The Ethiopian Advantage From edx on AAA
A very nice post
Mad I`m sorry you had a loss here but you guys were clamouring for a new CEO, careful what you wish for if its going to cause you to sell at a loss. These guys have laid it out , strategic, new ceo ,drill the colluli and the east sell the farm. good luck to you
Took a while to rewrite this, so if fiddle reports it as "spam" again I've got a saved copy this time.
- Potash buyers normally buy potash FOB a port or other transit point, not the mine/deposit. This seems to be a common misconception given how many opex to opex comparisons I see that look at opex to get pounds out of the ground, not to market. The most important figure is cost to get it to your buyers market.
- To use an example, WPX has one of the, if not the lowest projected OPEX per ton in the world to get pounds out of the ground (even lower than Allana). But the WPX corporate presentation shows (in teeny tiny fine print) that it's OPEX FOB Vancouver (port) is around $360 per ton (damn unionized CP labour). Saskatchewan producers are all very near $400 per ton when the product reaches port where the point of sale occurs.
- Allana's OPEX FOB Dijbouti (port) is about 350% cheaper than the Saskatchewan producers and will decrease when the rail line is built. Massive, long-term competitive advantage. There are other producers globally that produce cheaper than Saskatchewan, but I'll get to why Saskatchewan is key later in the post.
- Further to this advantage, Ethiopia is the closest potential supplier to India. What this means is when an Indian buyer takes ownership of the product FOB Dijbouti, it costs them less to ship it to their home market than it would from Vancouver, so that's another overall cost advantage for the buyer to buy Ethiopian potash vs Saskatchewan potash (and even pay a premium). I don't know about Dijbouti to China vs Vancouver to China - even though Dijbouti I believe is closer, China has enormous container traffic going to and from North America already and the cost to ship product from North America to China is about half as much as it costs shipping product from China to North America (because many of the containers are empty on the way back to China).
- And another long-term consideration? Solution miners in many parts of North America rely heavily on natural gas. Their projected or present opex numbers are based on a natural gas price that has totally collapsed due to massive over-supply. But the long-term outlook on natural gas from present levels is very bullish. Many power plants, industrial complexes and fleets of commercial vehicles are being converted to run on natural gas. Some energy intensive industries are actually cheaper to operate in North America now, because although China has the labour cost advantage, North America presently has the energy cost advantage. All of North America's natural gas infrastructure was designed to import the stuff. Now that fracking has made North America the "Saudi Arabia of natural gas", we want to export it to Asia which pays something something like an 800% to 900% premium over what we pay presently. The infrastructure necessary to export natural gas is being built now. You can bet we're going to export as much as the infrastructure will allow. In short, natural gas prices locally in North America are going to rise in the long-term. This will increase most North American solution miners opex, except those using solar evaporation.
- We all know the story about growing populations and middle classes meaning we have to grow more food. The on-going concern is always going to be over-supply and that there are a ton of potash projects in the pipeline, globally at this point in time. But most of those projects have very large capex requirements. Most will not make it to production. But even if they all did? Allana will be fine - it's opex FOB transit point advantage (assuming solution mining works out, etc) means it will be profitable when virtually no one else will.
- Finally, why is Saskatchewn so key? Saskatchewan suppliers comprise ~20% of the present global supply. If prices collapse they cannot make money under $400 per ton. They will stop producing, taking supply off the market, stopping any further price collapse. We saw a glimpse of this earlier this year both Canadian and Eastern European suppliers cut production to support prices at $500/ton (spot). The long-term outlook for Potash isn't terribly important as far as Allana is concerned - it will be relatively more profitable than virtually any of its peers which provides a huge margin of safety under any market conditions.
Warren Buffet loves companies with long-term, competitive advantages that are under-valued and present high margins of safety - Allana is the junior resource epitome of such a value-investment. No doubt there are still risks ahead (not enough water, civil/regional war, debt-financing, etc) but if this play goes to production it will be an all star in the potash space - that's pretty much guaranteed.