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Brazil Potash (GRO): Advancing a Domestic Potash Solution for the World's Largest Importer · WTR Small-Cap Spotlight

• 0:02
  SPEAKER_01: Welcome to the WTR Small Cap Spotlight Podcast.
• 0:04
  SPEAKER_01: I'm your host, Sean Sieverson, founding partner and CEO of Watertower Research.
• 0:09
  SPEAKER_01: In today's podcast episode, I'm being joined by Matt Simpson, Chief Executive Officer of Brazil Potash, which trades on the NYSC American under the symbol GRO.
• 0:20
  SPEAKER_01: Brazil Potash is advancing the development of the Autas Potash product in the Amazonas state of Brazil.
• 0:26
  SPEAKER_01: The project is strategically located in one of the world's largest agricultural markets, which today imports an overwhelming majority of the potash fertilizer consumed by its farmers.
• 0:35
  SPEAKER_01: Also joining us is my WTR equity research colleague, Dimitri Silverstein.
• 0:40
  SPEAKER_01: Good morning, gentlemen, and thank you for joining today's podcast.
• 0:45
  SPEAKER_01: Thanks, Matt.
• 0:47
  SPEAKER_01: Good morning, Sean.
• 0:48
  SPEAKER_01: Great to be here.
• 0:50
  SPEAKER_01: Thanks, Matt.
• 0:50
  SPEAKER_01: Good morning, everyone.
• 0:52
  SPEAKER_01: Matt, before we get into some of the recent developments, for those listeners who may not be familiar with Brazil Podash, can you give us a brief overview of the company and the Autas project and ultimately what you're trying to build?
• 1:04
  SPEAKER_00: Sure.
• 1:04
  SPEAKER_00: So potash is a critical mineral that has no substitute essential to grow food.
• 1:10
  SPEAKER_00: The issue is that 80% of it is produced in three countries, being Canada, Russia, and Belarus, which really means two countries, given that Belarus is a landlocked country reliant on Russia for export.
• 1:22
  SPEAKER_00: And that has led to massive swings in pricing.
• 1:25
  SPEAKER_00: Potash has gone as high as$1,200 to as low as$280 in just the last five years alone.
• 1:32
  SPEAKER_00: And Brazil is the world's largest importer of potash, about 22% of the seed-borne market.
• 1:37
  SPEAKER_00: They import 98% of what they need when potentially the second biggest basin in the world is sitting in their backyard.
• 1:43
  SPEAKER_00: So simply because we're in Brazil and everyone else is 12,000 miles away, we're able to produce this critical mineral at a cost below just the transportation alone for everyone else.
• 2:01
  SPEAKER_02: I think you're muted, Sean.
• 2:04
  SPEAKER_01: Sure and thanks, Dimitri.
• 2:06
  SPEAKER_01: Um thank you, Matt.
• 2:07
  SPEAKER_01: That gives us a good foundation for the discussion today.
• 2:10
  SPEAKER_01: And I'll turn it over to the podcast over to Dimitri, and he's got several questions for you, and we'll dig into some of the recent developments and what they can mean for the company.
• 2:20
  SPEAKER_02: Thank you, Sean.
• 2:20
  SPEAKER_02: Uh Matt, uh one of the biggest recent developments has been the Brazilian uh Senate's approval of the Profit, which is a legislation intended to encourage domestic uh fertilizer production and reduce the Brazilian dependence on imports that you just mentioned.
• 2:35
  SPEAKER_02: Given that Brazil imports the overwhelming majority of the potash its farmers consume, what does the passage of Profort tell us about how the Brazilian government views the domestic fertilizer production?
• 2:46
  SPEAKER_02: And specifically, what could the legislation mean for you and the Odysseus project?
• 2:52
  SPEAKER_00: So, Dimitri, um the Profort legislation, it's really short for pro or positive for fertilizer, was just passed by Brazil's Senate on August 12th.
• 3:03
  SPEAKER_00: And this is the first really meaningful step that Brazil's government has taken to put action behind the National Fertilizer Plan that they established in 2022 when potash hit$1,200 a ton.
• 3:15
  SPEAKER_00: And specifically for Brazil potash, this is extremely positive legislation for us and our shareholders because it contains three key elements.
• 3:23
  SPEAKER_00: The first is that the government is going to exempt all taxes and duty on the import of equipment and materials for construction of new fertilizer projects.
• 3:34
  SPEAKER_00: So in our case, when you combine the Profort legislation with Sudan, which is the Amazon estate free tax zone, it'll mean about roughly 190 million potential savings on our total construction costs.
• 3:48
  SPEAKER_00: So that's huge money that just completely gets wiped out instead of needing to be raised.
• 3:53
  SPEAKER_00: The second thing it does is it mandates the BNDS, which is the Brazilian government finance agency, very similar to USX in the United States, to preferentially fund the construction of fertilizer projects.
• 4:09
  SPEAKER_00: So that could also be uh lower cost debt funding and possibly even equity for our project from Brazil's government.
• 4:16
  SPEAKER_00: And the third thing is there's a requirement that starting just next year, that at least 2% of the fertilizer sold is produced domestically, and that ramps up to 10% by 2031 with the potential to go even as high as 30%.
• 4:31
  SPEAKER_00: So the first two I'd say are probably the most direct impact for us, being again the uh tax exemptions, and then also the preferred uh funding from the government agencies.
• 4:44
  SPEAKER_02: That's a very interesting uh property is clearly important for a domestic policy standpoint, but it also comes at a time when fertilizer security supply is becoming much more of a global issue.
• 4:55
  SPEAKER_02: Uh the the global potash market remains highly concentrated, as you mentioned, in Canada, Russia, and Belarus.
• 5:01
  SPEAKER_02: And the US itself is heavily dependent on Canadian potash imports.
• 5:04
  SPEAKER_02: I think it imports probably as much potash as as Brazil does, but mainly from Canada.
• 5:10
  SPEAKER_02: And we now uh have the ongoing review of the renegotiation process surrounding the US-Canada-Mexico trade agreement.
• 5:18
  SPEAKER_02: Do you believe fertilizer supply chains are becoming more geopolitical?
• 5:22
  SPEAKER_02: And does that make developing a large domestic source of potash, such as the Autas project, more strategically important to Brazil today than it was even a few years ago?
• 5:33
  SPEAKER_00: Oh, look to Dimitri, all of these um political actions is what's completely been behind the swing in prices for fertilizers globally.
• 5:42
  SPEAKER_00: And really, there's three key fertilizers being that the potash, nitrogen, and phosphate that have all gone through massive volatility.
• 5:50
  SPEAKER_00: Um, with potash, it was initially impacted by the US sanctioning the Belarusian government uh back in 2021, followed by um Russia, Putin invading Ukraine, and then prices kind of came back down.
• 6:06
  SPEAKER_00: And then we're seeing prices uh rise yet again with the war in the Middle East, where something like half the world's sulfur, about 40% of the world's um urea, and uh about 12% of the potash comes out of.
• 6:19
  SPEAKER_00: And it's not just the supply constraints that are being impacted, it's it's also the transportation costs because transportation from just Vancouver to Brazil is up about 40% since the war in the Middle East started.
• 6:31
  SPEAKER_00: And that then gets translated on to fertilizer prices, and then ultimately the price that everyone pays at the grocery store or a restaurant for their food.
• 6:39
  SPEAKER_00: So geopolitical uh events are definitely causing uh massive volatility.
• 6:44
  SPEAKER_00: And as you mentioned, um, with the Canada-US-Mexico trade agreement, uh, the US does import about 80 to 85 percent of their potash from Canada today at zero tariff.
• 6:54
  SPEAKER_00: And uh who knows what happens with those negotiations in terms of potash prices, which again cannot be absorbed by the farmer, they get passed on to all of us.
• 7:03
  SPEAKER_02: Absolutely.
• 7:04
  SPEAKER_02: So uh we have the Brazilian government taking steps to encourage domestic fertilizer production at the same time that Brazil potash has had another significant development on the legal front.
• 7:14
  SPEAKER_02: I'm speaking, of course, of the latest uh TRF-1 decisions, which leave in place earlier rulings recognizing the validity of the Mura uh consultation process with the indigenous community, the authority of uh the Amazonas Environmental Agency to issue permits to license the project, and the validity of the environmental licenses themselves.
• 7:36
  SPEAKER_02: The court also determined, from what I understand, that the latest appeals did not satisfy the requirements to proceed to Brazil's higher court.
• 7:46
  SPEAKER_02: Um, after nearly a decade of leading of legal proceedings uh surrounding this Auditis project, how should investors think about the project's legal uh risk profile today compared with, let's say, six to twelve months ago?
• 8:00
  SPEAKER_00: To me, sure, I think investors can take a lot of comfort that the Court of Appeals, called the TRF1, has repeatedly ruled in the company's favor, as you just outlined, that all the permits were properly issued, that the consultations with the local Indigenous people were conducted appropriately, and that they reinforce the Amazon state as the correct licensing jurisdiction for the construction permits that were issued.
• 8:25
  SPEAKER_00: And I think as you saw firsthand only a couple months ago when you're at site, the support from the local communities, especially from the Mura, is uh exceptionally strong for this project.
• 8:35
  SPEAKER_02: I certainly did.
• 8:37
  SPEAKER_02: I was really impressed by by the attendance of the Indigenous people at our uh event.
• 8:42
  SPEAKER_02: And you know, everybody that spoke up talk about talked about these third-party non-native people or non-native entities that are trying to put you know sticks into the into the spokes of the wheel of the project in a very negative term.
• 8:56
  SPEAKER_02: So it does look like the Mora people are clearly on the side of the project and understand what the economic benefits of its development could be for the community.
• 9:05
  SPEAKER_02: Is there anything remaining in the judicial process today that you believe could realistically prevent Brazil Padish from moving into construction?
• 9:13
  SPEAKER_00: Well, look, I think it's important for people to know that even though we've won, I think this is now the fifth time on the exact same merits that our permits were properly issued, consultations were properly done, it doesn't stop the federal prosecutor from trying yet again.
• 9:29
  SPEAKER_00: Unfortunately, in Brazil, even though you you've been tried and vindicated, uh they can continue to come back.
• 9:35
  SPEAKER_00: But I think people again should take comfort in knowing that the vast majority, in our cases, over 90% of the local indigenous population uh voted in support of this project, and and they see this project as an opportunity to give them a much better life.
• 9:50
  SPEAKER_00: And that wasn't uh a light decision.
• 9:52
  SPEAKER_00: You know, that took seven years of consultation, Dimitri.
• 9:55
  SPEAKER_00: There were over 36 different communities that participated in that consultation process, and now we're up to 37 that um were participating in the uh in the cultural event that that we both attended, and I'm also attending one at the end of the um the month.
• 10:09
  SPEAKER_00: Um so what's really important is listening to what people on the ground actually want for development and knowing that this project is being developed in a responsible manner.
• 10:19
  SPEAKER_02: Understood.
• 10:20
  SPEAKER_02: And the distinction is important, I think, uh Matt, that you're absolutely correct.
• 10:23
  SPEAKER_02: Um, you know, obviously reducing permitting uh political risk and label risk, you know, eventually turns into a more uh constructive uh investor uh sentiment.
• 10:35
  SPEAKER_02: Today you have several pieces coming together.
• 10:38
  SPEAKER_02: You got the environmental permits, uh substantial indigenous community support we just talked about, long-term contract and demand that should sign, uh, favorable government policy towards domestic fertilizer production, and now the series of favorable judicial decisions uh and and uh and uh uh actions at this at the Senate level.
• 10:57
  SPEAKER_02: Has the combination materially changed your discussions with potential lenders, uh strategic developers or investors, uh, development finance institutions, export credit agencies, and what still needs to happen before Brazil Potash has put a construction financing package in place?
• 11:14
  SPEAKER_00: So that really is our focus right now, Dimitri.
• 11:17
  SPEAKER_00: It's all about putting together the funds for construction of the project because we we are permitted to build the mine, to build the processing plant, the port.
• 11:24
  SPEAKER_00: We do still need one permit for the power line, uh, but we're not concerned about obtaining that.
• 11:29
  SPEAKER_00: And should there have been any any issues, we can also switch to uh liquefied natural gas and do a cogen plant at site.
• 11:35
  SPEAKER_00: So all of the risk from a permitting standpoint is behind us, and it's really now about getting those construction funds together.
• 11:42
  SPEAKER_00: So we did just recently announce one of the uh build-own operate transfer contracts for the uh construction power that becomes our backup power.
• 11:50
  SPEAKER_00: Looking ahead, there's several other agreements that we're looking at putting in place for that the power line, uh potentially for the port and potentially the the steam plant that will all chip away at that while in parallel completing what's called front-end engineering design.
• 12:04
  SPEAKER_00: And this is a much higher level of engineering that's required by the debt lenders in order to invest in the project.
• 12:10
  SPEAKER_00: So those debt lenders are heavily engaged in doing their environmental and social diligence of the project, but we do need to have updated economics that are at a very high level of resolution for them to be able to invest.
• 12:24
  SPEAKER_00: So we recently awarded that engineering work for the processing plant and surface facilities to a combination of wood, which is a big international construction engineering firm, and POMAN, which is a local Brazilian company that's done a lot of construction.
• 12:39
  SPEAKER_00: And then for the uh shaft sinking, which is actually the critical path in the mine development work, to a consortium led by WSP with uh Red Path, which is one of the premanent mine sinking companies in the world, and uh Urkus Plant has extensive experience in uh in processing and mining salts.
• 12:57
  SPEAKER_00: So that work um should be done in the first half of next year.
• 13:00
  SPEAKER_00: And then once that is done, that will be a prerequisite to lock in the debt to then go full uh spled ahead with the construction.
• 13:08
  SPEAKER_02: I understood.
• 13:08
  SPEAKER_02: That's a very good timeline you laid out very clearly.
• 13:12
  SPEAKER_02: So assuming the financing uh process continues to advance, the investment story then begins to change.
• 13:18
  SPEAKER_02: The discussion becomes less about permitting and litigation, and increasingly about engineering and construction and execution.
• 13:24
  SPEAKER_02: Uh, you already initiated feedwork, as you've explained, and there's a number of other uh pieces that need to come together before the full-scale construction.
• 13:33
  SPEAKER_02: What are the next two or three milestones investors should be watching over the next, let's say, six to twelve months as evidence that the autism project is moving from a permanent development project towards construction?
• 13:47
  SPEAKER_00: Again, it's all about putting the pieces of the funding package together so that the near-term things that investors should look out for are those build-on-operate transfer contracts.
• 13:56
  SPEAKER_00: We should have uh more news on our progress in those uh in the coming months.
• 14:02
  SPEAKER_00: Um, and then going into the the end of the year, this is really where we're we're looking to pull together um the bulk of the equity.
• 14:08
  SPEAKER_00: And the equity is the most challenging or tricky part of the funding to get in place.
• 14:13
  SPEAKER_00: And then following that, uh the debt would be more of a mid-late next year event, but we don't need to have all the funding in place to really materially advance the project.
• 14:22
  SPEAKER_00: You know, we're sitting right now on a pretty substantive amount of money that we we just raised on$63 million on top of funds that we already had in Treasury, and that allows us to not only complete all of this work that we just talked about, uh, but even start um a number of the free souls for the shaft sinking, which is again the critical path.
• 14:41
  SPEAKER_02: Excellent, excellent.
• 14:42
  SPEAKER_02: That gives investors a good sense of individual milestones ahead.
• 14:45
  SPEAKER_02: So let's finish by stepping back and looking at what all of these pieces could mean for Brazil Podash over the next year.
• 14:52
  SPEAKER_02: If we were having this conversation again a year from now, what would you hope Brazil Podesh has accomplished between now and then?
• 14:59
  SPEAKER_02: And of the milestones you just discussed, uh, which one do you think could do the most to change investors' perception of Brazil Podesh and the risk discount the market is currently assigning to the project?
• 15:13
  SPEAKER_00: Well, Dimitri, I really hope this time next year, and I think it's very realistic for us to have the funding in place to be able to make a final investment decision to construct the project.
• 15:23
  SPEAKER_00: Again, early works are starting, but we do need to have, in particular, the anchor equity in place.
• 15:30
  SPEAKER_00: And that anchor equity is what really unlocks the debt.
• 15:32
  SPEAKER_00: It's what unlocks the Franco-Novada royalty commitment and allows us to go full steam ahead with the project.
• 15:39
  SPEAKER_00: So that really is the key milestone that I think investors need to focus on.
• 15:43
  SPEAKER_02: Great.
• 15:44
  SPEAKER_02: Uh I appreciate that, Matt.
• 15:46
  SPEAKER_02: Well, thank you, Matt.
• 15:47
  SPEAKER_02: Um, I'll turn the call over to Sean.
• 15:49
  SPEAKER_01: Thank you for joining us today.
• 15:51
  SPEAKER_01: That was Matt Simpson, CEO of Brazil Podash, NYSE symbol, G R O.
• 15:56
  SPEAKER_01: And thanks to my equity research colleague Dimitri Silverstein for also joining us today.
• 16:01
  SPEAKER_01: And finally, a special thanks to the editor and producer of the podcast, Krista Fitzpatrick.
• 16:06
  SPEAKER_01: And uh thank you everyone for listening today.
• 16:08
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• 16:20
  SPEAKER_01: As a reminder, that's open access and can be available and can be reached at our website, all the research terminals, like Bloomberg Terminals, or through social media.
• 16:28
  SPEAKER_01: We will see you next time for another edition of the WTR Small Cap Spotlight.
• 16:32
  SPEAKER_01: Thanks everyone.