Allana Potash’s Low CAPEX/OPEX Project Creates Compelling Opportunity in Turbulent Potash Market

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In July 2013, the potash market was rocked when Russia’s Uralkali, the world’s largest producer of the crop fertilizer, announced it was breaking Belarus. The decision caused potash prices to spiral downward, falling from around $400 per metric tonne to the current level of around $340 FOB Vancouver. Prices still have further to fall as experts don’t expect a bottom to be established until at least the end of 2013.

For many companies in this space, the collapse has created enormous pressure on their ability to operate and expand, and creates legitimate questions of their viability going forward. Like with most industries, catastrophe usually leads to opportunity, and those most capable of navigating through the turmoil are best positioned to capitalize on the massive market.

As covered before, Allana Potash Corp. (AAA:CA) (ALLRF) has always been a very lean-operating materials company focused in Ethiopia, even before the fallout of the Uralkali-Belarus situation created havoc in the potash market. That focus on low capital and operating expenses puts an even higher premium on Allana’s value proposition now. Combine that with the prime location of its Danakhil project, amiable relationship with the local government, and ability to leverage other outside resources and infrastructure projects, there’s no question why management is so excited about the company’s future.

Equities.com caught up with Richard Kelertas, Senior Vice President of Corporate Development for Allana Potash, to get an update of how the company has done during this current environment, as well as for more insight into how the potash market is being affected by it.

EQ: What are some updates at Allana Potash since the last time we spoke?

Kelertas: Things have changed quite significantly in the potash market. Uralkali’s decision to break away from the Belarusians has caused a bit of consternation in the potash market, and prices have fallen as a result. A lot of customers are sitting back and waiting for the price to fall, and for the oligopoly to fall apart.

What it has done as well is start to make high-cost projects a little less valuable. So our low cost project hasn’t changed, we still have some of the lowest CAPEX per tonne and lowest OPEX per tonne in the world for greenfield projects. There is still a tremendous amount of demand for potash fertilizer throughout the world. As the population grows exponentially in various parts of the world, we’re going to see tremendous demand—not just in traditional areas—but also in areas like Africa that haven’t used a lot of potash. Their agricultural efforts are picking up dramatically.

So with short-term pain comes opportunity. Many projects that were on the drawing board are being reconsidered or delayed, or even abandoned altogether. That creates opportunities for us.

EQ: So while the majority of the potash industry is facing significant uncertainty, how has Allana better positioned itself to capitalize?

Kelertas: We just received our mining license and permit from the Ethiopian government, which is quite a big milestone for us. We also completed our feasibility study in February 2013.

We’re in the process right now of getting our financing together for the project. The total cost would be $645 million to build a solution mining operation in Ethiopia for about a million tonnes in total capacity per year.

A few months ago, we signed mandate letters with a group of banks to provide the debt financing for our project. That’s a consortium of export development banks and developing financial institutions. These institutions are not commercial banks. We expect to finance the project using about 65 percent in debt and 35 percent in equity.

EQ: What is the current status of the debt financing?

Kelertas: It’s moving along. We are in the midst of due diligence with lenders and hope to have the debt financing structured by the end of 2013.

Concurrently, we are working on equity financing and strategic off-takers, and these talks are progressing well.

Of course, we have two equity partners in The International Finance Corp. (IFC), which is part of the World Bank, as well as Liberty Mines and Metals, which is part of Liberty Mutual Insurance Group. Liberty Mutual Insurance is one of the largest insurance companies in the world. Liberty Mines and Metals owns just under 15 percent of our total equity, and IFC owns about 3 percent.

EQ: Can you elaborate more on the mining license and how big of a milestone that is for Allana Potash?

Kelertas: It’s significant because it indicates confidence in Allana Potash being able to deliver on our promises. We also have a lot of interesting benefits that come out of that mining license. Some of the key terms that are confirmed include the exclusive 20-year and ongoing 10-year renewable rights to mine, process, and sell both on the export markets and domestic markets. We also have the right to use all the groundwater that’s underneath our property, and the structured materials and infrastructure as well.

The terms and conditions of the mining license with respect to the government involvement amount to 5 percent free-carry ownership of the project by the Ethiopian government, and a royalty of 4 percent on total gross revenue. So that is significant in that none of that changed through our negotiations.

Several other projects have had a lot of variability in the free carry with individual governments and royalty rates. For us, that did not change, and certain terms in the license will provide for appropriate consideration for material changes in laws or regulations.

On top of that, we also received custom exception during development, construction and early operations and confirmation of other aspects of Ethiopian mining and tax laws and regulations. That’s a big win for us, and there are other enhancements that are under negotiation right now with the government parallel to the mining license.

Allana Potash’s Ethiopian Project Presents Enormous Potential in a High-Demand Market (Map 1)EQ: The location of the Danakhil project served as a major significant advantage for Allana Potash. How are you maximizing the geographical benefits and accessible resources?

Kelertas: From the very beginning, we felt that we were in an excellent position because the resource was there. We believe there are several billion tonnesof potash residing in the Danakhil depression which represents significant potential for Allana. Allana intends to concentrate on developing up to 1 million tonnes per year to start.

The location, because it’s the hottest inhabited place on earth according to theGuinness Book of World Records, allows for us to keep our OPEX down.  It allows us to do very low-cost, efficient, and environmentally friendly solar evaporation and solution mining for the separation and removal of the potash from about 100 to 400 meters depth.

Another major advantage is that we have plenty of water. For solution mining, you need quite a bit of it. You need about 18 million cubic meters per year for a million tonnes, and we have a lot of ground water. Also, the recharge rate is extremely high because of precipitation in the mountain ranges feed aquifers around our property. That makes it very advantageous - all we have to do is pump it out of the aquifers in our license area to our production site.

EQ: The Ethiopian and other African markets should see a meaningful increase in potash demand, as you noted. Can you potentially tap into other surrounding markets?

Kelertas: That’s our fourth strategic advantage: The close proximity to international markets. There are the obvious ones such as India, China, and the Pacific Rim, but there’s also our own backyard: Africa. That would be a significant market for us and it is developing quite rapidly. We’ve already seen indications from the Ethiopian government that private concerns are now building four MAP and DAP plans in Ethiopia, and could build up to about 200,000 tonnes per year of potash to feed those plants over the next couple years.

So we have a market right at home, and the rest of Africa is expanding its agricultural performance and cultivation. We know that because a significant amount of land is being purchased or leased by foreign governments to either develop agricultural capabilities in different African countries, as well as to allow for export development.

EQ: In terms of infrastructure, what are some cost-savings benefits that are helping you keep your expenses down, especially over the long term when you plan to ramp up production?

Kelertas: Product is being delivered to the Port of Tadjoura in Djibouti where we’ll be shipping out of, with estimated overall production and transportation costs at under $100 per tonne FOB port.

Infrastructure is a critical component of any project. You need to have transportation, water, loading and offloading warehousing facilities, and either railroad, port, or whatever you’re going to use to export. If you don’t have that in place, you’re going to have to go out and get it or build it yourself, and your costs will go up dramatically.

We’ve been very fortunate in that we have total cooperation from the Ethiopian government and the government of Djibouti to build roads, and port facilities to use and modify for potash shipping. Also, there are $7.5 billion to $8 billion worth of rail construction contracts that have been signed with the Ethiopian Railway Corporation. That will mean that at some point over the next few years, we’ll be able to tie in a transportation system by truck to the rail system. That will further lower our costs.

Also, the government is keen on making sure that this region in Ethiopia is serviced by better roads and better power because it’s a disadvantaged area being a remote region in the northeast portion of Ethiopia. Hence, there’s a lot of work being done to improve the basic infrastructure and power development.

To start, we’ll be using fuel oil and gensets to meet our power requirements. When an electricity grid connection is available, and that is being studied, that could lower our costs significantly. There’s a lot of cost savings potential with transportation and power, and then there’s a potential for future ramp-up in production, which will lower your unit cost, which will in turn provide us with a lot of advantages going forward.

EQ: Meanwhile, the overall potash market is experiencing critical pricing pressure lately. Do your advantages keep Allana buffered from the rest of the trends that are occurring in the broader market?

Kelertas: Everybody is now looking for projects that are extremely low cost, not only on the CAPEX and OPEX side, but the right location and also projects that are able to be developed within a couple years.

Allana’s prime location is one thing that has buffered us besides our low cost. The fact that we also have a market right around the corner from us that’s not a traditional market either is appealing. We’ve been very forthright in indicating that there has been quite a lot of interest coming from the Middle East for our potash.

A lot of the Arab world has been heavily involved in developing agricultural projects and programs in Africa. It’s very important that we outline the fact that our location basically provides us with three significant markets: Asia/Pacific Rim—which includes China, India, and Indonesia/Malaysia—the Middle East, and also Africa.

EQ: Does the current issue between Uralkali and Belarus serve to shake out some of your competitors?

Kelertas: It’ll be interesting to see how the situation in Russia and Belarus transpires. Our view on this is that we expect to see some resolution to this issue in the coming months. In the meantime, our view is that we have an advantage with our extremely low cost.

EQ: If or when there is a resolution to the current uncertainties, what kind of potential are you looking at in the potash market?

Kelertas: If and when there is a resolution, we could see prices recover. How much is anybody’s guess. There is a demand reaction to this kind of price decline. Crop prices have been very strong, and yet fertilizer prices have come off. We haven’t seen that kind of ratio between crop prices and fertilizer prices for a while. That spurs demand. That may be short term, but it certainly will mean that with more money in the jeans of the farmers, they’re going to be looking to try to boost yields and maybe even try to take over some extra land to boost their income even more. If fertilizer prices—which is a large chunk of their overall expenses—have come down as much as they have, they’re going to be buying more of it.

EQ: You discussed the financing timeline above. What are some other milestones should we be looking out for?

Kelertas: We’re hoping that by the end of 2013, our financing will all be completed so that we can start construction next year. That being the case, with the quick turnaround time of solar evaporation and solution mining, you can get a project up and running in 18 months, if all goes well.

That means we can be producing our first tonnes by the end of 2015, and the timeline after that is to ramp up to a million tonnes by late 2017/early 2018. The catalysts coming forward are the completion of our debt and equity financing with some off-takes, and then moving forward with contracting, construction and startup.

EQ: Are there any final thoughts you’d like to add?

Kelertas: We’re quite pleased with our progress so far, but there’s always a tremendous amount of work still to do, and we’re working extremely hard to reach our goal of constructing a solution potash mine in Ethiopia, the first in east Africa, and we’re looking forward to it.

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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