Harvest Minerals (LSE:HMI) — Investor Presentation

0:01 Good morning, and welcome to the HARVEST MINERALS LIMITED investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated in the right hand corner of your screen. Just click Q and A, scroll to the bottom, type your question, press send. Company may not be in a position to answer every question received during the meeting itself. Have a review of all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Brian McMaster, executive chairman. Good morning, Brian.

0:30 Good morning, Paul. Thank you. Good morning, everybody. Thank you very much for taking the time to join. Hopefully, you're all familiar with this platform. So there's a very brief presentation, which I'll just quickly run through first, and then we have received a number of questions, some of which were duplicates a week. We've gone through today, extrapolated out the duplicate questions, and we've got sort of circa 30 questions. And like I've done in the past, I'll read the question and then an answer. And, hopefully, at the end of all this, things will be a lot less muddier. So thank you very much, and apologies in advance for having to listen to me for the next forty five minutes or so. So just running through the presentation quickly. I would expect that most of you are familiar with with a lot of this stuff. But effectively, HARVEST had one principal asset at the moment, which we've been devoting the majority of our time and and expenditure to, and it's called Arapure, and it's it's a free dig organic natural fertilizer asset in Minas Derais in Brazil.

1:41 The significance of the asset is that it's a simple and a cost of cost effective production. That's free digging. There's no waste mining materials crushed and ready for delivery and application. It's in a location which is surrounded by extensively by agriculture. So we we literally sell our product within a 250 to 300 or the majority of our product within a 250 to 300 kilometer radius of the mine. And since bringing the the product online about two years ago, we've now had quite stellar year on year growth. And as we said earlier in the year, we were targeting a 150,000 tons in sales, and we've we've reached that target with a few months left to go in the year. The company has very strong ESG credentials. We have a minimum environmental impact with the first Brazilian company to be awarded the London Stock Exchange green economy mark, and we have been initiating and implementing various things to become carbon free. We have I think we've talked about this and made announcements about this in the past. We have installed a solar facility, which accounts for our electricity use and, in effect, the only non environmentally friendly aspect of what we do is the diesel that goes into the trucks, which the majority of which we don't control, they're owned by delivery companies or the farmers, and the diesel that goes into our digging equipment. And in order to counterbalance

3:11 that, we have an initiative where we've been planting trees. I think last year, we planted sort of 18,000 trees, and we continue to do so over the course of the coming years. So the next slide talks and I'm probably not gonna go through that in detail. It's a little bit detailed, and and this presentation will be announced to the market shortly, so you'll have the opportunity to read it yourself. But it does talk to the macro picture of Brazil and the importance of fertilizer to Brazil and the importance of what we're doing and where we are. But some of the high level aspects of this are that Brazil is the third largest exporter of agricultural products in the world. Sort of roughly 85% of its fertilizer is imported.

3:57 The government has stated now for a number of years that it wants to reduce reliance on imported fertilizers down to around about 45% by 2050. The need for Brazilian crops is increasing year on year. Fertilizer prices continue to to increase. And, yeah, sort of circa 70% of all fertilizer used in Brazil is applied to the crops which are right in the heartland of where we are. So we are a very small fish in an incredibly big pond, and it is continuing to get bigger and bigger. And part of the significance of what we're doing is that we are a bit of a niche player. We are 100% organic. We're 100% local, and they are important characteristics that the farmers are looking for going forward.

4:47 So just touching on our results a little bit and some of the questions well, the majority of the questions we've received talk to this slide in particular, so we'll get into the detail of this a little bit. But we have announced that we've received sales orders year to date of a 153,000 tons, which is, you know, double that of this time last year. Q three sales orders of 32,000 tons, which was down the same period last year, can sort of it can be accounted for by timing issues. We have healthy pro healthy profit margins. We've exceeded our overall yearly target. The buoyant fertilizer market is continuing. We're cash flow positive. In the interim results, we we speak to this is in the audited account where net cash inflows for the six months ended June were just shy of $700,000.

5:40 We made a loss after tax of 880,000. The 1.5 roughly difference between that is just the write down of some assets which we announced earlier in the year. And at the end of June, we had cash well, it's called cash and cash equivalents, but it's it's cash of just shy of $2,500,000.

6:04 The next slide, again, it's quite detailed, but I won't go through it because it it it's very difficult to create a story or a commentary around this without boring people too much, but you can just see, you know, the key buying periods for the various the various crops and how as we start to get an impact into some of these other crops, you know, they have less seasonality to them, and it helps spread the load for us over the course of the year. So for example, you know, when we first started out, we were pretty much uniquely sugar coffee. Sorry. Now as we get involved in haughty fruit and vegetables like lettuces and things like that, which, you know, are becoming an important part of what we're doing, they're they don't have a seasonality. Compost, again, spreads itself across the year. So there are various avenues that we're pursuing now to try and even out the lumps and bumps of the business.

7:00 The next slide is effectively a drone shot of the processing facility. You can see on the left there is a a pile of product there under some tarps. That is where we are currently in the closing stages of opening up a new shed. So effectively, we've built 50% of this shed capacity again where that that dump is, and that is we've talked about this numerous times to the market. That is to to keep more product dry because the Achilles heel of the operations is when the the product gets wet. But you can't you can see a row that is sort of stretching out from behind this shed up around sort of the back of the hill. That is where the mine place itself is. It's just at sort of the end of that road.

7:48 I think we've sort of talked about this a little bit, but, you know, it's an important thing for large parts of the investment community, and and they are be continuing to become important characteristics. An important thing for our customers, it's an important thing for us as a company that we remain committed to our ESG standards and that we continue to pursue a zero carbon strategy. And we are a long way down that path, which has been recognized, as I said, by the London Stock Exchange awarding us with the green economy mark. The IBD recognition there is says that we're, you know, being recognized in Brazil as an organic product. Sorry. So in terms of the investment case, I mean, the the highlights are and hopefully, you're on this call, you've come across this bridge already, but we have a long life flagship project in the heart of Brazil's agricultural market. We're rapidly building brand awareness and reach. We have a strengthening balance sheet.

8:45 We're focused on growth. We have robust ESG credentials, and we say an exceptional team. But judging by the emails I've received lately, not all would agree. So thank you for listening to the presentation. As I said, and I do apologize if this is monotonous, but I'm going to whip through the questions and hopefully that will help solve some of the problems. Just while I'm here, there are questions coming through on the chat, and I can see somebody says, can we get a copy of the slides, please? And the answer to that is, yes. They this presentation will be released to the market. So in no particular order, this is just the way the questions have been presented. It says, how many of the year to date one fifty three thousand tons of sales does the company expect to book as revenue in FY 2022?

9:37 So we're gonna work on calendar years here, which is also a financial year for us. But the answer is, as at year to date, September 2022, so that's September 30, Of the 153,000 tons, 93,000 of them have been booked as revenue. And the company, the team on the ground in Brazil's expectations are that the whole 150,000 tons will be booked out by the end of the year. The next question says, when do you expect to be cash flow positive from your operations as opposed to getting loans and classing them as positive cash flow?

10:17 We we don't get loans and class them as positive cash flow. That would obviously be a fundamental mistaken breach of accounting standards. The loans get recorded on the balance sheet as a loan. And as the half year accounts say, and I've just reiterated here, we are already cash flow positive.

10:38 The next question, you stated in the q three update that the sales margins are 55 to 60%. Is this the average gross margin? Why is it falling from the July guidance of 75 to 8030%? And is this figure should we now employ for the full year? The variation in that margin relates to some amortization and rehabilitation cost expenses, which are calculated by the auditors based on a per unit of production and sales. Well, pre sorry, per unit of production. So as our production has risen substantially, those costs have risen well, they're they're actually noncash costs, but they are from an accounting entry perspective, they are costs nonetheless, have risen as well. And the auditors say that because of the variable nature of those costs, I e, they are related directly to the volume that we sell, that they want to include them in cost of sales.

11:37 So the answer is there has been no increase in overall costs, but based on advice from our auditors, there has been a rescheduling of where those costs sit in the profit and loss cascade. And now those two cost lines will be included in our cost of goods sold, and they do have an effect on our margin. But they don't have an effect on our net margin because, as I said, there is no increase in cost. So, hopefully, that's not too convoluted, but it does mean that we will be looking at those lower margin rates going forward. If average sale prices are not disclosed, how should investors evaluate whether it is worth paying expense based purely on tonnage? Yeah. Look. I'm not a 100% sure what that question is trying to get to other than to say, in the audited accounts, we talked to revenue of 2,735,000, and we say we sold 35,000 tons. So I think it doesn't take much arithmetic to work out. That's roughly $78 a ton.

12:47 Could you please clarify the recent restatement of the cost of mining in the interims for last year's interims? The figure has increased by just under $160,000. The answer to that is, again, it was something that was brought to us by the auditors. It's a reallocation of a consumable cost related to the Yarapura mine that were previously classified in other expenses. And the auditors on doing this year's work said that they don't believe that that cost line should sit in other expenses anymore, and they wanted it reclassified. And therefore, by reclassifying it, we had to go back and amend last year's comparatives. So it's not an increase in costs. There's not a $160,000 that's just been pulled out of thin air.

13:34 It's just simply a little bit of a movement of the deck chairs. The next question reads, in the July investor meet q and a, you said that most farmers are given lengthy credit terms to pay to fully pay for KP fertile. To me, that would seem that the majority of this year's 153,000 tons sales orders will be fully paid for when farmers get their crop in the summer of twenty twenty three,

14:00 etcetera, etcetera. Not sure I said the majority of farmers get long credit terms, but certainly it is the case that some farmers do. And I've talked previously on this forum and others about how we've been working with banks to try and create credit facilities. And now as we are recognized as fertilizer, that becomes even easier to help iron out that bump for us. But where we sit as at today is that so far for this year, 97% of our customers are paying on thirty days. So it's it's not such a an issue for us at the moment. The next question asks, basically where any deposit payments recorded in the the accounts.

14:49 At the moment, we're we're not carrying a material number of amount, sorry, of deposits. As you I've said, we've invoiced the majority of the product that's being ordered. I think the deposits total roughly something like a $150,000, and they are recorded as a set off against the debtor's number.

15:17 Next question reads, this has been an unusual year with the profile of demand for KP fertile front loaded to q one and q two with q three being slightly lower. Do you expect the profile of demand regardless of overall volumes to revert in future years to building up such that q three is the peak demand for future years with 2022 being an an an an anomaly? The answer is, look, I I really am not a 100% sure. I mean, that's why we talk at the start of the year about an annual target because within an annual target, it's quite difficult for us to have really meaningful quarterly expectations because there are so many factors which are outside of our control, which dictate how farmers respond. So the an example of some of those factors would be obviously the weather, would be what type of crop the farmer is producing, obviously, the broader macro environment and all all those sorts of things. So, yes, things got front loaded a bit this year, and I think that was probably, you know, in fairness, the majority of that was a little bit of a run to a safe haven given what was happening in The Ukraine and Russia.

16:24 Do I expect that to continue for next year? The answer is I don't know, but we would expect that our overall sales targets will continue to grow year on year on an annual basis. And how that works within that on a quarter by quarter basis, we just have to see what the how the cards are dealt. And I'm not sure that it's massively important how we deal with it on a quarterly basis. I think, you know, the proper way to assess the performance of this business would be on an on an annual basis. The next question would be the 2021 h one cost shown today don't match the h one cost published yesterday oh, sorry, September last year. Again, that's what I mentioned a moment ago. That's because of the reclassification of certain expenses that was pushed through by the auditors.

17:11 Somebody asks, how many customers does HARVEST have? At the moment, it's active customers. It's circa about 300. Questions again about gross margins. It was noticeable that director's fees rose 32% over the comparative period. Why such a rise? This was due to the timing with invoices received in prior year. Refer to the full year financials, and you'll see that on the annual basis, the director's fees remain consistent. So effectively,

17:53 not all of the directors invoice on a monthly basis. For example, Luis and I invoiced the company on a six monthly basis. And I think that, frankly, last year, one or both of us didn't put the invoicing in time, and it just didn't get recorded in the right period. And and that's the that's the reason for that. But as we say, if you look at the full year accounts, you'll see that there has been no change.

18:23 So somebody asks, what do other, quote quote, unquote, other expenses relate to given they remain as a significant figure? They are effectively an amalgamation of an overhead cost line in Brazil for the main office and admin staff at the Arapira site. So it's just simply, you know, a lot of small things grouped together and effectively constitute, for want of a better term, main office expenses. The next comment is, it is good to see an increase in inventories to meet soaring demand and combat weather issues. Can you advise as to whether these inventories are held at cost, and how many tons did $350,000 broadly represent at the end of h '1?

19:08 The answer is inventories are valued at the lower of cost in net realizable value. Raw materials, purchase cost, and finished goods, cost of direct materials and labor, and an appropriate proportion of variable and fixed overheads are based on normal operating capacity.

19:26 HMI's balance sheet shows trade and receivables of 318 marked as noncurrent. What does this relate to? The answer is it's recoverable taxes in Brazil. We've reclassed them as noncurrent as they're going through various tax reporting procedures, and the timing for collection is unknown. But it it's something that we're expecting at some point when the taxing authorities in Brazil get around to reviewing it. We'll receive those funds. Says, can you confirm if you expect the average sale price to be higher in h two? How is management viewing the current trends in pricing more generally? Look. The answer is we and we've spoken to this before. We obviously are monitoring the environment closely, and where possible, we're pushing through price rises. We have put through three price rises this year. And in percentage terms, the price that we were charging in q one compared to the price we're charging now, it's 25% roughly more now than it was at the start of the year. Can we, you know, continue to do that for the remainder of this year? The answer is we'll have to see. I'm not sure.

20:38 It's something that we continue to monitor, but, you know, it's it is a balancing act between putting price rises through and stifling the business. So it's just one of those things we keep watching. So the next comment relates to the royalty expenses. It said they were 4% for the period, which appears high. It's the same every year. It's 4%. It's 2% of the government and 2% royalty to the person who would purchase the the asset off. So that's just the way it is.

21:10 So the next question says, referring to the April 2022 borrowings of 3,500,000 ri for the purchase of equipment and machinery, can you confirm, was this to enhance production or process, or whether it represented maintenance of the current production assets? As we say, was for the purchase of equipment, so it wasn't for maintenance. It was actually to acquire new equipment, which was needed for the expansion of the of the operation. One of the things that's interesting is that, you know, in terms of bank debt and those sorts of things, you know, HARVEST is effectively a start up. We have no credit rating. We had no track record, and it took quite a long time and quite a convoluted process for us to be able to borrow those funds. And part of the reason we did it was to help establish a track record of being in the banking system and and having a credit rating.

22:03 But, again, as in order to be classified as a a quote, unquote good citizen, we have actually discharged those debts. So you will see at the full year accounts when they get released, if we have repaid those debts in full.

22:20 The latest interim results state the company's maintaining its twenty twenty two year end sales target of a 150,000 tons. Given sales are already at a 153, can you confirm the figure is tagged the 1 50 k figure is a target for invoice sales this year? The answer is, I mentioned earlier, yes, I can confirm that. Go as fast as I can. I've got one page to go, and then I'll ask answer a few of questions that have come through while I'm talking. In h one twenty twenty one, the cost of goods sold oh, we've covered that off, I think. Do you anticipate the reversal of the timing of orders seen in 2022 to become the norm? Actually, I'm sure what that question means, so I'll have to skip that. Sorry.

23:11 Sorry. I'm just reading through these as we go, I think, because some of them are starting to become duplicates. Does the CapEx recorded in h one twenty twenty two represent the FY commitment, or is there still more to come through in h two?

23:24 There there might be a little bit more. If it is, it's, you know, roughly tens of thousands. It's not it's not a material number. We're just tidying up some odds and ends here. But once that comes through, we don't have any plans at the moment for further CapEx. So we're kind of it'll be steady as she goes from here in terms of of CapEx for the foreseeable future. How confident are you that the 2022 starts can be repeated or even better than 2023? Well, I guess the only thing that we can do to gauge confidence from that would be to look at the past and use it as a proxy for the future, and we've had some pretty stellar years despite what anyway, we've had some good years over the last few years, and the feedback we get from our customers and our expectation for the future is that that that should continue well into the future. So, yes, we do remain very confident.

24:16 Why do you avoid providing forecasts? And I think we've got asked this question. Last time we did an investor presentation, and and the answer remains the same. And the answer is, as I said earlier, you know, it's it's really difficult to have the operations of this business fit into a a neat and tidy quarterly box. I mean, the farmers who we rely upon to sponsor our business, they don't respond to quarterly dates on a calendar. They respond to, you know, bigger issues such as the weather, such as demand, etcetera, etcetera, etcetera, etcetera. So the reason we don't put out monthly forecasts and detailed forecasts is because the likelihood of us achieving them on a quarter by quarter basis is something completely out of our control.

25:08 That's why we do put out annual forecasts, and we say by that through those annual forecasts, this is our expectation for the overall year. Now we can't necessarily tell you whether that will all happen in q one, two, three, or '4, but sometime between now and the end of the year, this is a proper estimate of what we expect to do. And, you know, we'd like to be able to do something more detailed than that, but unfortunately, we can't. And as you can see from what's happened earlier this week, if we put material into the market that isn't concise or we miss targets or people misinterpret what's going on, the ramifications for the share price can be severe. So it would seem foolish, unfortunately, for us to volunteer to put forecasts into the market that we know are going to be subject to a whole heap of variables which are outside of our control.

26:00 The next question is what is your current dry storage capacity? It's roughly 50, maybe 60,000 tons sort of in that order. It's, you know, two lots of 25 to 30,000 tons either side of the operating plant. Do you need to raise more funds to support expansion plans? The answer is no. We do not. What plans for expansion do you have for 2023? At the moment, we think we have sufficient capacity to get through our expectations of demand for next year, so we don't have any plans for further CapEx expenditure and ex expansion. However, if the market dictates and drives us in another direction, we can respond to that quite quickly. So that's that's pretty good.

26:46 So I'm just gonna quickly run through if I can. These questions are coming through. So somebody says, it is not possible to use maths to work out the selling price when you have been three price rises. Can you give us the current selling price?

27:07 Well, I think, you know, at the end of the day, the statement was that if you divide the revenue number by the number of tons sold, you will see what the average selling price is, and I think, you know, that gives you more or less the answer. So apologies if that wasn't clear.

27:25 Any update on the Edwards family holding that appears to be sold lower? Are you engaging with them? The answer is, look, it's clearly not appropriate for us to talk openly about what individual shareholders do don't want to do. You know, we are engaging with them as shareholders, but we don't engage with them around their investment decisions. That's for them to to make a decision on, not us. Yeah. Do we expect them to be selling more in the in the near term? The answer is no. But is that a statement of fact? The answer is, again, no. I'm sorry. But, you know, it's not our place to tell other shareholders what shareholders are thinking. So somebody's asked here, what is the theoretical maximum production tonnage?

28:24 Yeah. That unfortunately, that question concerns me a little bit because we've probably spoken about that ad nauseam for five years now. And the nameplate capacity of the plant is 320,000 tons, and it it would be it's a little bit concerning that somebody, you know, at this stage of our evolution is still asking those sorts of questions. And again, that same person is saying, to what extent could exports fill some of the order gaps on your slide presentation? We don't have any order gaps in our slide presentation, which is clearly demonstrated by the fact we've already reached our annual target. And again, for five years or more, we've been, you know, ad nauseam saying that this product is not available for export. It doesn't lend itself to export. It won't be exported.

29:12 And and yeah. And that's that's the thing you're in. And and again, I'm highlighting these couple of comments because, you know, none of this is new material. If you're a shareholder and you don't understand those fundamentals, I really do encourage you to go back and read some of the announcements from prior years because, you know, we're not hiding things under a bushel here. Everything that people need to know to understand the business is out there, you just have to take the time to understand it. And if if you don't understand some of those fundamentals, I think that's a really concerning aspect of your investment criteria. I'm just reading through these the rest of these questions, and some of them are, unfortunately, I just can't answer or they're they're just not appropriate to to answer. So I think, you know, Paul, we might be able to draw a line there.

30:06 Sure. No problem at all. And, course, any questions that do come through post this, Brian, we'll have the ability to review those. We can publish responses where appropriate to so on the on the investment company platform. And Brian, just on that basis, before we redirect investors to give you some feedback, and of course, the recording of this presentation and the slides will be available on the investment company platform. I could just ask you for a few closing comments and we'll redirect the attendees to give you some feedback. That would be great. Yeah. Well, I think, you know, as a as a starting comment, you know, certainly from on behalf of myself and the rest of the board, we we sincerely apologize for the confusion that seemed to have been created by the release of the annual accounts there, you know, whilst the nuances in in the difference between sales orders and sales as recorded revenue were clear to us. It it now works out they weren't clear to some others, and that was certainly an oversight on our part and and and one that's, you know, clearly unsatisfactory.

31:07 But as I said a moment ago, you know, I mean and I've I've had this kind of sense for for a long time now, and I don't know how to address it without sounding like a a bit of a whinger. But, you know, the truth is a lot of the feedback we get from shareholders is is right in the minutiae of the business, and it's it's always angled at this idea that shareholders are trying to catch us out in a lie or trying to catch us out with a trick or they think that we've done something that's just not true. And, you know, it's simply not the case. You know, I've been and I've said this repeatedly that the business is extremely extremely simple, and it remains extremely simple. And, you know, all of the information that we can put into the market, we put into the market. You know? And if if something goes into the market and you don't understand, I mean, it it's almost certainly a misunderstanding, and and reacting with your finger and selling your shares really is should be the last thing you're trying to do because, you know, just a five second deep breath would understand that this business has been going one way as a business for a number of years now, and that is it's going upwards and it's getting bigger. It's getting at least cash flow positive. You know, it's it's ticking a lot of boxes. And so, you know, if if you keep that overall framework in your mind and think, well, hang on a second. Something's been released and it doesn't reconcile with that. I mean, it's either a misunderstanding or a mistake.

32:35 Mean, selling the shares was, unfortunately, for those people who got trigger happy was was really a not so smart thing for them to do and not so smart thing for the rest of us. So, you know, we try as best we can to ask questions. We don't answer sorry, to answer questions. We don't answer questions when people send us abuse, which we get quite a lot of, but I've just taken a stand now, and I I just refuse to answer people who are who send me abusive questions. But where we can, we do answer them, and we try to answer them as quickly as possible. And we try to be as open and as transparent as we can in the market. So you know? And if if this doesn't satisfy you or doesn't reconcile with how you think the company should run, then, unfortunately, I think HARVEST either HARVEST is the wrong investment for you, or I said on the on the TMS podcast the other day, you know, we're the wrong board for you and you need to make a change. Which reminds me, somebody actually put a question sorry, Paul, about why can't the shareholder the AGM be held in London, which is a good question.

33:44 And which is a good question. The answer is HARVEST is actually an Australian company, which is governed by the Australian Corporations Act. And, unfortunately, pursuant to the Australian Corporations Act, we must hold the shareholders meeting in Australia. We did make telephone facilities available, so there was the option, and we did hold it within business hours in The UK. So there was the opportunity for people to engage if they wished, and we encourage you to. Anyway, I gather by the comments that are coming through now, I haven't satisfied many people, Keaton in particular, whoever you are, but I'm sorry about that. Maybe I'll sell you shares champ. Go on to something else and do something more productive thing. Giving me a hard time because I'm not interested.

34:36 Anyway, that's it, Paul. Thank you very much. Fantastic. Brian, thank you very much indeed for updating investors' day. Can I please ask investors not to close the session? You should be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This will only take a few moments to complete, and it's greatly valued by the company. On behalf of the management team of HARVEST MINERALS LIMITED, we'd to thank you for attending today's presentation. That concludes today's session. Thank you. Good morning.