A company that certainly bears having a closer look at now is one in which I invested and made a little money on earlier this year. I have regular communication with some of the company’s shareholders and so I am speculating here, but this is what I think is going on. Without divulging any secrets, I believe there is growing impetus from shareholders are seeking to monetize their investmentm sooner rather than later. This could be accomplished by putting the company into play and selling it to either Agrium (NYSE:AGU) or Mosaic (NYSE:MOS) or some other major player in the space. The multi-million dollar question is, “what is the value of the takeout?”
The answer is, based on multiple conversations with various stakeholders, analysts and bankers, somewhere in the neighbourhood of $350 million, which with the current share capitalization, would mean a fully diluted $3.43 a share.
Which might explain the recent share price spike, as I’m quite sure I’m not the only one who is speculating about this.
Now there are two likely strategies afoot here, and one is that, with the anticipated completion and filing of the bankable feasibility study, the company and its stakeholders will want to be demonstrating to potential suitors that they have the ability to raise equity financing to begin construction, thus catalyzing a sense of urgency in any serious buyer. But also, if the investors want $350 million, the buyer can’t pay $3.40 a share from where its trading presently. Given Friday’s close of $1.15, and the concentrated share positions in what should be considered “strong hands”, it is doubtful that a sale would occur in this price range.
If you’ve been paying attention at all, Arianne has accomplished a number of notable goals this year, inlcuding:
- Changing its name from Arianne Resources to Arianne Phosphate Inc to reflect its single-project committment;
- Hiring Brian Kenny as CEO, who is a seasoned project development executive, having most recently overseen the development and completion of the $7 Billion EMAL smelter project in Abu Dhabi and directed more than $10 billion in development projects in Saudi Arabia, Western Algeria, and Kazakhstan over 5 years with Dubai Aluminium Co Ltd. As Project Director, Brian managed all technical, legal, financial and environmental aspects of the projects. He also arranged project finance, negotiated project agreements, and coordinated with host country government ministries and local agencies;
- Arranged additional financing in the form of $2.5 million credit facility and a $3.55 million private placement;
- Completed and filed its Environmental Impact Assessment (EIA) for the Lac à Paul apatite mining project with the Ministère du développement durable, de l’environnement, de la faune et des parcs (MDDEFP) for review. This assessment, which started in 2011, was conducted by GENIVAR Inc., an international engineering consulting firm, in collaboration with Dessau – Groupe Conseil Nutshimit, Hydro-Ressources Inc. and Cegertec WorleyParsons.
Agrium has stated recently that they are interested in becoming vertically integrated by acquiring a domestic source of phosphate rock, and indicated he had identified a suitable candidate, without mentioning Arianne by name. But a quick look around at the available North American phosphate deposits would sure make it difficult to conclude otherwise.
Potash Foofooraw Impacting Phosphate
Not overly surprising is the fact that the recent turmoil in the potash market has had a carry-over effect in Phosphate prices, which is a result of the broad market’s inability to differentiate one fertilizer from the other. But thanks to the expected weakness in potash pricing going forward, impetus will be added to fertilizer companies who will seek to weight their production toward phosphates to compensate for lost revenue from potash. Agrium, for example, only realizes 5% of its revenue from potash sales, and so is in a superior position to comptetitor Mosaic.
Every living thing needs phosphate at the cellular level. If farmers don’t have it, crops will be stunted. Without plentiful supplies, the wheels will come off modern agriculture, with its bountiful harvests and ability to feed a teeming planet.
There are no substitutes for phosphate and there isn’t any practical way of recycling the compound. Farmers could maintain phosphate levels in soil if they have access to manure, but that isn’t practical for most growers without livestock, except perhaps for small-time operators on the organic fringe.
Adding to the rich tapestry of bullish details is that nearly 75 per cent of world reserves are located in just one country: Morocco and the disputed territory it is occupying in the western Sahara.
Just as Saudi Arabia does with oil, Morocco acts as the swing producer of phosphate, adjusting its output to stabilize the market at relatively high prices. Its domination creates concerns about security of supply.
Other countries with major reserves are in North Africa and the Middle East, including Algeria, Syria, and Jordan, where most investors quite sensibly fear to tread.
So taking a position in phosphate is a potentially brilliant, long-term investment concept, with one glaring problem: There are hardly any direct ways to play the compound.
Arianne Phosphate Inc. is obviously one way, and who knows? With all the buzz, it just might be the takeover target of the year.
Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.
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