|Shares Out. (in M):||229||P/E||0.0x||0.0x|
|Market Cap (in M):||126||P/FCF||0.0x||0.0x|
|Net Debt (in M):||0||EBIT||0||0|
Increasing food prices around the globe due to rising population, unpredictable weather patterns and dwindling supply of fertilizers offers a great opportunity to invest in fertilizer mining companies. A significantly undervalued advanced stage, well financed and high quality potash asset in Danakhil Depression, Ethiopia in one of the largest evaporite basins in the world, very near Asia, the biggest market, makes Allana an attractive investment in this sector. Possibility of low cost solution mining due to extreme temperatures that is prevalent in the region, shallow high grade deposit, strong shareholder base and proximity to key markets will allow AAA to become one of the cheapest producers of Potash in the world. The company is on track to complete the development stage and move into production by 2015.
Allana Potash Corp (TSX: AAA) (OTCQX: ALLRF) is a Canadian potash exploration company. The company’s principal business segment is international acquisition, exploration and development of potash properties. The company has a strong management team with significant experience in the potash industry. The company is currently focused on the exploration and development of the previously explored Danakhil potash property in the evaporite basin of the Danakhil Depression, Ethiopia. The Danakhil Depression is one of the largest evaporite basins in the world with known potash resources and has been attracting lots of interest from some major mining companies including BHP Billiton (NYSE:BHP). Currently, the company has NI 43-101 compliant measured, indicated and inferred resources of 1.88 billion tonnes of Potash with a composite grade of 19.1% KCl.
Potash refers to a mixture of potassium salts, the most common being potassium chloride (KCl). Agriculture is the main driver for potash demand, as 95% of world potash production is used as fertilizer.
The major use of potash is in fertilizers (~95%). So the demand-supply of potash is greatly driven by potash fertilizer demand. According to a Fertilizer Outlook report by the Food & Agriculture Organization (FAO), dated 2011 global potassium fertilizer demand for 2012 is likely to surpass the 2010 level by approximately 9%, with Asia accounting for almost 61% of the increase. Annual demand is expected to grow by 3.1% per year between 2011 and 2015 from 28.7 million tonnes in 2011 to 32.5 million tonnes in 2015. Market analysts believe that potash demand will continue to escalate and support current and future investments in potash exploration and development.
Global demand for agricultural commodities is estimated at approximately 60% higher by 2030 compared to the level in 2010, according to United Nations (FAO) statistics. Larger populations, economic growth, improving diets in emerging markets, shrinking arable land per capita, and growing interest in alternative fuels/bio-fuels are major drivers of food demand in the past few years. To meet the growing food demand, governments, private industry and agricultural communities worldwide are actively promoting the use of fertilizers such as nitrogen, phosphate and potash for better crop yields.
Potash production in Asia stood at 3.9 million tonnes KCI in 2010 as against a demand of 22.5 million tonnes KCI, PotashCorp reports. Meanwhile, Africa recorded zero potash production, while demand stood at 0.8 million tonnes KCI.
There are only 12 players in the global potash industry as mining is capital intensive. Supply is therefore limited. In addition, potash is generally found in widespread underground deposits. Hence, the percentage of potash production traded cross border is 78%, versus 13% and 45%, respectively, for nitrogen and phosphate. According to the U.S. Geological Survey (USGS), Canada, Russia, Belarus, Germany and Brazil hold the largest potash reserves.
The Dallol Project
Allana’s flagship project, Dallol is located in the Danakil Depression, a desert in Northeast Ethiopia. The property is surrounded on all sides by other licences and consists of four potash concessions totaling 160 sq. km. The Dallol project is located in one of the largest evaporite (a sedimentary deposit from the evaporation of seawater) basins in the world and is comparable to the evaporite basins in Saskatchewan and the Russian Urals. The Eritrean Red Sea Coast is about 100 km away and the Dallol project is located approximately 600 km from Djibouti’s (capital of Ethiopia) Tadjoura port.
The property is accessible by road (paved, all-weather, off-road) and a new railway line to Djibouti is under consideration.
The Federal Democratic Republic of Ethiopia is a country located in the horn of Africa, northeast Africa. It is the second most populous country in Africa, which is landlocked and is topographically comprised predominantly of high plateau. The country has a very ancient history and is considered to be one of the oldest sites of human existence. It has a diverse population both in terms of languages spoken and religious following.
Ethiopia is one of the poorest nations in the world with limited infrastructure and economy based on agriculture. The country followed communist ideology in which most was owned by the government, but steady economic development and privatization has started since early 2000s.
Mining sector is very small in Ethiopia contributing less than 1% to the GDP. Gold is the main mineral that is being mined; it has one large scale gold mine in the south of the country owned by Midroc (98%) and Ethiopian government (2%). In addition to gold, Ethiopia has reserves of platinum, copper, potash, natural gas and hydropower.
New mining regulations were issued in the 1990s to promote the exploration and development of Ethiopia’s natural resources. The laws were further developed to shift the government monopolization of the sector to include mutual partnership and to promote foreign investments by providing business incentives that include security of tenure, the right to sell minerals, preferential duty and tax provisions on equipment and machinery, a 5-8 % production royalty (revised in Proclamation 678/2010), a 35 % income tax on taxable income, and a structuring to allow for repatriation of profits.
The property surrounds the historic Musley Deposit. The Houston formation which hosts potash-bearing horizons extends to the company’s property. The drilling campaign confirms the presence of abundant potash mineralization. The core logging and the down-hole geophysical testing indicate the presence of four distinct horizons. These are:
Allana launched a comprehensive exploration program in April 2010, including camp construction, diamond drilling, a 2D seismic survey and water drilling. As of April 30, 2012, 57 drill holes (~25,000 metres of drilling) were completed and a Bankable Feasibility Study (BFS) by Ercosplan is currently underway. The PEA, based on costs and other operating considerations, suggests a solution mining method.
The recent activities of the company include:
As a result of the exploration program the company has developed a sizable NI 43-101 compliant potash resource. The company has 1.298 Mt @ 19.7% in measured & indicated category and 588 Mt @18.6% in the inferred category. With just 70% of the licensed area and that too only the shallow part explored so far the Dallol project still offers good upside of further resource increases. Based on the current resource estimate and with extraction ratio of 34% using solution mining the expected potential life of the mine is over 30 years.
Schedule to Production
The company plans to complete a Bankable Feasibility Study (BFS) and an Environmental & Social Impact Assessment (ESIA) by the fourth quarter of 2012. Meanwhile, BNP Paribas is executing project financing and contracting, which is expected to close by Q2 2013. To begin production, Allana has to complete the following work tasks at the site:
Two significant institutional investors – World Bank-affiliated International Finance Corp. (IFC) and Liberty Metals & Mining Holdings LLC (LMM), a subsidiary of Liberty Mutual Group, have ownership interest in Allana Potash. Liberty Metals & Mining has ~14.9% ownership in AAA and IFC owns 4.1%.
The company had cash and cash equivalents of $58 million, as of April 30, 2012. It is well funded to complete its exploration program and the feasibility study, but require additional funding to develop its projects.
What makes Allana Potash Interesting?
Strong Management Team
Allana’s executives have extensive experience in exploration and strategic projects, while local skilled personnel are part of its corporate development team. On April 23, 2012, AAA announced the appointment of Richard Kelertas, Senior Vice President, Corporate Development. He is a renowned Agribusiness and fertilizer analyst in Canada and has 35 years of experience in various roles in sales, marketing, corporate development, corporate banking and equity capital markets. The company’s technical partner, ERCOSPLAN (Germany), has extensive potash experience in Russia, Central Asia, Africa and Saskatchewan, Canada.
Potential for Low Cost Production
In November 2011, Allana filed a positive Preliminary Economic Assessment (PEA) for its project showing low labour, capital and other operating costs using solution mining, with processing using the energy-efficient solar evaporation technique instead of thermal evaporation using fuel such as natural gas and coal. This is possible because the Dallol project lies in the Danakil Depression, which is one of the hottest places on earth. The company estimates total direct capital expenditure of $795.66 million and operating cash cost of US$70/ton at site and US$91/ton FOB Djibouti, which is highly competitive when compared with potash projects currently under development.
Strong Upside Potential
Based on our discounted cash flow valuation, the model price for AAA is $2.65/share. Our valuation is based on the PEA completed in November 2011. Currently the AAA is trading at $0.56 and had a 52 week high of $1.52; we see many short term catalysts and long term potential that can provide significant upside to the stock. We anticipate as the company completes its feasibility study and moves into development stage the company’s stock will increase substantially. Therefore, the price could rise well above our model price.
Proximity to Demand-Driven Asian Markets
The company’s world-class Ethiopian potash resources are located closer to key Asian Markets such as India – the second-largest importer of potash – and other Southeast Asian countries. The world’s top fertilizer companies export their potash through two marketing groups – Canpotex and Belarusian Potash Company (BPC). These organizations – or legal cartels – work out annual contracts with importing nations, the largest being China, India and Brazil, three of the four BRIC nations. The cartel determines production and prices, similar to price control by OPEC. Canpotex coordinates potash sales with Potash Corp. of Saskatchewan, Agrium (NYSE: AGU) and Mosaic (NYSE: MOS), handling about 25% of global potash exports outside North America. Potash Corp. is the world’s largest potash producer by capacity with a market share of 20%. On the other hand, BPC handles sales for OAO UralKali – one of the world's largest potash producers – and Belaruskali (now merged into a single entity) in Russia and accounts for almost 35% of global potash exports. Together, the legal cartels control 60% of the global potash market. The Asian region’s potash consumption is expected to increase, driven by a rapid increase in the demand of fertilizers for food production. Countries like India & China would have a strategic interest to acquire a secure source of supply outside of the present cartels and AAA fits the bill nicely, particularly after a BFS study.
Limited Supply bodes well for AAA
There are only 12 players in global potash industry, even though there are numerous small potash projects that are coming up around the globe, there are no major projects like AAA’s currently under development so the supply is limited. Moreover, Asian potash demand-supply outlook is also favourable with production in Asia at just 3.9 million tonnes against a demand of 22.5 million tonnes in 2010 creating a huge market with demand that is expected to grow at a robust pace.
The company is well financed and has a sufficient cash balance (approximately $58 million as at April 30, 2012) to fund its pre-construction work in its Dallol project. The company has two significant strategic investors in International Finance Corp., a World Bank Group member and Liberty Metals & Mining, a subsidiary of Liberty Mutual Group and has developed a good relationship with these institutional shareholders. BNP Paribas is the company's financial advisor for structuring debt financing for constructing the Ethiopian potash project. The company recently announced that prospective lenders have shown non-binding indication of interest aggregating more than $600 million.
Ongoing Development of Transport Infrastructure
The government of Ethiopia is actively proceeding to build road transportation infrastructure to connect the Dallol project to main highways and ports. A railway network is also under consideration. Investment in the project is primarily fuelled by funding from China, Gulf and India.
M & A Potential
With a sizable resource estimate and a continued push toward developing a production plan, the possibility that Allana could attract serious attention from bigger miners interested in a strategic entry into the highly prospective potash sector is increasingly becoming more real. We believe that as Allana develops its potash project and moves it further along the development curve, the value awarded to its in-situ resource by a potential suitor could increase significantly.
Additional Significant Upside
Discounted Cash Flow (DCF) Valuation
Using the DCF valuation based on the information from the PEA that was filed in November 2011, we derived a value of $2.65 for AAA stock. The assumptions used in the valuation are as follows:
|Production Start Year||2015 (mid)|
|Production||1 million ton MOP per year for first 10 years, 2.0 million ton MOP per year thereafter|
|Mine Life||30 years|
|Potash price||$500 per ton|
|Direct Capital Cost||$795.66 Million|
|Sustaining Capex||$160.72 million|
|Operating CAsh cost||$90.54 per ton|
|Tax holiday||7 years|
The company plans to raise 65% of the Direct Capital cost, approximately $517 million (65% of 795.66 million) through debt and rest in equity (70:30 ratio). This will translate into raising of $362 million debt and issuing 272 million additional common shares, at $0.57 per share (weighted average price for June 2012).
DCF calculations are as follows:
|NPV per project||C $ Million||C$/Share|
|Dallol Potash Project (12% discount rate)||1,688.36||3.24|
|Debt including the new issue for project development||362.03||0.69|
|Current Mkt Price (Aug 15 closing)||$0.55|
|FD shares outstanding +No of shares to be issued for raising capital for Dallol Potash project development (in millions)||
Risks to Valuation: Allana Potash Corp. is exposed to most of the normal risks faced by other junior resource companies in general like future production, unknown environmental, commodity price, capital raising, geopolitical & regulatory and personnel risks. Some of these risks could be mitigated by management experience and through access to financial sources.
The closest comparable peers of AAA are Western Potash Corp. (TSX: WPX), IC Potash Corp. (TSX: ICP), Verde Potash Plc. (TSX: NPK) and Karnalyte Resources Inc. (TSX: KRN). The table below summarizes these companies: We found interesting that Allana is the nearest to Asia, the big source of demand and the continent with a strong demand supply imbalance.
|Comparable Companies||Verde Potash||IC Potash||Western Potash||Karnalyte||Allana Potash|
|TSX: NPK||TSX: ICP||TSX: WPX||TSX: KRN||TSX: AAA|
|Price (Aug 15, 2012)||3.4||0.79||0.64||7.38||0.55|
|52 wk High||9.37||1.31||1.47||17.5||1.5|
|52 wk Low||2.67||0.67||0.6||4.85||0.46|
|Cash in Hand (Q3, 2012), M $||29.4||53.4||8.2||32.0||58.2|
|Average Grade (%)||9.22/8.91||25.75/25.96||18.7||19.7/18.6|
Since a few majors control the potash market in the world and given the company’s proximity to key markets, low cost production possibility and shallow deposits, it could become an irresistible acquisition target for these companies.
Apart from the generic risks that are inherent for most junior mining companies like commodity price, environmental, capital raising, regulatory and personnel risks, some specific risks are also there for AAA. Since AAA is exploring in Ethiopia, a developing country, it faces higher geopolitical risk compared to companies operating in Canada and the US. AAA is also exposed to company specific risks - not getting good drill results in the Dallol project and not getting enough financing at the right time, and the shareholders also face dilution if the company has to finance at the current low valuations.
Near Term Catalysts
Several positive news and milestones are expected in the near future, which would drive the momentum on the stock.
|Entry||08/17/2012 01:58 PM|
How do you get comfortable with the political risk in Ethiopia? I hasn't been a haven for capitalism and property rights. How are the royalties structured?
We've looked at Verde Potash quite a bit and feel comfortable that the Brazilian government won't change the rules. But even in Brazil, investors get nervous that Argentina's asset nationalization strategy will spread.
|Subject||RE: Speculation Trade?|
|Entry||08/27/2012 01:55 PM|
thank you for your question and comments. There are certainly risks, as is the case with any new exploration project. However, Allana's project is one of those few, which has a good chance of succcess. The resource is there and can be produced within a reasonable time and with a reasonalbe capex. Your point that the industry has no success with greenfield project is only partially correct. It is the case not because new projects can't come to stream, rather, the whole demand situation and renewed interest in potash as a commodiity is only a few years old. Big miners such as BHP Billiton are certainly interested in securing good projects and so are countries like India and China in securing good sources of supply. BHP still remains committed to its Jansen Potash Project- a greenfield project. The opportunity with Allana must be viewed in the light of potential interest from the demand side that will come from places like India and China. It is much cheaper to ship a heavy commodity like potash from Ethiopia to India then say from Canada.
Your point about the management team is just focused on Richard Kelertas. His experience as a senior analyst in the industry is well respected. Everyone has some good and some bad calls. He was a very highly ranked analyst, as you also note, and brings strong network amongst institutional investors, a good thing for a company like Allana.
Allana is not going to production from exploration to production in 3 years. The resource is there and a BFS will be done by end of 2012. From there to production on 3 years in not far fetched. Besides, the comparison to BHP is not valid. Going to production with a solution mining method vs underground mining is very different. It is much less expensive to develop a project using solution mining and when you are trying to start with 1-2 million tonnes a year vs 8 million tonnes a year with underground mining.
As I stated before, the opportunity with Allana is to develop a project and bring to a stage where a BFS has been completed. Once that stage is over, it would potentially attract serious interest from firms/institutions looking to get their hands on a source of potash supply closer to potash hungry Asian market, which currently has a demand deficit of over 18 million tonnes a year. There are not many greenfield projects closer to Indian and Chinese markets that supply can huge quantities of high quality but low cost potash and Allana has potash project that meets those criteria.
Hope this helps to answer some of your questions.