Outsider Club Founder Nick Hodge interviews Brian Ostroff of Arianne Phosphate

Arianne Phosphate's (TSX-V: DAN)(OTC: DRRSF) Lac à Paul Phosphate Project in Quebec is one of the most prized, undeveloped phosphate mines in the world.

Nick Hodge: Hi, this is Nick Hodge with the Outsider Club. Today I'm speaking with Brian Ostroff. He's the CEO of Arianne Phosphate (TSX-V: DAN)(OTC: DRRSF), which, as we'll get to in a moment, controls the Lac à Paul Phosphate Project in Quebec. It's one of the most prized, undeveloped phosphate mines in the world. This interview comes as the agriculture and fertilizer industries have seen a flurry of merger/acquisition activity, after a few years of rough times brought on by soft agricultural commodity prices. Phosphate, though, has been one of the few bright spots.

Brian, thanks for joining us today. I set the backdrop a little bit there, but can you talk a little bit more about where the fert industry is now, how we got here, and how phosphate fits into it?

Brian Ostroff: Sure. Certainly, as you say, it's been a pretty rough time the last few years for the fertilizer sector as a whole. What is interesting and certainly encouraging, I think, to investors in the space, we've had pretty extensive discussions with a lot of players in the industry and the general feeling has been that 2016 should be the bottom of the cycle. At the end of the day, that's just talk, but it is encouraging when I see all the deals that have started to occur in this space, and obviously with these companies now looking and putting billions of dollars back to work in this space, they must like what they're seeing.

To your point, phosphate as a whole has really held up. I think that most people make the mistake of assuming that because phosphate and potash and nitrogen are all used in the same thing, namely fertilizer, that their pricing and market dynamics are all the same, and that's just not the case, so where we've seen pretty significant declines in potash pricing and nitrogen, particularly of late, phosphate, phosphate rock prices have been pretty stable over the last two, three years. In fact, in 2015 phosphate rock prices were one of few commodities that were actually up for the year.

Nick Hodge: Why is that? Do you mind if we drill down into the market dynamics of phosphate a little bit? Why has it held up, where is it currently coming from, and maybe how much it costs and if we see supply deficits anywhere.

Brian Ostroff: Sure. Again, phosphate is a necessary component. You are going to require it, it's not one of those things where, potash prices have come down quite a bit, maybe I can use twice as much potash. You really have to look at the three commodities alone. In the case of phosphate, what's certainly interesting to us is that North America runs a deficit in phosphate, South America, Western Europe, Asia. Basically the whole world is in varying degrees of deficit, so this deficit is made up for by the Middle East and North Africa. Morocco, for example, is by far the largest player. They're about four times bigger in the phosphate export market than Saudi Arabia is in the oil market.

As you can understand, it's an area of the world that is historically been very unstable. Tunisia used to be the second largest supplier of phosphate rock, but since Arab Spring that production has dropped to somewhere in the neighborhood of about 80%, so when it comes to North America we run a deficit here. We're currently importing somewhere in the neighborhood of about four million tons and you're going to continue to see that deficit grow. We're probably going to be somewhere in the neighborhood of about eight million tons over the next five to six years.

We need phosphate, there is no substitute for it, and in terms of trying to get access to it, certainly security of supply is definitely a factor.

Nick Hodge: I think you hit the nail on the head. It's definitely an oil-like situation where we're dependent on a critical material, a critical resource input from places that may or may not be our friend or may or may not have the best human rights record, so it's certainly a jurisdictional advantage for Arianne to have such a large deposit here in North America, specifically in Canada.

Not only is not all phosphate rock located in the same place geographically, but not all phosphate rock is created equal when it comes to the type of rock itself. You want to hit on, Brian, a little bit on the difference in the types of phosphate rock that are available to market and the types that Arianne possesses?

Brian Ostroff: Sure, and that's a very good point. Gold, for example, if you dig it out of the ground in Argentina or Siberia or right here in Valdor, Quebec, it all trades for the same price. It's all basically the same thing. Not so for phosphate. Each deposit tends to have subtle differences, although there is one big difference. Most of the world's phosphate comes from a sedimentary deposit, and that would represent close to 95% of the world's phosphate. The issue with these types of deposits are unfortunately mixed in them are things like uranium and thorium and cadmium. It's a big deal, and it's a big deal because when you go through the process of turning it into fertilizer, you basically liberate some of these deleterious elements. I'm sure some of your listeners are aware, for example, of what's recently gone on at one of Mosaic's facilities in Florida where you now have a nasty situation of this radioactive byproduct getting into the groundwater.

There are a few deposits in the world called igneous. There's probably less than a dozen in the world, and these are capable of making a very high purity phosphate concentrate. It does not have these deleterious elements, it's not radioactive, and obviously I think that if the world had a choice it certainly would not be using sedimentary deposits, but at the end of the day we really don't, and it's "How do we manage?"

In the case of Arianne, we do possess an igneous deposit. It allows us to make a very pure concentrate, and more importantly it sells at premium prices. On average it'll sell at 50 to 60% higher than benchmark phosphate rock prices. Another thing that I should really mention about phosphate is although a lot of it is used in fertilizer, there is more and more taking its way into food. It's used as preservatives, its specialty application, if any of your listeners drink Coca Cola or Pepsi or what have you, they're drinking phosphate. If they eat deli meats, if they eat anything with preservatives, there's a good chance that they're having phosphate.

Of course, you need to be very careful, and the nature of the phosphate is very important. In the case of Arianne, it will be the production of this high purity phosphate, which is going to allow a much higher bottom line to the company. The other thing I actually would like to just mention about the phosphate business itself, it's interesting because we were talking about where everything, or most areas of the world are in deficit. 85% of the world's phosphate mines are actually owned by the fertilizer companies. It's a very integrated business, and what happens is for those who don't own their own phosphate rock, who aren't fully vertically integrated, their ability to make any type of reasonable profit is challenged, because if you have to buy someone else's phosphate rock and then turn it into the MAP and DAP yourself, and then look to sell it, there's a good chance you're competing against guys who are making their own MAP and DAP from their own phosphate.

These guys are going to continue to have a challenge, and I think that the world is actually going to get even more integrated. As you watch the mines that are starting to come on-stream, they are owned by the guys who are making the fertilizer themselves. It's just going to be more and more captive rock, which is going to continue to put a bigger and bigger squeeze on the guys who don't have enough of their own rock. Again, back to North America, Agrium, Potash Corp, Mosaic, they all import phosphate rock.

Nick Hodge: It just underscores the value of having a high purity phosphate rock deposit here in North America, the need not only to produce domestically to alleviate the deficit, but also for the majors to refill their coffers. Let's get into some specifics about your project, the Lac à Paul project. You have a feasibility study that was out in 2012, we know there's robust infrastructure, we know that it's going to create jobs, we know that it's fully permitted for production. Can you talk a little bit about that feasibility study and how numbers relate to it, like CAPEX and rates of return and things like that?

Brian Ostroff: Sure. To your point, Arianne did put out its feasibility study. Everything was compiled during 2012 with 2012 pricing, but the feasibility study itself was published towards the end of 2013, and it was a very successful feasibility report. What it really did was put this project on the global map when it comes to the fertilizer companies. From that point forward, I would say that just about every major global fertilizer company came to know of Arianne, and so a lot, as you would imagine, has changed since then, but just touching briefly on that, it was projected to be a 26 year mine at three million tons a year. It was projected to have a cost on the ship, ready to go, at about $94 a ton, produce at 38% concentrate, and it did have an NPV of roughly two billion dollars with a 1.2 billion dollar cap ex.

Again, the feasibility study was very well-received, but we right away said, "As good as this is, we can make it even better," and right off the bat the company went to drilling off more, showing just how large and robust this deposit was. Today, it is the world's single largest greenfield phosphate deposit. It has, including inferred, well over a billion tons, which just makes it huge. Also been able to streamline the process of making the concentrate and take significant cost out. Where it was $94 a ton in the feasibility study, today Arianne can produce that at $79 a ton.

I'll throw in one other thing, too. To keep it constant with that bankable feasibility study, we want to show it at the same currency rate, which at the time was a 95 cent dollar. Today we're looking at a dollar in and around 78 cents, so you would have significant currency savings as well, and that would put this project, particularly since they can produce such a high purity rock, cost competitive with, I would say, 80, 90% of the mines around the world. The infrastructure, as you say, has been fortunately all developed before this project came to be, it's in the province of Quebec, it's right beside a power dam. 30 kilometers away we've been able to contract with hydro for life of minepower supply. The oversize roads already exist, so I'd say we're sitting in pretty good position.

The last thing I would add is of course we all know that the mining industry has been pretty challenged over the last few years, and we've gone back out to some of the engineering firms, etc., to refresh our quotes, and we believe that today, ultimately you can build a mine for cheaper than you could have built it back in 2012, 2013, so we're assuming that that cap ex can come in under that 1.2 as well.

Nick Hodge: The input costs are lower, obviously, than the data sets used, the 2012 data sets used, in the feasibility study that was out in 2013. We can assume that the economics have improved as well as it relates to the internal rate of return, the IRR, and the net present value of $2 billion, and by the way, as it relates to that net present value of two billion dollars, I just want to put a fine point on the fact that the stock trades at less than $100 million Canadian market cap, so in my opinion, or from my perspective, there's some severe undervaluation going on there.

I want to start to wrap up, I want to talk about the path forward for the projects, but I want you to just say one more time what the cost is going to be of the mine. I think you said $94 a tonne, but can you let us know what the selling price of high quality phosphate rock is compared to $94 a tonne and then what the revenue projections are for the project?

Brian Ostroff: Sure. Actually, $94 was the old number. The company about a year ago had taken that number down to $79 a ton, and again, that's using a 95-cent dollar. At an 80-cent dollar you would have a considerably lower cost. If you look at this project, you now have something that should generate somewhere in the neighborhood of $550 million a year in revenue. This type of rock today trades in the neighborhood of about $180 a tonne, so at low $70s you're going to be making well over $100 a ton, that's over $300 million a year for many years.

Just in terms of the path forward, I'd come on as CEO a little less than six months ago. I've been very familiar with the story, I'm partner at Windermere Capital, and we'd made our first investment in the company about five and a half years ago and have watched this project move forward and move forward from what was at one point an interesting patch of dirt to today, again, the world's largest, the world's purest, the world's safest.

I came on board because as this company has gone from stage to stage, run by a geologist who found the deposit, run by an engineer who put together the feasibility and the mining plan, run by our COO who has got the project permitted, strong social acceptability, collaboration agreement with the First Nations, it basically came time to, "OK, now it's time to do a deal, and it's time to have a dealmaker in place." I've been pretty vocal. We've got three paths forward here that I am pursuing.

Number one is get this project fully financed, stick the shovel in the ground and move that forward. We certainly believe that even a fully-financed project, fully-diluted, as I said, you're going to be looking at EBITDA of well over $300 million US a year at seven times EBITDA, you're going to be looking at a project, a company that should be worth well over two billion dollars.

That's point number one. Point number two, what we are pursuing is, we've talked a little bit about, there have been a lot of deals in the space. The Chinese haven't bought, the Anglos, the South American assets, there are some rumors about a Mosaic-Vale tie up, again for some South American assets. Here in North America there might be a tie up between Agrium and Potash, and so a lot of assets are going to get spun out or shaken loose or no longer necessarily being core, so we think that that might provide an opportunity for us to deal on some of these assets and perhaps put together a company that is a little bit more than a rock deposit. We definitely see opportunities on the joint venture front.

The third path, of course, is there's always the possibility of an acquisition. Again, there are major players around the world that do not have enough of their own rock supply, and they've got to be scratching their heads and starting to think, "What can we do?" Arianne is one of the few very large mines that are going to be coming on stream that today are independent, that rock is not vertically integrated and certainly we believe that there are those out there that see the value of that and are attracted to it.

Nick Hodge: Lac à Paul's a massive project. It's a premium phosphate product that's going to fetch premium pricing in the market. It's fully permitted, you've put pen to paper with a potential project finance outfit. It's extremely attractive from a valuation perspective given the NPV and the IRR numbers that are even more robust in the present day. Can I ask you, what do you think the market is missing when it comes to the Arianne story in the market?

Brian Ostroff: That's a good question. It's one I get asked a lot. In general, I would say that over the last three plus years it's been a pretty rough time for the fertilizer sector, and as I've said, unfortunately people don't differentiate phosphate from potash or what have you. There's been a pretty strong headwind, and as Arianne has continued to advance its project, they've hit on every milestone but maybe that's been done into an environment where people don't necessarily care. Today, we're seeing a whole bunch of deals in the space. I think that that's going to help, and I think that that headwind is going to alleviate, and with that, I think we'll start to get a bit more traction. The one thing that this company has done consistently over the years is we've set milestones, and we've hit on those milestones.

Arianne can only control what Arianne does. I think that for investors today looking at this project, you've got a situation where all the heavy lifting has been done. The deposit has been found, the quality has been proven, it's an industry that's going to continue to grow, and you've got a management team that has consistently and effectively hit their milestones. I've set out what our next steps are going to be, and I think that as those occur in the coming months, shareholders will get a fair value. As you pointed out earlier, you've got a company that's trading at under 4% of its NPV for what is arguably the best deposit on the planet.

One last thing about phosphate: phosphate, the demand for it grows every single year. Today gold is $1300 or so an ounce, and next week it could be $1500, it could be $1100, we don't know, but next week I know we're all going to want to eat, so here is the single best deposit, proven track record, and months away from what I believe is going to be a significant event which should cause a large re-rating for investors.

Nick Hodge: That's exactly why I've been following this story. It's a recommendation in the paid newsletters I write, like Like Minded People and Early Advantage, and I'll continue to pay attention as you look to advance this project going forward. Ladies and gentlemen, we've been talking with Brian Ostroff, CEO of Arianne Resources. It trades on the TSXV under the ticker DAN or over the counter under the ticker DRRSF. Brian, is there anything else you'd like to add?

Brian Ostroff: No, thank you for your time and support and I think that, again, in the coming months as the backdrop for the fert space starts to change and Arianne gets a little bit more attention, this has a lot of potential for investors who look at it today.

Nick Hodge: Thanks so much for joining us today.

Brian Ostroff: Thank you.

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