Harvest Mi (di) Regulatory News (HMI)

Harvest Minerals Limited / Index: LSE / Epic: HMI / Sector: Mining

14 January 2020

Harvest Minerals Limited ('Harvest' or the 'Company')

Shareholder Q&A

Harvest Minerals Limited, the AIM listed remineraliser producer, has received a number of follow-up questions following the release of its Annual Report, recent investor Q&A session and roadshow. To maintain transparency and in line with its commitment to increasing shareholder engagement, the Company is pleased to provide answers to these questions. The Company aims to undertake this exercise on a quarterly basis where thought necessary.

Brian McMaster, Executive Chairman of Harvest stated, "We are grateful for the positive response and interest we have received from shareholders in recent weeks. The publication of our final results together with the information shared in our most recent Q&A investor call has continued to drive much interest in our Company and accordingly generate a number of further shareholder questions. We are therefore pleased to be able to provide a response to these queries as part of our continued effort to increase investor engagement. We look forward to a productive and prosperous 2020 and I would like to take this opportunity to wish all shareholders a very happy New Year."

1. Question: Can you give an update on your coffee plantation trials and how your trial farm is working?

Answer: As announced over the past six months, our coffee trials have been performing exceptionally well. The most recent results (September 2019) demonstrated that KPFértil produced superior results to conventional fertiliser in new coffee plants.

Currently, we have seven trials being carried out by independent consultants. Three relating to direct application to coffee plants, two focussing on blending KPFértil with compost, one relating to direct application to sugar cane and one for direct application to vegetables.

We expect results from these tests to be available throughout the year with the first results expected in Q2 2020.

At our own demonstration farm we have established coffee, soybean, sugar cane and maize and we will be establishing a new pasture area this year. The results to date have been excellent, allowing us to demonstrate first-hand how effective KPFértil is.

2. Question: Can you explain the buying process for farmers in Brazil - Do they have to try it first or is it down to your salespeople having to actually sell the product?

Answer: As discussed in a previous Q&A published in June 2019, (https://polaris.brighterir.com/public/harvest_minerals/news/rns/story/w6lggkw), the sale of KPFértil starts with a technical analysis of the customer's needs and depends not only on the crop's own nutrient requirements but also on the type of soil and any previous fertiliser regime. To assist with this process, members of our sales team are trained agronomists and/or experienced fertiliser sales experts.

The buying process does vary, however, and our experiences to date are that customers generally trial a small amount of our product so they "can see for themselves" and once satisfied orders increase from there. This is illustrated in a video we published in December 2019 (https://youtu.be/QFvtQKdnSj0), in which one customer discusses how it is converting to solely using KPFértil with compost over the next couple of years.

3. Question: Do you have a loyalty/ referral programme for your customers?

Answer: No we don't.

4. Question: Can you take payment in kind?

Answer: In answering this question we assume by "in kind" the questioner is asking if we can exchange our product for the farmers end product. E.g., coffee, soybeans, sugar etc. The option to take payment in product is open to Harvest and it is something we have been exploring in recent months. To date, all sales have been for cash consideration but going forward we would be open to broadening this for some products/customers.

5. Question: What additional benefits will a full mining licence bring and do you have to pay US$1m to the original project vendor when this is received?

Answer: The granting of the full mining licence will trigger payment of US$1m to the original vendor of the project, which will be funded from existing resources. The main benefit of receiving the full mining licence is that it will provide tenure to exploit the resource further, positively effecting production output. Until such point, however, Harvest is able to work to its current full capacity.

6. Question: I still believe that the Company has massive potential, but what is missing for me right now is clear evidence that the market has accepted the product. A lack of sales forecasts suggests you have a lack of conviction that the market will buy your product. Is this the case?

Answer: Absolutely not. We have internal sales targets/forecasts and have stated that we expect to reach a maiden profit for the 2020 financial year, which is evidence that we see the business is progressing well. We have consulted with our advisers regarding the best way to provide general forecast guidance, and they have advised us that it is not normal, or a requirement, for a business that is a relatively early growth phase to publish forecasts and accordingly advise that we should not publish forecasts until we reach a very predictable revenue state. We revisit this advice with our advisers on a regular basis and we will look to publish forecast guidance when the advice confirms it is required and advised.

7. Question: Can you provide any evidence that 400Ktpa is not just possible but actually probable in the long term, this would make the investment case overwhelming?

Answer: We have stated previously that:

·; the size of the resource is sufficient to support a life of mine in excess of 100 years at 400ktp;

·; the existing plant infrastructure has a capacity of 320ktpa and plans have been approved to increase this; and

·; the known market within a radius of just 300km of the mine site is over 9-27m tonnes per annum for soybean, maize, coffee and sugar.

Given these factors, that is, we have the resource, we have the production capacity and we have the market potential, it seems clear that the opportunity to grow to a run rate of 400ktpa is possible.

8. Question: If you are really selling the product in increasing quantities why are you not giving clear evidence of sales?

Answer: We announced a trading update in early December 2019 outlining sales levels for the preceding 12 months.

https://polaris.brighterir.com/public/harvest_minerals/news/rns/story/r7ne2vw 

9. Question: Why has there been a slow uptake in sales considering the so-called high demand stated by the Board on numerous occasions?

Answer: This question is not supported by the facts. Harvest commissioned the processing plant in June 2018. To go from a standing start to a breakeven sales run rate within the first 18 months is a credible achievement for a new product and cannot on any measure be considered "a slow uptake."

10. Question: How many coffee plantations are actually on your doorstep i.e., in close proximity, excluding Velsoso?

Answer: There is high demand for fertilisers localised to the area Harvest is located. This demand is driven by coffee plantations, sugar plantations, soybean, maize, pasture and vegetables. But in specific answer to the question regarding coffee, Brazil is the largest coffee producer in the world, exporting over 2.6mtpa. Over half of this comes from the coffee planted in Minas Gerais where our project is located. There are a lot of coffee farmers close to the project, ranging from small family businesses to large scale major exporters. Expocaccer, one of the local coffee co-operatives based 130km for Arapua, has 560 producer members itself.

Harvest has an office in Carno do Paranaiba, and if you look at that on Google Maps, you will be able to see for yourself the hundreds of coffee plantations on the project's doorstep.

11. Question: The story told last year (2018), has not met the facts (sales) up to now, what went wrong?

Answer:  The facts of the past 18 months or so have met the "story" told in 2018. The full story outlined in the May 2018 capital raise was that we would develop the infrastructure to build a facility capable of producing 320ktpa and that we would commence selling product with a ramp up expected over the course of several years or so. We have done exactly that. During the period since May 2018, it is correct that we had a failure with the relationship with Geociclio but that was turned into an opportunity for us to grow our internal sales team. Similarly, in May 2018 we spoke of the distributer model (e.g., Agrocerrado) and subsequently we have learned that there are more benefits to us developing our own sales expertise. So whilst there has been some learning along the way, the facts remain that we have built the mine and related infrastructure we said we would, we have achieved a breakeven sales position in the first 12 months of selling and we expect to report a maiden profit for the 2020 financial year.

There seems to be much made of the perception that we have missed targets or generally underachieved since May 2018. A proper review of the facts would reasonably lead to the conclusion that is not the case. It is normal for not everything to go perfectly in developing a new business. It is commendable that Harvest has achieved as much as it has as quickly as it has and we believe the future continues to look bright.

12. Question: The fact you had 74% of sales from one customer is a significant negative factor for me and I believe puts your business at risk. In the last Q&A you said, "We expect this number to decrease rapidly going forward as we develop a wider range of customers." Does this mean you have lost your major customer, that sales to other customers are going to increase significantly or both?

Answer: The 74% of sales from one customer relates to the period ended 30 June 2019, which is dominated by the sales contract with Agrocerrado. This contract was a significant portion of our initial sales strategy and since executing that contract we have been committed to developing our own direct sales channels. Consequently, going forward, Harvest will be selling directly to customers which will, by design, reduce the significance of the relationship with Agrocerrado and see us selling to a larger pool of customers. We have already seen the broadening of our customer base develop.

13. Question: Were sales to Agrocerrado included in the results to June 2018?

Answer: No. First sales to Agrocerrado were recorded in the financial accounts as at 31 December 2018.

14. Question: How much KPFértil was actually sold in 2019?

Answer: As announced in December 2019, approximately 50,000 tonnes.

15. Question: One poster on ADVFN wrote that in October your sales were 3,899t at an average sales price of 210BRL/t. Where did they get that from or is it fake news?

Answer: The only accurate source of information is from the Company directly. We would caution readers to be sceptical of any information published from sources other than the Company.

16. Question: Why do you report in A$, it is needlessly confusing?

Answer: Harvest is an Australian domiciled company governed by the laws of the Australian Corporations Act, which dictate that the company must publish its results in Australian dollars.

17. Question: Is the company viable?

Answer: The Board of Directors believe so. A review of the Annual Report and related RNS' will provide sufficient information for the reader to make an informed decision of their own.

18. Question: When you say you will be breakeven at the profit before tax level for 2019 and aiming to be profitable before tax in 2020, this could just represent a difference of $1. If you broke even in 2019 and most of the customers have repeated their orders, shouldn't any additional sales made constitute a significant profit?

Answer: We have announced recently that the breakeven point for the 2019 calendar year was 50,000t, which we reached, and that going forward we expect to implement a cost reduction programme that will reduce that breakeven point further. It follows that once we have reached our breakeven level of sales, the gross profit from each additional tonne will "fall to the bottom line" and represent net profit.

19. Question: What is the timing difference between accounting and cashflow breakeven?

Answer: As outlined in our trading update announced on 2 December 2019, we anticipate completing the first working capital cycle in Q2 2020.

20. Question: The largest line cost item in the accounts is Consultants, this is not great and almost double the prior year. Why are the wage/consultant fees so high?

Answer: These costs were higher due to the costs of the ramp up of the production phase and some related one-off costs. We anticipate that this cost line will be reduced going forward as some of these costs are one off in nature.

21. Question: It is impossible to determine how the Company should be valued. Why do you not have any forecasts going forward?

Answer: Please see response to question 6 above.

22. Question: Nice to see revenue is picking up, but can you explain how losses became so big and what are you going to do on the cost side to get to profitability?

Answer: We are looking at costs and will provide an update to the market on initiatives being made in support of this late in Q1 2020. The annual accounts for the past several years outline the expense items that are included in the cumulative loss.

23. Question: Quick glance at the accounts showed that cashflow from customers is not matching your revenue; presumably there are a lot in receivables, what are you doing to fix this?

Answer: The amount held in accounts receivables is detailed in the accounts. It is common within the industry to have a long working capital cycle and we are working through that cycle now.

24. Question: What are the actual share holdings of the directors and senior management?

Answer: These amounts are stated on the Harvest website as required by the AIM Rules.

25. Question: The market appears to have not only priced in your slow performance, but complete failure at this point. Is the market wrong?

Answer: Market speculation is naturally outside of the Company's control but we firmly believe that Harvest has performed positively and has strong growth prospects. We maintain that it "is the right business, in the right place, at the right time."

26. Question: My biggest fear as a shareholder remains dilution at this price. A clear statement from the board stating that there will be no share issue / fundraising for expansion etc would be very well received.

Answer: The Company has stated repeatedly that it does not need to raise cash for any purpose at this present time.

27. Question: Are the existing institutions that backed HMI at 18.5p still generally supportive and "get" why the price is the price?

Answer: We maintain regular dialogue with shareholders and recent feedback from institutional meetings confirms that they are understanding of the Company's business plan and achievements and excited about the next stage of growth.

28. Question: Why don't the existing institutions top up?

Answer: We cannot comment on the position of others but believe Harvest's value proposition remains strong.

29. Question: Can you clarify the dividend policy?

Answer: We intend to provide the market with a more detailed announcement covering this in due course.

30. Question: Would you consider a share buyback programme?

Answer: Not at this present time. The cash the Company holds is being utilised to accelerate the growth of a high margin, high demand product. The economics from the sale of our product are compelling and the anticipated economic returns from continuing to grow our market are the best use of capital for the Company at this time.

*ENDS*

For further information, please visit www.harvestminerals.net or contact:

Notes

Harvest Minerals Limited (HMI.L) is an AIM-quoted low-cost and high margin Brazilian remineraliser producer, located in the heart of the largest and fastest growing fertilizer market in Brazil.

Our product, KPFértil, is a registered and approved organic multi-nutrient direct application fertiliser. It contains many of the essential nutrients and minerals required by plants and, unlike most fertilisers, it does not require any complex processing or chemically alteration, instead it can be applied directly to crops.

KPFértil is produced at the wholly owned Arapua project, that consists of a fully permitted mine, production and storage facilities able to produce and deliver KPFértil to customers. Known mineralisation at the Project is expected to support 100+ years' production at 450Ktpa.

Our focus now remains on growing our business and we have the dedicated in-country sales and marketing team with the skills, experience and contacts to sell KPFértil into the potential multi-Mtpa market on the doorstep of the Project.