MBAC Fertilizer's Sum Of The Parts Analysis Points To A Higher Valuation

MBAC Fertilizer (MBCFF.PK) is focused on becoming a significant integrated producer of phosphate and potash fertilizers and related products in the Brazilian and Latin American markets. MBAC has an experienced team with significant experience in the business of fertilizer operations, management, marketing and finance within Brazil. In October 2008, MBAC acquired Itafós Mineração Ltda., which consisted of a phosphate mine, a mill and plant and related infrastructure, all located in central Brazil. MBAC's exploration portfolio includes a number of additional exciting phosphate and potash projects, which are also located in Brazil. The Santana Phosphate project is a high grade phosphate deposit located in close proximity to the largest fertilizer market of Mato Grosso State and animal feed market of Pará State.

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MBAC's three projects have a combined Net Present Value of $1.6 billion. MBAC has 152 million shares outstanding, which gives the company a market cap of $317 million and an enterprise value of $514 million.

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Itafós Arraias SSP Project

The Itafós Arraias Single Super Phosphate [SSP] Project, which is currently nearing construction completion, is located in the municipality of Arraias, in the state of Tocantins, Brazil. The production facility will comprise a mill, a beneficiation plant, a sulphuric acid plant, an SSP plant and a granulation plant. Once completed and fully operational, the Itafós Arraias SSP Project is estimated to have production capacity of 500,000 tonnes of SSP per annum. Based on the updated Itafós Technical Report dated March 27, 2013, proven and probable reserves are currently 64.8 million tonnes, up from 44.2 million tonnes, which supports a mine life of approximately 19 years, up from 14.5 years.

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Physical progress of the construction to date is approximately 94% complete. The company has received the operating licenses for the mine, the water dam, the tailings dam, pipelines and the beneficiation plant allowing for the testing, commissioning and start-up of concentrate production. The company continues to expect the Itafós Arraias SSP Project to be fully licensed and in operation by the mid-2013.

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On June 13, the company provided a progress report on the completion of construction and the start up of operations for the Itafós Arraias Single Super Phosphate Project with the following highlights:

• Near completion of construction and at current trends the company expects the construction to be completed in the next several weeks, consistent with its previous guidance.
• Cost to completion has progressed consistent with previous capital cost estimates.
• The company has produced and is stockpiling phosphate concentrate from the beneficiation plant and the company is very pleased with the quality of the concentrate.
• The company expects to be in a position to deliver SSP in July with the ramp up of operations to reach capacity by October 2013.
• Operations team is in place and involved with the plants' commissioning.
• Sales volumes of SSP to date have increased from 35,000 tonnes in the previous update to 50,000 tonnes.
• The working capital needs of the company, which is entirely for the operational phase as the company begins to generate cash flow, are expected to be entirely funded through ordinary course working capital loans and other debt. The company has recently received credit approval from Banco Votorantim S.A. for an initial working capital line of credit in the amount of $10 million. The company is also in advanced discussions with banks and other lenders to structure the balance of the working capital financing.

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The company expects to consider the expansion of the SSP facility under construction to an enlarged complex with production capacity of an additional 500,000 tonnes of SSP per annum. The Itafós Arraias SSP Project is the company's core asset from which the company can start growing in coming years.

Santana Phosphate Project

The company holds exploration properties and permits for a phosphate project in the southeast of Pará State, Brazil.

The target phosphate fertilizer markets for the Santana Phosphate Project are the northern and eastern regions of Mato Grosso State and the southern region of Pará State. Mato Grosso State is known as the largest soybean producer in Brazil and the largest consumer of fertilizer, while Pará State is a large beef producer in Brazil representing a market for the animal supplement di-calcium phosphate [DCP]. The project will have a significant competitive advantage as its target market is located a considerable distance from the main existing integrated phosphate fertilizer producers in Brazil.

In June 2012, the company announced the results of a pre-feasibility study based on the updated mineral resource estimate.

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The next steps for the project will be to increase the mineral resource confidence to include measured mineral resource estimates. The company intends to complete the definitive feasibility study by mid-2013.

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The production from this project is expected to start in the first quarter of 2015. Subsequent to the end of first quarter 2013, MBAC retained financial advisors to review the sale of a minority interest in the Santana Phosphate Project.

Araxá Project

In June 2011, the company entered into an option agreement with Extramil, a private Brazilian company, to purchase 100% of a REE/niobium/phosphate project located in the southwestern part of Minas Gerais state, Brazil. In September 2011, following completion of satisfactory due diligence, the company exercised its option to purchase 100% of the Araxá Project. MBAC is currently working, together with Extramil, to obtain the preliminary environmental licence for the project. During the prior year all mineral rights in respect of the Araxá Project were formally transferred to the company. The remaining payment under the option agreement in the amount of $0.6 million will be due once the construction license is issued.

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MBAC has determined that although the Araxá Project has great potential, it is considered a non-core project given the company's focus on agricultural inputs. Subsequent to the first quarter end, MBAC has retained financial advisors to review the sale of part or all of the Araxá Project.

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Financials

The company reported the first-quarter financial results on May 15 with the following highlights:

On April 16, the company completed a bought deal equity private placement and issued 23,479,128 common shares for aggregate proceeds of $50.6 million less transaction costs of $2.5 million. As part of the bought deal equity private placement, directors and officers acquired a total of 3,592,328 common shares for consideration of $7.7 million.

Competition

The company's mineral exploration, development and integrated fertilizer business is competitive with other entities engaged in the same business. MBAC believes that it is well-positioned to compete in its market segment given the anticipated low cost of production, advantageous location of its operations and the experienced management team it has retained. It also has a unique footprint in the Cerrado area of Brazil with potential for off-take agreements to be entered into, which support the potential single super phosphate [SSP] market in such area.

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Brazil is unique among countries with its favourable climate, abundance of fresh water and arable land available for agriculture. As the global demand for food increases, Brazil remains an attractive market for an increase in agriculture exports which in turn increases fertilizer demand.

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Conclusion

The management and directors own approximately 13% of the company. The stock did see intensive insider buying in April. There are seven analyst buy ratings, zero neutral ratings and zero sell ratings, with an average target price of $3.22.

Revenue from the company's most advanced Itafós project are expected already in July. The two other projects could be partnered or sold. The latest share price drop was mostly due to the delays and cost overruns at the Itafós project. The company is currently fully funded to complete the construction at the Itafós project after raising $48 million in April. I have a long position in the stock currently.