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Arianne Phosphate (TSX-V: DAN) CEO Brian Ostroff on Potential Downstream Partnership, Supply Risks in the Phosphate Market

June 12, 2017

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is CEO of Arianne Phosphate (TSX-V: DAN)(OTC: DRRSF) Mr. Brian Ostroff. Brian, thank you so much for joining me this afternoon.

Brian Ostroff: Thank you for having me.

Gerardo Del Real: You had a pretty significant press release that I want to talk about. Let me introduce the headline. The headline reads, "Arianne enters into a memorandum of understanding partnering to explore downstream production of phosphoric acid." It's a very important news release with a lot of fine print. Can you provide the details for me?

Brian Ostroff: Absolutely. I'm happy to say that what we've done here is start to look at the possibility of going into a downstream agreement ourselves. What your listeners should really understand about the phosphate business is 85% plus of the phosphate mine production is owned by the guys who wind up making the end product themselves. Really, that has always been the key to profitability. Guys like the Moroccans, the Saudis, even the Russians. They control most of the phosphate rock and what they have done is they have continuously looked to increase their own ability to process that rock into fertilizer. The real stress in the situation comes about for the guys who have those fertilizer plants but are reliant on others for that phosphate rock. It just makes it very difficult, in terms of the economics. Once you go and you buy someone else's phosphate rock, you ship it to your facility, you transform it into your end product, and you sell it, there's very little, if any, margin left.

That pressure, I believe, is going to continue because the guys who actually do have the rock, what they're doing is they're continuing to build out their own downstream operations. That poses quite a bit of risk to anyone who does not have their own rock. There's obviously the financial risk, you're not going to make any money. You're subject to the whims of the market if the guys with the rock all of a sudden start to see and move the price of that rock up. Of course, we've talked a little bit in the past of where that rock comes from. So your other risk is security of supply.

Gerardo Del Real: Correct. That security of supply risk is pretty significant. We've had several recent developments that have proven that out. Just to be clear, Brian, I understand that this joint venture would benefit in the sense that you'll also be getting specific input from this large producer. Is that accurate?

Brian Ostroff: Yeah. What we did was we basically looked at the ability to integrate our rock. We deal in a world of fertilizer companies, they're giants. We are the small guy. Right now we're a $100 million market cap company and we're dealing with guys that are multi-billion dollar companies. We continue to believe that the important piece is the rock. I always say follow the rock. If you understand where the rock is, where it's going, you will understand the business and you will understand the ability to be profitable. What we've done with this is really turn the equation on its head, which is rather than being that large guy that is going to go and pick up rock deposits, we, with the rock deposit, have looked at the possibility of partnering with the guy who has the sulfuric acid, and making the phosphoric acid ourselves.

Due to confidentiality and the early stage of discussions, we're not in a position to disclose who that partner is but it is a group that is very active in sulfuric acid. They are a large producer/seller/trader of sulfuric acid and that's the ingredient that you need that when mixed with phosphate rock creates the phosphoric acid. Once you have the phosphoric acid you then either turn it into fertilizer or you purify it more and it makes its way into food grade, Coca-Cola, pastrami, what have you. Right now the agreement is going to look at the merits of putting together our own phosphoric acid facility, jointly, and they would ship in their sulfuric acid and we would ship in our phosphate rock and together we would be able to share in the benefits of the phosphate, phosphoric acid production. Again, I think that what this does is it provides us an option. Options are always good to have. It's nice to have an extremely large partner looking at the potential of working with us.

Gerardo Del Real: Excellent. Now that unique approach that you're taking, and you mentioned it's early stage so we'll definitely make sure to highlight that, but the unique approach that you're looking at undertaking is important because the Saudis don't sell rock, is that correct Brian? They transform it and they sell fertilizer.

Brian Ostroff: Exactly.

Gerardo Del Real: The Moroccans, the Russians, they're all expanding their own fertilizer plants and that is going to equal a lot less rock I would imagine. Would that be correct?

Brian Ostroff: That is correct. In fact if you look out over the next few years, the phosphate mines that are projected to come online, all of them are already integrated or plan to be integrated. Arianne really was the only projected mine of any size and scalability that was independent. All of a sudden now there's a possibility that some of that production may no longer be independent. That will, I believe, continue to put a squeeze on the rock market.

It's interesting because everyone talks about the overcapacity in the industry. Everyone is saying, "Too much capacity, too much capacity." What I find interesting is that the Moroccans don't talk about overcapacity. The Saudis don't talk about overcapacity. The Russians don't talk about overcapacity. Why is it that the guys that actually have the rock don't talk about overcapacity? The real problem is overcapacity stems from facilities that do not have their own rock. The guys who are complaining about overcapacity, I think what they're really saying is, it's tough to make a buck here. It goes back to my premise, which is if you don't own your own rock it is tough to make a buck. That overcapacity, really what's driving that overcapacity is guys who have the rock are bringing on more capacity to handle their own rock. It's not really overcapacity, it's basically this move to displace non-integrated facilities. The guys that talk overcapacity, those are the guys that have the non-integrated facilities.

Gerardo Del Real: Interesting. My colleague, Nick Hodge, recently described a deal and let me just quote him. He said, "It's a big deal because in the global game of phosphate chess, Arianne is now one step closer to the kings." To provide a bit of context to that statement I believe there were projections, that at current prices would have you grossing approximately $300 million per year. Is that number accurate Brian?

Brian Ostroff: That is. At current projections we would be looking at roughly a gross profit of $300 million a year. Now again, pending the work that we're doing on the possibility of this downstream asset, those margins might improve with the final product. Ultimately that's what the Moroccans are doing by expanding downstream. They believe that they can enhance their margins. There's still a lot to be figured out. But just as a rock mine producing our 3 million tonnes a year, we should be looking at gross profits in and around $300 million.

Gerardo Del Real: Again, just to provide some context to the opportunity here, your market cap is currently at what Brian?

Brian Ostroff: We are just under $100 million market cap.

Gerardo Del Real: I think that speaks for itself. I know you're very busy behind the scenes setting a lot of different potential catalysts in motion so I definitely want to have you back on soon, Brian, to talk about those events as they materialize. I want to thank you for your time. Is there anything else that you'd like to add?

Brian Ostroff: Yeah. It's been a little while since we've talked and I just wanted to add a little color on the security of supply. Like I said, the risks that face the non-integrated players today are twofold. It's financial, how do you make a buck when you buy someone else's rock? And security of supply. At this point most of the world runs a deficit. North America, South America, Western Europe, a lot of Asia, and we are all dependent on the Middle East and North Africa, for whatever rock does come our way.

Certainly recent events with Qatar and Saudi Arabia, I think continue to illustrate some of the ever present geopolitical concerns out of the Middle East and what that might do in terms of phosphate supplies. As well, over the last months, there have been a couple of ship seizures from phosphate rock that has come out of Western Sahara. That is an area that is disputed, currently under Moroccan control. There are many of those, including world bodies like the EU and UN, that view Western Sahara as an occupied territory and quite a bit of phosphate does come out of Western Sahara that the Moroccans mine and sell.

In the month of May, a couple of ships that were leaving Western Sahara, with this phosphate rock, have been seized so there is some court action pending to see the validity of this. I point this out because close to two thirds of the production of that mine actually makes its way into North America. In fact, one of the ships that was seized was headed for Agrium. Now that one was then released but the first one that had been seized, we're still waiting to see where the court rules on it. Be that as it may, I think we all understand that there is a geopolitical risk with regards to phosphate rock and over the last four to six weeks I believe that's starting to become a little bit more front and center.

Gerardo Del Real: I'm sure it's going to become a lot more front and center here in the future. Geopolitically we can see the instability that's developing all around. I think that speaks well to the jurisdictional advantage that you have. Could you provide a little bit of context and just explain to maybe people that are new to the story as to where the project is located?

Brian Ostroff: Sure. We do have the good fortune of being located in Canada, province of Quebec. Very, very friendly mining jurisdiction. Well situated, a lot of the infrastructure is already in place, power dam 30 kilometers away, heavy duty haul roads already in place down to a river that currently sees a lot of shipping traffic, primarily from Rio Tinto. Well, well placed.

Gerardo Del Real: Excellent. Excellent. Brian, thank you so much for your time. Again, I know you have a lot going on behind the scenes and I'm hoping that we can get you back on the show here soon.

Brian Ostroff: Great. Well I appreciate the time and the opportunity to keep your listeners updated.

Gerardo Del Real: Thank you, Brian.

Brian Ostroff: Thank you. 

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