New Investment: Allana Potash Inc.

(HornTrade) – As everyone knows, the global potash market is run by two cartels: Canpotex in Saskatchewan and the Belarusion Potash Company in Belarus. Between the two, they control 90% of world potash production, which makes large potash projects outside of these two areas increasingly valuable. Allana has such a deposit in Ethiopia located in the Danakil Depression. The company has an independent NI 43-101 compliant resource of 105.2 Mts. with a composite grade of 20.8% KCl and hopes to expand the resource during its current drilling program. Historical drilling conducted in the 1960′s outlined a possible deposit of 171 million tons at a composite grade of 31-34%. One of the advantages of the deposit is that it is near the surface (easier to mine), which should help make Allana a low-cost producer. Furthermore, the deposit has good access to water, an important ingredient for mining. The only knock against the deposit is that current infrastructure is not great. The deposit is not near a port and lacks a railway to link to the nearest port in Djibouti. However, the government has plans to construct the required infrastructure to support the project.

An important deposit like Allana’s Dallol Project, which is located outside of Saskatchewan, should be considered a major strategic deposit and, in my opinion, has a good chance of being acquired before production commences. The obvious buyer would be a Chinese company because the Chinese government has made it a national priority to acquire important global resources to support domestic consumption. Potash is one of those vital resources needed to improve the country’s crop yields. China has already signed trade deals with Ethiopia to help develop natural resources and improve infrastructure in the African country.

Timeline

The company is currently drilling to expand the resource. If everything goes according to plan, the company will complete a feasibility by the end of 2011.

After that, the company should begin mine and plant construction during 2012 and could be in production by mid to late 2013.

Management

The company is run by Farhad Abasov, who used to be VP for Uranium One, and has 15 years of experience in business. From what I have seen, management is very shareholder friendly. The major accomplishment for management was an off-take/financing deal with China Minerals, where the Chinese company made a strategic investment in Allana and agreed to fund 35% (about $280 million) of the capital costs associated with the mine. This deal not only reinforces the strategic importance of Allana’s deposit, but also shows that management is financially savvy (pretty rare for resource companies). Using other people’s money to construct your mine is the right way to go from a shareholder perspective.

Financial Position

As with all exploration companies, you face the risk of dilution. The company currently has approximately $4 million in the bank. which will not be nearly enough to finance the development of its Ethiopia project. So further equity dilution is a certainty. However, dilution should be partially mitigated by Allana’s recently announced off take/financing agreement with China Mineral. The company has also strongly hinted that they have been approached by other interested parties regarding a similar deal. If true, this would be a major coup for Allana shareholders because it would further reduce financing risk. The total estimated cost of the mine is around $1 billion so securing early financing is vital.

Major Investors

Allana is backed by the merchant bank Forbes & Manhattan which has a strong record of advising resource companies from discovery and exploration, all the way to production. Another major investor in Allana is China Minerals, which made an investment in the company as part of the previously mentioned financing deal.

Summary

I consider Allana an excellent call option due to the importance of potash as a strategic resource to countries like China and India, which do not want to be entirely at the mercy of the current potash cartel. Allana has a large deposit located in a neutral country and has the potential of becoming a low cost producer. Furthermore, I believe that the company is very cheap with a current market cap of around $60 million compared to other junior potash companies like Potash One. One other thing I like about Allana is that it should be relatively uncorrelated from the price of potash, which is a positive considering the low price of potash. It should be noted that this is still a high risk stock, and you should expect significant volatility. The mining business is never a sure thing, and Ethiopia has historically been plagued by political turmoil (and civil wars), which could complicate the situation. Overall, I think the potential rewards far outway the risks in the case of Allana Potash.

Source: istockanalyst.com

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