Gensource Potash Corporation (GSP) Earnings Call Transcript & Summary

Good afternoon, everybody, and thank you for taking the time to join us here today. My name is Mike Ferguson. I'm the President and CEO of the company. I'd like to start with a short agenda for today's call. I'll start with some introductions. We'll move on to current Gensource activity where we are right now. That will be followed up very closely with Tugaske project financing, some -- followed by some industry -- potash industry news and a discussion of Tugaske project development as it stands today. And we'll end up with questions and answers from shareholders. Thank you to those who have sent in your questions by e-mail. We received quite a number, and we'll discuss those right at the end and do our best to give you a fulsome response. So we'll start with some introductions. With close guidance and support from our Board of Directors, I'd like to start by introducing our management team. On the call with us here, we have Alton Anderson, CFO; Rob Theoret, Vice President, Corporate Finance and Business Development; Deb Morsky, Vice President, Corporate Services; and Paul Neufeld, Project Manager. Thank you all for attending and participating in this call. Let's start with Gensource activity and a bit of a snapshot as to where we are now. So as a quick snapshot, Gensource is actively pursuing the capital -- equity capital markets to complete the full project financing package for the Tugaske project in conjunction with the previously announced committed debt financing, which together will allow the first module at Tugaske to move into construction. Turmoil in the global financial markets, exacerbated by Russia's invasion of Ukraine, have caused delays in completing the equity financing. We recently quoted the Deputy Prime Minister Chrystia Freeland in Saskatchewan, that Saskatchewan potash is "more important than ever" and is now "geopolitically essential". I like that last quote particularly. This is an example of how vital potash supply is and how vital Gensource's Tugaske project production is to creating a new source of potash supply. Equity investor groups globally are now also beginning to see potash production in the same way, in the same strategic way. Helm fertilizers, Tugaske's offtaker and our future equity partner, remains focused on the Tugaske project with its $50 million equity investment commitment previously announced and is additionally providing short-term support for the completion of the project financing effort and the current bridge engineering phase. Financing and construction of the first module at Tugaske remains the priority focus for Gensource and Helm, with initial planning for the second module at Tugaske underway and expected to be incorporated as the project develops. We currently have, together with HELM, in-person meetings scheduled with equity investors in the coming weeks. That's a snapshot of where we are right now today, and it's a good segue into the project financing efforts that have been going on recently and up to now. Project financing work is not only ongoing, but it is the single greatest focus for the company. For previous news releases, shareholders will be aware that the company invested significant time in the public markets, both in the U.K. and in Canada, starting early in the year through to mid-May. These meetings garnered significant interest in Gensource and the Tugaske project on both sides of the Atlantic. However, due to the deterioration of the public financial markets during this time period, the company chose not to complete a public market financing. Nonetheless, Gensource continued discussions with private equity investors. With a significant improvement in potash price and unprecedented visibility of potash and other fertilizers in the global press, there is increased interest for private equity in the fertilizer space and in the potash market, particularly. The company is currently in detailed discussions with both domestic and international equity investors. These discussions have been constant over the past several months. But now, with the heightened focus on potash as a truly strategic commodity, the discussions have now progressed to a serious negotiation level, well past an LOI stage. This effort, it should be noted, has been undertaken shoulder to shoulder with our future equity partner and offtaker, HELM, to structure an equity solution that will complete the financing picture for the Tugaske project. In addition, as mentioned in our most recent news release, HELM continues to support the project in significant ways by guaranteeing accounts included in the debt financing package, by providing short-term financial input to the company, and by investing further of their own resources and personnel to roll up their sleeves and help negotiate and complete the financing of the project. To quote Olivier Saulnier, Executive Vice President of HELM AG and the person in charge of the fertilizer business unit, "We are looking forward to participating in the Tugaske project, not only to capitalize on the marketing opportunities and enhance our current supply chain for potash distribution, but also to be part of the exceptionally high environmental profile for the project." Those are important drivers for HELM in their partnership on Tugaske. We have been relatively -- I should say, have we been relatively quiet in communications recently with our shareholders? Absolutely, yes. We apologize for that. However, there are -- these are sensitive and important discussions and negotiations that do not lend themselves well to public disclosure when incomplete. As we work down the pathways on financing, we will provide specific disclosure when major agreements have been reached, and all parties involved are comfortable to make the required disclosure. Before that time, any disclosure is incomplete and premature. Some of the efforts recently in the potash for the project financing effort, and I started before that with a summary of where we are today. I'd like to just look back at the potash industry a bit to make sure that we're -- that everybody has the same context for what's going on in the world. We've all seen the changes in the potash industry recently, supply, demand and pricing that have occurred visibly to anyone looking over the last 12 months. While these changes seem start, we view them as a structural part of the industry for many decades. It's important, though, to understand that these changes are not all about Russia's invasion of Ukraine. The supply problem in the industry, we believe, is structural and has actually existed for a very long time. With the 5 largest players accounting for more than 75% of the market, and each of those 5 players relying on large and, in many cases, [ hold ] producing assets, it only takes a problem at one asset to have a global impact. Such was the case last year when Mosaic Esterhazy K1 and K2 mines flooded. Even though K3 was well along in its development, the flooding immediately removed 5 million tons per year of production from the marketplace; a global supply shock. Next, we had sanctions levied against Belarus for its airline highjacking incident that threw into Belarus colleagues almost 12 million tons of production. Finally, Russia's invasion of Ukraine earlier this year also put a cloud over Uralkali, EuroChem and Akron current and future production plans. All of these occurrences exacerbated by increased demand as the world emerged from COVID lockdown resulted in constrained supply and caused the supply concerns and price increases that we've all seen. We are of the view that these occurrences have simply shed light on a potash supply chain that was too concentrated, had little diversity, and therefore, no resiliency. As shareholders, you have heard us say for a long time now we're here to create new and independent supply chains that is a fundamental tenet of our business model, and the Tugaske project will create the first such independent supply chain with our partner, HELM. How long will these disruptions in the marketplace last? No one knows for sure. But it's our view that these disruptions are structural. They'll be with us for a long time to come. Russian and Belarusian product will find ways to get out to some markets, and the situation will even out of it. But that supply will remain constrained, and we're of the view that the potash industry will never really return to its previous state. This is where Gensource comes in, adding targeted, new and independent supply chains to fill incremental demand. That leads us to a quick discussion on what's happening at the project itself, project development work. Development of the Tugaske project has been proceeding through the spring and summer. We previously announced the scope of work called "Bridge Engineering". That work is an engineering and procurement effort to accomplish 3 key goals. The first is to bring together the one congruent package, improvements and updates that have been made to the project over the last 12 to 18 months. These items include such things as an optimized site rail layout for handling and loading railcars, larger product storage warehouse that provides some added flexibility to the operation going forward, optimization of construction materials in the wet end of the process facility, understanding the cost environment present there, and other minor process flow changes that have been seen as accretive to the project. As you'll also be aware, we completed the field survey and geotechnical testing and analysis as part of this work. Our land control is in place for the plant site, drill pads and pipeline rights of way are all secured. All of these items provide the required input data and conditions for foundation and civil site work design activities associated with construction work, which is the next step for the project. The second key goal of the scope of work is to bring all major contracts to a state of execution readiness. Specifically, these contracts are the full process plant equipment package for the entire equipment package for the processing facility coming from one source, the site-wide electrical instrumentation control package, and the drilling contract. Those are the 3 major high-value contracts that we're focusing on now to bring clarity to. All 3 contracts are being scoped and priced to bring them up to date and ready to sign. Executing these contracts is an important step prior to launching the detailed construction work. The third key goal for the bridge engineering phase is to update the CapEx, OpEx and the financial analysis. The latest update to the capital cost estimate, operating cost estimates and financial modeling are from last October. As we are all painfully aware, the world is now a different place than it was then. The supply chain disruptions and inflationary pressures have caused pretty significant impacts in our own daily lives and equal impacts into the cost of construction as well. A key deliverable from the bridge engineering work will be up to the minute CapEx and OpEx estimates that are completed to a level of detail recognized by the debt and equity funding institutions planning to invest in the project. That's the biggest piece of the work that's ongoing. The current goal is to have the bridge engineering phase complete as quickly as possible to finalize these equity investments. That's where the bridge engineering phase and the project development work stands here today.

We had a number of questions that were e-mailed into us. Thank you for sending those questions in. We appreciate that very much. We had a number, you can well imagine, that we're along similar lines. So the first question we'd like to deal with is, number one, financing. What stages is that? And why is it taking so long? Those are my words summarizing many questions that came in on that theme. I've tried to cover the response to that question in the discussion that I've just been through. It is at a detailed negotiation stage. As you well know, the debt financing is in place, waiting for the equity solution, and the equity solution is in progress right now. The follow-on or a corollary question here is also around financing. It seems to be taking a long time. There appear to be delays. Can you address what might be causing those delays? Is it the potash industry? Is it the capital markets? Is it the technology? So I'd like to address this question. This is also a bit of a summary of several questions that arrived on this theme. I'd like to first address the technology side. The techniques that we're using have been reviewed by -- it's got to be 3 or 4 independent technical reviews by the banks and by equity investors. And the results of every technical review is that the techniques used are robust and in wide-scale use. Additionally, the Gensource team has seen as world-class and capable of executing the project. We hear talk about this as a potential problem in the mix, and I guess, I'm here to challenge that. We have a top-notch, world-class team, and our work has been reviewed by independent experts worldwide. There's no issue on this front. What about the other questions. Is it the potash industry? Is it the capital markets? And the answer is yes to both. The capital markets earlier this year, the public markets were in great turmoil. They remain that way right to today in a lot of respect. And it created conditions under which we believe it would have been damaging to attempt to close the financing. The potash industry is an overarching factor. I have said it before, and I don't mean to be repetitive, but the potash industry is opaque. It's not an openly traded commodity. Price discovery for those doing their detailed due diligence is very difficult. We have, within the project excellent price discovery, because of the involvement of HELM, our marketing partner. In their line of work, they see right through to the retail price. And with that intimate knowledge, we can work backwards and understand the net back price to the project. But outside investors, who know at the beginning very little about the potash industry, are used to seeing things like gold and nickel and silver that have openly traded exchanges, and potash is anything but that. And it causes a long stage of analysis of the industry and the understanding of the pricing structure within the industry before anyone can get comfort in how this work and the confidence in the pricing structures that, number one, are reported in the press, which are, in many cases, questionable; and number two, in the details they're presented with in terms of how they -- the pricing structure in the industry actually works. So those 2, the capital markets and the potash industry itself combined, we see as the major cause for delay in completing this. The next question was a good one that I covered a little bit. Again, it's on financing, and it's a question about CapEx and OpEx impacts in light of the current inflationary price environment. And as I mentioned, we've all seen it at the gas pump and at the grocery store over the last many months, the inflationary pressures that are royal in the world. Those same pressures impact the cost of materials, the cost of labor, the cost of the equipment that this project will use and have to pay for in the coming construction period. And that's the effort that's being undertaken right now, as I mentioned in the bridge engineering phase, is to essentially redo the entire CapEx and OpEx estimates to arrive at, up to the minute, clear understanding of what the pricing situation is for material and equipment and labor. And on top of that, to understand what's happening in the coming weeks and months as we move into a more definitive stage. Of course, until we can actually write contracts, sign contracts to execute the work, the pricing remains somewhat flexible. So we have to keep our eye on what's happening in the marketplace as we go because these things change these days, week-to-week and month-to-month. I would say, however, that what we are seeing is a slight dampening of that volatility. Back in the spring, we would see steel prices, and particularly stainless steel and duplex stainless steel pricing, moving around tremendously, almost day-to-day, certainly week-to-week. Those undulations have damped out. Things are more calm now. And we hope that it will continue to damp out and calm down even further into the fall and winter where we will be locking in our final pricing. So that -- there's no question, the project is impacted by CapEx to OpEx changes. We live in the world -- the entire world is impacted by these things. On the good side of that, certainly potash pricing has been improved. So from a financial analysis perspective, there's no real change to the project itself. But we are keeping our mind an eye very keenly on CapEx and OpEx impact as we go forward. And we are in direct contact with the relevant contractors and suppliers to make sure that they are keeping us up-to-date on almost a weekly basis as we go down this path. Next question was actually an interesting one, asking about project cash flow. Can you tell us what the annual EBITDA is and the cost to implement the announced second module? For this, I'd like to hand things over to Rob Theoret, who can discuss some information in this respect, understanding that we're not in a position to make definitive statements on these things at this time. Rob, can I ask you to jump in?

Yes, you bet. Thanks, Mike. Good afternoon, everyone. That was a very good question regarding project cash flow. And the way I'll answer it is that we want to make sure that we refer to the bible of engineering for this project, which is NI 43-101 report that we had issued several times and updated. And based on the operating numbers and the data that we have within that report, what does the EBITDA or essentially operating cash flow look like for the Tugaske project. I can tell you that if you -- if we were looking at a 20-year average potash price of $424 or $25 a ton on average for the last 20 years, if you multiply that converted to Canadian dollars, of course, $425 converts to about CAD 550 ton, multiply that by the number of tons that we're producing 250,000 tons. You're going to have a range of $130 million to $135 million in top line revenue growth. The operating costs at the Tugaske project are outlined in our corporate presentation and in the NI 43-101. But at the end of the day, to extract the potash crystallize it, put it in a form to sell and load it up onto a railcar for shipping, the cost of that process is about $105 a ton which includes royalties and some provincial taxes. So with that said, at historical USD 425 pricing, our EBITDA or our operating cash flow will range between $100 million to $110 million a year at the Tugaske project for 1 module. Now if you -- if we look at -- within current context, if we were producing potash today, we'd be looking at potash prices that are closer to USD 700 a ton, which converts to approximately CAD 800 and change, that would generate a top line revenue number of $220 million, less the operating costs, and your EBITDA or your operating cash flow will range between $180 million to $185 million. So it's a very high margin, a very robust project. And a question that's always asked and goes with this question here on EBITDA, what does the market value these types of cash flows? How do they value it? And in general, if you look at fertilizer companies or potash producers and you look at how much EBITDA they're generating or operating cash flow, they tend to trade or value those assets on a multiple basis. And on average, historical average, you would value that at 8x to 10x your EBITDA. So from a valuation perspective, you can do the math, and these assets are very, very valuable, and they continue on for an incredibly long time because of the nature of the resource that is nearly inexhaustible. The second part of the question is what is the cost to implement a second module? So in our previous announcements, we've identified the fact that HELM is looking to add another module to the mix into the future once we have the first one up and running. And the cost of a second module added to the first one, I don't have the exact engineered numbers, but it will approximately be 80% of the cost of a single module. And the reason for that is there is existing -- to set up a first module, there's infrastructure that needs to be invested in. And at the Tugaske site, we have -- the first module is sized from an infrastructure perspective such that it can handle 2 modules. So there's a little bit of upfront capital -- extra capital that is in the project currently to allow for a second module, but the second module, capital costs will decrease or be about 80% of the cost of the first module. And of course, there's operating synergies that you get to enjoy by adding a second module, and those operating synergies really increased has the operating cash flow or EBITDA that you'll see at the Tugaske project. And that's it for now, Mike. Thank you.

Thanks for that, Rob. Appreciate it. So we have one final question that we'd like to address here, and that is what is the outlook to get this done? That's kind of part and parcel of many of the other questions, too, is what's the forecast? And what we've learned is that forecasting is difficult in this situation. But what we do know is that the strength of the potash market and the current supply constraints provide a tremendous opportunity to accelerate our potential here for the strategic project and growth opportunities in general in the potash space. We know that Gensource, we believe, is leading the way. We are the leading candidate to take advantage of the situation. The team, which includes Gensource, our partners at HELM, and the debt providers and our current group of equity -- potential equity investors, is making exciting progress towards the goal that we all share, and that is to launch the Tugaske project into construction and ultimately into operation. Our goal is to complete this financing process this fall and launch into execution mode as quickly as possible. We know that you as shareholders are invested in that goal as are we, as a management team, significantly invested and aligned with shareholders in obtaining this goal. And we're excited about reaching that goal and confident of reaching that goal this fall, which will see the beginning of the change in the potash industry. That's the end of our questions today. Again, we appreciate everybody's time to join us. We appreciate the questions that were sent in, those are very helpful, and we look forward to the next call. Again, thanks for your time, and have a good day.