Interview With Allana Potash Corp(TSX: AAA) SmallCapPower.com CEO Interview With Allana Potash Corp(TSX: AAA)
Published Aug 06, 2013
In this exclusive interview, Allana CEO Mr. Abasov discusses the significant progress made by the company to advance its Danakhil project towards production. He also discusses the recent developments in the potash industry resulting from the breakup of a key supply cartel and its likely impact on existing and upcoming producers like Allana.
SCP: Give us a quick update on the potash project that Allana Potash is developing in Ethiopia
FA: Allana has had a very busy year so far in 2013. We have completed our feasibility study in February, announced a significant increase in our potash resource with the total estimated measured and indicated mineral resources reaching 2.45 billion tonnes at 17.9% KCl, including 347 million tonnes grading 28.3% KCl of estimated measured and indicated sylvinite mineral resource (that is the basis for our feasibility study estimated mineral reserves and our initial production plans) . An additional estimated inferred mineral resource totalling 1.12 billion tonnes at 15.9% KCl indicate potential for expansion of the resource in the future. The Company has also successfully managed to complete the Environmental, Social and Health Impact Assessment Study which was subsequently approved by the Ethiopian Government.
We have submitted our application for the mining permit to the Ministry of Mines of Ethiopia a couple of months ago. The Ministry officials have been making tremendous progress on the review of the documentation. The cooperation between the Ministry officials and Allana executives has been exemplary as both sides fully understand how important this project is for both Ethiopia and Allana. We are optimistic that we will receive the mining permit soon.
Our debt financing process has been on track for the last several months since the completion of the feasibility study. As you might remember, we have engaged BNP Paribas, one of the largest French banks with a great track record of completing such project financing packages in Africa, to lead our debt financing process. We have successfully put together one of the best groups of lenders. The group includes major global Development Financing Institutions (DFIs) and Export Credit Agencies (ECAs). The support coming from this group of potential lenders has been very strong as they are keenly aware of the transformational nature of our project not only for the Afar region, but also for Ethiopia as a whole and this part of East Africa. We expect some significant developments on this front in a very short period of time.
Allana has also continued advancing partnership talks with large fertilizer and other industrial organizations. Negotiations with some of them are in the final stages and we expect important developments in this regard. The support we heard from some of these organizations, even in the midst of last week’s events, was very reassuring for us.
On the technical development side, the team has worked very hard after the feasibility study completion to define the selection process for an EPCM contactor. The key is to find the right EPCM contractor who can design, engineer and build our potash project in this part of the world at a reasonable cost and in the most efficient manner. This process is going very well and we have identified several very strong organizations from among which we will be selecting the right EPCM contractor. The plan is to finalize the process in the fall.
Allana also continued building its technical team in the last several months by adding key experts to its experienced team including professionals on the solution mining side. We have been interviewing a number of candidates for the position of Senior Vice President of Operations, and are in the process of finalizing that process.
I am very pleased with the progress made by our technical and financing teams so far.
SCP: Recently, Russian producer Uralkali announced that it was dissolving the cartel with Belarusian state-owned Belaruskali and will supply potash to countries like China and India on its own. There is a wide spread perception that the days of controlling the pricing through these cartels is probably over and potash prices are likely heading lower in coming years. All potash producers and companies that are developing potash projects witnessed a plunge in their share prices last week. Do you believe that significantly lower potash prices will result due to this development and how does this new development impact Allana Potash?
FA: Unquestionably, the news on Tuesday shook the potash world. Our take on this news is that although Uralkali has announced its departure from BPC and most importantly from the long-held policy of price-over-volume, we believe it will take time for Uralkali to boost its production capacity to reach their recently announced production target.
As far as Allana is concerned, one of the most important reasons we selected the Danakhil project in Ethiopia was its low-cost structure. This is one of the shallowest deposits in the world that is amenable to solution mining. Also the region is extremely hot and dry which means we will end up having one of the most efficient solar evaporation processes in the world. All those factors make our potash project one of the lowest cost projects not only among greenfield and brownfield projects but also even in comparison to some current potash producers.
With $642 million of capital requirements to reach 1 million tonnes of production per year it is very hard to find even a handful potash projects in the world that can compete with Allana’s Danakhil project in Ethiopia. Our estimated production cost is $65/t and our full cost including transportation to the Tadjourah Port in Djibouti is estimated at less than $100/t. So not only do we compare very advantageously to others and will we be able to withstand lower potash prices but also we will eventually thrive in that environment. IRRs are still healthy even at projected short-term, worst case market prices.
SCP: Some experts are arguing that the breakup of the cartels is actually a good thing in the long run for the potash industry. It will help to establish a fair price, which might very well be at a lower level from the current prices, but will spur demand and will lead to higher sales for potash miners. What are your views on this?
FA: As we already saw last week the impact of that breakup in the short term was already painful with the entire sector taking a big hit on valuations. Nevertheless, if the potash prices do eventually go down only economically most robust projects will survive. I also agree that lower prices will eventually spur more demand and that should work well for companies like Allana and other low-cost potash companie
SCP: A wide spread fear amongst investors, with regards to junior potash companies is the fact that at lower prices their projects become unviable and unfundable. How is Allana positioned now that lower potash prices in coming years are a real possibility? Do you think Allana can still easily attract interest from financiers and put together a project finance package to take the project to production?
FA: We have been saying for years that investors should focus on the fundamentals of potash projects and not other aspects that are very difficult to quantify. As you know very well, in the last several years the market has seen quite a few new potash projects both greenfield and brownfield expansion projects that have astronomical capex price tags with high operating costs. But investors magically believed that these projects had a chance to raise capital and build these projects despite weak economics. I believe now most investors will finally start delving into the project economics rather than investing based on how “sexy” the story sounds.
We have had a very clear and well-delineated financing strategy for Allana from day one. We realized that we have potentially a very low-cost project in a developing nation and have been mindful of the project’s bankability of the project since its early stage of exploration, focusing on two aspects: bringing large Development Financing Organizations to help us with financing of the project debt; and finding strong financing supporters from the private sector for project equity as early as possible.
That’s why we have become the first and still the only potash project in the world that has equity investment from International Finance Corporation (IFC), a member of the World Bank Group, who has already expressed strong indicative support for us at the construction stage as well. They are actively engaged with the company right now on all aspects, not only financing issues. For example, IFC was involved in the preparation of the Environmental Impact Study.
In addition to IFC, as I mentioned above now we have a group of other large global and regional DFIs expected to support us on the debt side. We expect that 60-65% of our entire capex requirements will come from debt financing by this group.
On the equity side, we continue to have strong relations with Liberty Metals and Mining, a part of Liberty Mutual Insurance Group, that own approximately14% of the company’s shares and who are committed to supporting us at the construction stage.
I also mentioned before that we are advancing talks with a number of large fertilizer and other industrial groups on potential strategic investment and offtake.
Our plan is to get 100% of our funding completed among these groups in the next several months.
SCP: Our understanding is that Allana’s project, when in production, could be one of the lowest cost producers. The capital expenditure required to get to 1 million tonnes a year type production is also on the lower side of the range. Can you please elaborate on this and tell us what you believe are key differentiating features of Allana’s project versus other upcoming projects?
FA: Our strong economic parameters with $642 million capex and $65/t of operating cost are our best advantages.
But also we have other significant advantages. Let me summarize them.
a) Financibility and clear visibility on where the funds will come from. As I already described 60-65%
of our entire capex is expected to come from debt financing from a group of large DFIs and ECAs.
The equity component is expected to come from existing strategic equity investors as well as a
potential new strategic partner.
b) Once in production, we will be the nearest producer to India and most of Asia, and East Africa
c) The demand for potash is growing in Africa, and we will be able to meet that demand. In Ethiopia
alone this demand may reach 200,000 tonnes per year in the next few years.
d) We are building one of the strongest junior potash operating teams in the world
e) We also enjoy full support from both the Ethiopian and Djibouti governments, who see this as a
key element of their economic growth strategies.
f) Allana is the only potash junior with access to its own potash terminal as we signed an MOU with the
government of Djibouti to that effect a few months back. We are finalizing that agreement as we speak.
I don’t know of many potash juniors who have clear visibility on where their funding will come from. I should also add that we have close to $20 million in the bank thus the company is financially solid. This is sufficient to implement our current and planned programs.
SCP: So are you suggesting that in a way the recent developments have a silver lining for Allana since your project will likely be one of a very few upcoming projects that will get built?
FA: Very well said. Yes, and most importantly it is not only Allana management and board that think that way. We received expressions of interest from some large fertilizer players last week when the potash sector was in a state of turbulence. Looks like the fundamentals are becoming an important factor for investors and strategic players again.
SCP: We believe that most new potash projects that are near completion and likely to be in production within 18 to 24 months are here in North America, far away from the most potent sources of demand for potash, which are in India and China. Allana’s on the other hand is in Ethiopia, with a port access and once complete will be the closest source of potash supply to India. Do you believe that this will help Allana in getting significant interest from Indian and Chinese investors/miners interested in a good source of potash supply?
FA: Allana became the first junior to sign up a potash terminal as I mentioned before. This is a unique advantage that we have as most juniors are far from potash consuming countries and have no access to ports currently. This is of course important for accessing the Asian markets, but recently we are also developing an “Africa First” strategy, pursuant to which, we believe a considerable part of our potash will stay in Ethiopia and be exported to the rest Africa as well. As far as India is concerned, we have been receiving strong expressions of interest from various organizations in that country.
SCP: What should investors be looking forward to from Allana in the next 6 to 12 months?
FA: I am very happy that you always ask this question and so far we have always delivered on all the milestones we have set before us. In the next 6-12 months, our singular focus will be on the following: getting the mining permit; securing strategic equity financing; securing debt financing; selecting a very strong EPCM contractor; securing an offtake agreement; and continue building our team. If we are successful with these objectives in the next few months we hope to break the ground for construction in early 2014.