Why Investors Need to Be Looking at Phosphate in General and Arianne Phosphate in Particular

Outsider Club founder Nick Hodge interviews Arianne Phosphate (TSX-V: DAN)(OTC: DRRSF) CEO Brian Ostroff for an update on the phosphate market and the Lac a Paul project.

Nick Hodge: Hi. This is Nick Hodge with The Outsider Club. Joining me today is CEO of Arianne Phosphate Brian Ostroff. Arianne Phosphate Inc. trades under the ticker DAN on the TSX.V, or under the ticker DRRSF Over-the-Counter. Brian, thanks for taking the time today.

Brian Ostroff: Thank you for having me.

NH: Brian, Arianne just raised C$2.3 million, leaving it with a good cash position just over three million. Over the past, call it 6 to 12 months or so, you've entered into several key agreements and partnerships with strategic firms on your path to advancing your world-class Lac à Paul phosphate project toward construction. We'll cover all that, but first, it's the macro market for phosphate that I want to talk about. There have been some high-profile seizures this year of phosphate shipments, and a couple of other things going on, just especially as it relates to the crazy world we live in, and all the way to rising gold prices. Can we start there with the macro market? What's your take?

BO: I think, to your point, Nick, the world is just a mess right now. We see the precious metals moving up, and it really is because of a lot of uncertainty that we're seeing. We're seeing it obviously in the geopolitical world, and even with regards to weather. Here in North America, we've seen Harvey. Looks like Irma's on its way. But this is really a worldwide phenomenon. There's been some tremendous floods in Asia. You really have both of these factors really starting to play.

Just to say, all that glitters is not gold, and we need to understand that there's nothing more basic than food when it really comes down to it. You can't eat gold and you can't drink oil. I think everyone just needs to get their head around the significant risk to our food chain, and that risk is really phosphate.

Phosphate is a needed commodity. We use it in fertilizer as well as other direct applications right into food. Here in North America, we are not self-sufficient in phosphate. Nor is South America or Western Europe or significant parts of Asia. We get that phosphate from the Middle East, and in terms of the high-purity phosphate, we get that from Russia. Today, as you look around, the Middle East is just a mess, and when it comes to Russia, I would say that things have not been worse between Russia and the West in the last 30 years.

We're starting to see some tipping points where it comes to phosphate itself. You've talked a bit about the ship seizures. Just for your listeners, there is an area in Africa, it's called Western Sahara. It was a Spanish colony granted independence in the mid-1970s, and Morocco annexed it. With that, it led to a long bloody civil war, and today a lot of the world bodies—the UN, the EU—do not recognize Morocco's ownership, if you will, over Western Sahara. In Western Sahara, there is a very large phosphate mine. It produces a good-quality phosphate. The Moroccans mine it and they sell it. We had a couple of ships seized over the early part of the summer through a maritime court order, really with the independent Western Saharan body saying, "This is illegal, it's a plunder of our resources." We will see how that plays out.

It is worth noting that that mine, almost two-thirds of that production makes its way into North America. As everyone sits down to their meal, they need to realize that the most basic starting block, the fertilizer, is just not something that we in North America are in control of.

NH: I couldn't agree more. It's not like those shipments were headed to some far-flung place. I think one of the ships that was seized in South Africa, that phosphate was headed to New Zealand, and another one that was seized in the Panama Canal was headed toward Canada. This phosphate is headed toward First World, robust markets. How tight is the supply? At what point should investors be looking at this and saying, "Hey, there's a problem. We should start looking for better sources of phosphate rock?"

BO: Just keeping it North American-centric, North America imports four million tonnes a year of phosphate rock. Again, the bulk of that comes from Middle East and North Africa. Investors should be paying attention to this now. Investors are funny in that they really I think sometimes make the mistake of judging a situation or judging a company by what's going on in the market. For all of it, the last few years has been a bit of a challenging time in the world of fertilizer and the fertilizer stocks, such as Arianne's. But that doesn't mean that the environment is not right for these companies, and these stocks to progress.

We here in North America have a very real issue. If for whatever reason there should be something even more dramatic to come out of the Middle East, and I'm talking predominantly about Morocco and Saudi Arabia, it would have an immediate, immediate impact on our requirements to get the fertilizer we need, the crops we need. You would see an immediate reaction in the price of grains and ultimately on the shelves of the supermarket.

NH: As an investor, I am looking at the phosphate market already. I've been a shareholder of Arianne for some time now, and it's been a recommendation of mine for a while as well. I think that that investment starts with jurisdiction. As you say, and as is well known, we don't get our phosphate rock from friendly places. But Arianne's Lac à Paul project is right here in North America, in mining-friendly Quebec, and it's fully permitted and the government is onboard. Can we pivot to the project a little bit? Can you talk maybe for a second about the basics of the project and give us a bit of an update?

BO: Sure. With regards to Arianne's Lac à Paul project, as you said, this is a very large deposit. Including Inferred, we have drilled off over a billion tonnes, making it the world's single largest greenfield phosphate project by a multiple of three over the next closest greenfield. We are well situated in the province, Quebec. No issues with regards to security of supply. A lot of the infrastructure that we require is already in place.

As well, we are able to produce a good high-quality phosphate. Unlike most of the world's phosphate, we don't have any deleterious elements in there like uranium or cadmium. Just by the way, cadmium has become a big issue now in Europe. There is legislation before the EU looking to limit the amounts of cadmium in the phosphate that comes in. That will definitely impact phosphate. A lot of the phosphate from Middle East and North Africa is high in cadmium. That brings me back even to the Russian situation. They are producers of high-purity rock, and right now Russia and the West just isn't getting along.

Here you have a very large deposit. It is high quality. It is already permitted. Now we are moving the project towards development. It's something that the government of Quebec is strongly in support of, and over the last few months, as you had mentioned in your introduction, we've made a lot of headway towards.

NH: I'll cover some of that headway in a second, but first, tell us why your rock is different, and also why who owns the rock is the ultimate winner in this business.

BO: Our rock comes from an igneous deposit, which for phosphate is pretty rare. There's only about 10% of the world's phosphate rock production that comes from an igneous deposit. Most phosphate comes from sedimentary deposits, and as I had mentioned earlier, in there is a lot of other deleterious elements, such as uranium and radon and cadmium. Your issue is, as you process that rock, in some cases you are liberating these bad elements, such as the uranium, and then you need to deal with it. Or, in the case of some of the heavy metals like cadmium, unless you take it through an additional purification step, which is usually not done in the case of fertilizer, that cadmium follows its way onto the fields. That is a big issue. As I say, the Europeans have really raised the flag with that, and there is pending legislation to restrict it.

There's just not that much of this high-purity rock. It trades at very premium prices over, say, the benchmark Moroccan rock. It's used not only of course in fertilizer, but phosphate is being used more and more in specialty applications. We see it as a preservative in foods. Anyone who drinks Coca-Cola is drinking phosphate. We see it in animal feeds. We see it in pharmaceuticals. Actually, phosphate is used in some of the new rechargeable batteries. Lithium iron phosphate batteries are used and growing acceptance in Asia. Again, that creates a demand for the high-purity stuff, and that's why we see it trading at such substantial levels over the benchmark Moroccan stuff.

NH: As you say, the project is fully permitted. It's a very big project, would produce something like three million tonnes a year of phosphate concentrate, if I have that number correct. You're just slowly checking the boxes, ticking this thing towards construction because it's ready to go.

This summer you signed a memorandum of understanding with a global producer of sulfuric acid to explore the possibility of setting up a downstream operation that would ultimately produce phosphoric acid for fertilizer manufacturing. I don't think that the market quite understood the significance of that announcement. Can you explain what that announcement means in terms of advancing your phosphate project?

BO: Sure. That deal actually followed on the heels of several deals that we had done over the last six to eight months. What's exciting about this deal is it really focuses on looking at the downstream. Today in the phosphate market, about 85% of the world's phosphate rock production is owned by the guys who make the downstream products, be it fertilizer or the purified phosphoric acid that makes its way into food. What is interesting as you look at phosphate is the guys who have that additional rock are actually not necessarily looking to sell that rock, but they're expanding their own downstream operation. Where today that number is 85%, I think that when you look out in just a few years it's going to be 90%.

Morocco is going downstream more and more. As they increase their production of phosphate rock, they're looking to increase their production of fertilizer. Saudi Arabia is a large producer of phosphate rock, but, of interest, they do not sell any phosphate rock. They take all their own rock and they convert it into the downstream products like MAP and DAP. The Russians, who do sell some rock, are actually expanding their own downstream operations, and they've said that within the next few years they do not see any excess rock to be able to sell to the market. That should be a concern to guys who do not have enough of their own rock. Again, here in North America, Agrium, PotashCorp, Mosaic, they all import. India imports a lot. Some of the European companies, they import. There's going to be less and less rock.

What we basically looked at is turning the equation on its head. We are the small company at a sub-hundred million dollar market cap. We live in a world of giants. All of these guys are multi-billion dollar players. But at the end of the day, our belief really is it still comes back to the rock. The challenges that these large companies have is that they do not have enough of their own rock. What we've done, or what we believe is with our rock comes flexibility. What we've done is we have entered into a discussion. We are looking at going downstream ourselves, basically taking our rock and partnering up with a larger player whereby we can take our rock and participate in the production of downstream product. We will see where that goes, where this particular opportunity goes. We are looking at other opportunities to possibly go downstream ourselves.

It provides Arianne flexibility, optionality. There is demand for the rock, but today maybe there is greater opportunity even if we were to go downstream ourselves with either some or all of our production. That's very exciting. That, as I say, really I believe changed the equation a lot. Today we have an option that maybe didn't exist six months ago, and arguably others that have been looking at us maybe for our rock might have one less option. We'll see how it turns out, again, this deal and perhaps a couple of others that we're looking at, and over the next few months we will see what comes of it and other opportunities. But, again, the flexibility, the fact that we own our own rock provides us a flexibility that many of the larger players don't even have.

NH: I was just going to say that now that you've partnered with a downstream producer of acid, as you say, some of the potential suitors or the bigger companies, the Agriums and the Potashes of the world who would typically be considered a suitor for a project like Arianne has, they might've thought, "We have time, or this project might be around for a while because the rock is going to be there," but this announcement definitely I think puts on the pressure. If it wasn't recognized by the investment market, it was definitely recognized by the phosphate and fertilizer market, and that could ultimately lead, again, as you said, to more options and value for Arianne down the road.

You have a project here whose bankable study showed that it had a net present value of C$1.8 billion, and yet you're currently trading with a market cap of less than C$80 million. That's why I'm an investor. That's why I've been recommending this stock. Could you just leave us with how investors can learn more about the fully permitted and undervalued Lac à Paul phosphate project before you go, Brian?

BO: Sure. Again, investors I do believe should be taking a look at this. Over the last few years, the sector has been out of favor, but, as I've said, there's nothing more basic than this. One day you wake up and you realize that you have a problem, and then everyone wants it and ultimately it's too late. I would just caution your listeners to don't make that mistake of judging a company by the stock.

The last year, two years, have been wonderful for the company. Moving it forward, I believe that the dynamics in the phosphate market as a whole continue to be very compelling. We are one crisis away from seeing a dramatic change in the environment, and so the time to really look at this is now. Investors who have further interest can go to our website at www.arianne-inc.com to get more information there. Of course, investors who want to know more can always reach out to me and I can provide them further information.

NH: Perfect, Brian. Thanks again for taking some time out of your day today, giving us an update on the phosphate market and telling us a bit more about Arianne.

BO: Thank you.

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