WTR Insights Conference featuring Brazil Potash. I am Dmitry Silversteyn, Managing Director of Chemicals and Materials Technology here at Water Tower Research, and I will be your host today. We are pleased to be joined by Matt Simpson, Chief Executive Officer of Brazil Potash. Welcome, and thank you for being here.
Thanks for having me on, Dmitry.
Before we begin, please note that Brazil Potash safe harbor statements can be found on the Investor tab of their website and in the latest presentations, which can be found at www.brazilpotash.com. We will aim to address investor questions submitted during today's conversation, or in the management series report that will follow. Please enter your questions in the chat. Investors interested in scheduling a meeting with Brazil Potash can indicate that interest within the conference portal. With the housekeeping items out of the way, let us jump right in. Matt, let us start at the highest level for investors who may be new to Brazil Potash. Can you introduce the Autazes project, its size, location, and planned production, and explain where the project stands today on the path from development into construction, and ultimately becoming a major domestic supplier of potash in Brazilian agriculture?
Dmitry, a lot of people might not realize this, but potash is a critical mineral with no substitute used to grow food, and I would argue it is much more important to eat than it is to have the latest iPhone or rare earth metal. The project is located in Brazil, which is the world's largest net exporter of agricultural goods, and also coincidentally the largest importer in the world of potash at about 22% of the global market. Our plan is to initially produce 2.4 million short tons, which will supply about 17% of Brazil's need.
The basin in Brazil is absolutely massive because potash is formed by failed oceans. So you do not have a lot of these basins in the world, but where they do exist they tend to be absolutely massive in size. And we are fully permitted for construction, currently raising the funds to build this project.
Excellent. That's a good start. Thank you for that overview. The strategic rationale seems unusually easy to understand. Brazil, as you mentioned, is an agricultural powerhouse, yet it imports roughly 95%-96% of the potash it consumes. Why has such a large disconnect persisted? What advantage does producing potash within Brazil give Autazes, relative to products shipped thousands of miles from Canada or Russia or Belarus, the current major producing countries?
Dmitry, potash is a market that historically has been well balanced in terms of supply versus demand. The real issue here is a high concentration of supply within only three countries, being Canada, Russia, and Belarus. Because Belarus is a landlocked country, it's really arguably two countries that control 80% of this market, and that's led to massive volatility in pricing. in just the last five years, potash has been as low as $280, but also as high as $1,200. When you consider that there's only a 10-day planting season for most farmers, having that high volatility in pricing is very problematic. Potash prices this year have risen quite a bit, mainly because of transportation fuel costs, but also because about 12% of the potash that is supplied globally comes from Israel and Jordan and is now impacted.
Looking out, I think investors really need to watch what happens in trade discussions between the United States and Canada because the U.S., much like Brazil, imports 95% of its potash. But the difference is that Brazil's imports are largely based on the production global spread, whereas the U.S. imports 80%-85% of their potash from Canada today at zero tariff. Also looking out, we need to look at things like Super El Niño, where there's expectations that temperatures will be quite a bit higher this year. One of the big things potash does is helps plants survive stress, which means unusual temperatures, too much water, not enough water, insect bites.
Construction of this project is really important, Dmitry, because it ensures that the largest net exporter of our food has a domestic source of this critical mineral that mitigates geopolitical events along with any transportation issues such as rail strikes, port strikes, and even more recently, we're hearing now that there could be issues with water levels in the Panama Canal, which is how potash from Canada reaches Brazil.
Wow, that's quite an interesting setup and certainly speaks to the importance of the project that you're developing. One thing that differentiates Autazes from many development stage mining projects is that you're not waiting until construction to find customers. You've already contracted roughly, I think, 91% of the planned production, at least in the initial phase, including relationships with the major Brazilian agricultural groups. What does that level of commitment and commercial recognition tell you about the demand for domestic potash in Brazil? How important are those arrangements and agreements when you sit down with prospective lenders and strategic partners to put together the capital stack that you need to build this project?
Dmitry, you're spot on. Brazil Potash has pre-sold 91% of our production at market prices, which today are about $400 a ton, plus inland freight capture, which adds about $50 to $70 a ton against a cost of production of about $80. The margins are substantial. As I've already mentioned, Brazil is the largest net importer of potash in the world. But it's really important for the lenders to have certainty on our product being placed into customers that are well-financed and that can stand behind these purchase commitments. These contracts were put in place primarily to ensure that we provide comfort to the lenders of the debt for project construction, which are currently advancing their due diligence.
Excellent. Let's talk a little bit about government and what's going on there. The Brazilian government has done considerable work, I guess, in supporting domestic fertilizer production with President Lula just recently signing the Profert into law. I think it just happened this month. Can you explain what Profert and the existing SUFRAMA benefits could mean specifically for Autazes from potential construction cost savings to access to financing, and whether you view this as a meaningful change in the financing environment for the project and the level of government commitment to the project?
When potash prices hit $1,200 a ton back in March 2022, that's when Russia invaded Ukraine, Brazil's government really was concerned, and they put together a national fertilizer plan with the goal of reducing their nitrogen, phosphate, and potash imports from around 85% down to 45% by 2050. While it was great that they put together this document, there was no real teeth behind it. The first real meaningful thing that the government has done is they recently passed this legislation that you just referenced called Profert or pro fertilizer, and the legislation really does three things for us, Dmitry. The first is it has a reduction on import taxes and duties for equipment that cannot be sourced domestically in Brazil. That cuts our construction costs quite materially.
It also provides for government-backed lending for the construction of new fertilizer projects at preferred rates, and preferred rates means 3% government rate, which is phenomenal, especially when you consider the prime rate in Brazil is 14%. The final thing is it mandates minimum domestic content starting next year at 2%, ramping up to 10% by 2030, and it could go as high as 30%. For Brazil Potash, really the first two being the import tax and duty exemptions and the preferred financing from the government are the most material, tangible things that are going to benefit our project.
Thereby lowering your construction CapEx and operating CapEx once things get going. That's actually a pretty good incentive for you to continue, and I guess the government is doing all it can to try to incentivize this project as well as other fertilizer projects in the country. That's great to hear because I think it's very difficult to get these things off the ground, especially at the scale that you're at, without government commitment. Let's talk about that a little bit more. Legal and permitting risk has historically been one of the biggest questions investors typically have about any construction project, but particularly Autazes. There were two important court decisions in August.
Can you bring us up to date on exactly where the project stands today following the Court of Appeal and the Supreme Federal Court decisions, what permits you currently have in hand, and what, if anything, remains before you can move into full construction mode?
Brazil Potash has 21 installation licenses for construction of our two shafts to build the processing plant, to upgrade a largely existing road that connects the plant to the port, and to build a river barge port itself. The only license we don't have right now, Dmitry, is to construct a 100-mile power line that will connect us to the national grid. We're not concerned about getting that license. It's something that's going to be likely managed by a third party that will also fund the construction of that power line. Should we run into any issues, we can also just revert to liquefied natural gas and build a cogeneration plant right at site. Again, project fully permitted and all in good standing.
In terms of those two challenges that you just referenced, the first one was a challenge to the Court of Appeal in which there was a ruling that reinforced the indigenous consultations were properly conducted, that the correct licensing authority being the Amazonas state and not the Federal Environmental Agency, has the authority to issue our permits. They said there's no justification to appeal these decisions to the Supreme Court. So it again just reinforced that all of our licenses were properly issued. Separately, there was a request to the Supreme Court to temporarily suspend the licenses, and the Supreme Court declined to hear this petition because there wasn't proper basis to file a claim.
These unfortunately are kind of regular occurrences that happen in Brazil, but it's important for investors to take calm to know that we've on five occasions been vindicated by the Court of Appeal, and that again, the licenses are all in proper, good standing.
Great to hear that, Matt. It's pretty impressive for your project to be that far along in terms of permitting and regulatory permissions. It sounds like you're right on the cusp of basically having everything you need to get going. Let's turn to what is actually happening on the ground and talk a little bit more about that, specifically when it comes to engineering work. You now have Wood and Promon covering the surface facilities and WSP and Redpath working on the mine shafts and underground development. What does completing full project FEED allow you to do that you couldn't do before, and how does that work translate into greater cost certainty and ultimately a financeable construction package?
For the non-technical people that are viewing this, FEED stands for front-end engineering design, and it's the level of engineering that's typically required by banks in order to fund the debt, but it's also the engineering that's needed before you can order long-lead equipment items because you really need to have good clarity on exactly what equipment is needed, what size it's going to be, what throughput rate it's going to handle. In our case, what the debt providers have requested, Dmitry, is that we also provide monthly resolution of the spend during the construction period and for the first 10 years of operation, quarterly resolution on the production rate and associated sales and operating costs. Beyond that, we'll then revert to an annual estimate, which is more typical. The aim is to have this all completed in the second quarter of next year.
Great. Like I said, sounds like you are really moving on multiple fronts and things are coming together. When we put all of these pieces together, so 91% contracted production, favorable Court of Appeal decisions, the Profert and the SUFRAMA full project FEED and discussions with regulatory agencies and lending agencies, potential financing sources. There is a lot of stuff that you already accomplished. It feels like the conversation is increasingly shifting from whether the Autazes project gets built to actually how it gets financed and built. What are the two or three milestones over the next, let us say, 6-12 months, that investors should watch more closely or most closely, and what needs to come together before you are ready to make the transition into major construction?
The biggest things, Dmitry, for investors to look out for are all the pieces of the construction funding puzzle coming together. Nearer term, the focus is really on completing these Build, Own, Operate, Transfer contracts, the first of which is for a 20-megawatt diesel generator set that will be used for our construction power that then reverts to our backup power we have just announced as a binding contract. Other ones that we potentially would look at doing would be things like our power line construction that I referenced earlier, the river barge port, potentially our steam plant, and even the water treatment system are all areas that we are looking at having third parties fund to really cut down the initial construction costs because the margins on this project are just so strong.
Keeping in mind, again, actual numbers today, we would be selling for about BRL 450- BRL 470 against a cost to produce of BRL 80. So if we transfer BRL 350 million of construction capital, which is our goal, into a little over BRL 10 of operating cost, it is a great outcome for investors. Going into the new year, we are also going to see the completion of that front-end engineering design study that I mentioned in the second quarter, and that is then followed by the debt funding. In between, I am working really hard to try to secure the anchor equity investor for the construction, potentially at the asset level.
Understood. So very exciting time over the next year and a half, it sounds like. Let me finish this conversation by giving you the floor for about two minutes. An investor looking at Brazil Potash today sees a large project in the country that imports nearly all of its critical agricultural inputs, customers already contracted for most of the output, increasingly explicit government support, and a project moving through advanced engineering towards financing, as you just mentioned. What should that investor spend the time to understand the company today, and why might they not wait or wait until Autazes is fully financed and under construction? Is there a risk of missing an important part of the opportunity? How would you position this project for an investor looking to do more due diligence on you?
Dmitry, I think it is really important that people understand where our food comes from. They need to know that whether you started your day with a coffee or an orange juice, and later on in the day, you had something that came from a chicken, a cow, or even a soybean, that odds are it came from Brazil. Brazil is the world's largest net supplier of agricultural goods. It is a country that grows three crops a year, so they never stop growing, unlike most countries that have a cold winter. They have the highest amount of fresh water in the world. Their weakness is they import 98% of their potash, which is absolutely critical for commercial farming when potentially the second-biggest basin is in their backyard. This project, again, is fully permitted for construction.
Really the things that investors need to look out for is seeing those pieces of the construction funding puzzle coming together because there is potential for a massive uplift in the share price between where we are today and the project being fully financed for construction, then ultimately into production. My hope is that one day investors are going to wake up and read a press release about this project being fully funded, and that is exactly what I am focused on doing.
Understood, Matt. Thank you. Thank you, Matt Simpson. We appreciate your participation. Thanks as well to everyone for tuning in. More materials on Brazil Potash are available at www.watertowerresearch.com. If you would like to submit additional questions or arrange a meeting with management, please use the conference portal to indicate your interest. Our next WTR Insights Conference session is beginning shortly, so please stay tuned and stay with us. Thank you, everyone.