arianne phosphate inc. (tsx.v:dan) - midas letter · 2017-02-17 · midasletter / january 21, 2013...

Arianne is a buyout waiting to happen. Its not a matter of if. Only when. As a betting man, I’m confident that 2013 is the year it gets taken out. The company is incrementally moving towards feasibility on their Lac à Paul phosphate-titanium deposit in southeastern Quebec and expects to publish that document by the end of Q2 2013. Bank analysts covering the stock believe it will be shortly after the release of the feasibility study. Arianne posted a positive pre-feasibility study in November.

The candidates to buy Lac à Paul include all the major North American fertilizer makers, as well as some major foreign ones.

At the top of the list is Calgary-based Agrium Inc. (TSX: AGU, NYSE:AGU) In its 2011 Annual Report, Canadian fertilizer major Agrium stated that it had entered into a long-term rock supply agreement with OCP to purchase phosphate rock to supply their Redwater, Alberta phosphate facility. The phosphate rock from OCP will replace the phosphate rock currently supplied from the company’s mine at Kapuskasing, Ontario. The move to utilizing rock from OCP is scheduled to take place in the second half of 2013 as economic rock reserves at Kapuskasing are expected to be depleted at that time.

The agreement covers rock supply for a period up to 2020 at prices that are based on a formula that tracks finished product pricing and key published input costs. It offers downside price protection to Agrium in periods of low phosphate prices and also affords OCP an opportunity to benefit from the upside when international phosphate prices are strong.

Agrium is not in a situation with the OCP deal where they must “take or pay”, whereby the buyer is contractually obligated to pay a minimum whether they need it or not. And there is much to suggest that the quality of Moroccan phosphate rock is substantially lower than that of the Lac à Paul deposit. The very high grade of the phosphate rock at Lac à Paul is expected to average 35-39%, which would make this deposit far more economic, in terms of input costs to the finished fertilizer product, than does importing Moroccan lower-grade phosphate. That is why for Agrium, Lac à Paul is almost certainly a “must-have” acquisition.

As an aside, if the market begins to bid up Arianne, which at the time of this writing (Saturday, January 19, 2012) certainly appears to be happening, we could expect to see an offer on the table a lot sooner than Q2, as Agrium (or whoever) realizes that they better “sh*t or get off the pot” as my grandmother used to say, if they want to ensure this acquisition at a good price.

I’m not going to go into detail here about why Lac à Paul is just as much a must-have acquisition for the other major fertilizer manufacturers of the world. The grade says it all, and ongoing metallurgical testing is likely to deliver a number closer to 40% than 35% - a significant difference.

by James West

COMPANY RESEARCH REPORT

ARIANNE PHOSPHATE INC. (TSX.V:DAN)

Shares Outstanding (Basic).................................................................................~73.7 M

Fully Diluted........................................................................................................~90.5 M

Marekct Cap........................................................................................................$94.6 M

Debt......................................................................................................................$5.4 M

Treasury (As at September 30, 2012).................................................................~$5.7 M

52 Week Range..........................................................................................$0.80 - $1.44

Average Volume (3 month).....................................................................................76,314

Focus..............................................................Nea-term Phosphate project development

Operating in:.........................................................................................................Quebec

High Grade Feasibility-stage Phosphate Project Ready for Purchase

2MidasLetter / January 21, 2013

COMPANY RESEARCH REPORT / ARIANNE PHOSPHATE INC. (TSX.V:DAN)—The company recently announced in a press release dated January 14, 2013 what amounts to a narrowing of corporate focus to the Lac à Paul project exclusively:

“The Company also announced its intention to divest all non-phosphate exploration properties in order to focus exclusively on becoming a leading Canadian Phosphate producer. The decision to sell these non-core assets is a logical step in Arianne’s evolution and reflects the transition of the Company from exploration to mine development.

“This divestiture will enable the Company to focus all its financial and management resources on developing its major phosphate deposit at Lac à Paul, in particular completing the Bankable Feasibility Study commenced last summer.” stated the Company’s Chairman of the Board, Mr. Pierre Lortie.

Post divestiture, the assets remaining in Arianne will be exclusively focused on phosphate. The primary assets are the Lac à Paul deposits as well as some other phosphate exploration properties. The projects to be sold include: Heva, La Dauversière, Black Dog, Chico, Dulain, and Terres Rares. The Company expects to complete the divestment process during 2013.”

Sales of these assets will likely become a driver of the share price near term.

The Lac à Paul Deposit

In July 2012, Arianne issued a 43-101 Pre-feasibility study that was undertaken on their behalf by Met-Chem Canada Inc., a globally active Montreal-based provider of end-to-end mining and environmental services.

As a pre-feasibility document, the numbers are subject to change in the upcoming Feasibility Study expected by the end of the summer this year.

According to that report:

The Lac à Paul Property is located in North of Saguenay Lac St-Jean area, the nearest village is St-Ludger-de-Millot approximately 175 km south of the property. The property is 30 km east of the Chute-des-Passes Hydro-electrical complex of Rio Tinto ALCAN. The property is approximately 190 km north of the seaport of Grande-Anse (Saguenay) which is a good connection to Saint Laurent River.

Met-Chem Canada Inc. (Met-Chem) was requested by Arianne to provide a Pre- Feasibility Study Report for the exploitation of the Lac à Paul deposits. Met-Chem was to provide leadership for the mining, process design, tailings, infrastructure, environmental aspects, compilation of capital and operating cost estimates at a confidence level of ± 25%, economic analysis and report preparation integrating geology, mineral resources and, metallurgical testing for which information is to be provided by other consultants.

Process flowsheets for an increased milling rate of 50,000 tpd were developed from the recent metallurgical testing program performed by COREM in 2011. The capital cost and the operating cost estimates have been developed for the increased milling rate.


Metallurgy

Samples from the Paul deposit were sent to COREM for metallurgical test work. Testing was performed at a bench scale, a lock-cycle scale and a pilot plant scale. The goal was to optimize the separation conditions. Conditions investigated were feed grind size, reagent type and dosage amount, flotation circuit and the use of magnetic separation prior to flotation. As results from the batch tests and the locked cycle tests indicate, a circuit with 1 rougher, 1 scavenger and 2 stages of cleaning was efficient to concentrate the Paul Zone apatite to a grade of 38.3% and a recovery of 90.7%.

ResourcesAt a cut-off grade of 2.43% P2O5, the resources amounted to measured and indicated resources of 347.7Mt of 6.50% P2O5 and 8.43% TiO2 and inferred resources of 114.3Mt of 5.46% P2O5 and 6.19% TiO2.

The production target for the mine is to supply the maximum ore feed that the plant can handle. The target for Year 1 is 13.2 Mt of run of mine ore. This target is a function of the plant’s ramp up before obtaining full operating capacity. The plant’s availability is expected to increase from 93% in Year 2 to 95% in Year 4. At 95% plant availability, the mine is expected to supply 18.642 Mt of run of mine ore per year (51,075 t/d).

The mine plan will attempt to supply a constant head grade close to the deposit’s average although due to the grade variability in the deposits, the grade in the mine plan ranges from 6.6% to 7.5% for Paul and from 5.7% to 6.2% for Manouane. The amount of concentrate produced is a function of head grade and plant recovery and thus varies from an average of 3.2 Mt per year for Paul to an average of 2.2 Mt per year for Manouane.

The 175$/tonne sale price that has been suggested by Ressources d’Arianne and which was used for the project economic analysis is based on the 85% BPL Russian prices over recent years with consideration of the September 2011 CRU 10-year outlook report on the phosphate rock market.

Environmental

Preliminary environment considerations have been addressed and legislative framework, environmental sensitive areas, issues and project stakeholders have been identified.

The Project Notice was filed with the MDDEP by Ressources d’Arianne in May 2011 and the EIA guidelines were issued to Arianne in June 2011. Public consultations are being held on the project.

Geochemical testing was conducted on mine rock and tailings samples to give a preliminary assessment of the metal leaching (ML) and acid rock drainage (ARD) as well as radioactivity potential of the tailings generated by the project. Results indicate that radioactivity will not be an issue for the project and preliminary environmental characterization shows that only the magnetic fraction of the tailings can be considered potentially acid generating. Mine closure and rehabilitation cost have been estimated at US$ 22.8 M.

CAPEX

The total capital cost for the project life at a milling rate of 50,000 tpd is estimated at US$1.12 billion where the pre-production initial capital cost is evaluated at US$813.9 M while the sustaining capital requirement is US$307.4 M

COMPANY RESEARCH REPORT / ARIANNE PHOSPHATE INC. (TSX.V:DAN)—


Phosphate Demand (P2O5)

The Phosphate fertilizer consumption/demand includes H

3PO

4 (phosphoric acid) based fertilizer demand + non-

H3PO

4 fertilizer demand. The non-H

3PO

4 fertilizer demand

includes P2O

5 through single super phosphate, rock

phosphate, etc. The world phosphate fertilizer demand is expected to increase from a total of 41.7 million tonnes in 2011 to 45.0 million tonnes in 2015 at a growth rate of 1.9 percent per year.

Of the overall increase in demand for 3.3 million tonnes P2O

5,

55 percent would be in Asia, 29 percent in America, 8 percent in Europe, 4 percent each in Africa and Oceania.

Among the Asian countries, about 28 percent of the growth in world demand of phosphate is expected in India, 9 percent in China, 5 percent in Pakistan, 3 per cent in Vietnam and 2

per cent in Indonesia. Among the major countries in America, 15 percent of the growth in world demand is projected to be in Brazil and 4 percent in USA. The share of East Europe & Central Asia is expected to be 5 per cent and of Central Europe to be 4 per cent. Figure 4 shows the regional and sub-regional share of world increase in phosphate consumption between

2011 and 2015.

Phosphate Supply

World phosphoric acid (as P2O

5) capacity was about 48.5

million tonnes in 2010. A modest increase of 2.9 million

Phosphate: Supply and Demand to 2015

The story of growth in phosphate demand is primarily tied to the story in food production growth. The world population grows, and food production demand alongside it. Emerging economies are raising their intake of meat protein, which raises the pressure on arable land to produce sufficient feed. As the “P” in “NPK”, phosphate shares the same growth drivers as nitrogen and potash.

So for a visual snapshot of the agricultural activity growth profile,

According to the Food and Agriculture Organization of the United Nations,

“World demand for total fertilizer nutrients is estimated to grow at 2.0 percent per annum from 2011 to 2015. The demand for nitrogen, phosphate, and potash is forecast to grow annually by 1.7, 1.9, and 3.1 percent, respectively, during the period. Global total nutrient production rose

significantly in 2010 keeping pace with world consumption. Over the next five years, the global capacity of fertilizer products, intermediates and raw materials would further increase.”



My Expectations:

I’m of the opinion that the Lac à Paul project is very close to becoming the subject of an offer for either the entire company, or just the deposit. In view of Arianne’s announcement of their intention to sell all of the non-phosphate related assets, I think it will be tidiest for the acquirer to simply take out the whole company. From all the writing on the wall in the public domain, and more importantly, from the scuttlebutt within the industry, Arianne will be gone before the end of 2013.

Risk Factors

Price Risk: There exists the potential for fertilizer prices to

tonnes is expected in 2011 with the total rising to 51.4 million tonnes. By 2015, it is expected to rise to 57.6 million tonnes.

Of the total 6.2 million tonnes addition in world capacity between 2011 and 2015, 46 percent addition would take place in Asia, mainly in East Asia (China) and West Asia (Saudi Arabia and Jordan).

About 37 percent capacity would be added in Africa (Morocco and Tunisia), 13 percent in Latin America, 8 per cent in East Europe & Central Asia and 1 per cent in Oceania. No addition in capacity is expected in Central and WestEurope. In North America, the capacity may rather decline by 4.5 per cent.

Expansions in China will account for one-third of this increase. According to IFA, between 2010 and 2015, close to 34 new phosphoric acid units are planned for completion, of which 15 would be located in China, 6 in Morocco and 3 in Saudi Arabia. Only two stand-alone merchant units are expected to come on stream. Over the next five years, close to 40 new units of MAP, DAP and TSP are planned to comeon stream in eleven countries.

After taking into account operating rates, the world supply of phosphoric acid (as P

2O

5) is estimated at 39.6 million

tonnes in 2010, which is estimated to rise to 42.1million tonnes in 2011. A modest increase is expected annually, and by 2015, the total supply will be 47.8 million tonnes of various regions and sub-regions to the total increase in phosphoric acid (as P

2O

5) supply between 2011 and 2015.



fall unexpectedly if new discoveries and subsequent production overwhelm demand in the near term. Strong phosphate prices have seen an increase in phosphate exploration and project acquisition activity, all of which could impact the supply scenario positively, driving prices downward.

Project Risk: There is a slight risk that the project economics as expressed in the upcoming feasibility report may be optimistic in terms of CAPEX and OPEX by the time the project actually goes into production as a result of price increases due to inflation.

Execution Risk: It is conceivable that any buyer of Arianne’s project and/or the company may succeed in offering a modest premium in the event of an acquisition that shareholders may elect to accept, rendering any potential upside for investors limited.

Disclosures:

I, James West, certify that I am not in receipt of any compensatory incentives for the production and publication of this piece. I have purchased shares in the public market for investment purposes.

Either James West or the Midas Letter Opportunity Fund may buy or sell shares in the company at any time and without further notice.

The information contained herein is derived from sources believed to be reliable, but no warranty expressed or implied exists between the subscriber and James West that this information is accurate.Resource investing is risky and you could lose part or all of your investment. Consult a registered investment professional in your area before making any investment in any security. The information contained herein is for information purposes only and is no way intended to be construed as advice to buy or sell shares in any security or asset.

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arianne phosphate inc. (tsx.v:dan) - midas letter · 2017-02-17 · midasletter / january 21, 2013...

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