By Kevin Michael Grace
Lest there be any doubt of its confidence in Ethiopia and its Dallol Potash Project, Allana Potash
(T.AAA) has dispelled it by doubling the size of its property. On September 4, the company announced a buyout of Nova-Ethio Potash Corp, increasing thereby the size of its holdings in the Danakhil Depression from 154 square kilometres to 312 square kilometres. Richard Kelertas, Senior VP Corporate Development says the potential addition in potash and water resources is a “bargain.”
The agreement stipulates that Allana will pay Nova 12.7 million common shares and a further 35.6 million should Nova contain 29.2 million tonnes of potassium chloride within the sylvinite zone. (At press time, these 48.3 million shares are worth $28.7 million.) Should Nova contain more than 45 million tonnes of potassium chloride within the sylvinite zone, Allana will pay $7.5 million more, with a cap of 25% of Allana common shares.
How much potash does Nova contain? Kelertas responds, “We have a general idea because Nova has already drilled 21 holes, and we’re reviewing the data now. Our geologist has already come to the conclusion that there is quite a bit of potash in the form of sylvinite in the area. It’s contiguous to our own site, so the geology is probably very similar. We’ll go ahead and commence an exploration drill program for another 20 holes, and that will firm up the resource. Our expectation is we’ll probably prove up anywhere from 25 million tonnes to 45 million tonnes of mineable KCl (sylvinite) on that site, but that’s just an estimate for now.”
The Dallol Project’s resource is already considerable. According to an April 30 43-101 report, it contains 1.3 billion tonnes measured and indicated with an average grade of 19.3% KCl for a total of 251 Million tonnes of KCl, with an inferred resource of 588.2 million tonnes with an average grade of 18.6% KCl for a total of 109 million tonnes of contained KCl. The total measured and indicated sylvinite resource is 171.4 million tonnes with an average grade of 31% KCl for a total of 53 million tonnes of contained KCl, and the total inferred sylvinite resource is 46.6 million tonnes with an average grade of 30.3% KCl for a total of 14 Million tonnes of KCl.
The Nova property gives Allana not only more potash but the means to mine it. Kelertas explains, “We’re also acquiring substantial water resources in that area. This is potable water we can use for a solution-mining process. Now that we’ve got Nova, we’re not going to be a small player anymore.”
Water is crucial in Ethiopia. Kelertas says, “We’re doing water testing on our site and on Nova’s site, and that’s progressing well. The studies we’ve done indicate there is lots of water on our property and Nova’s property, especially in the southwest. We’ve also done some work on pilot testing of recharge rates. It’s one thing to take water from the ground, but it is another to see how quickly it is recharged. Reflectivity analysis has shown not only a lot of water, but the recharge rates are pretty good, especially from the alluvial-fan area, which flows right into the Nova property and some parts of our property.”
In addition to water testing, Allana furthers its rock mechanic work. Kelertas says, “We’re doing a well test and cavern test to see how large the caverns have to be to be able to pump water down and then create a brine and be able to pump the potash and sylvinite out of the ground.”
Meanwhile, Allana works on its updated feasibility study. According to Kelertas, this should be published by “the first part of 2013.” He adds that the Nova property has likely been added to Dallol too late to be included in the update. “Our view is the bankable feasibility study will probably just concentrate mostly on our current concession. If we can add some information on Nova, it will be great, but if it’s not ready, we’ll have to do a separate economic assessment. Because the geology is so similar, we probably will be able to get quite a bit of the Nova property resource firmed up and put into our bankable feasibility. So it all depends on how quickly the drill results come through on the 20 holes we have to drill with Nova. If it takes too long, we’ll have to leave it out.”
The current PEA of November 2011 forecasts (at a 12% discount rate) an aftertax net present value (NPV) of US$1.85 billion, an aftertax internal rate of return (IRR) of 36.8%, a total CAPEX of US$796 million, total operating expenditures a per-tonne basis of US$90.54 and a 30-year mine life.
Western companies have not been welcome in Ethiopia for very long, so the death in August of modernizing Prime Minister Meles Zenawi has raised questions. Kelertas is pleased to report a seemingly seamless transition. “The Deputy PM took over, and there haven’t been any incidents or uprisings or upheaval in government services or anything similar. In terms of the security around our site, we’re basically in the middle of nowhere, and we’re also not far from the Eritrean border. There have been no real border skirmishes for the last five to six years between Eritrea and Ethiopia. There is peace now, and a very large garrison of Ethiopian troops is stationed between our minesite and the border, so stability in the region is now the norm.”
Macro security has been settled and micro as well. “Of course, we get a lot of people coming in looking for employment opportunities, so we have to let them know we’re not ready to hire extensively at this time, although we have with our pilot-testing program. So the security at the minesite has been basically non-active, and they haven’t had to do much compared to some other African countries, where there’s always some threat of an uprising or a Taliban threat, we’ve not seen that in Ethiopia at all.”
And the improvement of Ethiopia’s infrastructure continues apace. “Over the last 10 years, the Ethiopian government has spent something like $1.5 billion in improving the road system,” Kelertas says. “Now we’ve had most of the roads around our area completely rebuilt and set up for haul roads to be able to ship our products. There is also a paved highway that’s close by, and we’ve also got our road system into our camp and an airstrip that we put in with government help.
“Also, there is another 30 to 40 kilometres worth of road that is being rebuilt and brought up to spec, and will connect our project all the way down into Djibouti. We’re quite pleased with the road infrastructure improvements so far carried out by the government.”
Rail is being modernized as well. “About 5,000 kilometres will be rebuilt to the tune of something like $7 billion to $10 billion,” Kelertas says. “Several contracts have already been awarded with Chinese, Indian and Turkish firms. A new rail system will be available to us by 2016 or 2017. A dedicated rail system from our minesite to connect up with one of the new major rail lines that goes to the Port of Djibouti is still under discussion. It will probably cost the Ethiopian government about $800 million to build, and we’ll have to pay tipping fees to use it.”
With a resource, roads and rail, Allana now looks to end users. “We’ve got three different groups of interested parties, and we’re still in negotiations right now,” Kelertas says. “There are several parties who are interested in looking at us as either a joint-venture partner or as a silent partner for them to get into potash production in that part of the world. Some of them are located in different parts of the industrialized world and are talking to us about possibly putting together a partnership.”
Allana is committed to production. According to Kelertas, “I know there are several interested parties who want us to be successful and move to production, and some sovereign funds are certainly talking to us about that. But someone may come by and say ‘This is a strategic asset now that we’ve proven it up. They have lots of water and have doubled their size, so let’s go into partnership or just take them out completely.’ So that’s a possibility, but we’re not counting on it. We’re working on taking this project to production within the next two years.”
Kelertas emphasizes, “We’re not going to give the company away. There is no doubt that we’ll be very, very tough negotiators, if someone comes in and offers a ridiculously low price. Even a normal premium of 30% to 40% to our current share price would like be too low. This stock was well over $2 for a long period of time, and now we’ve progressed and doubled our size. So we’re worth a heck of a lot more than the market suggests we are. Even our current preliminary economic assessment, if you take a look at that valuation using a 12% discount or use whatever discount rate you want (14% or 15%), we’re extremely undervalued. Now that we’ve added Nova, I think we’re the best bargain on the street right now.”
As for production, “We’re hoping to get the first tonnes out the door by the end of 2014, early 2015. Then we’ll be ramping up, and it will take us to 250,000 tonnes over the first year in 2015, three-quarters of a million tonnes in 2016 and full production by 2017 (that’s with contingencies and delays). We hope we can get up and running sooner. Then after that, once we have cashflow coming in, and we have ramped up, we can get our second phase to reach two million tonnes. That’s just on the property that we have now and with the water we have now. This is without our Nova property. We don’t even have to worry about Nova. In seven to 10 years, we could be at five million tonnes, using Nova’s resources.”
And as for a future glut of potash, Kelertas says this, “We have a lot of evidence that suggests to us that the market will be a lot tighter over the next five years. As projects are getting delayed and postponed, downsized or even abandoned, we don’t think we’re going to have that serious of an oversupply issue. There is no substitute for potash, and the industrialized world cannot continue to feed the rest of the world. Hence, for drought protection and yield improvement you need potash. Africa consumes only about 800,000 tonnes right now, and we think it can consume anywhere from eight to 10 million tonnes in the next 10 years or so.”
At press time, Allana had 228.5 million shares trading at $0.59 for a market cap of $134.8 million.
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