Global demand for potash, a resource to fertilize soil for agriculture, is expected to continue to grow in the coming years due to several economic factors. The demand from emerging markets with rapidly growing populations such as China, Brazil, India, Southeast Asia, among others, is one major component of why the potash market is expected to be strong for the foreseeable future. Another market that is expected to be a major consumer of potash is Africa.
One key player in that space seems to be Allana Potash Corp. (TSX: AAA) (PINK: ALLRF) , which is focusing on its flagship potash property in Ethiopia. In addition to a very advantageous geographical location to capitalize on the long-term trends of the promising potash market, the company has also been very effective in strategically positioning itself to outperform competitors in the space. To learn more about the company's opportunities and direction, we spoke with Richard Kelertas, Senior Vice President of Corporate Development for Allana Potash.
EQ: Can you provide us with a brief overview of Allana Potash Corp. and its operations?
Kelertas: Allana Potash is a junior exploration mining company focusing on potash deposits in the Dallol area of the far region of northeastern Ethiopia. Our flagship properties are in Ethiopia, and this project was brought to our attention after doing some minor exploration work ourselves in 2008 and 2009. We took a look at some historical data that was done by the engineering firm Parsons Company back in the 1970s and found it to be potash rich.
This region has been mined for salt and potash for several hundred years. Right now, the area in the Danakil Depression mountain region has about four or five participants, of which we are the largest. We also just acquired another property called Nova Potash (private company), giving us a total of over 300 square kilometers of land that is licensed for potash development. We also have properties in Argentina, but we’re not developing those at the present time.
We’ve been in Ethiopia for close to three years now and have a camp that’s operating there to finish off all the exploration work. Then we’ll be looking toward our feasibility study, which we expect will be ready by the end of 2012/January 2013. ERCOSPLAN, our engineering consultants from Germany, are handling all the detailed engineering and technical work. Almost all of our field pilot testing work is complete.
EQ: What is the potential of the Ethiopian Potash Project?
Kelertas: We expect we should be able to produce about a million tonnes of potash a year and that will be in the form of muriate of potash (MOP) versus a sulfate of potash (SOP) product. It’s based on potash deposits (comprised of mostly sylvinite, but also could contain carnallite and kainite) that are quite large in this area. So with the initial exploration work and geological work that we’ve done, we have a measured and indicated resource of 1.3 billion tonnes of 19.7 percent KCl, according to our NI 43-101 compliant estimates as of April 2012. We also show half a billion tonnes of 18.6 percent KCl as inferred resources. So we believe we could support a mining operation of one million tonnes per year for 35 to 40 years quite easily with the amount of potash that’s on the property.
We will be using solution mining as our mining technique, which is the cheapest and least invasive. Also, our operations will be located in the hottest place on earth. We will use solution mining and solar evaporation for the bulk of our separation of the brine from the potash. These operations will be spread out over a large land area. We obviously want to keep our cost very low, the use of solution mining and solar evaporation obviously allows us to keep our costs as low as possible compared to other mining methods.
EQ: The demand for potash as the world’s population continues to expand creates very promising opportunities for the company and the industry you’re in. Can you tell us more about the market potential?
Kelertas: What’s interesting about potash and phosphate fertilizers is that, as far as commodities go, what we saw in the last downturn is that price and demand held up quite well. Like everything else, we did have some weakness in price and demand, but over the longer term, potash growth and demand has stayed very stable at about 2.5 to 3 percent per year. The key to that is as the population continues to grow with an extra 800 to 900 million inhabitants expected to populate the earth over the next 10 to 15 years. With that, the land base available for agriculture is going to shrink and, and in many cases, that will lead to an overall drop in global yield and farmland availability. Fertile land is disappearing at an alarming rate around the world, and this creates a tremendous opportunity for additional fertilizer use around the world, because there’s no substitute for potash (and phosphates) for agricultural products. It’s also important to remember that while 85 percent of all potash around the world is used for agriculture, it’s also used for other products as well, such as in high technology and electronics.
Also, the location of our project is very advantageous for us. First of all, we’re situated in a low impact area because it’s in the middle of the desert and there’s really no environmental issue to deal with. Second, we’re very close to the Port of Djibouti, which is about 600 kilometers away. Djibouti can service the Pacific Rim, Asia, India, China, and Indonesia from that port. An additional port is being built in Tadjourah, especially for potash exports. So that’s very advantageous.
Third, with regards to local potash demand, Africa will eventually be using more potash than they do currently. Today, they only consume about 800,000 tonnes of potash per year. Idle farmland in Africa is now being set aside for significant planting of staple crops, and we see that the demand for potash and other fertilizers in Africa will grow exponentially in the next few years.
In terms of global potash demand, Brazil is going to be a real powerhouse for the next decade, but we think Africa will be the powerhouse “in waiting” over the next 10 to 25 years. Africans need to feed themselves, and have to become less reliant on Western and Asian nations to support their population growth. So we see a tremendous opportunity to supply the African continent in the longer term. Initially however, our markets will be Asia and the Pacific Rim, and we will service those markets on a timely and cost effective manor from our location in Ethiopia.
Kelertas: When we discovered the property’s rich resource potential among the old exploration and geological data that was collected by Parsons and others, we focused right away on the advantageous site conditions for low cost solution mining: strategic location, shallow and abundant potash resource, high temperatures, and plenty of water.
Also, we’re going to be very low cost from a CAPEX and OPEX perspective. There are about 100 junior potash projects around the world—either brownfield or Greenfield—but each of them will need billions of dollars to develop. We estimate that our project will cost less than $800 million to produce a million tonnes a year. There’s a large contingency worked into that number, as well as all the port infrastructure cost. However, it’s highly unlikely we will have to pay for the port construction.
Therefore our CAPEX and operating costs are going to be very low. The key here is that if you’re trying to attract a strategic partner, especially in that part of the world, we don’t believe that they want to get involved in a potash project that will cost billions of dollars and take several years to come to fruition and be very expensive to extract. They want a project that can be up and running very quickly, perhaps in about 12 to 18 months from now and within close proximity to their markets.
There are also a few paradigm shifts that are taking place in the global potash market that are important to understand as well. First, the large, controlling players like the Canadians, Russians, and Belarusians are now adding capacity, which is going to take several more years to get up and running and to actually reach market. However, the major buyers like India, China, and Brazil are not too happy with the control of pricing and the oligopoly that these producers basically have. This leads major users and consumers to look for alternate sources of supply, which makes our project very compelling.
We’re also the right size because we expect to produce a million tonnes annually, but believe we have the potential to also get to two to three million tonnes of output per year once all the new rail line projects are completed in our region of Ethiopia (likely by 2017-2018). Also, besides having low estimated operating costs and fairly low capital needs for a project of our size, we are independent from any of the major potash marketing and distribution groups (ie. Canpotex). Therefore, we have generated a lot of interest from end users (fertilizer manufacturers and processors) and also from distributors that represent large buying factions in India, China, and throughout the Pacific Rim.
Lastly, we have just recently increased our land mass with the acquisition of Nova Potash, which was located directly to the west and south of our property. This increased our licensed land mass by 50 percent. This acquisition also gained us control of most of the water access in our region. Solution mining obviously needs a ready source of water supply and a replenishable body of water is critical. Based on the water availability, as well as all of the pilot and lab testing we have done, we have come to the conclusion that solution mining is going to work quite well for us and be extremely cost effective.
We’ve now completed most of the rock mechanic test work and the pilot testing in solar evaporation ponds and test caverns. We’ve been getting sampling results throughout and our partner ERCOSPLAN is currently conducting all the floatation test work, processing optimization, crystal size and grinding tests in Germany. We have drilled about 22 water wells for our hydrological studies and have hit water in all of them. Also, our environmental studies and scoping work is being conducted by a biodiversity and social services consultant, and will be completed by year-end.
The next step is just a matter of pulling in all of the data, summarizing it, getting it all in place and coming to a conclusion on whether all the data in the preliminary economic assessment that we announced in November of 2011 is accurate. We expect that we will have this report completed by year-end and hopefully make the results public sometime in January 2013.
EQ: Can you discuss your company's competitive edge or strategic advantages over your competitors?
Kelertas: The control of the water resource on site is obviously very critical. There are a couple other exploration companies in that area and they’re looking to do solution mining as well, but they don’t have the access to water that we have. Secondly, we have made ourselves completely available to the Ethiopian government. We’ve been advising them on various projects, cooperated with them 100 percent, and are essentially partners with them for this project. We share a very positive and cooperative relationship with the Government and are confident that we will have their support to grow and expand the projects as necessary.
Another real competitive advantage that we see going forward is our location. Because of this, in addition to keeping our site operation cost low, our shipping and handling cost should remain very low as well. The existing port facility in Djibouti is being rebuilt right now as we speak. As well a brand new port facility in Tadjourah is being built to accommodate handling, packing and shipping of over a million tonnes of potash per year that will be exported to Asian destinations. We have signed a memorandum of understanding (MOU) with the Djibouti Port and Free Zones Authority (DPFZA) so as to ensure that the warehousing, handling, and ship birthing facilities will suit our particular requirements.
Another competitive advantage over other junior potash exploration companies is that we are well financed past completion of our final Feasibility Study (FS). We have close to $50 million in cash in the bank as of our most recently completed financial year, July 31, 2012. Our cash burn rate is such that, by the time we finish our FS and we get all the T’s crossed and I’s dotted, we should have well over CA$30 to CA$35 million still in the bank. This is a tremendous advantage compared to a lot of other juniors that are scrambling to raise capital to continue their projects. Most of the other junior potash projects right now are trying to raise capital just to keep their lights on and will need even more just to get to their Preliminary Economic Assessment (PEA) stage, not to mention getting to their final FS stage, which is where we’re already at. We believe we have an excellent chance of being the very first junior to get to production (if not one of the only ones).
EQ: Can you tell us more about the key shareholders that have invested in Allana Potash?
Kelertas: We have two key anchor shareholders. One is Liberty Mines and Metals, which is a wholly owned subsidiary of Liberty Mutual Insurance. They own approximately 14 percent of our equity. They have a $1.5 billion U.S. fund to invest in mining projects around the world and Allana Potash was the first public mining company that they invested in. They do a tremendous amount of due diligence before they invest. They will participate in our equity financing for the mine on a pro rata basis of their ownership.
We also have as another anchor investor, International Finance Corp. which is a division of the World Bank. They have been instrumental in opening a lot of doors for us with regards to export development and export financing opportunities for the project. There are very few junior potash (or even senior potash) companies that have this kind of pedigree in terms of strategic investors/partners in their stable.
EQ: Can you tell us about the management of Allana Potash?
Kelertas: We’re led by Farhad Abasov, our CEO. He has over 20 years of business management experience. In addition, he is currently the executive chairman of Rodinia Lithium, and has founded several public and private mining and energy companies. He previously was Senior Vice President of Potash One, which was taken over by K+S for a tidy sum. He was also Vice President for Uranium One, as well as a member of the management team for Energy Metals, which was sold to Uranium One for $1.8 billion in 2007. He has a successful history of augmenting shareholder value.
We also have representation on the ground in Ethiopia in Nejib Abba Biya, who is our Senior Vice President of Business Development. He is originally from Ethiopia, and is a Canadian and Ethiopian citizen. He has over 20 years of experience in doing business in Ethiopia and has an excellent working relationship with the federal and regional government there. He also has a long history with many of the military and senior cabinet administers in the current government.
Peter MacLean, our Senior Vice President of Exploration, has over 20 years in the mining and exploration industry. He has worked at junior and senior mining companies including Monarch Resources, Aur Resources, and Newmont Mining.
Jack Scott, Senior Vice President of Strategic Projects, has experience in many aspects of the industry, from financing, engineering, construction, strategic planning, acquisitions and divestments.
I, myself worked as an equity analyst for 25 years in the capital markets sectors in Canada. I also worked at corporate and investment banks that had offices and operations throughout the world. Before that, I spent many years in sales, marketing, and corporate development for various industries, and worked for various government ministries in the province of Ontario.
Our Board of Directors includes Diana Walters, who is the President and CEO of Liberty Mining and Metal. Also on the Board is Richard Lacroix, a former Senior Vice President of Potash Corp of Saskatchewan and former Director of Canpotex. He had spent over 30 years with Potash Corp., so he understands the potash market, the resource, its geology, and the global trading patterns intimately. Also on our Board is retired Major General Lewis Mackenzie, who led the U.N. peacekeeping effort in Sarajevo in the 1990s. He consults and updates us on all security issues in Africa, Ethiopia and Djibouti. I should note that we’ve had no serious boarder issues with Eritrea, and have had no issues with Somali pirates in the last six months in the Gulf of Aden (near Djibouti). There is a Navy Seals contingent posted just north of Djibouti, near to the new Port of Tadjourah. This obviously has meant security issues in that area are under control.
EQ: What are a few milestones or goals over the next 12 months that the investment community should look out for?
Kelertas: Our PEA was completed in November of last year. That got us on track with our full exploration work, and we’re finishing off our FS, which we expect will be released in January. We also expect that our Environmental and Social Impact Assessment (ESIA) will be done as well by the fourth quarter of 2012. However, right now the key for us is to develop and secure offtake agreements (for substantial production volume) and potential equity strategics. We’ve been working with many interested parties throughout the world and have several well-advanced negotiations going on. Obviously, these offtakers and strategics will be able to make a final definitive decision when the FS is completed. We hope to be in a position to have these secured (offtakes and strategics) in the first half of next year.
We’re also in the process of getting our debt financing details all lined up. BNP Paribas is our financial advisor and arranger on this effort. They have put together a consortium of several banks that have given us “soft” commitments for about US$650 million in project debt financing. While these are only soft commitments for now, we are optimistic and will be working to firm these up after the banks complete their own due diligence and their full review of our FS when it is ready at the end of December.
If all works well, we will be able to put the first shovel in the ground to start construction toward the fourth quarter of 2013. If that’s the case, then we likely will be able to ramp up production quickly by late 2014 or early 2015. That’s essentially our timeline with upcoming milestones. In the meantime, we’re in the process of trying to get our story out in the capital market and investment community, speaking with institutional investors throughout the world and focusing them on our progress and potential higher returns.
Our PEA (November 2011) indicated a after-tax Net Present Value (NPV) at a 12-percent discount rate of US$1.8 billion. Using a long-term average potash price of US$475 per metric tonne, our project (at full capacity of one million metric tonnes per year production) will generate an after-tax Internal Rate of Return (IRR) of over 35 percent. Net of our cash, the market is only assigning a value of approximately CA$100 million to our project. Our shares are currently trading at a 95-percent discount to our after-tax NPV. This market discount is not justified by any measure.
EQ: Any additional closing comments?
Kelertas: Well, there’s always market uncertainty that hangs over any capital intensive commodity development project. Recently, it’s been a very difficult equity and debt market environment (the U.S. fiscal cliff, economic chaos in the EU, falling GDP numbers in China and India, and falling potash prices), but we’ve been able to progress our project with a tremendous amount of management grit, determination, along with cooperation from our board and the Ethiopian government. We’re in the right location and we’ve got rapidly improving infrastructure in terms of roads, rail lines and power being built to service our project. It’s definitely a competitive advantage for us to service those international markets that want a project like ours to start getting potash out the door as soon as possible. Once we’re up and running at a million tonnes per year, our operating costs will compare with some of the lowest cost producers anywhere in the world. In terms of return to shareholders, this is the bottom line that really counts.
Cautionary Notes
The ability of Allana to produce one million tones of potash per year or to increase production beyond one million tones per year has not been the subject of a feasibility study and there is no certainty that the production rate or proposed expansion will be economically viable.
The information presented in this interviewcontains “forward-looking statements”, within the meaning of the United States Private Securities Litigation Reform Act of 1995, and “forward?looking information” under similar Canadian legislation, concerning the business, operations and financial performance and condition of the Company. Forward-looking statements and forward?looking information include, but are not limited to, statements with respect to estimated production, the estimation of mineral reserves and mineral resources; the realization of mineral reserve estimates; the timing and amount of estimated future production; costs of production; capital expenditures; success of exploration activities; permitting time lines and permitting, mining or processing issues; government regulation of mining operations; environmental risks; unanticipated reclamation expenses; title disputes or claims; litigation liabilities; and limitations on insurance coverage. Generally, forward-looking statements and forward?looking information can be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved”. Forward-looking statements and forward?looking information are based on the opinions and estimates of management as of the date such statements are made, and they are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements or forward?looking information. Although management of the Company has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements or forward?looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements and forward?looking information. The Company does not undertake to update any forward-looking statements or forward?looking information that are incorporated by reference herein, except in accordance with applicable securities laws.
Investors are advised that National Instrument 43-101 of the Canadian Securities Administrators requires that each category of mineral reserves and mineral resources be reported separately. Mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty of measured, indicated or inferred mineral resources, these mineral resources may never be upgraded to proven and probable mineral reserves
Cautionary Note to U.S. Investors Concerning Estimates of Measured, Indicated or Inferred Resources
The information presented uses the terms “measured”, “indicated” and “inferred” mineral resources. United States investors are advised that while such terms are recognized and required by Canadian regulations, the United States Securities and Exchange Commission does not recognize these terms. “Inferred mineral resources” have a great amount of uncertainty as to their existence, and as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or other economic studies. United States investors are cautioned not to assume that all or any part of measured or indicated mineral resources will ever be converted into mineral reserves. United States investors are also cautioned not to assume that all or any part of an inferred mineral resource exists, or is economically or legally mineable.
Cautionary Note Regarding PEA:
The PEA is preliminary in nature and is based on a number of assumptions that may be changed in the future as additional information becomes available. Mineral resources that are not mineral reserves do not have demonstrated economic viability. The PEA includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves, and there is no certainty that the PEA will be realized. The PEA is not based on and has not been amended to reflect the updated resource estimates published by the Corporation on April 30, 2012.:
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