August 17, 2012 - 1:04pm EST by
2012 2013
Price: 0.55 EPS $0.00 $0.00
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
TEV (in $M): 126 TEV/EBIT 0.0x 0.0x

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  • potash
  • Commodity exposure
  • Fertilizer
  • Canada
  • Secular Growth
  • low-cost producer


Investment Summary


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.

Macro Picture


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.

Supply-Demand Dynamics

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:

  • Sylvinite Zone: Overlies the Upper Carnallitite Zone and averages approximately 4m in width and grades about 30% KCl. It is fairly widespread and KCl grade here may reach up to 52%. The company is currently focused on this zone.
  • Upper Carnallitite Zone: Overlies the Kainitite Zone. It is locally prominent and is less widespread.
  • Lower Carnallitite Zone: Overlies the Kainitite Zone. It is locally prominent and is less widespread.
  • Kainitite Zone: It is the most widespread and averages approximately 7m (metres) in width and typically yields 20% KCl. It forms the basal potash horizon.


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:

  • Exploration program is currently underway in the northwestern part of the property (Hole 58).
  • Pilot Evaporation Ponds: Brine is in evaporation ponds and salt precipitation is underway. The company estimates to extract sufficient sample in one month that can be used for processing evaluation.
  • The company has started water well drilling and completed pre-drilling of six holes targeting aquifers in alluvial fans. Further, for the installation of water monitoring equipment and to prepare for deepening by a large diameter core drilling rig, these holes have been cased and cemented.
  • Environmental Resource Management (ERM) has completed Scoping Report.

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:

  • Brine Field: Preparing the brine field for production requires 30 wells and 42 replacement wells. The caverns for these wells require pipeline infrastructure, power for pumps, and a facility to dispose the brine. The estimated completion time for a solution mining well is 2.5 weeks and cavern preparation leaching is expected to take about 10 months per cavern. Work is scheduled for completion by April 2015.
  • Evaporation Ponds: Large evaporation ponds can be constructed simultaneously with brine fields. Work is expected to be completed by March 2016.
  • Flotation Plants: Construction and equipment installation for the flotation plant will take about one year. Work is scheduled to be completed by October 2014.
  • Auxiliary Infrastructure: Establishment of power generating facilities for pumping large brine volume and other needs. Work is scheduled to be completed by October 2014.




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.

Strategic Partners

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


  • Highly Discounted with Substantial Upside Potential: Based on our discounted cash flow valuation method, we have arrived at a Model Price (MP) of $2.65 per share,380% higher than the market price of $0.55, as of August 15, 2012. We expect the company to continue with its feasibility study, other technical studies and establish new resources over the next 12 months. Accordingly, we believe Allana Potash is “Undervalued.”
  • ·         Fast tracked feasibility possible: With a significant resource estimate in the M+I categories and a strong cash balance and financial banking, we now expect Allana to move fast towards completing a bankable feasibility study and an Environmental & social Impact Assessment and to move to the development phase.



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
Average grade 19.31%
Direct Capital Cost $795.66 Million
Sustaining Capex $160.72 million
Operating CAsh cost $90.54 per ton
Tax rate 30%
Tax holiday 7 years
Discount ratte 12%


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:

Net Asset Value Breakdown
NPV per project  C $ Million  C$/Share
 Dallol Potash Project (12% discount rate)  1,688.36  3.24
 Unadjusted NAV  1688.36  3.24
 Cash  58.16  0.11
 Debt including the new issue for project development  362.03  0.69
 Adjusted NAV  1384.5  2.65
Current Mkt Price (Aug 15 closing) $0.55
P/Adjusted NAV 0.21
FD shares outstanding +No of shares to be issued for raising capital for Dallol Potash project development (in millions)


Adjusted NAV

$ 2.65

Target Multiple


Model price


Implied Return





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.


Comparable Analysis

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
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
S/O 37,222,782 151,406,384 161,295,183 21,868,914 228,536,024
M.cap 126,557,459 119,611,043 103,228,917 161,392,585 125,694,813
Cash in Hand (Q3, 2012), M $ 29.4 53.4 8.2 32.0 58.2
Area Explored  Brazil USA Canada Canada Ethiopia
M&I (MT) 71   254   1298
Inferred (MT) 2,764   708   588
P&P (MT)   838   144  
Average Grade (%) 9.22/8.91   25.75/25.96 18.7 19.7/18.6




Investment Summary

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.

  • High grade - Shallow resource with low production costs: The relative shallow depth of the resource base within 200 meters of the surface allows for easier extraction relative to various potash mines in Saskatchewan which are over 1000 meters deep. PEA supports low-cost solution mining due to the extreme temperatures that are prevalent in the region.
  • Fast progress to development stage: With a fairly significant resource estimate and a strong cash balance with financial options already available, AAA should be able to move fast towards conducting a bankable feasibility study and to move to the development phase.
  • Developing Infrastructure: Ethiopian government has so far shown positive attitude and commitment to the resource industry, fully understanding the potential to add to the economic growth of the region. The Ethiopian government is committed to provide rail and road infrastructure to the Danakhil basin, especially to the deep sea port which is about 600km away. Ethiopia's location, closer to the end markets of China and India, is also a key for Allana, providing cost-competitive transportation.
  • Recent Drought News: Could drive interest in fertilizer stocks and helping Allana
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