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Harvest Minerals sows the seeds for big returns
A spiring fertiliser producer Harvest Minerals (HMI:AIM) has the potential to generate a material amount of cash from its operations in the medium term.
There is also a blue-sky element to story as it owns an exploration project that could potentially allow Vale (VALE:NYSE), one of the world’s biggest miners, to extend the life of its Taquari-Vassouras potash mine in Brazil. Harvest is keeping that ace up its sleeve for now.
We believe Harvest’s share price has significant upside potential from the current 18.62p level, despite having already shot up 365% in the past three months.
Harvest joined AIM in September 2015. Its subsequent plan to raise a large amount of money to advance the potash exploration project was unsuccessful, causing a rethink of its work programme.
Potash prices have been falling over the past year and investors have been reluctant to back large scale mine exploration and development projects. ‘Our story has changed due to economic circumstances,’ explains chairman Brian McMaster.
The primary focus is now on the Arapua project which is further down the value chain compared to potash but very appealing from a potential return on investment perspective.
Harvest expects a trial mining permit any day now. Getting the permit seems a formality as it already has the necessary components, being municipal, federal and state licences.
It will produce something initially categorised as ‘stonemeal’ which is another term for remineraliser. Harvest then needs to apply for fertiliser certification which will require crop trials, potentially taking up to 18 months.
It will have a very simple operation, digging up a layer of soil and extracting material underneath that is naturally enriched in nutrients. Harvest doesn’t need a big processing plant or complicated beneficiation – the stuff comes straight out of the ground, it potentially has to be crushed slightly and will most likely be sold to local farmers.
Harvest started trading on AIM at 0.9p, which is the equivalent of 9p when you adjust for a one-for-10 share consolidation at the start of 2016. It tried to raise $15m a year ago, more than twice its market value at the time, but only secured $3.6m. The focus subsequently switched from the potash asset to Arapua.
The shares drifted for months before exploding to life in August 2016 when a study showed the economic potential for Arapua and Harvest subsequently secured a land agreement which paved the way for trial mining. The price went from circa 4p in early summer to a peak of 23.5p on 19 August.
The scoping study gave a range of potential economic returns using different selling prices, demonstrating that Harvest could get a significant return for very little investment. ‘At higher prices, the project goes off the charts,’ says McMaster.
Harvest told the market everything could be funded out of existing cash and production could start within a few months. You don’t get many mining companies saying they can start a project at the flick of a switch.
All-in costs are calculated to be $7.34 per tonne. McMaster suggests $60 per tonne potential selling price, based on the scoping study and Harvest’s nearest competitor’s pricing. That implies significant gross profit margins.
It expects to produce 50,000 tonnes of material – all of which is saleable – every 30 days or so, according to McMaster. ‘It
is probably realistic to suggest we will produce 400,000 tonnes in a year,’ he adds.
The company says it will start paying dividends if it cannot find a suitable acquisition or organic investment opportunity. That exact sales pitch helped bring investors on board at last year’s fundraise, reveals the chairman.
Beaufort Securities suggests $30 per tonne selling price could be more realistic for the first few years while Harvest establishes its customer base. Its product is different to what many farmers normally use, so selling prices may have to include an initial discount to get farmers to try something new.
The broker also assumes production will hit 200,000 tonnes a year by 2018 and 400,000 tonnes by 2022, so investors trying to work out potential returns shouldn’t assume it operates at full capacity and gets top dollar from the get-go.
Key risks to consider include a lack of a commercial mining permit and no sales agreement at present. ‘That is a little bit of the remaining $64 question,’ says the chairman. An agronomic expert has been appointed to help with product development and marketing.
Investors who stumped up the $3.5m cash in the late 2015 placing also got warrants which can be exercised for shares at 8.8p before a deadline of 31 May 2017. They are clearly in the money now, hence why you are seeing a lot of announcements regarding warrant holders exercising their right for new stock. (DC)
We originally said to buy at 9.5p (adjusted for January’s share consolidation) and anyone following our article would have since doubled their money. We think there’s more to come. Beaufort has a 32p price target for the next 12 months, implying 72% further upside from the current share price. We share this bullish view but appreciate it could be a bumpy ride as there are many unknowns regarding customer appetite, output levels and selling prices.