2011 vision - AAA $50.00 at time of production $50 Price Target:
Here's why it's a reality and not a myth (the game changers that made this possible are Haro land and LMM):
Past:
Long before we had any drill results, management was saying they are looking to mine 1 million tonnes per year by solution mining and CAPEX would have been around $800 million (with an agreement to have 35% financed with China Minerals United who gets 20% of production for lower pricing than world potash price). CAPEX was said to be $70 per tonne by the CEO for that 1 million tonne per year solution mine.
A recent interview with the CEO said that a 1 million tonne per year solution mine would have had a CAPEX of $725 million (dated Feb 9th 2011):
https://research.tdwaterhouse.ca/research/public/Markets/NewsArticle/1314-L3E7D90MM-1
Present:
After acquisition of Haro land and recent drill results - looking more like open pit mining. On Feb 10th 2011, CEO said on BNN that 2 to 3 million tonnes per year possible and open pit mining as well. Given that a 1 million tonne solution mine would have cost approximately $725 million, a 2 million tonne open pit mine might cost less than a $1 billion. Financing $1 billion fora 2 million tonne per year mine will not be a problem for them. They can easily raise $500 million by issuing 120 million shares at average costs of $4.20 per share after they release the complete feasibility study (share price should be over $5 by then when people actually see how profitable their operation is going to be, so selling 120 million shares at $4.2 average cost shouldn't be a problem). This would leave Allana with approximately 320 million shares outstanding on a fully diluted basis. They can then do debt financing for the other $500 million with the help of Liberty Metals & Mining. These events would make 2 million tonne per year open pit mine producing in 3 years(possibly less than 3 years as open pit mines can be built faster).
Realistic $50 Price Target in 3 years or less:
Based on a 2 million tonnes per year open pit mine:
CAPEX = $1 billion (this is the high end cost assumption because open pit should be cheaper)
OPEX = $50 per tonne (the solution mine would have been $75 to $80 per tonne for a 1 million tonne per year mine so a 2 million tonne per year open pit mine should be $50 per tonne or less – considering that the more you mine the lower your per tonne costs and open pit mining is cheaper than the solution mining)
Transportation costs = $30 per tonne (based on what CEO said on BNN this week)
All other costs = $50 per tonne (interest payments on debt, salaries, taxes,etc). Remember, royalties don't need to be paid to the government until Allana recoups it's costs of building the mine.
Math:
OPEX = $50 per tonne
Transportation Costs = $30 per tonne
All other costs = $50 per tonne (interest payments on debt,salaries, taxes, etc)
Total Costs per tonne = 50+30+50 = $130 per tonne
Potash Price = $400 per tonne (price assumption 3 years out)
Mine Production = 2 million tonnes per year by open pit
Net Earnings = (400*2) – (130*2) = $540 Million
Shares outstanding = 320 million shares (assumption at time of production)
Market Cap = $10 * 320 million shares = $3.2 billion (assuming the stock is at only $10 at time of production)
EPS = Net Earnings/Shares outstanding = 540/320 = $1.69 per share
P/E ratio assuming the stock price was only $10 = stock price/EPS = 10/1.69 = 5.92 times
To put in perspective, Potash Corp has a P/E ratio of 31.65 times,Intrepid Potash has a P/E ratio of 86.84 times as at market close Feb 11th2011. So as you can see, $10 for the stock after 1 year of production is way too low (if they produce 2 million tonnes by open pit). It should be more like $50 which would give it a P/E ratio of 50/1.69 = 29.59times which is still lower than Potash Corp and way lower than Intrepid.
Conclusion:
My $50 price target in 3 years time is a realistic one based on current producers comparison and not just a number I put out.