Emerging Opportunity in Fertilizer Stocks: Arianne Phosphate (TSX-V: DAN)(OTC: DRRSF)

Gerardo Del Real Interviews Brian Ostroff, CEO of Arianne Phosphate (TSX-V: DAN)(OTC: DRRSF), owner and developer of the Lac a Paul phosphate project in Quebec, one of the largest and highest grade phosphate projects in the world.

Gerardo Del Real Editor Photo 110Gerardo Del Real: This is Gerardo Del Real with The Outsider Club. Joining me today is CEO of Arianne Phosphate (TSX-V: DAN)(OTC: DRRSF), Mr. Brian Ostroff. Arianne is developing the world-class Lac à Paul Phosphate project in Quebec. Brian is a graduate of the University of Toronto and in 1987 he joined RBC Dominion Securities, where his focus was on smaller cap special situations as well as alternative investments. In 1999 Brian joined the M&A advisory firm Goodrich Capital where he was the Canadian managing partner.

In 2004 Brian moved over to the trading side of the business where he spent a year as a proprietary trader with a large Canadian bank and subsequently on his own for four years prior to joining Windermere Capital as managing director. His area of focus is the junior and mid-tier mining sector. Mr. Ostroff has sat on Arianne Phosphate's board since 2014. Brian, I want to thank you very much for joining me today.Brian Ostroff Arianne Phosphate

Brian Ostroff: Thank you for having me.

Gerardo Del Real: I provided a brief introduction there, Brian, but could you please share with us how and why you got involved with Arianne Phosphate?

Brian Ostroff: Sure. As you had mentioned I am a managing partner over at Windermere Capital. It's a group that has the responsibility of managing a couple of resource-based funds. Quite a few years back we did come across Arianne and really thought that it was a pretty interesting situation. It was in a commodity that I don't think people really appreciated. Like many of the investments that Windermere makes it's something that we believed with a little bit of time and effort, and a bit of money, we could progress to something pretty special. Little did I know back at the end of 2010 that six years later I would wind up becoming CEO of this company. But it really is a project that I strongly believe in and certainly Windermere and some of our current partners really think the world of.

Gerardo Del Real: I want to talk about the Lac à Paul project. I described it as world class and it truly is because it presents frankly a very compelling opportunity. But before that I'd like to talk a bit about the fertilizer sector. You mentioned that it's a market that I don't believe a lot of investors and speculators understand, and it's not on the radar frankly of a lot of speculators in this business. Could we talk about the fertilizer sector as a whole? Then maybe we can get more specific about the opportunity that Arianne’s Lac à Paul phosphate project presents?

Brian Ostroff: Sure. I think that you are correct in your assessment. At best, people know fertilizer. Fertilizer is made up primarily of three major components. That's potash, nitrogen, and phosphate. I think where investors tend to do themselves a disservice is they don't understand that the three components are different and they have their own supply/demand dynamics. They just assume that they're all the same and they really aren't.

Most people have seen a pretty precipitous decline in potash over the last few years and they've just assumed that the entire industry, all the components, has been to that degree a train wreck. While potash has been soft, certainly, I think that phosphate and phosphate rock has held up a little bit better. Certainly if you take a look at projections going forward, I think phosphate is the one that most people can agree has the brightest outlook.

Why would that be? First, you need to understand that most of the world runs a deficit when it comes to phosphate. Although there is not at the moment a global deficit, North America runs a deficit as does South America and Western Europe and most places in Asia. That deficit today is made up by the Middle East and North Africa. You do have your largest player being Morocco. An interesting statistic, Morocco today is almost four times bigger in the phosphate market than Saudi Arabia is in the oil market.

Gerardo Del Real: Wow.

Brian Ostroff: Yeah, it's a pretty amazing number. Beyond that, Tunisia used to be number two but Arab Spring has taken out a lot of that production. Syria used to be a producer and, well, we know what's going on there. Egypt, Algeria, today Jordan is the second largest producer for the export market. I think that it's important to realize where this stuff comes from and understand that, bringing it back to North America specifically, we do run a deficit. We need four million tonnes a year to come in from outside our borders and this is the bulk of where it comes from. It is important.

The industry itself, 85% of it, is integrated. That is, the guys who actually own the phosphate mines are the ones that are integrating it, making it the fertilizer. The example I always like to give is that, think of the fellow who has wool. He has that wool and he'll charge $50 to the suit maker to buy it. That suit maker, it costs him $25 to turn into a suit and he sells it on to his wholesaler for $275. All of a sudden the guy with the wool says, "Actually I should be the one making the margin," and now he charges $200 for that wool. The suit maker's not making very much.

At the end of the day the reason that this industry is so integrated is because there is a tremendous challenge. If you need to source your phosphate rock elsewhere and then turn it into fertilizer, your profitability and your end product is going to be very challenged. Today, although Agrium and Potash Corp and Mosaic all do have their own phosphate supplies, they are not adequate, they all import and it has a big, big effect.

Lastly, the nice thing of course about phosphate is demand grows for it every year. At the end of the day phosphate's basically food. No phosphate, no fertilizer. No fertilizer, no crops. Ultimately, no crops, no animal feed, etc. It is definitely an interesting space. I think it's an area that most people take for granted. They show up at their supermarket and they get whatever they need. I don't think they understand how challenged a world we might be living in if those supplies were to continue to be reduced for whatever reason.

Gerardo Del Real: It sounds like, Brian, that a lot of the source is, to put it kindly, a lot of the source is coming from regions that are prone to instability, let's say. I think that's one of the key differentiators of the Lac à Paul project, so let's talk about the project. It really is unique. It is definitely one of the most important undeveloped phosphate projects in the world. You have scale, you have compelling economics, you have infrastructure, and again we talked about the very important strategic advantage that you have with the jurisdiction that the project is in. Can you go over the uniqueness of the project and the key differentiators that make it stand out?

Brian Ostroff: Sure. First and foremost, to your point, we are very well situated. We are in Canada in the province of Quebec, obviously a very safe jurisdiction and a jurisdiction that is pro mining. We sit right at the heart of a continent where we run a deficit. The other thing that makes this project pretty special, and it's something that I didn't get into a little bit earlier, most phosphate makes its way into fertilizer but there is a growing amount now that make their way into human applications, food primarily. It's used as a preservative. Your listeners, anyone who's drinking Diet Coke, is drinking phosphate.

I bring that up because not all phosphate deposits are the same. Unlike gold where you can dig it up in Nevada or Siberia or here in Quebec, that's all going to be the same and all trade at the same prices. Now most of the world's phosphate comes from something called a sedimentary deposit. Without boring your listeners and readers, in the end it is mixed in with some pretty nasty stuff, namely some radioactive elements like uranium and thorium, and some heavy metals like cadmium. That has more and more become an issue. There have been some big environmental issues down in Florida that have resulted in pretty hefty fines.

The Europeans are becoming very attuned to the heavy metals. They're looking at putting in legislation that will reduce the amount of cadmium in the phosphate that comes in. The offshoot of that is these rare deposits, these igneous deposits of which there are 12 today, Arianne has one. They make this high purity phosphate. Our stuff can make its way into the food chain, it doesn't require a lot of expensive, further downstream work. Of course what's important to investors is it trades at very substantial premiums over say that Moroccan benchmark.

That is a key differentiator. By being situated in a good mining jurisdiction a lot of our infrastructure is already in place. There is a hydro dam 30 kilometers away. There's a heavy duty haul road, it leads down to an area where there's a deep seaport. Currently that river has Rio Tinto ships coming up and down. That's also a big key. There are so many times where you see these projects, they're great projects, but infrastructure's a challenge. You're going to be $2 billion into the infrastructure before you even get to the mine.

I think, lastly, it's also a great thing about being here in the province of Quebec, is we have a lot of support. Quebec wants to see this project happen. It is about $12.5 billion in economic benefit to the region. This is going to be a big employer, the first 25 years of mine life should generate about a billion dollars in employment revenue and a tremendous amount of tax revenue. I think for all of these reasons this is certainly a tremendous project.

Lastly, as I say, we've got this pure phosphate. We are well situated. It's also the world's single largest greenfield phosphate asset. Including inferred we have drilled off over a billion tonnes, so this becomes a very substantial answer going forward for North America and many other areas of the world. We can address some of the problems that we see today in the phosphate market.

Gerardo Del Real: Excellent. A good analog I think for metals investors would be it sounds like it's equivalent to maybe a high-grade gold deposit that starts at surface and is very clean, with excellent recoveries. Obviously that has world-class scale, and I think that world-class scale is what's generated significant interest from several of the big players in the Ag space, Brian. Now, many of those big players believe that the next leg up has begun in the fertilizer space. Can we talk about some of the recent developments with Arianne?

Arianne Logo

The feasibility study in 2013 outlined a pretax NPV of US $1.9 billion, a 26 year mine life at three million tonnes per year. It was projected to have a cost on the ship, ready to go, at about $94 a tonne, and produce at 38% concentrate. You've actually enhanced the economics of the project since then. I want to get into all of that, but first off could we please talk about the recent developments with Arianne? Because a lot of those are very, very important and they're fairly recent, we're talking the last couple of weeks, couple of months.

Brian Ostroff: Sure. To your point I would say that the company has been hard at work, really just going back to after the publication of the feasibility study. It was very well received. I will say that probably the best thing that came out of that feasibility study was it took this project and it really put it on the map. I would say that many, if not all, of the global fertilizer players came to know of Arianne and the Lac à Paul project, and I think have watched with a fair amount of interest as it's progressed.

Right off the bat, areas where we made it better, again as I'd originally alluded to, this project has now gotten a whole lot bigger. One of the things we wanted to demonstrate was in the feasibility it was projected at 26 years with a three million tonne a year production, today with what we've drilled off we've really wanted to demonstrate that there's a whole lot more. We have stated a goal of trying to demonstrate close to 50 years, and again at over a billion tonnes, I think we've definitely done a good job of showing the scope of this. Now the other thing that we've been able to do is wring out some cost.

Whether it's the economies of scale of the greater amount of resource, or our ability to have streamlined the processing of the phosphate rock into the actual concentrate, a couple of deals that we've been able to put in place with Hydro Quebec. All of this has taken our cost down considerably from $94 a tonne on a ship to today we have said that we are at $79 a tonne. As well, we've demonstrated our ability to produce a 40% concentrate, which would make this the purest. As all of this work has gone on, certainly the project has picked up momentum. In 2015 we were able to sign our collaboration agreement with the First Nations. Right at the end of the year we received our ministerial decree, which is our permit.

What you have here is, again, probably the world's largest, incredibly cost competitive at today's phosphate price for high-purity phosphate, we should probably be clearing about $100 a tonne in gross profit, and it's on three million tonnes a year, so quite sizeable. I think also what has really started to happen is, as you had alluded to, over the last eight weeks we've really been able to partner up with some pretty big guys that have taken interest in the project.

We recently announced a deal with Rio Tinto, whereby we are looking at ways to get some maritime transportation synergies. Today their boats literally sail right past where our dock will be and they come in full and they leave empty. So there's obviously a lot to be gained by us being able to piggyback off of those ships as they leave. We have entered into agreements with various large multinationals that are going to be part of building the mine, with that it would be PROCO, ABB, FLSmidth. I think one of the really key things here is a lot of these guys, ABB, FLSmidth, they do come with the commitment to help assisting us in financing those contracts.

If you were to group that altogether you would see that it makes up a pretty big piece of our overall capex, which today stands at about $1.2 billion. But between the ability to get these contracts financed and some bank debt and equipment financing, I think that we are really in a place of moving this thing toward shovel ready. One of the things that I'm quick to say is, this isn't little old Arianne anymore. There are other big players that seem to have a fair amount of interest in seeing this thing happen.


Gerardo Del Real: Excellent. Now, Brian, you're fully permitted, you have an asset with an NPV of around $2 billion. It appears that we are entering the next leg up in the fertilizer space. The bottom line is there aren't many, if any, deposits with the scale and the jurisdictional advantage that the Lac à Paul project possesses. Could you provide some context as to the opportunity that Arianne presents? Can you do that by sharing with us the current market cap of Arianne? Now I mentioned the word compelling, I used the word compelling several times, and when we talk about an asset that's got the purity and the scale that Lac à Paul has, you would expect a market cap much, much higher than the current market cap that the market has assigned in Arianne. Could you provide that market cap for us?

Brian Ostroff: Sure. Actually if it's okay I'd really like to handle ... You basically had two questions embedded in that one. Today we trade at roughly an $80 million market cap. Again, you're talking about a project that showed an NPV of roughly $1.9 billion, so we are under 5% of our NPV for what is the largest, the purest, the safest. There's not many projects like this, with this size and scope. I would argue that Lac à Paul is an answer, it's not just a band-aid.

Now one of the things that has started to happen, and as you might imagine I get this question a lot, if this project is what you say it is, how could it possibly be trading at the valuation that it is? I think that's a great question and one I ask myself probably 20 times a day. Really, this feasibility study came out towards the end of 2013, just as the fertilizer market had started to roll over. All of this progress that Arianne has made had been made in an environment of continued deterioration in the fertilizer space.

Today I would say the reason that Arianne was trading where it was, was really a combination of A, no one cared about fertilizer, so it really didn't matter what we did. Number two was for all of it Arianne is not a particularly well known story and with that it's kind of out of the limelight. Lastly of course, it is a relatively small company with a large capex. I would say that these three pieces are now starting to change. I've talked a bit about the progress that we've made in attracting some partners in assisting us with the financing, so that's getting better.

I think that through some efforts of the company and certainly guys that are well known for spotting some of these hidden gems, such as your publication, have started to know of Arianne and I think are doing a good job really letting people know that Arianne exists. The last piece is as you said, the fertilizer world is starting to change. Interestingly a lot of the industry players that I talked to about a year ago had all said that they see 2016 as the bottom in the fertilizer sector.

Of course those are just words, but it would probably surprise your readers to know that over the last 12 months there have been about a quarter of a trillion dollars worth of deals in the Ag space as a whole, a lot of that in the seed space but certainly we've probably seen close to about $50 billion in the fertilizer space. These guys obviously believe that we've seen a bottom. I'd say over the last five, six months quietly fertilizer prices have started to strengthen. We've seen grain prices trade up, even some of the big cap fertilizer companies, like the Mosaics and CFs of the world, Agrium, Potash, they've backed off in the last little while, but about six, seven weeks ago that they were trading up at a 52 week highs.

I'm not sure that the market itself has figured it out, certainly the corporates have. Given their appetite for acquisition and deal making, I think that at some point investors will start to figure it out. You talked earlier about some of the other mining areas, certainly the metals, I'm sure a lot of your readers remember about a year and a half ago the area was a mess, and then things started to get better and what are the names that moved first? It was the guys who had the real projects, that despite the bad times continued to move their project forward.

Today I think fertilizer's in that world, it's starting to get better, the majors have started to move a bit. But here's the big difference, the big difference is there aren't a whole lot of junior fertilizer names. There's got to be thousands of juniors in the metals but not that many in the fert space, and certainly not very many in phosphate. As this move continues to develop I don't see how Arianne will be lost on anyone.

Gerardo Del Real: Excellent, excellent. I like the analogy to the metals market and where things were for four, four and a half years, to remind speculators and investors when those companies, the better companies, the better names with quality assets and quality management started to move, they moved in multiples in a very, very short amount of time. We definitely consider ourselves contrarians by nature and we would much rather be a tad bit early than a tad bit late when it comes to quality assets and safe jurisdictions. Arianne obviously has that with Lac à Paul. So, Brian, what's the approach moving forward? What can shareholders and potential holders, people that are new to the story, what can they expect in the coming months from Arianne?

Brian Ostroff: I think that investors in the story today of course get the benefit of five or six years of really hard work. This company has continued to move forward, and today an investor can own this story at roughly the same valuation as several years ago, before it was permitted, before we knew how big it was, before we knew how pure the phosphate concentrate was. Really, I think that the timing is quite good. I became CEO of this company about a year ago. Interestingly we had brought on a new Chairman and the Chairman's first move was to put me in as CEO. I thought at first that was a curious choice, and had looked at him and said, "But I'm not a mining guy, I'm a deal guy."

His comment was, "Well, that's precisely it.” Today this project has been moved along. We had a great geologist who basically found this asset and engineers who took it through the feasibility and made it better. The team there today has done a great job in terms of getting it permitted and social acceptability, but today it's time to start looking for a deal and so maybe it makes sense to have this company run by a deal guy, especially a guy who represents the largest shareholder and beyond that has a pretty big personal stake in the name himself."

With that I've accepted that logic. At the end of the day I think that it does make a lot of sense. I do represent a very large shareholder and I am a large shareholder. I think the path forward is to really try and get the maximum value for the company’s shareholders. I think that there's three paths forward here. We either finish up getting the last pieces of financing and we stick the shovel in the ground, and the next thing we know is we own a company that even at today's phosphate prices should gross about $300 million a year in gross profits.

Gerardo Del Real: That's per year?

Brian Ostroff: Per year, yes. Or, this becomes one of those projects that becomes integrated. As the environment has gotten better, maybe one of the larger fertilizer guys says, "This is something that I want to be part of or I want to own." Lastly of course there's the ability of joint venturing. With all the M&A activity that's been going on, I think that there are a bunch of assets up for grabs and the ability to maybe combine some of those assets today exists.

What I believe is whether it's path one, path two, or path three, we shouldn't be at 5% of NPV. I don't know which path is going to play out but I know that whichever one is best for shareholders is what I would like to see happen. But A, B, or C, I think investors today would be looking at a pretty solid return on their investment.

Gerardo Del Real: Brian, I want to thank you very much for your time. I encourage everyone to go to the Arianne website. I think, again, we'd rather be early and Arianne truly presents a compelling opportunity that should be on everybody's radar. Frankly whether it's choice one, choice two, or choice three as you labeled them, I think each one of those we end up at the end with a much higher share price. I'm definitely looking forward to the near and mid-term future with Arianne to see what other deals you have up your sleeve there, Brian.

Brian Ostroff: Thank you. I appreciate the time and the time of your listeners.

Gerardo Del Real: I'm pretty confident there's going to be many more developments throughout the year so I'm looking forward to hopefully having you back on.

Brian Ostroff: I would expect it as well.

Gerardo Del Real: Thank you, Brian.

Brian Ostroff: Thank you.

Heal Your Ailing Portfolio Body