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Global Biofuel Markets to Double to $185 Billion by 2021

With global economic challenges appearing almost hourly, two growth areas are moving ahead apace; food production and the rapidly rising demand for biofuels. Investors should note that each has one driver at their core—crop yields need to continually increase in the face of a reducing portfolio of arable land worldwide.

Very simply, biofuels production is expected to grow from 24 billion gallons in 2012 to 51 billion gallons by 2019 evidencing an impressive compound annual growth rate (CAGR) of 9.6% from 2013 to 2019.

And food? The Earth Institute at Columbia University states: “With a world population that is projected to reach 9 billion by 2050 and require 70 percent more food than we produce today, and a growing global middle class that is consuming more meat and dairy, phosphorus is crucial to global food security.”

While global demand for phosphate is growing rapidly, of particular note is the largest demand/supply disparity, found in South America. Through 2018, Phosphate demand growth on the continent is forecast to be one quarter of the total global growth in demand, while only 1.6% of world reserves are on the continent: A very real problem for a continent that is crop rich, but critically phosphate poor.

And in that lies a compelling—albeit potential—investor opportunity to ride along with aggressive companies willing to develop new, high quality properties in South America such as Focus Ventures’ Bayovar 12 phosphate project.

“The world’s phosphate (P2O5) deposits are very unevenly spread around the globe—meaning they can be located a long way from regions of highest demand such as Europe and the Americas,” stated David Cass, President and Director of Focus Ventures Ltd. (TSX.V: FCV), a company that, in less than two years has acquired and drilled out a large, new phosphate resource in Peru close to Vale’s biggest phosphate mine. “Couple that with geo-political and infrastructure issues in the main phosphate producer areas in North Africa, specifically Morocco, and the need for a stable phosphate supply globally is critical, particularly in South America.”

Mr. Cass is a geologist with over 25 years of international experience in mineral exploration and mining. Fifteen years of his career were spent with major mining company Anglo American PLC, where he held positions of increasing responsibility in jurisdictions including Peru, Turkey, Iran, Eastern Europe and the America’s.

Phosphorus, derived from phosphate rock, is the essential nutrient that crops need to thrive and to increase yields. 40% of global food production is directly linked to the use of fertilizer; an interesting and virtually recession-proof investment opportunity.

The Bayovar 12 project is a short half an hour’s drive by sealed road from a port owned by Focus’ partners in the project. The port is currently used to ship gypsum mined from the concession area and has also been used to export rock phosphate to New Zealand. The Pan-American Highway crosses the property at its eastern end and the Chiclayo-Bayovar road transects the property east to west. The power line that supplies Vale’s Bayovar Mine also crosses the property.

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The drilling to date has outlined phosphate mineralization over approximately 8 km from west to east and 5 km north to south. All holes intersected the same sequence of phosphate beds and highlight once again the remarkably consistent geology and grades of the phosphate mineralization over long distances, apparently with no faults or structures affecting the beds.

In his March 29th Exploration Insights piece, independent exploration analyst Brent Cook states: “The Bayovar 12 phosphate deposit lies within a modest-sized sedimentary basin located near the coast in northern Peru. The deposit contains an undiluted indicated 115 million tonnes grading 12.37% P2O5, and an inferred 73 million tonnes grading 12.44% P2O5. The higher-grade beds are closest to the surface, and the resource is wide open to expansion. It is about 10 kilometers from Vale’s Bayovar deposit (416 Mt @ 15.5% P2O5) and Hochschild’s Fospac deposit (130 Mt @ 17.5% P2O5).”

Focus subscribes to a simple business model; produce a simple product with a low capex and get to significant cashflow as soon as is practicable. Those tenets have allowed the company to raise CA$4 million in Q2 2015. The proceeds of the placement were used to make a US$1.5 million prepayment on the company’s loan from Sprott Resource Lending Partnership, for exploration and development of the Bayovar 12 project in Peru, and for general working capital purposes.

Ralph Rushton, VP of Corporate Development notes, “Focus’ Bayovar 12 property is 10 kms from Vale’s Bayovar mine, the largest phosphate mine in South America. As there are very few mines outside of Brazil, a quality project such as ours close to transportation and large South American markets gives us a huge competitive advantage. The largest demand for phosphates in the foreseeable future is South America, putting Focus in an enviable position as it moves toward production. Focus anticipates selling its natural product into Latin America, focusing initially on local markets in Peru and Argentina and Brazil.”

Large areas of farmland in Latin America are phosphorus-depleted as a result of over farming. This problem is particularly acute in Argentina: the growth of intensive agriculture in parts of the Pampas has resulted in ‘P’ (phosphorus) depletion. Direct application rock, being a natural product, is ideally suited to replenish the P in the soils.

While 85% of phosphate is used to produce phosphoric acid, the basis for water-soluble fertilizers, Focus intends to concentrate on producing Reactive Phosphate Rock (RPR), which utilizes the mined rock as a direct fertilizer after a simple non-chemical upgrading procedure. The advantage is that this direct application form can be used as a more cost-effective slow release version of fertilizer as opposed to the dominant water-soluble products, which must be frequently re-applied and are manufactured using sulphuric and other acids. Focus intends to seek organic status for its RPR.

The Phosphate price has moved lower since the peak at US$430 a tonne in 2008. But, at roughly US$115 a tonne in 2015 so far, (Moroccan rock sets the benchmark), global production margins are still healthy, giving investors in the sector excellent leverage and price protection.

Focus intends to avoid the large tonnage production model and build its business on the direct phosphate application noted above. The result for investors should be comfort that cash flow will appear quickly as production eventually begins against a low capex, since Focus’ direct application model will use a simple washing process and no chemical additives.

The Moroccan rock is primarily used for acid manufacture. Since Focus plans to target the direct application rock production, those prices tend to be substantially higher in general, at $175-185 per tonne, as evidenced by recent sales in Brazil and Peru.

The counter-intuitive disparity between the pricing for lower grade DAPR (direct application phosphate rock) versus higher-grade rock for acid making represents the opportunity for Focus. Potentially lower capex/production cost means that it will produce a lower ‘grade’ product but with significantly higher value.

Undoubtedly, the phosphate hungry markets throughout the Americas will be fertile ground for Focus to flourish and add consistent shareholder value, as growth in the food and biofuel markets isn’t going to slow down anytime soon.

In conclusion, Chairman and CEO Simon Ridgeway, industry veteran and a Casey Research Explorer’s League inductee states, “Focus is planning to be a major part of the food/biofuel supply/demand solution: delivering the best and most vital phosphate nutrients to farmers in the Americas.”