Mining phosphate for fertiliser

Pat Avery is the CEO of a business called Fertoz.  It’s an Australian listed phosphate fertiliser business started a few years ago by a couple of Australians, importing phosphate from Vietnam and selling it into Australia.  But now they’ve got a couple of phosphate mines in Canada and they’re starting to ramp up production from there and selling it into North America and the USA and Canada.  It’s capitalised at $17 million.  They’ve been losing money, last year they nearly ran out of money. 

They’ve raised a couple of million bucks the last month or so and they reckon they’ve got orders now for 10 thousand tonnes of phosphate fertiliser in North America which will make them cash flow positive this year and in fact, they’ll make a profit probably, net profit of about $2 million bucks, which would put them on a PE ratio of about 8 or 9 times.  Based on their current order book they look pretty cheap, a PE of only 9.  But, Pat Avery, as you’ll hear in the interview if you listen, is forecasting quite a significant ramp up in production, 10 thousand tonnes this year, 30-40 thousand tonnes next year and 100 thousand tonnes in 2020.

Look, it’s reasonably credible, those sorts of predictions, so if that’s true – and he reckons it’ll probably go more than 100 thousand tonnes in 2020 and that doesn’t seem reasonable.  If that happens then they’ll be making in profit, their current market cap.  So it looks like a pretty good stock in many ways, pretty straightforward.  If you read their material on the website it’s full of hype and it’s a bit off-putting to be honest, but if you actually drill into the numbers it looks okay.

They say they have an order book for that much this year, the demand is pretty strong for organic fertiliser and fair chance that the stock will be re-rated fairly soon once the sales start to come in and the orders materialise that they talk about.  Worth a look, Fertoz is the name of the company, FTZ is the code and the CEO is Pat Avery.   

Here's is Pat Avery, the CEO of Fertoz. 

Well, Pat, tell us about how Fertoz started?  Because I gather there’s two basic sides to the business.  There’s the mining operation of phosphate mostly in Canada, but also a fertiliser marketing business in Australia.  Which of those two was the beginning of the business and how was it started?  

That’s a great question and really, the exploration for high quality ore and the interest in organic markets really started together about five years ago in Australia, our founders, and they really did see this growing trend of demand for organic food and even though we think of North America or Australia, there are very large organic markets in China, Mexico, South America, so they found that trend and they did start importing one product, Fertag, a division of Fertoz – imports one product and just started to get field trials, testing… 

But the founders also realised that we think this has a lot of potential and they looked for very high quality ore and that pursuit took them to British Columbia.  I will just add, and the reason for that is – and I worked in conventional fertiliser for a number of years, I was with J.R. Simplot.  But conventional is chemically concentrated and chemically added to it.  In organic though, the ore has to be used essentially as is, so you want very high quality ore, very low heavy metals, and that pursuit took them to British Columbia.

I take it the founder we’re talking about it James Chisolm, who’s still a non-executive Chairman?

He’s actually a board member now and Adrian Bias, who’s a very competent geologist is on our board and they started this early on, about five or six years ago. 

It basically started as an organic fertiliser importing business in Australia with those two guys?

It was.  They were importing product from South East Asia, starting to use it on organic crops and conventional crops.  I mean it can certainly be used on conventional – later on I’ll discuss a little bit and there’s some very good benefits even on conventional acres, acres that have received conventional fertiliser but particularly on organic.  I think they had a very good vision about that.

When did they start it?

Let’s see, about the middle of 2013 – 2014, and they saw the trends but I think again they did a good job of – okay, they found this high quality ore in British Columbia, but like any developed nation, permitting does take a while.  Exploration took about a year and then permitting in British Columbia is fairly rigorous as Canadian provinces go or west United States.  It took about three years to really get the permits necessary to start developing bulk sampling permits, take out a few thousand tonnes and then you start your marketing effort so people can try the product.

But they started the business as an importer, right?  What I’m trying to do is get a sense of how that cash business is going?  I look at the most recent cash quarterly and they’re sort of making $400 to $456 thousand dollars in the December quarter.  I mean, that business doesn’t seem to have gone that well since they started.  I get that it takes a while to get the mines going, but what about the importing and selling business in Australia of that fertiliser?  I mean, that seems to have been slow to get going?  

Well, and it did take a while.  I think that’s a great point, is they did see this high quality fertiliser from South East Asia and starting importing it, but for agricultural products, it’s a much tougher market penetration.  I mean, I’m joking, but it’s not tennis shoes or TVs or cell phones.  Ag products are very much sold on relationship and trust, so in Australia or North America what happens is if you’re a wholesaler of retail fertiliser, a farm centre store, when those agronomists are making recommendations on products their reputation is based on it.  They want to live in the area, they’re friends with the growers, it’s a very much relationship business.

If you look at the curve of Fertag, they did just sell a couple of hundred tonnes the first year or two but that may have been 20 tonnes on 10 farms.  Then after they liked it, after a season – another tough thing about ag is you have to wait about six months to see how the product worked.  But then when they liked it, those growers started buying more.  They went from 10 tonnes to 50 tonnes to 100 tonnes and we were looking for Fertag in Australia to move 2,000 tonnes this year but there’s about a two year ag market penetration curve, two to three years. 

But let’s be precise about what you’re selling.  This Fertag product, where do you get it from?  In South East Asia, is it?

It’s produced in Vietnam.

And how much did you sell of that last year?

Only about 200 tonnes.

Right, and are you saying it was to 10 farms?

It was four or five or six growers at, in some cases, 2 or 3 tonnes a piece, 5 or 10 tonnes a piece, just so they would try the product. 

And is that a phosphate based fertiliser?

It is.  It’s an interesting mix of phosphate and some silica.  But again, once you see it adopted in our announcements over the last three of four months is they’ll do about 2,000 tonnes this year and cash grow.  Fertag, our division, will be cash positive by December.

What’s that prediction of 2,000 tonnes based on, actual orders, is it?

It is.  Interestingly, because we have a little bit of time our Fertag division really doesn’t place orders from Vietnam until we have the order in hand, so very low risk, a little bit of lag time, but those orders are in hand. 

How much do you get per ton for that stuff and what is your margin?

That’s a good question too and again, as we segue to North America which I know a little bit better and it’s kind of a bigger volume.  But again, the point is, and you make a great one, with good companies sets out margin targets to start with.  Fertag did start saying, because there’s some timing risk and shipping the product and warehousing, you have to look for a 30-50% margin, perhaps a little more, on the product in case there’s delays or weather or ships or things like that.  It does attract a very attractive margin.  Revenue, again it depends on if they want it delivered, if they want it in super sacks, if they want it in larger volumes prices can be $400, $500, $600 a ton. 

Right, okay.  What is the price though?  I mean, you told us what it can be.  What is the price that you sell it for?

Well, it is that range.  Really, the reason I say that is if they take a bulk truck it’s a little bit lower.  If they take it in 1 ton – those super sack bags, it’s a little higher just because it’s more handling and more cost and things like that.  Sales price is $400-600 dollars a ton and margins are around 50%.

So you’re getting a 50% margin on that?

Yes.

Okay, that’s good.  You reckon you’ll sell 2,000 tonnes this year and you’ve got orders for that, that looks promising?

Yes, it really is.  I think they followed a pretty disciplined strategy and we used that same model.  We make our own ore or mine our own ore but I’m looking forward to building out our North American model with you because we’re seeing very similar results. 

Just before we get onto that, I’m just wondering how the company runs.  As you say, you’re based in Denver.  Obviously the cash flow business at the moment is in Australia and you’ve got a couple of phosphate mines in British Columbia in Canada, so you must be all over the place?

[Laughs] Well, certainly compliance is very important, so we have an Australian corporate secretary in Melbourne.  Again, we have two board members who are Australian, James and Adrian.  And again, as we segued into northern operations in Canada and The United States – I mean, I’ve only been on the company about two years, got on the board about two years ago and became Executive Director Chairman about 15 months ago or something  like that, 18 months ago.  So again, we certainly have our conference calls and move things and our auditor is BDO in Australia.  We follow all the compliance and run our Australian business and then segue it with our North American business.

Tell us about what you have in Canada exactly?

Okay, and we’re very excited about that.  Again, I really want to applaud our shareholders and for people to look into it.  I mean, it takes a bit of time and the organic market, which I’ll expand on a lot, is a little bit different than the traditional ag and food market.  Our geologists found two very good mines in Eastern British Columbia, one in sort of Central-Eastern and one in very South-Eastern part of British Columbia.  That’s significant for a number of reasons.  First of all, as I said, it’s very high quality ore, very high phosphates. 

Let me just drop back a moment because I’m hoping some of your listeners are really excited to learn about fertiliser like I am!  No, I’m kidding…  But when you grow grass at home or you’re growing your vegetables at home and you go to the hardware store, you run down to Bunnings and you get a package of fertiliser that says ’10-10-10’ or ’12-12-12’, that’s per cent or units of nitrogen, phosphate and pot ash to grow a plant.  So it goes without saying, most the time you want a fairly high value in P and K.  You don’t want a 1-1-1, you want a 10-10-10 or high production agriculture can be even higher, but that takes chemically concentrated fertiliser. 

So, sorry to take that moment, but they found very high phosphate quality, very high units of phosphate…  Again though, the good news is it had no additional salts which can go into the ag ground, very low end heavy metals because it’s not uncommon for any ore, but even phosphate or pot ash to have heavy metals with it.  So they really did a great job of finding this high quality ore.  The other thing which I’ll mention is any market or any company, you love to have a business where you have a closed end market.  Mining has done a wonderful job for the world but a lot of times you’re producing not where the market is.  You’re moving your product by airplane, ship, barge, rail, truck, thousands of miles halfway around the globe.

There’s nothing like having markets in your background and so we were able to produce this product and again, under organic we can’t chemically concentrate it or change it, but all we do is crush it, screen it and we sell it as powder, which really is just about the size of salt, is powder product, because that’s about how half the fertiliser is put down in North America and the other way we can change it is we do make it granule – those little round pellets about the size of a beady or something.  But about all of North American agriculture either goes down as a powder by the spin spreader or a granule out those large air seeding machines.

But my point is, the founders also were very bright about – there’s millions of conventional acres in Alberta, Saskatchewan, Manitoba.  But there’s also about a million acres of organic ground which has been growing steadily every year and the Western United States very similar.  Our mine in South-eastern British Columbia is only 100 miles from the State of Washington, Idaho or again, California not very far away.  We have great product and we have the bulk of this within a truck market.  I’ll explain how to differentiate that in a moment.     

Right, so are you now mining phosphate in these two mines in British Columbia or just one of them or what, from both?

We are.  We took out a bulk sampling out of our Southern mine and we’re waiting for a larger bulk sampling permit and our Fernie mine or our Wapiti mine which is in Central, we are expanding that permit also but we have pulled ore out of it for two years.  We’ve been mining at Wapiti which is the Central mine and we took a bulk sample permit out of Fernie two years ago, started selling it and now we have applications in to expand both mines.

I’m just wondering how you’re doing this, because from what I can tell from your accounts, you nearly ran out of money last year and you’ve raised another $2 million dollars now.  Is that going to be enough to develop these mines, $2 million dollars?

Boy am I glad you asked that question!  Really, the good news is the bulk of the cost in mining was exploration and permitting.  I mean, as you can imagine, and rightly so, those permits just like Australia, you’re doing environmental studies, water run-off, water quality, caribou plans, dear migratory species – and so the permitting is quite expensive but we have that behind us now.  We’re actually just awaiting final permits at our South-eastern mine and our Central mine. 

The bulk of our mine permitting costs are behind us and I will tell you that one thing I think we’ve done that is fairly bright is we did not go out and buy a bunch of mining equipment.  We contract our mining.  Of course you’re paying someone a margin.  However, one thing I’ve learned about mining is, if your equipment is sitting around it’s really expensive.  We don’t have a bunch of invested capital or iron sitting around, we contract that mining.  Then we can bring them in as we get orders, ramp that up.  We also, downstream, as I said, to make the product usable in Agriculture, we are crushing and screening and bagging and shipping.  We also contract those. 

Again, contract processors make a margin but we just didn’t want to go out and spend a lot of capital and have it fit which can be a real challenge in the mining industry.  I want to get all your questions in, but the reason again we’re pleased with that working is we also have seen the curve now and the bulk of the $2 million dollars candidly is working capital because we have so many orders.  That same agricultural curve, we have very experienced agronomists and sales people.  They’re actually by trade, agronomists and grain traders, they’re very respected in Canada and Western US. 

If you look at our previous announcements, that curve, we sold about a thousand tonnes last summer.  Again, that represented maybe 10 or 15 growers or companies trying 20 tonnes, 50 tonnes, 100 tonnes – well guess what, Alan, they’re back this winter, came back and said, “We want 1,000 tonnes, 2,000 tonnes, 3,000 tonnes…”  And so our announcement two weeks ago – and I will tell you, in the dead of winter – and we had good response from the guys, something I should go back and say after the thousand tonnes we sold last summer.  We did crop tests as they took the product off and we saw good yield increases.  I say we, but professional agronomists measured the crops and we saw significant yield increases by using our rock phosphate. 

In the winter people were saying, “We’re going to buy more.”  And all that, but we set a goal of 10,000 tonnes in 2018.  Well, the first four months of the year, we’ve past that.  We’ve had a number of people come back and we do something different, we don’t follow the traditional ag market of a manufacture like maybe Incitec Pivot sells to a regional wholesaler and a wholesaler sells to a farm centre store like a retail store and the retail store sells to growers.  One thing I think we did fairly innovative, and I think this is changing around the world, is we’ll sell to anyone.  We’ll sell to wholesalers, we’ll sell to retailers and we’ll sell direct to growers. 

Orders in hand were about 12-13,000 tonnes now and I have indications of more than that.  So, Alan, I’m sorry that was a long-winded version of your question, but the mines – we’ll get those permits soon and we’ll contract mining.  But the bulk of that money was to have the working capital to make 12,000 tonnes of orders and then we’ll accept a good margin on that.  

Your order book for 2018 is 12,000 tonnes, is that right?

Yeah, it’s about 12,200 or something, I would check it every day. 

What’s your average price per ton?

An average – again, it’s similar to Australia, but our average price is about probably $400 because we’re moving a fair amount of volume of our powder which is a little lower and we charge a little more for our granulated product because you can apply it to the crops easier.  Again, Alan, we’re being experienced operators.  We set margin targets, we set price targets.  You always charge more for ease of use.  For a grower again wants it granulated, he can fertilise his fields quickly, we charge a little more for that product. 

Given that your contract mining it, what’s your margin going to be on that $400 dollars average?  Is it the same as Australia, 50%, or is it less?

It’s actually the same, and again we have about four products, so I’m giving you the weighted average.  We have some products that make about a 30-35% margin, but those are very close to our mines, it’s very simply ground.  Then, as I said, if a grower or a retailer wants a nice granular product, the kind you see in hardware stores and they want it in super sacks or bags or they want it delivered, then I’ll candid – we have margins greater than 50%.

Okay.  I’m just trying to get a sense of – because if you’ve got sales contracts for that, you know what you’re selling in Australia, you can be pretty clear about what sort of money you’re going to make this year in terms of profit.  I think your corporate costs are fairly low aren’t they?

They are.  Again, we’ve all done this, been in a range of companies and we’re all pretty cautious.  Essentially, everybody, our independent contractors with Fertoz, varying degrees of time because it’s a seasonal business – frankly, they’re grain trading part of the year and I’m full time but yeah, it’s in our filings.  Our operating costs are less than $100,000 dollars a month.  With the orders in hand now we’ll be cash flowing steadily by the following winter. 

Your net profit looks like running at something like – I’m just trying to calculate it in my head – you’d be a couple of million dollars profit after all costs?

Yeah.  If we can sell, say, 15 thousand tonnes this year at $300 or $400, that’s about $4 million dollars revenue, about 30 or 40% margin, again we’ll be covering all our operating costs plus money for growth or room or partnering or things like that.

Are you going to spend money on growth?  I notice you’ve got another deposit of phosphate in the USA as well as the two in Canada, are you going to spend money on that?

We’ll spend a little actually on the Alberta deposit.  What happened is, having been in the phosphate business a while, I actually knew a company that went out of business that had about 10 thousand tonnes of very good ore in Butte Montana.  We actually formed a marketing agreement with them and we’re selling that essentially for them and splitting the margin.  So, I really don’t have any cost into that and once the 10 thousand tonnes is gone.  But you know, I did that to make sure I had plenty of supply.  We’ve also found that the phosphate in British Columbia extend into the province in Alberta and frankly, permitting is much faster and much less expensive in Alberta.  If we spend a little money on exploration and permitting, that will be expanding into Alberta.  But yeah, our indications, as I said, once these occur, the more people try this, the more people talk about it, it will really be summer before I have my 2019 orders, but we’re projecting 30 to 50 thousand sales of tonnes next year and 100 thousand tonnes in 2020.

And you reckon you can make that no worries, 2020, 100 thousand tonnes?  I mean, I just noticed in your presentations you’ve done a lot of work on the phosphate market in North America and there’s capacity for 100 thousand tonnes of sales?

There very much is and I’m glad you brought that up.  What we found is, again the organics market is very much under-served.  People have gone into organic farming and they have to sometimes use compost, basically dried manure, and it may have a couple of per cent of nutrients in it but that’s all they can get.  We’ve seen some growers try to ship product from the west coast.  There are some other products like, believe it or not, bat guano or fish kelp you can grind up into organic fertiliser, but it’s very hard to use. 

Candidly, Alan, I think there’s 500, 600, 700 thousand tonnes of demand out there.  We have two small competitors but they’re actually limited by their ore reserves and their quality is not nearly as good as ours.  We’ve actually taken away a number of customers from our competitors due to our quality.  But when I look at organic acres within a truck market, our primary market is a truck driving about 300 miles.  There’s over 500 thousand acres in that area.  If you look at a secondary market, maybe going 300, 400, 500 miles but you’re selling maybe higher quality product to bigger distributors, we’re a better margin.

We are very comfortable in those projects and I’ve actually had people ask for a significant amount next year, so 30 to 50 thousand in 2019 and 100 thousand in 2020, I’m quite comfortable, could be more. 

Could be more.  How do you go about marketing it?  Have you got a sales team operating in North America, is that how it works?

We do.  We have three sales people in Canada and as I said, I mean, we also do something unusual and I love Millennials, I have several children that age, but again our people are more in their 40s and 50s and they’re pretty successful agronomists or grain traders, they’ve been with some major ag companies.  As I said, the bulk of selling in agriculture is relationship and trust.  I mean, I know it is when you go down and buy a phone.  But again, you’re going to see these farmers year in year out, you’re going to see their kids grow up and you want to make sure you have a product that sells and works, I should say. 

I mean there’s always new foo-foo dust products that come out every year.  When our sales people say this is going to work, “This is going to increase your yield…”  It’s going to work and we have a sales person in the Western US, very experienced gentleman.  But you sell on relationship, agronomic value, test results…  It’s really quite a relationship longer term buying proposition.

Well, it’s been really interesting talking to you, Pat, thanks very much.

Thank you.  I appreciate your time.  Any other questions?

No, I don’t have any more questions, I’m done and I look forward to talking to you again in a little while to see how you’re going.

Thanks for your time.