GrowMax Resources Corp. (TSXV: GRO) - Initiating Coverage ... · The remaining 8.4% is held by the...

Siddharth Rajeev, B.Tech, MBA, CFA

Anthony de Ruijter, BA

July 27, 2017

2017 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

GrowMax Resources Corp. (TSXV: GRO) - Initiating Coverage: Phosphate and Potash in Peru

Sector/Industry: Junior Resource www.growmaxcorp.com

Market Data (as of July 27, 2017)

Current Price C$0.10

Fair Value C$0.46

Rating* BUY

Risk* 5 (Highly Spec)

52 Week Range C$0.10 - C$0.24

Shares O/S 213,925,645

Market Cap C$21.39 mm

Current Yield N/A

P/E (forward) N/A

P/B 0.2x

YoY Return -58.3%

YoY TSXV -1.8% *see back of report for rating and risk definitions.

* All figures in C$ unless otherwise specified.

Investment Highlights

➢ GrowMax Resources Corp. (“GrowMax”, “company”) is focused

on becoming a leading producer of phosphate and potash fertilizer

products in Peru.

➢ Strong management team led by Abdel (Abby) Badwi, former

CEO of Bankers Petroleum, and Stephen Keith, former CEO of

Rio Verde Minerals.

➢ The company is advancing its Bayovar phosphate project to

production. The region is host to several phosphate projects,

including the 3.9 mmtpy Miski Mayo Mine brought into

production in 2010 by Vale (LSE: VALE).

➢ A Preliminary Economic Assessment (“PEA”) on the Bayovar

project completed in 2016 showed an after-tax Net Present Value

(“NPV”) at 10% of US$93 million, and an after-tax Internal Rate

of Return (“IRR”) of 16.5%, assuming 50% debt financing.

➢ The company currently has a market capitalization of $21.39

million and working capital of $41.2 million, indicating an

enterprise value of -$19.8 million.

➢ We are initiating coverage with a BUY rating and a fair value

estimate of $0.46 per share.

Risks

➢ The value of the company is highly dependent on phosphate and

potash prices.

➢ Exploration and development risks.

➢ The company has yet to achieve commercial production.

➢ The actual operating cost and economics may be different from

the PEA estimates.

➢ Exchange rate risks.

2017 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Background

Bayovar

The company was formed in 2005 as a private company named Americas Petrogas Inc. The

company then went public in 2008 through a reverse takeover of a capital pool company

listed on the TSX Venture Exchange. Its original focus was on oil and gas assets in Latin

America, primarily Argentina. Revenues had reached a peak of $63 million in 2013.

However, the majority of the company’s oil and gas assets were subsequently divested in

August 2015 for approximately $88.3 million. Following the transaction, the company had to

pay out $6.73 million in cash, and 4.96 million shares, to certain dissenting shareholders in

return for 22.77 million shares of the company.

Also in 2015, significant changes in management and board composition occurred with Abdel

F. (Abby) Badwi appointed as the Executive Chairman of the Board of Directors. The

company’s name was changed to GrowMax Resources Corp. in August 2016 to reflect

its new focus. As part of the new strategy, fertilizer development expertise was added to

management and board in the form of Stephen Keith, appointed as President in January 2017,

and John van Brunt and Steven Paxton, both appointed as directors in June 2017. Other

changes in management included the addition of Jamie Somerville as Executive Vice

President (October 2016) and Lloyd Wiggins as Chief Financial Officer (April 2017).

GrowMax’s remaining oil and gas assets were sold in November 2016 for US$5.0 million,

including US$3.0 million of contingent consideration.

The company’s vision now is to become a leading producer of phosphate and potash fertilizer

products in Peru.

Ownership

The Bayovar property is 100% owned by Americas Potash Peru SA (“APPSA”), which is

fully owned by privately held GrowMax Agri Corp. GrowMax Resources Corp. owns

approximately 91.6% of GrowMax Agri Corp. The remaining 8.4% is held by the Indian

Farmers Fertiliser Co-operative Limited (IFFCO) and its affiliates. IFFCO is a large buyer,

processor and distributor of fertilizer raw materials and products, including phosphate and

potash.

Source: Company


APPSA, formed by the company in 2008 in Peru, entered into an option to acquire the project

from the Peruvian government in the same year. The company then formed a subsidiary in

Canada, GrowMax Agri Corp., in 2009, to hold 100% of APPSA. In 2009 and 2010,

management attracted IFFCO to invest US$10 million for a 20% interest in GrowMax Agri.

However, as GrowMax Resources has been exclusively funding GrowMax Agri Corp. since

then, IFFCO’s interest has been diluted to 8.4% and could be diluted further without

additional capital contributions. IFFCO has also made additional equity investments for

US$32.6 million between 2009 and 2012.

In May 2014, APPSA exercised the option to acquire 70% of the Bayovar property, which

was subsequently increased to 100% in 2016. The total purchase price for acquiring the

additional 30% interest was US$9.2 million, of which, US$3.7 million has been paid to date.

Of the remaining US$5.5 million liability, US$1.5 million is due in the second quarter of

2018, and US$4.0 million is due upon the commencement of commercial production of

phosphate or Single Super Phosphate.

Remaining commitments:

➢ complete a revised economic study by March 2018;

➢ commence production by May 2019;

➢ payment of US$0.48 million in cash over two years to a Peruvian state-owned

company (US$0.24 million paid to date),

➢ produce over 70% of the annual sales volume stated in the revised economic study,

and

➢ invest at least US$19.80 million (US$3.90 million completed) in the project from May

2016 to May 2019

The project is subject to a royalty of US$33.00 per tonne of potash product sold due to both i)

Activos Mineros SAC (AMSAC), a state-owned entity and ii) the local community fund

where the project is located. In addition, production from the property would be subject to

standard Federal Mining Royalties for non-metallic mining, in particular, the Federal

Modified Mining Royalty (MMR).

Location, Accessibility and Infrastructure The 227,000 gross acre Bayovar project, comprising 16 contiguous mining concessions, is

located in the Sechura Desert in Sechura Province in northwestern Peru. It is approximately

900 km north of Lima, and 200 km south of the Ecuador border. The closest towns are

Sechura (65 km) and Piura (90 km).


Source: Company

The project is surrounded by existing infrastructure, and can be accessed year-round via

paved highways. It is approximately 1.5 hours by car via the PanAmerican Highway from

Piura. Piura is approximately 1.5 hours by flight from Lima. Approximately 40 km away is

the Sechura Bay on the Pacific coast, which is host to the ports of Bayovar and Paita (see

the map above).

The following image shows the project’s landscape.


Source: Company

The region is host to several phosphate projects:

➢ The Bayovar or Miski Mayo Phosphate Mine commenced operations in 2010, and

is currently producing approximately 3.9 Mt per year of phosphate rock. This project,

which holds one of the largest phosphate deposits in South America, is located 25 km

southwest of GrowMax’s Bayovar project. The development of the mine was operated

by Vale, which originally held a 100% interest. However, it sold 25%, and 35%,

economic interests in the project to Mitsui, and Mosaic, respectively, in 2010, for

US$660 million. Vale recently announced plans to sell its remaining interest to

Mosaic as part of a US$2.5 billion divestment of its fertilizer business. As a result,

Mosaic is expected to own 75% of the mine going forward, with Mitsui retaining

25%.

➢ Fosfatos del Pacifico S.A. / FOSPAC’s project is located approximately 16 km

southwest of GrowMax’s Bayovar project, between GrowMax’s Bayovar 7 block and

the Miski Mayo mine. The project was owned 70% by Cementos Pacasmayo (a public

Peruvian-listed cement company) and 30% by Mitsubishi. A Feasibility Study on the

project showed a mine life of 20 years based on 130 Mt of measured and indicated

resources at 17.5 wt.% P2O5.

➢ Two Peruvian private companies, Fosyeiki and Agro Sechura, operate smaller

projects currently producing under 0.1 Mt per year.

➢ Focus Ventures’ (TSXV: FCV / market capitalization of $9.3 million) project is

located directly south of GrowMax’s Bayovar project. A 2016 pre-feasibility study on

the project showed a production rate of 1 Mtpa producing 24% P2O5 product and

28% P2O5 phosphate rock concentrate.


Phosphate

Deposit

GrowMax’s primary focus is on the near-surface phosphate deposits, and the potash brine

reservoir and evaporite deposits.

The phosphate bearing units are situated in the upper part of the Miocene strata, primarily

within the Zapallal Formation.

Geological Model Stratigraphic Sequence

Source: Technical Report

The phosphate deposit is a sedimentary deposit consisting of stratiform bodies with

alternating mineralized and barren zones. The thickness ranges from under 1m to over tens of

meters for a zone. The overall thickness of mineralized and barren sequence can be over

several hundred meters. The deposits typically cover large areas, extending for tens or

hundreds of kilometres.

Phosphate was first discovered in the Bayovar-Sechura region in 1955 during oil and gas

drilling.

GrowMax drilled 125 holes focused in four areas (spacing 400m to 1,600m), namely the

Bayovar 5, Bayovar 6, Bayovar 7 and Bayovar 8 concessions. Depths averaged 110m, and

ranged from 52 m to 165 m. The drilling showed that the phosphorite beds have good

thickness and grade continuity across the concession areas.


Drill Hole Location Map

Source: Company

A significant portion of the project area remains undrilled.

The following table summarizes the NI43-101 compliant resource on the project, which states

29.7 Mt of measured (12% P205), 149.3 Mt of indicated (12.5% P2O5), and 430.1 Mt of

inferred (13.6% P2O5) resources.


A PEA on the phosphate project was completed in October 2016 by WorleyParsons.

Golder Associates prepared the mine plan and the above-mentioned resource statement. The

focus of the PEA was on the Bayovar 7 block.

The PEA was based on a 1 Mtpa open pit mine and processing plant of beneficiated

phosphate rock over a 20-year mine life. The ore will be mined from various layers. The

mined ore will undergo scrubbing and de-sliming to produce a 28% P2O5 product, which will

undergo froth floatation to produce a higher grade 30% P2O5 concentrate. The net recovery

rate is 80%. The following chart summarizes the operations:


Source: Technical Report

The project’s power supply will be from the national power grid. Natural gas will be used for

drying, and seawater will be used for processing.

The upfront CAPEX estimate is US$279 million. The project has an after-tax NPV (no

leverage) at 10% of US$71 million with an after-tax IRR of 13.3%. The NPV estimate

increases to U$93 million, and the IRR increases to 16.5%, assuming 50% debt

financing.

Source: PEA


The operating cost estimate is US$71.5/t, including US$44.9/t (mining), US$33/t

(beneficiation), and US$23.7/t (G&A).

The following table summarizes the cash flows:

Source: PEA

According to the company, a survey of potential Peruvian off takers indicates that the local

demand for phosphate rock concentrates is likely to grow from the current 200,000 tpa to

300,000 tpa by 2022. Therefore, the PEA assumed that 70% of the products will be exported

and the remaining 30% will be sold domestically. The following table shows the pricing

assumptions for the 30% P2O5 phosphate rock:

Source: PEA

We believe the prices used are reasonable as the retail prices of DAPR to farmers in Peru

have remained stable at approximately US$320 per tonne in the past few years (Source: M3

and Golder).


The NPV and IRR’s sensitivity to product prices is shown below:

As mentioned earlier, Focus Ventures completed a PFS on its Bayovar 12 project in 2016.

The PFS showed a production rate of 1 Mtpa producing 24% P2O5 product and 28% P2O5

phosphate rock concentrate. The PFS was based on proved and probable reserves of 58.8 Mt

(dry basis) at a grade of 12.94 wt. % P2O5. The initial CAPEX estimate of the project is

US$167 million and the after-tax NPV at 7.5% is US$458 million. The study used an average

LOM product price of US$145 – US$185/t (24% - 28% P2O5) and an operating cost of

US$69.8/t. This compares to an average LOM product price of US$147/t and an operating

cost of US$93.9/t for GrowMax’s project. The higher CAPEX and operating cost estimate of

GrowMax’s project is because its PEA was based on the sale of a higher-grade product (30%

P2O5).

We believe Focus’ PFS is not comparable to GrowMax’s PFS as the Focus PFS was based on

premium pricing assuming 100% of its production (1 Mtpa) will be sold domestically. We

consider this to be an aggressive assumption as the current domestic demand for rock

phosphate is only 200,000 tpa (as mentioned earlier).

GrowMax is currently considering advancing the project to PFS stage, the budget of which is

approximately US$4.5 million, which primarily includes US$1.40 million for the study, $1

million for metallurgical testing, US$0.80 million for infill drilling, and US$0.55 million for

exploratory drilling.

The company is also working towards submission of permit applications, and completion of

engineering designs in 2017, that could allow for construction and commencement of pilot

production from a small-scale pilot mine in 2018. This will allow the company to better

understand development and marketing options for a larger development, including the option

to sell phosphate rock for direct application (DAPR).

As an additional potential option to create value from its phosphate resources, GrowMax is

considering a project to produce and sell Single Super Phosphate (SSP). SSP is produced by

mixing phosphate rocks with sulfuric acid. The other common types of end-products sold to

farmers are DAP (di-ammonium phosphate) and MAP (mono-ammonium phosphate) – which

are produced by mixing phosphate rock concentrates with ammonia.

Bayovar’s phosphate rock is considered to be suitable for DAPR as it is highly soluble.


Source: International Fertilizer Industry Association / GrowMax

The key for producing SSP is the availability and cost of its inputs - phosphate rock and

sulfuric acid. Sulfuric acid is a readily available commodity in Peru. The phosphate rock can

either be purchased from third-parties and/or from the company’s own Bayovar property. As

the manufacturing process is simple, this option is a low CAPEX alternative that will

allow the company to quickly advance the project to production. Management

contemplates a 60,000 tpy operation with a CAPEX estimate of approximately US$15

million. The company is currently conducting market studies to confirm SSP demand in the

region and the cost of inputs.

Source: Company


Potash Deposit

A NI 43-101 resource estimate was calculated in 2014 for the potassium chloride (KCl)

resources mainly on the Bayovar 6 and 8 blocks.

Source: Company

In 2016, GrowMax commenced evaluating the viability of producing Sulphate of Potash

(“SOP”) from carnallite/kainite produced through solar evaporation of brine. SOP is a

premium potash fertilizer product. Data from the Government of Peru shows that SOP

imports in 2016 averaged US$600/tonne. Flotation tests conducted at the Saskatchewan Research Council (SRC) using samples of

kainite and carnallite obtained from pilot pond operations at the Bayovar project confirmed

the viability of producing SOP.

The company is currently preparing to launch a 5,000 tonne per year SOP pilot project. An

Environmental Impact Assessment (EIA) was submitted to commence construction.

Management expects to commence construction of the evaporation ponds by the end of the

year. The estimated CAPEX is US$19.8 million. The operating expense is estimated at

US$2.1 million per year. Management expects to commence production by the end of 2018.

The following chart summarizes the various projects described above:


Outlook on

Phosphate &

Potash

Source: Company

Management expects to spend US$10 million on CAPEX in 2017, and US$3.4 million on

G&A in 2017.

GrowMax is also in discussions with its partner, IFFCO, for potential off-take agreements.

There are two main fertilizer segments: inorganic and organic fertilizers. Inorganic fertilizers

are processed from deposits in the ground, water, or atmosphere. Potash, phosphate, and most

ammoniums are examples of inorganic fertilizers. Direct application phosphate rock is

classified as organic.

Organic fertilizers are the waste by-products of biological digestive systems. Examples of

organic fertilizers include manure, guano, urea, and composted plants. Inorganic fertilizers

generally have lower costs and a steadier nutrient release rate as compared to organic

fertilizers, and are generally more favourable. The only mitigating factor to this is that

inorganic fertilizers can contribute to crop burn if over-administered whereas this risk does

not exist with organic fertilizers.

The demand for fertilizers is influenced by two major factors: growing demand for grains and

decreasing amount of available arable land. The demand for grains is influenced by

population growth and GDP growth. The United Nations predicts that the world population

will rise to 9.2 billion by 2050 from 7.43 billion in 2016. This growth will require global food

production to rise by up to 70%. In addition, increasing urbanization and population growth

has decreased the amount of land available for growing crops. These two factors have

created a growing need for fertilizers; increasing amounts of food need to be grown on a

decreasing supply of land.

Fertilizers are a critical element in global agricultural production, with between 40% and 60%

of the world’s food supply being attributable to the role of fertilizers (The Fertilizer Institute).


Fertilizers accelerate plant growth and crop yield by supplementing base levels of three key

nutrients: nitrates (N), phosphates (P2O5) and potash (K2O). A breakdown of annual

consumption of each nutrient is given in the table below. Note that the consumption of

fertilizers is increasing across all nutrients. The data in the table below indicates that nitrate

fertilizers are expected to account for 59.5% of total fertilizer demand in 2017, whereas

phosphates and potash are expected to make up 22.6% and 17.8%, respectively. The global

demand for all fertilizer nutrients is expected to grow at a CAGR of 1.84% from 2015 to

2020. The CAGR of phosphates and potash are 2.19% and 2.44%, respectively.

World demand for fertilizer nutrient use (thousand tonnes)

Source: Food and Agriculture Organization of the United Nations (2017)

The following table gives a regional breakdown of the demand projections for phosphate

fertilizers. Latin America and the Caribbean are forecasted to see a CAGR in phosphate

demand of 4.03% through 2020, double the forecasted CAGR of the global phosphate

demand.

Demand Projections (thousand tonnes)


The 2017 demand for phosphate fertilizers in Latin America and the Caribbean make up 16%

of the global demand.



Moving to the supply side, China is the largest producer of phosphate, followed by Morocco

and the U.S.

2016 Production

Source: USGS

With regard to reserves, Morocco and the Western Sahara are estimated to hold 73% of the

global reserves.


Source: USGS

The following table shows forecasts for the global annual production of fertilizers, as well as

a breakdown by nutrient. The global supply of all fertilizers is expected to grow at 2.15%,

whilst the estimated CAGR of phosphates and potash are 2.28% and 2.6%, respectively.

World Supply (thousand tonnes)


The following table gives a regional breakdown of the supply projections for phosphate

fertilizers. Latin America and the Caribbean are forecasted to see a CAGR in phosphate

supply of 1.66% through 2020, implying a slower growth in production relative to

consumption.

2015 2016 2017 2018 2019 2020 CAGR

World 47424 48394 49558 51190 52361 53078 2.28%

Africa 7141 7220 7933 8567 8955 9402 5.66%

N. America 8013 8013 8013 8013 8013 8013 0.00%

Latin America & Caribbean 1871 1880 1880 1962 1962 2032 1.66%

Asia 25157 26026 26477 27393 28177 28377 2.44%

Europe 4763 4774 4774 4774 4774 4774 0.05%

Oceania 480 480 480 480 480 480 0.00%

Source: USGS


The 2017 supply of phosphate fertilizers in Latin America and the Caribbean made up 3.8%

of the global supply.


The table below outlines the expected demand/ supply gap both globally and regionally.

Though there is a positive balance in the global phosphate supply, the South American market

is expected to be in a deficit.

Supply Surplus (Deficit), thousand tonnes


Expected nutrient balance in 2020



The global economic crisis resulted in a significant decrease in phosphate prices in 2009 from

a 2008 high of $430/tonne to a 2009 low of $90/tonne. In 2010, fertilizer prices recovered,

and by Q4-2011, prices hit $200/tonne. Prices have since then softened to the current price of

approximately US$93/t.

The following chart shows the price of phosphate rock and related commodities in Peru.

Source: SUNAT, Agrodata Peru, GrowMax, World Bank

Based on the projected deficit in the South American supply, we have a positive outlook on


Management

phosphate prices in the region.

Management and board members hold and/or control 12.73 million shares, or 6% of the total

outstanding shares, excluding the shares held by IFFCO, for which Rakesh Kapur is the

representative on GrowMax’s Board.

Brief biographies of the management team and board members, as provided by the company,

follow:

Abdel (Abby) Badwi - Chief Executive Officer, Executive Chairman and Director

Abdel (Abby) Badwi was appointed as the Chief Executive Officer and Executive Chairman

of GrowMax Resources in November 2015. Mr. Badwi is an international natural resources

executive and professional geologist with more than 40 years of experience in the exploration,

development and production of natural resources in North America, South America, Europe,

Asia and the Middle East. Mr. Badwi was previously Vice Chairman of the board of Bankers

Petroleum Ltd., prior to which he was President and Chief Executive Officer of the same

company. He is currently also a director for Arpetrol Inc. Previously, he was President and

Chief Executive Officer of Rally Energy Corp., an oil and gas company with operations in

Egypt, Pakistan and Canada, President and CEO of Geodyne Energy Inc., President and COO

of Carmanah Resources Ltd., and Vice President International Exploration of Sceptre

Resources Limited. Mr. Badwi is a geology graduate of the University of Alexandria, Egypt.

Stephen Keith - President

Mr. Keith is a registered professional engineer and an accomplished senior executive with 20

years in the natural resources sector, with a specific focus on mining and finance. Mr. Keith

has worked as a geological engineer, an investment banker and an executive for several public

and private companies. Most recently, he held the position of Managing Director of Fertoz

Ltd., a company focused on organic phosphate production in Canada and fertilizer

distribution in Australia. Prior thereto, he was the President and Chief Executive Officer of

Rio Verde Minerals, a fertilizer company focused on developing potash and phosphate assets

in Brazil. Mr. Keith also previously served as Vice President Investment Banking at Thomas

Weisel Partners, working on natural resources transactions in the mining and energy sectors.

He has a Bachelor of Science in Applied Science with a major in Geological Engineering

from Queens University in Canada, and a Master of Business Administration in International

Business, with Latin America focus, from Schulich School of Business at York University in

Canada. Mr. Keith is fluent in Spanish.


Jamie Somerville - Executive Vice President

Jamie Somerville is a former financial analyst and consultant with over 15 years experience.

Mr. Somerville spent almost 10 years working as an institutional equities analyst covering

mainly Canadian-listed oil and gas exploration and production companies (E&Ps) with

international operations. For a majority of that time he was Vice President and Director at TD

Securities, prior to which he worked at Genuity Capital Markets (now CanaccordGenuity),

and MGI Securities. Prior to moving to Canada, Mr. Somerville spent over 5 years working

for Wood Mackenzie, a firm of global energy consultants, based in the UK. Mr. Somerville is

a graduate of the University of Strathclyde in Glasgow with a MEng (with distinction) in

Mechanical Engineering with Financial Management.

Lloyd Wiggins - Chief Financial Officer

Mr. Wiggins is a Chartered Accountant, Chartered Director and an experienced finance

executive with more than 35 years of professional experience. Prior to his appointment at

GrowMax in April 2017, Mr. Wiggins was the CFO of Petrowest Corporation, a publicly

listed, multifaceted energy services company with revenues exceeding $200 million. Prior to

that, Mr. Wiggins served as CFO and in other senior financial and accounting positions with

multiple public and private entities including Movie Distribution Income Fund, TGS North

American Real Estate Investment Trust, and the Hees/Edper Group of Companies. Mr.

Wiggins received his Bachelor of Commerce degree with an Accounting Major from the

University of Saskatchewan, is a Chartered Accountant with the Chartered Professional

Accountants of Alberta, and obtained his Chartered Director designation from the Directors

College (a joint venture between McMaster University and The Conference Board of

Canada).

Edward Tapuska - Corporate Secretary

Edward Tapuska is a Partner at law firm Osler, Hoskin & Harcourt LLP. He has practised

corporate commercial law for over 25 years, with a focus on public and private corporate

clients involved in the natural resources sector. He has considerable experience in a wide

variety of securities transactions (IPOs, private placements, M&A and debt equity financings)

and international and domestic oil & gas transactions (farm-out agreements, joint ventures,

and property acquisitions). Mr. Tapuska also has extensive experience with mergers &

acquisitions; both domestic and foreign, including corporate restructuring and

reorganizations, take-over bids and plans of arrangement. He advises on all aspects of

corporate governance, including the creation of corporate policies regarding audit committees

and insider trading, reserves committees, compensation committees and other matters.

John Van Brunt - Director

John Van Brunt is a chemical engineer and fertilizer industry executive with more than 40

years of experience in the production and distribution of agricultural products. He was a

director of Rio Verde Minerals Development Corporation (TSX:RVD) from 2011 to the

spring of 2013. Mr. Van Brunt was the Chief Executive Officer of Agrium Inc. (TSX:AGU)

from 1993 until his retirement in September 2003. Prior thereto, he was the President of

Cominco Fertilizers from 1991 to 2003. He has served on the Executive Committee of the

International Fertilizer Association (“IFA”) located in Paris between 2003 and 2005 and as


the President of the IFA from 2003 to 2005. Mr. Van Brunt has also served on the board of

directors of several private and public companies involved in the fertilizer industry.

Steven Paxton - Director

Steven Paxton is a former senior executive with The Mosaic Company and predecessor

companies and has over 35 years of global fertilizer sales and marketing management

experience. Mr. Paxton is currently a director of JDC Phosphates, a private phosphate

technology development company since March 2014. Prior thereto, Mr. Paxton was Vice

President International Sales for The Mosaic Company between October 2004 and June 2010

during which time he also served as President and Director of the Phosphate Chemical Export

Association (PhosChem). During his 35-year tenure as an industry executive, he also served

on several boards of directors including the Canadian Potash Export Association, Coromandel

Fertilizer Pty. Ltd, Chinhae Chemical Company and IMC Pacific Limited. He served as a

phosphate industry consultant to the United States Trade Representative for WTO

negotiations with China. Mr. Paxton graduated with a Bachelor of Science in Marketing from

Indiana State University in 1974, and from the Advanced Management Program at

Northwestern University’s Kellogg Graduate School of Business in 1998.

Ron Ho - Director

Ron Ho, CA, CFA is currently the Vice President, Finance at Sandstorm Gold Ltd. and

Sandstorm Metals & Energy Ltd., responsible for sourcing and completing volumetric

production payment financing transactions in the natural resource industries. Prior thereto,

Mr. Ho was the Chief Financial Officer of SNS Silver Corp. and previously was an

institutional equity research analyst at Raymond James Ltd., a full service North American

investment dealer. Mr. Ho obtained his Chartered Accountant designation while employed at

Deloitte LLP (formerly Deloitte & Touche LLP), where Mr. Ho provided risk management

and assurance services for numerous clients across several industries, and has been awarded

the Chartered Financial Analyst designation.

Rakesh Kapur - Director

Rakesh Kapur is the Joint Managing Director of Indian Farmers Fertiliser Co-operative Ltd.

(“IFFCO”), which is the largest fertilizer cooperative in the world with a turnover of US$4.5

billion (2015 – 16). Mr. Kapur is an ex-Indian Revenue Service Officer who holds a B. Tech.

degree in Mechanical Engineering from the Indian Institute of Technology (IIT), New Delhi

with a Post-Graduation degree in Management. During over 40 years of his work experience,

Mr. Kapur held various senior positons within the Government of India, including serving as

Director in the Ministry of Chemicals & Fertilizers and Joint Secretary, Telecom Regulatory

Authority of India prior to joining IFFCO in 2000 as Finance Director. He is currently

Director on the boards of six Indian and four international companies apart from being the

Chairman of IFFCO-MC Corp. Pxt Ltd., and Managing Director of IFFCO Kisan SEZ Ltd.

and IFFCO Kisan Sanchar Ltd. He is also the Chairman of the Fertiliser Association of India

(FAI) and of the International Fertilizer Industry Association (IFA).

Carlos Lau - Director

Carlos Lau is an entrepreneur with 45 years of experience conducting business in South

America. He is the President of Electra Holdings and the former Executive Chairman of


GrowMax Resources. He was a co-founder of both GrowMax Resources Corp. (then

Americas Petrogas) and its subsidiary GrowMax Agri Corp.

Ross C. McCutcheon - Director

Ross C. McCutcheon is a lawyer engaged in a business law practise with particular emphasis

on real estate, shareholder disputes, environmental, natural resource, trust and estate matters.

From 1976 to April 2013, he was the managing partner of the Vancouver law firm, Maitland

& Company, which firm focused its practice on serving entrepreneurs throughout the World.

Mr. McCutcheon has served on projects in more than 60 countries. Since May 2013, Mr.

McCutcheon has continued to practice law advising clients in Europe, Asia, South America,

the Middle East and Southeast Asia. During his 40 years of practising law, Mr. McCutcheon

has served as a director or officer, or advised companies, engaged in most sectors of the

economy, including, recycling; property development; construction; high technology; fishing

and fish farming; mineral exploration and development; oil and gas exploration and

development; natural resource and film related tax shelters; advice to charities; and individual

trust and estate planning, administration and litigation.

Our net rating on the company’s management team is 4.25 out of 5.00 (see below).

The company’s board has seven members, of which, five are independent. We believe

that the Board of Directors of a company should include independent or unrelated directors

who are free of any relationships or business that could materially interfere with the director’s

ability to act in the best interest of the company. An unrelated/independent director can be a

shareholder. The following table shows our analysis on the strength of the company’s board.


Financials

Valuation &

Rating

At the end of Q1-2017 (ended March 31, 2017), the company had cash and working capital of

$46.39 million and $46.64 million, respectively. We estimate the company had a burn rate

(cash spent on operating and investing activities) of $1.01 million per month in the first three

months of 2017. The following table summarizes the company’s liquidity position:

We estimate the company currently has 8.15 million options outstanding (weighted average

exercise price of $0.68 per share) and 2 million warrants (weighted average exercise price of

$0.25 per share) outstanding. At this time, none of the options or warrants are in-the-money.

Our Discounted Cash Flow (“DCF”) valuation on the phosphate project was primarily based

on the 2016 PEA. The key difference is that we have used a 11.5% discount rate, which is the

typical rate we apply for development projects in similar stages. The product pricing,

operating and capital cost estimates in our model are in line with the PEA. We believe our

model is conservative because, as mentioned earlier, management is currently evaluating the

potential to quickly advance the project to production through a smaller 60,000 tpy operation

with a CAPEX estimate of just US$15 million. Our models currently do not capture this near-

term upside potential.

Our fair value estimate on GrowMax’s shares is $0.46 per share. The following table shows a

summary of our valuation:


Risks

The sensitivity of our valuation to product pricing and discount rates is show below:

For conservatism, we have not included a valuation on the potash deposit at this time because

an analysis of the pilot project (5,000 tonnes per annum with an estimated CAPEX of

US$19.8 million) does reflect the project’s true potential.

In summary, we believe GrowMax’s shares are very undervalued based on our conservative

valuation models. We are initiating coverage on the company with a BUY rating and a

fair value estimate of $0.46 per share.

We believe the company is exposed to the following key risks (not exhaustive):

➢ The value of the company is highly dependent on phosphate and potash prices.

➢ Exploration and development risks.

➢ The company has yet to achieve commercial production.

➢ The actual operating cost and economics may be different from the PEA estimates.

➢ Exchange rate risks.


As with most junior resource companies, we rate Growmax’s shares a risk of 5 (Highly

Speculative).


Fundamental Research Corp. Equity Rating Scale:

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk

Hold – Annual expected rate of return is between 5% and 12%

Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.

Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry.

The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is

conservative with little or no debt.

2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive

to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt.

3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and

coverage ratios are sufficient.

4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a

turnaround situation. These companies should be considered speculative.

5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products.

Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding.

These stocks are considered highly speculative.

Disclaimers and Disclosure

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and

opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness.

There is no guarantee that our forecasts will materialize. Actual results will likely vary. FRC owns shares of the subject company. The Analyst does not own shares of the subject company. Fees were paid by GRO to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure

independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct.

Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. To further ensure independence, GRO has agreed to a minimum coverage term including an initial report and three updates.

Coverage cannot be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then

made available to delayed access users through various other channels for a limited time.

The distribution of FRC’s ratings are as follows: BUY (71%), HOLD (8%), SELL (5%), SUSPEND (16%).

To subscribe for real-time access to research, visit http://www.researchfrc.com/subscribe.php for subscription options.

This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and

uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services;

competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in

the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or

changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent

updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS

INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT

ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S

RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR

UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a

complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared

unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit,

including citing Fundamental Research Corp and/or the analyst, when quoting information from this report.

The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity

in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.

GrowMax Resources Corp. (TSXV: GRO) - Initiating Coverage ... · The remaining 8.4% is held by the...

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