Harvest Minerals (HMI) – Fertile ground for share price growth

Harvest Minerals (HMI) – Fertile ground for share price growth

Harvest Minerals is a mineral exploration and production company holding various exploration projects in Brazil. The most important of these is the Arapua remineraliser project in Minas Gerais, in the heart of the Brazilian agricultural belt, covering almost 15,000 hectares. The company is producing now and striving towards profitable revenue growth (latest share price 10.15p, market cap £18.9 million).

Background

Brazil imports 90% of its fertiliser but the government wants to become self-sufficient by 2020 – this means it is very supportive of local produce.

Additionally, Harvest’s remineraliser is organic. It is one of the few companies in the country which has managed to bring organic, domestic remineraliser into the marketplace. Brazil is one of the largest users of remineraliser on the planet.

Arapua project

Arapua produces the company’s unique product KPFertil, which is superior to all other conventional sources of potassium used in remineralisation. Results indicate that only 0.07% of the contained potassium (‘K’) provided by KPFertil was lost from the soil due to leaching compared to 20.8% of the contained K lost due to leaching from conventional sources such as potassium chloride. This means that conventional sources are of nowhere near the same quality as KPFertil; KPFertil is also cheaper than conventional remineraliser such as potassium. The MAPA certification is the gold standard of authenticity, providing HMI customers a guarantee that they are buying product of the highest quality and this gives them a huge advantage when it comes to selling the product. The board hope to ramp up production in Arapua to 400k tonnes which would give them $20 million per annum of profit.

Economics

Brazil reduced royalty rates on domestic remineraliser projects from 3% to 0.2% to support domestic market growth. This provides significant cost savings of ~US$1.46/t where in the scoping study a rate of $1.58/t was assumed – a saving of 92%.

All-in costs before this reduction were assumed to be around $7.34/t, with current sale price around $60/t. Assuming this would produce $50/t gross profit on a conservative basis, then 100,000 tonnes would give $5m of gross profit per year.

Harvest intends to ramp up production to at least 400,000 tonnes of sales over the next few years, which would generate annual gross profits of $20m (for context, Harvest’s current market capitalisation is £18.9m).

There is a 100 year mine life on Arapua, and the demand is there. The exploration and early stage risk has been removed as Harvest is already selling KPFertil, and are in advanced discussions with a large number of potential customers ranging from consumers, co-operatives, agricultural distributors and trade bodies.

The company have won two contracts alone which are enough to put them on a breakeven keel almost. The 36kt contract for KPfertil gives $2,160,000 of revenue. Using a higher than expected all in cost at $10 (broker gave $7) this means Harvest’s profit margins are 83% – thus making the company $1,792,800 in operating profit. With operating cash flow at $2.3m from the FY Results, this means that the additional 50kt contract alone is enough for the company to trade with an operating profit.

Placing

The company undertook an oversubscribed placing with institutions only at 18.5p, raising gross proceeds of £9.712 million – even though management was telling investors at shareholder meetings that the company would not place.

At the time, I commented that I felt Harvest may take advantage of investor interest and raise cash in order to accelerate growth. This was because the company did not seem to be growing as fast as suggested (the board said that they could get up to 400kt annual production over the next eighteen months when the previous placing at 10p was undertaken), and so I decided to exit my Harvest position entirely around 22p, capturing a 120% move from the 10p placing I participated in. Despite this being a value accretive placing with institutions, interest has waned and I now feel that the valuation is starting to become attractive.

Board

Brian McMaster has 20 years’ experience the mining industry. His experience includes founding Highfield Resources (A$346.18M), an ASX listed potash, and the recapitalisation and listing of 12 Australian companies. Career to date includes significant working periods in the United States, South America, Asia and India.

Mr McMaster was a founding director in venture capital and advisory firm, Garrison Capital Pty Ltd, which has been very successful to date. He has purchased over 4 million shares in the placing and so has put approximately £770,000 of his own money into the placing, so I think it is fair to say Brian is aligned with shareholder interests.

Chart

A look at Harvest Mineral’s price chart shows strong support at the 10p level. However, the stock is in a declining trend, and unless we like catching falling knives I’d be reluctant to buy here. Technically, I’d like to see the stock build a nice base, then breakout and start advancing.

If the 10p support does not hold, the stock looks set to test 7p. This would be a serious discount (62%) to the price the institutions (“smart money”) paid, and the valuation would be even more attractive.

Conclusion

In my opinion, Harvest offers large upside as 1) there is a clear demand for the product due to Brazil’s goal of self-sufficiency on remineraliser by 2020; 2) KPFertil is both cheaper and far superior to conventional remineraliser; 3) the product is there and just needs digging up, refined, and sold – there is nothing to stop them achieving their 400k tonnes pa goal if the demand is there; 4) Brian McMaster has experience in founding companies and scaling them up creating massive value for shareholders.

I personally do not own a position in this stock and will not be likely to open one unless it builds a base. I think the interim results will give us an idea of how quickly it is able to deliver product to customers – as of the Final Results the company was still burning cash. Given the size of the war chest it raised, I feel it’s unlikely it will be coming back to the market, and should the company surprise investors in terms of growth then there is definitely (in my opinion) scope for a re-rating. Until then, I’ll be waiting.

 

This article has been edited following reader feedback to reflect the distinction between fertiliser and HMI’s product, which is a remineraliser.

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COMMENTS

Wordpress (4)
  • comment-avatar

    Hate to tell you this but you are making a major mis representation

    KPfertil is NOT registered with MAPA as a fertilizer

    It is only considered a remineraliser and local agronomists say there are far more economical rock dust products available in country

  • comment-avatar

    My apologies comcas.

    If I am honest I don’t know what the difference is, as I was under the impression they were the same thing.

    Will edit the article accordingly – thank you for your comment.

  • comment-avatar

    There is a tremendous difference ,particularly in price

    Kpfertil is just dug up

    Sophisticated fertilizers are usually produced to exact formulas that are designed to
    specifically benefit certain crops

    As previously stated local agronomists do not recommend KPfertil

    you should amend your article as it is distinctly misleading

    Think chalk and cheese

  • comment-avatar

    Comcas – I’ve changed the article to reflect your comments.

    My intention wasn’t to mislead so thank you for setting me straight.

    I don’t hold a position in the stock but think it is starting to look attractive – what are your thoughts?

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