something useful... f Fraser Mackenzie is correct in their recent report and we consider the implications of over production as a possibility over the next 10 years, then one has to ask “who is still going to make money in an over supplied market?”
The answer may lie in their comment that: “ We note that the project continues to be economic under a US$325 per tonne potash price’ and that my friends may someday be worth its weight in gold…as very few current or proposed potash miners can say the same thing…period.
Having that ability allows Allana to not only move into production but gain the upside of potash selling at higher prices and withstand any downturn in the global price for potash.
I just would not want to be on the wrong side of “overproduction” and not getting financing to get to production and realize the real value of 10 x earnings per share….
Another interesting observation from their report is the word “strategic” and if taken in conjunction with Farhad’s 3 oversea visits to Asia in the last 12 months with no released news… “a sovereign wealth fund or state-owned fertilizer company from either one of these countries would be on a list of plausible “strategic” partners…. an agreement “could conceivably happen at any time” although the conversations have likely become more in depth following the recent release of a preliminary economic assessment.
Analysts Peter Prattas and Mona Nazir (Fraser Mackenzie) said they had identified a field of approximately 20 junior potash plays at various stages of exploration/development, and they had narrowed that down to eight companies they believed offered the best opportunity to achieve production on a commercial basis. “It is our belief that the sector has room for no more than five of these projects to get off the ground within the next five years,” they say. “Accordingly, our ratings favour those companies that we believe are most likely to succeed, bearing in mind their current valuations.” They have also included Potash Corp of Saskatchewan in the list of favoured buys.
The four top favourites, and ones on which they have put a “strong buy” recommendation (and including their own comments), are:
- Allana Potash Corp (TSX:AAA) - Ethiopia’s most advanced junior potash play. Target share price $C1.60.
- Ethiopian Potash Corp (TSX.V:FED) - Ultra-shallow deposit in a potash-rich basin. Target price $C1.05.
- IC Potash (TSX:ICP) - The world’s most advanced junior sulphate of potash project. Target price $C2.00.
- Karnalyte Resources (ASX:KRN) - The world’s only unfunded junior potash project already through feasibility. Target price $C20.00.
Valuation
Using the forecast from above along with a 14.0% discount rate after-tax, we compute a net asset value (NAV) of C$3.17 per fully diluted share. We apply a 0.5x P/NAV multiple to derived our $1.60 per share target price. We note that the project continues to be economic under a US$325 per tonne potash price and has the potential to double in value with a US$675 per tonne potash price assuming our 14.0% discount rate.
A takeout of the company remains a possibility with BHP and entities from China and India being prime suitors. BHP’s bid for Potash Corp in 2010 highlights both its desire to establish a large footprint in the potash sector and China’s growing concern regarding access to potash supply. As one of the biggest importers of potash, China does not want to see more concentration in the market and the same could apply to India, which relies on imports for virtually all of its potash consumption. Potash buyers currently face a duopoly dominated by two companies. Canpotex and Belarusian Potash Company combined control about 70% of global potash exports. We believe that industry consolidation increases the incentive for countries like China to invest in greenfield projects like Allana’s. We understand that the company continues to hold discussions with various parties with respect to a strategic partnership. With the world’s most dominant potash producers largely in control of supply and dictating prices, net importers of potash like China and India are very keen on securing the supply of material. Accordingly, a sovereign wealth fund or state-owned fertilizer company from either one of these countries would be on a list of plausible strategic partners. We believe an off take agreement alongside a meaningful investment in Allana would de-risk the project materially. The signing of such an agreement could conceivably happen at any time although the conversations have likely become more in depth following the recent release of a preliminary economic assessment.
The International Fertilizer Industry Association estimates world potash demand to have been 30 million metric tonnes of K2O (the equivalent of 48 million tonnes of KCl) in 2010 and forecasts demand to increase at a 4% compound annual growth rate through 2015. PotashCorp sizes the market at 57 million tonnes of KCl in 2011 growing to between 58 and 60 million tonnes in 2012. The need for potash and fertilizers continues to grow as the world population expands while arable land remains scarce thereby necessitating higher yields. In Exhibit 6, we show how the amount of arable land per person has and will likely continue to decrease over time.
We have identified projects among five majors that suggest an additional 30 million tonnes of capacity within the next 12 years. This includes Uralkali (8 mtpa expansion through 2021), BHP’s Jansen Project (target first production in 2015 with an initial 2 mtpa phase ramping up to 8 mtpa within 10 years), PotashCorp (6 mtpa expansion through 2015), Mosaic (4.6 mtpa expansion by 2019) and K+S’ Legacy’s Project (ramping to 2.86 mtpa of capacity by 2023). The eight leading junior projects we include in this report could add in excess of 10 million tonnes of capacity within this timeframe. This increase adds up to around 40 mtpa of additional capacity versus an increase in demand of 26 mtpa (assuming a 3% CAGR) to 48 mtpa (assuming a 5% CAGR) over this time horizon. This forecast suggests there is a risk of over-capacity and a possibility for pricing pressure. However, we believe many of these projects are unlikely to proceed entirely as planned. For example, the Jansen project has yet to be sanctioned internally by BHP’s board and many are sceptical of it ever coming into production.