Potash Ridge Set (TSX: PRK) Set to Enter the SoP Market with Low-Cost Production

Outsider Club Founder Nick Hodge interviews Ross Phillips and Robert Cross of Potash Ridge

Outsider Club Founder Nick Hodge interviews Ross Phillips and Robert Cross of Potash Ridge (TSX: PRK)(OTC: POTRF)

Nick Hodge: Hi, this is Nick Hodge, the founder of the Outsider Club here, and today we're talking with two gentlemen from a company called Potash Ridge. That's ticker PRK on the Toronto Stock Exchange. I have with me Ross Phillips, the chief financial officer and chief operating officer. He's got 10 years of experience in the resource and energy sectors. From 2009 to 2011, he was a senior manager of financial analytics, and later director of business development at Capital Power Corporation, and from 2003 to 2009, Ross held various senior roles at Sherritt International Corporation, which is a company that produces and sells thermal coal, nickel, cobalt, oil, and electricity.

We're also honored to have Robert Cross with us today. He's a corporate advisor to Potash Ridge, and also a significant shareholder that came into the story earlier this year. Mr. Cross has more than 25 years of experience as a financier in the natural resource sector, and he's also a co-founder and non-executive chairman of both Bankers Petroleum and B2Gold. Gentlemen, thank you for joining the call today and helping share the story of Potash Ridge with my readers a little bit.

Bob Cross: Great, pleasure to be here, Nick.

Nick Hodge: Robert, I wanted to start with you. I wanted you to just lay out for us a little bit why you came into the story, what attracted you to Potash Ridge in the assets, and what led you to become an advisor and large shareholder in the company?

Bob Cross: Sure, thanks, Nick. When I was introduced to the story very early this year, first of all it was sort of an orphaned company that had had significant funds spent on the resources in a previous time prior to this. In the recent recession in the whole resource market, it had approached $65-$70 million spent on Blawn Mountain at the Utah project. I don't like taking a lot of geological risk in life because I find you can make a lot of money by taking advantage of situations that are just priced way out of any kind of normal sense of value.

We had a situation where we had a wonderful SOP potash deposit drilled up, and the stock had been just crushed. I entered the story at about 5 cents a share. I like the geology, I like the asset base it had, but the other thing is the management team, both Guy and Ross, have significant experience in financing for large projects and all those complexities. That alone wasn't it. I think what really sold me on the story, other than the price, and I've been accumulating from 5 cents up, I participate in all the financing. I have a significant position. My intention is to go pretty close to 10% of the company over time, as management derisks the story.

The thing that really got me interested though was the strategy to start small. Blawn Mountain was a big project that's a billion dollar capital expenditure. That's daunting, and in the market we're in there's still significant financing risk for projects like that, even though the fundamentals of SOP look really good in North America, from a supply-demand point of view and a pricing point of view. I really liked strategy that Ross and Guy put together in Valleyfield. There are only 3 or 4 unique locations in North America you can put up a Mannheim plant like this because of the issue with dealing with the offtake of hydrochloric acid.

Quebec is extremely friendly to mining projects. There are funding options in Quebec. I have experience investing in Quebec before, so from a mining friendly jurisdiction, it ticked all the boxes. They put together a plan that I saw was extremely viable in terms of staging Potash Ridge from a smaller SOP producer into the big Utah project in the step function that I think eliminated a lot of the financing risk I saw when just looking at Blawn Mountain. Since that time, I think management has done a fantastic job derisking the project. There are lots of milestones to occur here. For all those reasons, I got in the story and I kept accumulating on mining stock weakness. I participated in all the financings. It sure ticked all the boxes for me, Nick.

Nick Hodge: There's a lot going on there. We're going to talk about the SOP market, and we have 2 projects here, one called Valleyfield in Quebec, and one called Blawn Mountain in Utah. Before we dive into what management has done to start derisking those projects, as Bob said he likes, and that's what drew him to the project. Let's first, Ross, talk a little bit about exactly what SOP is, what muriate of potash is, what the Mannheim process is. That way the listeners have at least a light grasp of what we're talking about here before we dive into the projects. Maybe start off with a little bit about SOP, Ross.

Ross Phillips: Great, thanks, Nick. SOP is sulfate of potash. Potash is fundamentally potassium-bearing minerals. On the fertilizer bag you have three numbers, it's N-P-K. K is for potassium. The most common form of potassium in the world is muriate of potash (MOP), potassium chloride. It's a 50 million tonne a year market, largely served out of Saskatchewan, the Ural mountains, and Belarus. It's really a fundamentally different market than SOP. It serves row crops, corn, wheat, those kinds of crops. The challenge with MOP is the chloride in the MOP actually hurts some crops, it builds up salt in the soil. High-end crops like fruits, nuts, vegetables, can't really use MOP, if at all, just because of the harm it does to the fruits of the end product and the revenue for the producers.

Sulfate of potash, or SOP, on the other hand serves these crops extremely well. It's potassium, but it's with sulfur. Sulfur is actually a nutrient in the soil that plants need, especially now since we really cut down our sulfur emissions from our power plants. This difference of what it does for the crops is essential. In terms of global market, the trade in SOP is only a tenth of MOP, it's only about 5 million tonnes a year. Independent bodies like CRU out of the UK have estimated that the worldwide demand could reach 10 million tonnes a year, or double what the current production is, within the next 4 to 5 years. This is driven by the value it brings to the crops. In North America, there is only 1 producer of SOP, and that's Compass Minerals, who produces it off of the Great Salt Lake in Utah. They're receiving about $700 US a metric ton for SOP, whereas the producers of Saskatchewan are only getting about $200 a metric ton for MOP. That premium is driven by the value it brings to the market.

Right now, there are only 2 ways to produce SOP. One is through brine salt deposits, like the Great Salt Lake, but fundamentally, they're not making any more Great Salt Lakes. The second is through a process called the Mannheim process. What that does is it takes regular potash, the MOP, the potassium chloride, mixes it with sulfuric acid so you get some sulfur, puts it into an oven, and out the other end comes sulfate of potash and hydrochloric acid. That's where the chloride goes.

The challenge of this process, which is widely used in China and widely used in Europe, is it produces hydrochloric acid, which really you need a local market to consume that. You can't transport it very far. That's why this technology hasn't been used in North America. As Bob noted, there's very few locations where you've got logistics to bring the potash in, ship out the SOP, and you have localized hydrochloric acid demand. That's what we found in Valleyfield, and that's why we're producing our first site there.

Nick Hodge: You have this Valleyfield asset that's going to use the superior Mannheim process to produce sulfate of potash, which itself is a premium fertilizer product. Can you talk a little bit more about the Valleyfield project? I know you guys aimed to be the first in North America that's using the Mannheim process, if I'm not mistaken, and you want to be in production by 2017. Can you talk about how that's going?

Ross Phillips: Absolutely, we picked up this project last summer. As Bob noted, as a company we were having some challenges. We did two things, we got the Valleyfield project and we looked at scaling Blawn, which we'll talk about later. An individual who got nine years of experience with this technology in China was developing this project ... he's North American, his name is Jay Hussey, in Quebec where he found a good location based on his experience with the process. We picked up the project last summer, and since then we've done a study with SNC-Lavalin, a very large Canadian engineering company, and we estimate the cost to get this facility into production to be about $50 million all in.

We're in the process, we signed a contract – a fixed-price contract – with SNC to bring it into production, but we're looking at having another party do the asset for us, and we're just going to look at concentrating on the SOP production. We're currently in basic engineering, we're progressing with our permitting, which based on what we know about the Quebec government, shouldn't be a problem. We should be in production by the end of next year with 40,000 tonnes a year of SOP. Based on the economics of the study by SNC and the current market prices, that could generate about $40 to $45 million a year Canadian in revenue, and a margin of about C$17 million a year. It's a very nice project, it's very quick to production. It's quite exciting for us.

Nick Hodge: You mentioned you'll be producing revenues of C$40-C$45 million per year with a margin I think you said of $17 million. You want to talk a little bit more broadly about how fertilizer companies are currently being valued?

Ross Phillips: We see fertilizer companies being valued at about between... Bob, correct me if I'm wrong... about 8 or 10 times EBITDA, or 8 or 10 times that C$17 million a year. When you look at Valleyfield, we're looking at whether we can put a second site at Valleyfield, or another site in North America in 2018. By the end of 2018 we could be generating about $35 million a year in EBITDA with these nice modest CAPEX facilities. One of the other things that I'd just like to add in is this ... shortage of demand in North America. What we found with Valleyfield, since we've completed that study, is we ventured into discussion with a lot of very large fertilizer companies very interested in the off take from Valleyfield. That's been a great help with our ability to attract financing and progress the project as well.

Nick Hodge: I'll talk about it with Bob a little bit later, but fertilizer companies being valued at 8-9X EBITDA, and you saying you're going to be generating $37 million a year, $30 some million is you current market cap right now, so we're talking upside of some 8 to 9 times if Potash Ridge were to be valued at what other fertilizer companies are being valued at.

Ross Phillips: I would defer to Bob on that one, but I think that's about right.

Nick Hodge: Bob, you want to discuss the valuation a little bit before we talk about Blawn?

Bob Cross: Sure, this is why this story's so interesting, Nick, because the valuation is still very cheap. I think you're right, Ross, in terms of those multiples. Those are sort of the standard industry multiples that we would expect to earn ourselves into. You don't get those multiples right away. I look at those multiples as our target, and you get to that target by derisking the company and executing. That's going to happen, Nick, over the next few years, but what a wonderful target to have. That's why accumulating the stock on weakness and just owning it to me is one of the best investments I see in my portfolio the next 2 to 3 years, especially with this management team.

I look at the risk. What is going to stop us from getting there? I'm looking at this Valleyfield project as a real bite-size, a project that certainly Ross and Guy have had experience to execute on. The other issue, Nick, with these projects is how dilutive is the company financing? How dilutive is the financing going to be to get us to that production milestone. I believe that in discussions with Ross and Guy, we are going to be able to accomplish Valleyfield production in a relatively non-dilutive way to shareholders. That's something that I'm betting on, and I'm betting Guy and Ross can do that based on the funding sources in Quebec. I have some experience in the province. If they can pull that off, then I think we can reach that valuation target off Valleyfield that you just mentioned, Nick.

Nick Hodge: We have Valleyfield that could potentially ramp up to $30 some million in EBITDA every year in the next couple of years. We're talking about a potential 8 to 9 times valuation from PRK's, from Potash Ridge's current market cap of C$35 million. Ross, we haven't even talked about Blawn Mountain yet. Whereas Valleyfield is aiming to be the first producer of the Mannheim process of SOP in North America, Blawn Mountain is aiming to be the biggest, not using the Mannheim process, but the largest producer of SOP. You want to talk about Blawn Mountain a little bit, and the timeline as opposed to Valleyfield?

Ross Phillips: Sure, Blawn Mountain is a world-class facility that has the potential to be the lowest cost producer, and one of the largest producers of SOP in North America. When the company was formed in 2011, we were formed to develop the Blawn Mountain project. We got it to the prefeasability stage in late 2013, and we had very robust economics. We had 20% return, an NPV of a billion dollars against CAPEX of a billion dollars. Therein was the problem that Bob referred to in that financing a billion dollar project in the recession we just went through in mining projects, was a little bit of a challenge.

Last summer we took a hard look at it and we said, can we bring this on in a smaller scale while maintaining the economics and the very attractive margin that it would produce? We're undertaking that study with SNC-Lavalin, but at the core of Blawn Mountain is based on the prefeasability, its production costs on a metric ton basis would be about $200 a tonne against the current place of $700 a tonne. It becomes a really attractive opportunity. The margins and the prefeasability were about $350 million a year. If you run that at below a third of the scale, we're talking $125 million a year US margin, or about $160-$165 Canadian, for the margin of a small-scale modest startup for Blawn Mountain. It's a really exciting opportunity to take that and bring it into the $30 million margin with Valleyfield.

We're doing, again, a study with SNC-Lavalin, this very respected large engineering company. We're refreshing our numbers, and we expect by the end of the year to have completed the scaling study and be on our way with it on a scale that matches the market appetite for financing, and still satisfies that demand. Blawn has an advantage in that it's close to California, it's close to a rail line that will get us there, so we can serve the almond and fruit markets and the vegetable markets in California which are currently underserved. It's a really neat world-class asset for us to have.

Nick Hodge: Robert, let's talk about that underserving for a little bit. The way I understand the SOP market is that China consumes everything it produces, and is in fact looking for more. Europe consumes most of what it produces for high-value crops in the Mediterranean, things like nuts and olives. It leaves North America wanting, right? High-quality crops in North America like citrus and almonds, and potatoes to some extent, they aren't getting the SOP that they need. Really there's a fundamental shortage in the SOP market. Can you use that as a backdrop, Bob, to give us a sense of why the timing is right now for an SOP operation, for an SOP investment, and how it's held up as a commodity against the bear market recently?

Bob Cross: Yeah, absolutely Nick. I think looking at global consumption, I think, Ross correct me if I'm wrong, 5 million tonnes, but it's forecast to grow to about 10 million tons. It's that gap that has to be filled by somebody. We all know how long it takes these projects to get into production. The demand in the United States, North America alone is 400,000 tonnes. That's going to grow. Ross, where is all that SOP coming from now?

Ross Phillips: Fundamentally, it's almost exclusively served from the Great Salt Lake in Utah through Compass Minerals. The remainder is a little bit of imports coming from Chile, little bit of imports coming from Europe. It typically takes about $800 a metric ton to be able to bring imports in economically to the United States right now.

Bob Cross: That's the gap we're trying to fill, Nick, and we have the asset. I think that we just execute into our time lines, we will be in this market producing. I think SOP prices from all the supply-demand charts I've read, all the research I've done... will hold… that premium pricing for SOP will hold simply because of demand in the North American market, and the fact you can't get the SOP in here cheap enough to compete, certainly with us. We're going to meet that demand. I think we're the only project that ... Ross, when you and I discussed what all the other competing projects in the world, especially North America, we are going to be it.

Nick Hodge: Yeah, Bob, I have to agree with you. It's one of the reasons I financed the company earlier this year in the letter I write called Nick's Notebook, and it's one of the reasons I wanted to get you two on the line today to tell us a little bit more about the story and how it's progressing. Mr. Robert Cross and Mr. Ross Phillips, I definitely appreciate you taking some time out of your schedule to do that. For the readers listening, again, we've been discussing Potash Ridge, it trades under the ticker (TSX: PRK) on the Toronto Stock Exchange. It's a $35 million market cap company that's advancing to sulfate of potash assets, one in Quebec and one in Utah, aiming to be in production as soon as 2017, and really serving a market that is experiencing a fundamental shortfall and has robust pricing. The commodity price of SOP has held up, selling for $700 a ton, and you have a company here in Potash Ridge that's going to be producing for $100 to $200 a ton. If you're looking for more information about Potash Ridge, you can simply head to PotashRidge.com. Appreciate you listening to the interview today.

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