A Proven MicroCap Strategy: Bottom Fishing Deeply Discounted, Cash Rich Companies

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Growmax Has Net Cash Near $38 Million but Trades at HALF that. It Requires Patience, but Cash is Cash (when the burn rate is controlled)

Liquidity on Growmax Resources (GRO:TSXV 9 cents) remains very good near 9 cents. In theory, even in light of the frustrations with this company, 9 and 9.5 cents appears to be very attractive risk.

For the past year GRO has been sitting on a large war-chest of cash worth close to $40 million CDN. Worth twice what the share price trades at, yet the stock goes no where. It seems like a long-term retirement project for senior management and their board of directors.

Given this track record of complacency, the most logical solution is to sell off assets and liquidate the company by paying out a lucrative cash dividend.

We have followed this company off and on for the past two years (hoping they would wind it up or make a material acquisition) but that never happens. I believe they are in no rush because they can draw wages and benefits without assuming the risk or hassle of operating a “real” company. Its a shame the same board keeps being re-elected. But they do.

So as much as I want to throw in the towel on this, we are waiting it out. In theory GRO is a decent speculation at 9 or 9.5 cents. But that depends upon whether they can be trusted to do what is right for ALL shareholders – not just themselves.

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Growmax Resources (GRO:TSXV 9 cents)

www.growmaxcorp.com

Corporate Presentation:

https://www.growmaxcorp.com/sites/1/files/documents/growmax-corporatepresentation-may_2018.pdf

Shares Outstanding: 214 million (insiders 21%)

NET Cash & Receivables to March 31: $38 Million (18 cents per share) *

Net Cash Calculation includes $38.5 Million Cash + $4M other current assets – $4.2 Million current debt. = $38.3 Million or 18 cents per share.

BALANCE SHEET NOTES:

Other current assets: In 2016 Growmax sold energy assets in Argentina and $4M CDN is owed as a current receivable.

The Company’s restricted investments of $6.4 million relates to a US$5.0 million performance bond posted for commitments related to the Bayovar Property in Peru. This bond should not be factored into available cash or receivables. Other non-current assets relate to value-added tax (“VAT”) payments made in Peru and should also be ignored.

Non-current payable to Peruvian Group: January 2016 Growmax acquired the remaining 30% beneficial interest in the Bayovar phosphate Property from a Peruvian group. A total of $3.6 million CDN is currently outstanding but a large percentage of that is only payable following commercial production from a Bayovar property – and they are likely several years from that scenario.

Under non-current liabilities, the deferred payments of $7.4 million is also associated with their Bayovar phosphate property being in production. That is currently not a realistic scenario (at least for 2018/19) so this liability (for the most part) can be ignored.

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Growmax continues to focus on South America – which makes sense (IF) they can make material acquisitions that truly rebuild shareholder value. Time will tell but here is insight on that market.

THE SPECIALTY FERTILIZER MARKET IN LATIN AMERICA

Significant premiums are paid for specialty fertilizers in Peru. The country exports a huge amount of fertilizer… but oddly they also import a large amount (which is subject to significant taxation). For producers “within” the country, there are significant growth opportunities.

Peru produces asparagus, potatoes, maize, rice and coffee but they also supply half the world’s quinoa and have 330,000 hectares of organic crops. They are one of the world’s largest producers of organic cacao, organic coffee, and organic bananas. These crops ALL require specialty fertilizer that need to be certified organic.

In addition to local consumption (31 million people), Peru agricultural exports are forecast to rise by 70% between 2017 and 2021. The food demand across the entire region is very high. Latin America has a population of 640 million people with 204 million in Brazil and 121 Million in Mexico.

RELEVANT NOTES FROM THEIR ANNUAL MD&A RELEASED APRIL 13TH

PERU/LATIN AMERICA

The key focus areas for 2018 and 2019 include the continued review and optimization of the Company’s existing projects in Peru and entering the high growth Peruvian fertilizer market. The Company is also assessing opportunities to add additional assets to the Company’s portfolio in high growth, high demand jurisdictions in Latin America. The Company’ overall mission is to become a leading producer of fertilizer products, starting in Peru and growing internationally within Latin America. To accomplish this, GrowMax Resources previously set five key drivers:

  • Commence with small production of specialty fertilizers, targeting high margin products in Peru from the Company’s existing projects;
  • Organically grow the Company’s existing assets as product quality is proven and sales force grows;
  • Preserve GrowMax Resources’ world-class, strategically located phosphate and brine assets in the Bayovar basin, Peru;
  • Leverage the Company’s balance sheet and experienced Board of Directors and management team to consolidate junior fertilizer assets in Latin America, targeting projects with favourable margins and generating cash flow earlier than cash flow expected to be generated from the Company’s existing assets; and
  • Invest in the future of agriculture.

The Opportunity: International Fertilizer Market and Peruvian Fertilizer Market Statistics

GrowMax Resources’ strategic location in Peru provides it with access to favourable domestic markets that do not presently exist internationally. Prices for common fertilizers in Peru are often materially higher than prices for comparable products in other markets which don’t import the majority of their fertilizer needs. The majority of the fertilizers used in Peru are imported and incur transport, distribution, marketing, and other costs in order to reach the Peruvian agriculture areas which utilize these fertilizers.

As a result of the increasing demand for these products in Peru, the Company expects these pricing premiums to be maintained and potentially increase going forward. Furthermore, Peru is experiencing significant agricultural export growth, while at the same time importing the great majority of its fertilizer needs. As such, the Company is looking to focus on nearer-term opportunities to generate cash in this high-growth, high-margin, stable jurisdiction.

International phosphate prices have been in decline in recent years, which is generally attributed to the oversupply of phosphate fertilizer from China, as well as capacity growth in other parts of the world, such as Egypt and Morocco. Although the economic drivers differ in the potash market, the dynamics are similar. As a result, fertilizer companies have significantly underperformed in the market, and junior development companies’ ability to raise capital has been significantly constrained.

Addressing the Opportunity: Corporate Strategy Update

Considering the downward pressure on international phosphate and potassium fertilizer prices, the economics for building a 1 Mt per year mine for an export-driven phosphate project are not optimal today. In response, GrowMax Resources, through its pre-sales and pre-marketing focus in recent months, has identified and is assessing a nearer-term, more attractive market within Peru. The Company is assessing the viability of taking advantage of this niche market by commencing with small scale production of specialty fertilizers that can be sold to local and regional markets. This strategy would allow GrowMax Resources to organically grow its assets as product quality is proven and a sales base is firmly secured. Additionally, advancing work on the Bayovar Property would ensure that the Company’s world-class assets, located in the Bayovar basin, are secured and construction-ready for when global markets rebound.

In addition to streamlining its current activities, GrowMax Resources is actively looking at further opportunities and assets in the mining and fertilizer sectors in Latin America to utilize its attractive balance sheet and leverage its strengths into new opportunities moving forward.

Potash Brine Project and Phosphate Project Update

GrowMax Resources is currently reviewing and assessing the opportunity to improve project economics on both the potash brine project and the phosphate project. For the phosphate project, GrowMax Resources has engaged various consulting firms to find efficiencies and reduce project costs. With respect to the potential optimization of the brine project, the Company is working with several consulting firms and geologists with extensive experience in mining projects within Peru. As a result of evaluating these potential optimizations, the Company is now targeting completion of the final design package, with a view to making an investment decision in 2018.