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Arianne: Finding Phosphate

09/25/2013 8:00 am EST


Brien Lundin

President, Jefferson Financial, Inc.

For those comfortable speculating in a low-priced, development-stage mining operation, Brien Lundin, editor of Gold Newsletter, looks at a Canadian phosphate miner that could be in the "right place at the right time."

This is a particularly good time to recommend Arianne Phosphate (DAN:CN) (OP:DRRSF), because the company is about to hit a pivotal point in its history.

Ariannce Phosphate seems to have the right resource at the right time and in the right location. The resource, as you can guess from the company name, is phosphate.

Phosphate is one of the Big Three nutrients in the fertilizer business (along with nitrogen and potash). All three are needed to ensure the world's food supply operates at maximum productivity.

Most of the world's phosphate comes from North Africa and, in particular, Morocco. And even a person with only a passing familiarity with recent events, knows that this is not exactly the most stable part of the world right now. The region has plenty of phosphate to meet world demand, but how stable is the supply?

That is the question that big fertilizer companies must continually ask themselves as they scan the globe for relatable supplies of minerals that they need for their main products.

And in the current geopolitical environment, Arianne's phosphate resource in the stable, mining-friendly province of Quebec would seem an attractive morsel to these companies indeed.

With the company's Lac a Paul project on the verge of having a feasibility study completed, now is the perfect time to get positions in this potential takeout target.

If the numbers come in like I expect on the feasibility study, the project will show the ability to generate three million tones of phosphate concentrate per year for 25 years.

Based on the more conservative parameters of last year's pre-feasibility study, the project comes with a pre-tax NPV (discounted at 8%) of $985 million. Capex costs are relatively high at $795 million, but that would be no obstacle for the elephant-sized companies that would likely be bidding on this project.

Another fact in the Lac a Paul resource's favor is that it is hosted in igneous rock, which can be processed to a higher concentration than sedimentary rock.

The higher-grade concentrate from this project should fetch a premium on the open market over the life of the mine, and this premium could add significantly to the project's economics.

Add in proximity to power and an available port just 300 kilometers away, and you have all the markings of a project that can easily get green-lighted, even in the current environment. That with some recent debt and equity financings, and the company has ample funds to finish its feasibility study.

Again, if that study comes in with the number I expect, the suitors won't be long in coming to Arianne Phosphate's doorstep. And when they do, they will likely have offers in hand considerably higher than the current market cap. Thus, Arianne is a strong buy at current trading levels.

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