Allana Potash’s Transformative Potash Partnership

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Wednesday April 16, 2014, 4:30am PDT
By Vivien Diniz - Exclusive to Potash Investing News

It’s been a tough year for the potash market, and while some companies have faded into the background, Allana Potash (TSX:AAA) has been busy developing the Danakhil potash project in Ethiopia.

Most recently, Allana entered into a strategic alliance with ICL (TLV:ICL) that has put the company in a perfect position for its future mining endeavors. Potash Investing News (PIN) spoke with Farhad Abasov, president, CEO and director of Allana Potash, who shed some insight on the significance of the ICL strategic alliance and the current potash market.

PIN: The Danakhil project is located in Ethiopia. How is the location working to your company’s advantage? How is being in Ethiopia helpful.

FA: The project is strategically located in a part of the world where we can easily access certain potash-consuming markets, such as India and different parts of Asia, but also growing potash-consuming markets in Africa. So once we’re in production, we will be the nearest potash producer and supplier to India. Currently, the Israelis and Jordanians are the nearest producers to India. And we’ll be quite close, probably one of the nearest producers to the rest of Asia. As far as Africa is concerned, especially the eastern part of Africa, obviously, we’ll be the closest producer to that part of the world, on the continent.

In terms of the location of the project within Ethiopia, it is a very unique geographic area. We have a fortunate confluence of very positive physical conditions in terms of the shallow depth of potash, availability of sufficient water resources and a very hot and dry environment, which means that we can use solar evaporation ponds. It is a bit far from the port of Djibouti. Obviously, there are other ports that are much closer, but they’re on the Eritrean side, and the border between Eritrea and Ethiopia is closed, so we’ll have to haul our potash down to Djibouti. Fortunately, the relations between the two countries are very good, and Djibouti basically services about 90 percent of Ethiopia’s overall trade. We’ve already signed a MOU with the government of Djibouti on the port construction, so we’ll have access to a new port. We’ll have our own potash terminal there.

PIN: Recently Allana completed a strategic alliance with ICL. Can you talk about the significance of this deal?

FA: Yes, of course. This is a very important deal for us. We think it’s transformative not only for Allana, but also for the sector. It’s the first time that a large potash producer has struck a strategic alliance deal with a junior company. In the past, there have been M&A transactions between senior potash producers and junior companies, but I do not recall when a senior potash producer has actually completed a deal where they became a strategic partner of a junior company. So this is very unique.

The deal has three major components to it. The transaction basically encompasses an equity investment of about $25 million, which has already taken place, and ICL may also invest up to an additional $59 million just through warrants. They have preemptive rights, which means that they can maintain their pro-rata ownership in the company. That may add further investment from ICL. So this is a key aspect of the entire transaction.

But there are two other very important elements to it. One is an offtake agreement, and 80 percent of our production will be going through a take-or-pay type of an offtake. In other words, it’s a solid offtake. They will either have to lift our product and sell it, or then obviously pay us the revenues. Or if they don’t lift it, they will still have to pay us for 80 percent of our production, which is currently slated at about 1 million tonnes of MOP per year.

This is very important because it basically guarantees revenue for the company for at least 80 percent of its production going forward. It is very important for lenders because it shows that we’ll be able to service the debt. And of course, it’s important for equity investors, because it shows that, again, we’ll have the guaranteed revenue coming to the company for at least 80 percent of the production. Now, 20 percent will be marketed by ICL as well, at the same terms.

The second component, which is extremely critical for a junior company, is the technical cooperation agreement between ICL and Allana. They will help us with literally all the processes, both during construction and operation periods, and even before construction starts. It’s important to know that ICL’s production profile in the Dead Sea area in Israel is very similar to what we’re envisioning for in Ethiopia. They use solar evaporation ponds, they use similar processes and techniques for potash recovery. And another very important similarity is that of the transportation mode– trucking – and that’s exactly what we’re planning to do with our potash. We’ll be trucking it down to Djibouti. So it’s a very unique transaction that encompasses three major aspects of the business moving forward. And most importantly, this is basically a validation of the project by one of the largest potash producers in the world.

PIN: I heard recently that junior potash companies can be separated into two different camps: those that ally themselves with major players, and those that look for offtake agreements with end users. Why was it important for Allana to make an agreement with a major player, as opposed to becoming a producer on its own?

FA: That’s a very important question. The major difference here is not only with our offtake, which is quite different from the other offtakes that you’ve seen in the industry. And not only is it different in the equity investment component, but it is vastly different in terms of the technical cooperation agreement, which highlights the solid intentions of the strategic alliance.

So if you look at literally any other deal in the sector, from investments from offtakers from China and India in some junior companies, and some other fertilizer companies that are also potential offtakers for potash, none of them have any idea how to build or operate a potash project.

In this case, ICL is not an investment company, it’s not a potash consumer. The reason they’re interested in this project is, that they believe that this project will get to production and will be a low-cost producer. Which means that this will complement, or be an extension to their production profile. So not only can they actually help us build this project and operate it, but we believe that eventually ICL will be in a position where they may even lead the project there in Ethiopia. –

So there is a big difference between doing a deal with a real producer and versus offtakers, in that regard.

Doing a deal with an offtaker, literally, except for soft offtake and some investment, you do not get any further benefits. In this case, we get full technical support and a very large commitment from ICL since they’re not a passive investor. They’re actively involved in pushing this project forward.

PIN: So basically, through the technical cooperation, ICL is going to help with the process of bringing the mine into production, and obviously they have a stake in it.

FA: Exactly. Not only does ICL have a stake in the company but they also have the right to increase that investment substantially as well as the right of first refusal on the project, which again shows their full commitment and interest in the project.

PIN: I understand that Allana is also in the midst of financing activities. How much do you need to raise?

FA: Well, the bankable feasibility study, which was completed early last year, showed that the CAPEX of the project, based on 1 million tonnes of production, will be about $US642 million. So that is the amount that we need to raise. But this will obviously be a combination of both debt and equity.

We’ve been advancing our debt negotiations, in the last several months, with a group of debt providers consisting of development financing institutions and export development banks, mostly from North America, Africa and West Europe. We already signed and annouced the mandate letters last summer. We’re looking at about 60 percent, or potentially 65 percent, of the entire CAPEX coming from debt financing.

The rest will be equity or quasi equity. Right now, we have, quite clear visibility on how much debt we will be getting from these parties. On the equity, we have visibility on most of it as well. That includes ICL, some of our existing shareholders and some new-interested investors right now with whom we’ve also been advancing talks. To summarize, we’re looking at, again, $US642 with 60 to 65 percent of that– basically $400 to $450 million coming from debt, and the rest from equity.

PIN: Do you have an idea of when you’ll accomplish full financial closing? Or is that really just dependent on the market?

FA: We are targeting the end of the year. We are hoping that we’ll have more clarity on that towards autumn or the fourth quarter of this year. We’ll hopefully finalize debt by that time and then do equity right after that. So late this year, early 2015, we’re hoping to get all of the funding done so that we can actually launch full construction.

Now, having said that, quite a bit of pre-construction work is going to start in the next few months. We’ll have enough capital to start the process. But for us to order all the expensive, long-lead items, components and equipment for the plant, we’ll need to fully fund the project.

PIN: And you’re targeting full production in 2016?

FA: Yes. The plan is to start production by the end of 2016, which means that will be probably about half of our stated capacity – about 400,000 to 500,000 tonnes will be produced in 2017– and then ramp it up to about a million tons by the end of 2017.

PIN: Financing aside, what’s left to accomplish before you reach production, in terms of development?

FA: All the permits have already been received. Last year, in October, we received our mining permit. So we’re good to go as far as permitting is concerned. What we’ll need to do before then, is that we have to engage two major contractors.

One is the EPCM contractor, which is basically an engineering company that will be doing both basic and then detailed engineering for the project. And that process is quite advanced. We’ve already gone through the first round, and we’re at the final selection stage where we have a few companies left as the final candidates. So we will be making a decision on the EPCM contract, in the next couple months or so.

Once the basic engineering is done, we’ll need to select our construction contractor, or a number of construction contractors (EPC contractors). So that will have to be done also later this year, most likely towards the second half of 2014. Those two most important technical engagements have to take place before we can launch full construction. And in addition to that, we’re also doing some pre-construction work as we speak. We will be doing some aquifer tests to ascertain that we have sufficient water in one of the aquifers that we will be drawing water from for the first brine field. And then, we’ll also be doing another test with the full-size solution mining cavern, in the next few months. So these specific work programs will be taking place concurrently with everything else that we’re doing this year.

PIN: It sounds like Allana is pretty set and there’s not too much left to accomplish.

FA: Exactly. Most of the site work has been done, but there is still quite a bit to accomplish. But with ICL being there, we feel much more confident and comfortable.

Remember, as a junior company, it’s day and night between doing everything on your own and having somebody who’s done this for the last 40 or 50 years, and having their team back you up along each step of the way across all aspects of the project. So even starting with pre-construction, the selection of the right contractors and going straight into construction, and then operations, of course, we’ll have the full support of ICL. We’ve already made an announcement that we’ve established a technical committee to which ICL has appointed their most senior specialists and top engineers from all fields from solar evaporation pond operations, to processing, to logistics. So we have a very, very strong support team from ICL at this point.

PIN: That’s good. If I can just backtrack a little bit, how was the reception by the market to the news of the partnership with ICL?

FA: Our shareholders received it extremely positively. As you know, we had to have a special meeting to vote to approve a buyer of shares above the 19.99 percent threshold level. So we held a special shareholder meeting the last week in March. It was an absolutely stunning show of support. Over 99 percent of shareholders voted in favor of the deal. That was really important for the management and board.

In terms of other investors, we’ve met with several dozen large institutions in London, in Toronto, as well as in Europe and Israel. Every single fund, be it mutual fund, hedge fund or private equity fund, has been extremely supportive. They thought that it was really a very unique deal and a very strong transaction, and that it added a lot of value to the project and further mitigated all the risks that lie ahead of us.

PIN: So definitely, as you said before, this is a very unique deal in the market. So it has received appropriate attention.

FA: Yes, it has. Again, you know, this has been a tough market for potash. So getting this type of deal done at a time when the sentiment generally has been quite negative, was a feat in itself. So that’s why it was another reason why we got full support from our existing shareholders, large and small, and of course, from some outside institutions as well.

PIN: I’ve been hearing some rumors that the potash market is showing some signs of recovery. Can you share your thoughts on that?

FA: There probably are some signs, but I’m a bit cautious on that. We think the price of potash seems to have bottomed out. We’ve been watching the contracts between India and China and large potash producers from Russia and Canada and we’re noticing that the potash price is not being pushed down too much lately. Especially considering the fallout between the Russians and Belarusians, one would expect much more manipulation–for lack of a better term– by the buyers of potash to force the potash price down. So I believe that at about $US300/tonne, it’s probably the bottom price right now, and most likely, the potash price will start coming back.

Now, I would not expect it to come back to $400 or $450 within the next 12 to 18 months, but it’s quite possible that it will make that comeback in the next two to three years, once it’s clear that there’s not a lot of new supply coming online. So we believe that the potash price will probably remain range-bound between $325 and $350 perhaps. But it has the potential to start going higher in two to three years.

PIN: That makes sense. Perfect. And that’s all the questions I had for you today.

FA: Great. Thank you so much.

Source: Potash Investing News