figures, we get the following multiples:
- EV/EBITDA = 2.44
- P/E = 2.70
- P/B = 1.76
- P/CF = 2.35
- P/S = 1.38
Also note that the NAV of the company—based on its glauconite resources and on the fact that the total Brazilian market for potash is 20 million tpy—is $49.77 per share in Canadian dollars or $38.82 per share in U.S. dollars.
The CEO Cristiana Veloso owns 20% of the shares. Also, he has been adamant about not using shares to fund growth. For the construction of its Plant 2, the company is using $3.75 million in debt and $1.41 million in internally generated cash flows.
On the most recent quarterly call, Veloso commented on the triple digit growth: “Blitzscaling is never an easy endeavour, but I’m confident we have built the right team to continue succeeding at this challenge. It is still day 1 at Verde.”
The company board includes people like Alysson Paolinelli, a professor, former minister of agriculture, and a World Food Prize winner.
Verde AgriTech has a Piotroski F_Score of 7, which is good.
Net debt is low: Cash is $2.4 million. Debt is $2.8 million. TL/TA is 30%, which is good.
Intrinsic value scenarios:
- Low case: Assume $400 per ton for potash prices—the current price is over $700—and that plant 2 is delayed. In this scenario, revenue could be $27 million and net profit $5 million. With a P/E of 15, the stock would trade at $1.49, which is 32% below today’s $2.20.
- Mid case: Assume $400 per ton for potash prices—the current price is over $700. With plant 1 and plant 2 producing, production would be 1,200,000 tpy. That translates into $80 million in revenue and $41 million in net profit. The company should have at least a P/E of 15. That would put the intrinsic value of the stock at $12.24, which is over 450% higher than today’s $2.20.
- High case: Assume $400 per ton for potash prices—the current price is over $700. With plant 1 and plant 2 producing, production would be 1,200,000 tpy. That translates into $80 million in revenue and $41 million in net profit. The company should have at least a P/E of 25 because of its significant growth potential. That would put the intrinsic value of the stock at $20.39, which is over 825% higher than today’s $2.20.
- Very high case: NAV per share—based on the company’s glauconite resources and on the size of the Brazilian market—is $38.82. That is over 1,660% higher than today’s $2.20. In other words, a 16-bagger. (Note that the company has 777.28 million tons of glauconite reserves, enough to supply most of the Brazilian market for decades.)
The biggest risks are market adoption risk, currency risk, political risk, and commodity price risk.
So far, farmers are adopting Verde’s products, as evidenced by the sold out production.
The Brazilian real seems to be fairly stable at $0.18 per U.S. dollar. But if there is a flight to safety during a bear market or recession, the Brazilian real would decline versus the U.S. dollar.
One political risk is that their application for the license needed to start Plant 2 in Q3 2022 won’t be approved in time. Another political risk is government corruption and the lack of growth-oriented reforms.
There is a risk that the price of potash could fall significantly. This seems unlikely, given double digit inflation in many parts of the world. It seems to be a commodity bull market. It’s even possible that potash prices will remain at $600-800 per ton, which would mean huge profits for Verde Agritech as long as it can fully increase its production as planned.
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