Analyst report from the last visit... Disregard if redundant. It was new information for me... GLTA
Highlights from our Trip
Ethiopia and its Government
A major takeaway is that the Government of Ethiopia is very intent on supporting the nation’s growth trajectory and more specifically wishes to develop its potash sector. Ethiopia has been one of the world’s fastest growing nations (near 10% annual growth) led by growing exports (~25% annual growth). For this to continue the government recognizes the need to encourage free market investment and the building of critical infrastructure.
Ethiopia’s Growth and Transformation Plan
In 2010, the federal government published its Growth and Transformation Plan (GTP). In general, this document introduced a framework toward sustaining or even accelerating Ethiopia’s growth trajectory which was among the world’s best at around 10% annually over the preceding 5 year period. A major component of this plan was further development of Ethiopia’s predominant agricultural sector as well as its more nascent mining industry with potash being one of the minerals specifically identified.
Ministry of Mines
We met again with the Minister of Mines, Mrs. Sinknesh Ejigu, whom we had first met in 2010. She shared with us the government’s vision of Ethiopia transitioning from an agricultural to industrial economy with mining being a high priority. Mrs. Ejigu reemphasized that her ministry’s main objective was to create an environment conducive for private investors to participate in exploring and developing Ethiopia’s mineral resources. This includes minimizing regulatory hurdles (by formulating and enabling competitive mining policies and laws) and maximizing support through the provision of infrastructure and tax incentives. The Ethiopian government is highly integrated with the various ministries closely communicating and working in concert to deliver on the objectives of GTP. We have seen this with Allana in the form of road infrastructure. With input from the Ministry of Mines, Ministry of Transportation and Ministry of Defence, among others, the provision of upgraded road infrastructure in and around Allana’s property has been rampant.
Canadian Embassy in Ethiopia
We next visited the Canadian Embassy and met the Canadian Ambassador, David Usher, and Counsellor Christopher Hull. These gentlemen shared their assessment of Ethiopia as a nation of great strategic importance, being Africa’s second most populous nation and the site of the African Union’s headquarters. They view the government as being very stable relative to its neighbours with an orderly rules-based system and corruption far lower than other African countries. The embassy appears very keen to lend its support to Allana in any way within its means.
Ethiopian Railways Corporation
The final government agency we visited was the Ethiopian Railways Corporation. Mr. Getachew Betru, General Manager, provided us with an update on the status of the various segments of the nation’s rail initiatives. Notwithstanding that Allana has always assumed trucking its product by road, a build out of rail infrastructure is a high priority for the Ethiopian government and provides the potential for improved economics for Allana. Contracts have been awarded for three rail segments totalling 1,146 kilometres that would connect the city of Mekele (approximately 150 kilometres from Allana) to the Port of Djibouti aimed for completion in 2015. There is a possibility that Allana could truck its product to Mekele and then ride the rail line to port. An additional rail line which would provide a more direct route from Mekele to the preferred Tadjoura Port (a total of 900 kilometres) is pending contract award. Another proposed rail line which would run all the way to the project site in the Danakhil is under discussion and would shorten the route to around 600 kilometres without a need for trucking. The General Manager of ERC is pleased with the progress of its railway initiatives and remains confident in the timelines related to those contracts already awarded. He expressed that the Danakhil line is a possibility and will remain open to discussion. Of course, the primary obstacle in building out such a line would be financing. However, the flat terrain suggests that this line would be relatively less costly possibly in the neighbourhood of $800 million.
African Union Headquarters and the Stability of Ethiopia
We happened to pass by the new headquarters of the African Union which was built and paid for by the Chinese government at an estimated cost of US$200 million. We believe this gift from the Chinese is a testament of Ethiopia’s stability and its strategic importance in Africa and the world more broadly. The Chinese, as well as India and other nations have been investing aggressively in the country.
Technical Work Surrounding the Feasibility Study
We spent a day up in the Danakhil area visiting Allana’s camp, the current solution mining pilot facility, evaporation ponds and a water supply drill site. We are confident that technical work is advancing toward the company’s goal of completing work for its feasibility study by year-end. We uncovered no areas of notable concern and look forward to updates as this work progresses over the next couple months.
Solution Mining Well Site
We visited the current solution mining pilot site which was initiated in September. Allana is deploying a three leach system beginning with sump leach (already completed) followed by an undercut leach (two weeks in) and finally a production leach of sylvinite mineralization (completion expected mid-November). This operation is utilizing water from a production well about 5 kilometres away. Test results will indicate dissolution rates of KCl (assumed in the PEA to be 125 grams of KCl per litre of brine) and help Allana to optimize its mining techniques. It is envisioned that a 1 mtpa operation will require about 100 caverns per year with 30 in operation at a time. The caverns are expected to have a radius between 40 to 60 metres with 60 metre spacing. Worthy of mention, while the feasibility study is contemplating mining of sylvinite, the company is also assessing the merits of mining the upper carnallitite horizon in tandem which could further improve the economics.
Evaporation Ponds
Next we saw the company’s pilot evaporation ponds. Allana had completed a trial with 6 ponds (25 metres x 15 metres x 1.6 metres) using synthetic brine and observed strong evaporation rates of about 1 centimetre per day. A 1,000 kilogram bulk sample was achieved in a month and was sent to Germany for flotation testwork and process optimization by Ercosplan. Actual production ponds are envisioned to be far larger in area at 2.25 square kilometres as per the preliminary economic assessment. A two pond system will be required for sylvinite mining (sodium chloride + potassium chloride) while the mining of the upper carnallitite horizon would require the addition of a third pond (magnesium chloride).
Water Well Drilling
Lastly, we observed a water well drilling site. Hydrogeological studies are continuing on the western alluvial fan area with 15 holes out of 18 holes planned having been drilled. Results thus far are very encouraging with all wells encountering water. Preliminary pump tests indicate flow rates averaging almost 70 square metres with intermittent rates of up to 150 square metres (enough for three caverns). The aquifer is currently estimated to be 165 million square metres with a 1 mtpa operation requiring an estimated 16 million square metres of water. This would equate to a 10 year life assuming no recharge. The recharge rate is currently estimated to be 60 million square metres per annum for this year (a particularly dry year) suggesting an almost fourfold rate versus that which is required. With Allana’s proposed acquisition of Nova Potash soon expected to close, the company will enhance its access to water placing it at an advantage versus other players in the region (such as Yara’s Ethiopotash project) and reducing any likelihood of having to access another water source such as Lake Assale about 18 kilometres away.
Strategic initiatives
The company continues to hold discussions with a vast array of potential strategic investors and/or offtake partners. The goal of these discussions is to secure additional funding for the project and a significant buyer of the end product thus easing the efforts of securing all of the necessary financing required to get the project off of the ground. We have contended that the most interested parties are likely to come from within China and India due to those nations’ large potash importing requirements and their overabundant reliance on a select few producers demonstrating cartel-like behaviour. However, interest could also come from a fertilizer major like Yara (US$14 billion market-cap) which currently has a controlling interest in a neighbouring Ethiopian project (a private company) which we assess to be inferior. Allana’s highly strategic proposed acquisition of the neighbouring Nova Potash property further strengthens the company’s position as the most advanced/robust potash play in the Danakhil region. As mentioned, the acquisition provides Allana with access to additional water resources which could be lacking in neighbouring projects like Yara’s Ethiopian project. Accordingly, Yara may be increasingly motivated to form symbiotic relations with Allana. This may range from sharing infrastructure costs to acquiring Allana outright.
Infrastructure
Progress continues on project-enabling infrastructure supporting the development of efficient transportation capacity for the project. First, we observed road construction by the Ethiopian Government in the Danakhil area is well advanced and is expected for completion in 2013 in time for the commencement of project construction. Second, the Tadjoura Port construction contracts from the Djibouti Government are pending with completion of the port targeted for 2014. In the event there is slippage in the timeline, the existing Djibouti General Service Port has capacity available to meet Allana’s initial production needs. Finally, as discussed a number of railway contracts in Ethiopia have been awarded with the Chinese and other counterparties which could enable the transport of potash to Djibouti by 2015/2016. This does not yet include a more direct route directly from Allana’s property which is currently in the discussions stage. While the preliminary economic assessment has assumed trucking of potash product through to port, the increasing prospect for rail has the potential to both lower costs and increase output from the project thus improving the economics greatly.
Financing
Also attending the site tour were three members of BNP Paribas, the bank engaged to help the company secure debt financing. We derive further comfort from our conversation with this group during our tour. Allana is among the best positioned junior potash plays currently to secure the required financing for its project. Firstly, it has one of the sector’s strongest cash positions ($58 million as of its last financial release). Secondly, it has two strong financial partners holding a combined interest near 20% that appear very committed to maintaining their pro-rata interest through to production. These include Liberty Metals and Mining (~17% interest) and International Finance Corporation – a member of the World Bank Group (~3% interest). Earlier this year, the company also announced that initial discussions with various prospective lenders have been very positive and to that point it had received non-binding indications of interest totalling over $600 million (an amount further corroborated by the BNP team) . Notably this amount represents an estimated 75% of the estimated initial capital for its potash project which exceeds the amount of debt financing Allana initially hoped for. With success in securing a strategic partner with another 20% committed to the project, it is conceivable that Allana may need to raise as little as $100 million through other outside equity sources thus increasing potential returns for Allana shareholders. Also worthy of mention, Allana is looking at ways to reduce its CAPEX requirement through means such as leasing versus buying (i.e. lease trucks rather than buy them as assumed in the PEA). It is conceivable that the final CAPEX requirement could be reduced to $700 million versus the ~$800 million in the PEA. We believe this would be well received by the market, given the challenging environment for raising capital, even if it were at the expense of higher operating costs and a reduced project NPV.We assume the estimated US$800 million in capex will be financed via a combination of debt (US$480 million or 60%) and equity (US$320 million or 40%). This could prove conservative given the non-binding demand that BNP Paribas has received from lenders thus far as discussed. Beyond that, the company has significant equity investment (~20%) from Liberty and IFC combined who could maintain their pro-rata interest going forward and may further participate on the debt side. Liberty has maintained its prorated interest in the company on successive financings and appears keen to stay the course on any future raises. Notably, the investment from IFC is a key enabler for funding from other multilateral development banks given its stringent socio-economic and environmental requirements. We expect that any strategic partner will be interested in investing capital into the project in addition to arranging an off take agreement. Accordingly, we believe Allana is well positioned to deliver on financing with favourable terms and within a reasonable timeframe. The company currently has C$58 million in cash, which we estimate will leave them with nearly $30 million after the feasibility study is completed next year.