Allana Potash outlines low cost production strategy for project in Ethiopia

NAI Editing's picture

The following is a Stockhouse Q&A interview with Allana Potash Corp. (TSX: T.AAA, Stock Forum) President & CEO Farhad Abasov.

BackgroundAllana President & CEO Farhad Abasov

Allana Potash is working to develop its flagship Danahkil Potash Project in Ethiopia, with strategic investors ICL, (Israel Chemicals Ltd.), IFC (a member of World Bank Group), and Liberty Metals and Mining Holdings, LLC, a subsidiary of Liberty Mutual Insurance Group.

Stockhouse: There is no hiding it. A lot of investors have written off the potash sector since the Uralkali issue last year. Headlines are always big when things are bad, but not so big when things slowly get back to normal. Are you still feeling the stigma against the sector from a series of events. What is the big picture event that investors are missing about potash in the months since?

Farhad Abasov: The sector is still feeling the impact of the breakup of the Russian/Belarussian cartel that took place in the second half of 2013. The major and immediate consequences were the decrease in the price of potash along with the increase in production by Uralkali and continuing uncertainty about the potash price forecast going forward. I would contend that a longer term impact on market sentiment was psychological as Uralkali’s actions changed a long standing philosophy by Canadian and Russian producers to prefer price over volume.

This has led to concerns about supply outstripping demand. As a result, we have seen a number of Greenfield potash projects worldwide get cancelled or delayed as they did not make economic sense in the current potash environment. In spite of this, some smart investors are looking at the fundamentals of existing or proposed projects, and are making investments in select low cost projects.

Allana has seen a number of large investors come into our stock in the last few months, due to the outstanding economics of this project. As we all know, the world will continue to consume potash in significant quantities. The question is which companies can operate competitively and are favourably located with respect to existing and future potash markets.

Stockhouse: What hurt more, the actions of Uralkali, or investors flipping out and overselling the sector?

Farhad Abasov: I believe Uralkali’s actions caused an initial panic, followed by apathy among investors. As we all know, some sectors tend to run from pessimism to euphoria and back. As investors we are all guilty of it. In my opinion, some strong companies definitely got oversold. As far as Allana is concerned, I strongly believe that our stock is significantly undervalued at this time and its current price doesn’t reflect the real value of our project.

Stockhouse: Sometimes a short term crisis is good for a sector. It forces companies to get smarter and more streamlined. Do you feel that the drop in potash prices last year will ultimately make the sector more competitive and ultimately present better investment opportunities? How did it change Allana for the better?

Farhad Abasov: I think that discipline and lean operations are critical to successful companies under any circumstances. The Belarusian Potash Co. (BPC) debacle has definitely spurred almost all potash producers to review and streamline their operations. Cost reduction and new market development have suddenly become focus points for a number of companies. This is the area where we believe Allana has really benefitted.

We have always strived to achieve the low cost structure possible for our future production. We also strongly advocate the development of new potash demand. I strongly believe that the cost advantages of our potash project in Ethiopia, along with our African market development strategy were the real reason why ICL, one of the largest producers in the world, has made an important decision to partner with Allana to develop our project. This is a transformative event for Allana, as this alliance will allow us to take the project to construction and then production.

Stockhouse: You have said that you want to become the world’s lowest cost potash producer. How close are you to reaching that goal and how can you get there? What are the milestones that will tell investors that you are on the right track?

Farhad Abasov: We are getting closer to the goal every day. We are pushing forward at full speed and we are implementing a lot of initiatives at the same time. This year started with the game-changing ICL deal. Now we are working very intensively to enhance the debt financing plan that we have been working on with major development/financing institutions, and banks.

With ICL’s involvement, we are getting more interest from new large lenders who would like to join our existing group of bank institutions. We have also received interest from new large investment organizations, which is very encouraging.

Management’s objective is to maximize value to our shareholders, which at this point in time translates into minimizing equity dilution. Therefore, we have set our sights on potentially increasing the debt size, so that equity requirements are minimized. In addition, we have already launched technical optimization programs that include further aquifer stress tests for our initial brine field, as well as building a full sized solution mining cavern.

We are also almost finished with our EPCM contractor selection process. I’m happy to report that top notch engineering organizations have submitted their bids to become Allana’s EPCM contractor. The selection of an experienced EPCM contractor is critical to the success of engineering design and then construction. Finally, on the infrastructure front, we are on track to finalize the port lease agreement with the government of Djibouti. The road construction on the Djibouti side has been progressing very well. This summer, our main objective is to work closely with the government of Ethiopia to secure project allocation for the remaining segment of the road from our project site.

Stockhouse: Your agreement with ICL for financial support and take or pay off-take deal, and the technical knowhow now available to Allana was a bit of a game changer. It has only been two months since the deal was announced. How has it changed Allana on the ground in that time?

Farhad Abasov: The transaction with ICL has validated our project from all aspects. It has made it even more financeable than before and has completely differentiated us from many other projects. We had three major components in the transaction, and they fulfill the objective of mitigating the financing, construction and operation risks. ICL has a production centre at the Dead Sea, very similar to what we envision for our project in Ethiopia in terms of solar evaporation use, processing and logistics. We believe that ICL is the perfect match for our project in that regard. ICL also shares our vision for the African fertilizer market, whereby we both believe that we need to work with a number of stakeholders in East Africa, including governments, NGOs and farmers to foster the use of potash.

ICL’s involvement with Allana has had an immediate positive impact in several ways. For the first time, we have started receiving positive interest in debt financing from large commercial lenders. This was not the case before. We have also seen a surge in interest from large investment houses with respect to an equity investment. Although we are not planning an equity raise at this time, it is a very positive sign for a junior potash company.

On the technical side, we have established a technical co-operation committee with ICL. We could see the benefits of ICL’s experience immediately. ICL has top experts in all areas, including production and logistics. The committee has already made significant recommendations that will enhance and improve our construction and logistics, including the port design, production and marketability of our potash product.

We have also seen very strong support coming from the top executives and key board members of ICL, as well as in our work with the governments of Ethiopia and Djibouti. All of this has been accomplished in the past couple of months.

Stockhouse: Is there room for expansion and other off take partners?

Farhad Abasov: We have sufficient resources to expand our Muriate of Potash (potassium chloride) (MOP) production and eventually produce Sulfate of Potash (potassium sulfate-SOP) product. At this stage, we believe we need to stick to our original strategy of producing one million tonnes of MOP per year. However, with ICL partnership, we will start working on larger production scenarios as we move closer to the completion of construction.

Stockhouse: Longer term, your company has a plan to start the first potash mine in Africa with which to help that continent deal with its ongoing food crisis. How much does that plan hinge on the political situation in Ethiopia remaining stable.

Farhad Abasov: Yes, our plan is to place as much of our product in East Africa in particular and the African continent in general, as possible. Potash consumption in Africa is quite small right now. But this is going to change due to a number of factors, such as improved rural infrastructure, large foreign direct investments, agriculture modernization, government efforts to build new fertilizer plants and continuing education of farmers in the use of potash. In Ethiopia alone, some agricultural subsectors have recently transformed themselves into significant export oriented industries.

So the political and economic stability of Ethiopia, of course, will be key to these plans. The country has been on a very stable development track over the past several years. They have liberalized many sectors of the economy, which has allowed substantial investment to start flowing into the country. Infrastructure development continues at a rapid pace. The country has been experiencing a real estate boom as growing income levels allow Ethiopians to purchase their own houses and apartments.

The Ethiopian government has been actively advancing progressive business policies and we believe this will continue to be the case. Thanks to this strategy, the country has achieved double digit growth rates in recent years. The country experienced a transition from the late Prime Minister to his deputy last year. The new Prime Minister has steadfastly continued to support pro-business and open economic policies and has been working hard to maintain and strengthen political stability in the country. Ethiopia is the second most populous country in the African continent. It has been playing a major stabilizing role in east Africa for many years.

I should also note that we are very satisfied with the level of support that Allana has been getting from the Ethiopian government, especially in regards to permitting and infrastructure development.

Stockhouse: What sort of timeline can we anticipate for the project to move to production, assuming all the pieces come together?

Farhad Abasov: The plan is to start full construction by early next year, providing that all pieces of the financing plan come together by that time and then complete construction two years later. We believe that with ICL’s support this can be accomplished.

Stockhouse: Why would investors be thinking of investing in Allana potash now?

Farhad Abasov: Allana is one of the few Greenfield potash projects that has a clear path to full financing and construction. The project is fully validated by its strategic partner ICL, one of the largest potash producers in the world. It also has a similar production profile. If you look at ICL’s history, you will notice that they don’t take a passive role in their investments. They actively help to develop them. We believe that our project is one of the lowest cost projects in the world, meaning it can be financed more easily and be profitable, even at low potash prices.

Currently, Allana is massively undervalued, which creates a great buying opportunity for investors.

Stockhouse: What milestones can we expect from the company over the next six to 12 months?

Farhad Abasov: We expect significant progress in the debt financing, completion of technical optimization programs, EPCM work commencement and further important achievements on infrastructure development.

Stockhouse: What is the total cost of the project to put it into production?

Farhad Abasov: US$642 million. We have signed mandate letters with large development financial institutions and banks last year for about 60% of the total cap ex. We are trying to enhance the package and increase the debt raise a bit further.

The rest of the capital will come from equity, which will likely be raised after the debt is in place. On the equity side, we believe that there will be a significant portion of equity investment coming from our existing shareholders, including ICL.

We will then raise some further capital from other large institutions. We are looking at 60% to 65% debt and the balance being equity.

Stockhouse: What is your goal with regards to having this financing in place so that you can start construction?

Farhad Abasov: We would like to get all the financing in place late this year or early next year, so that we can actually start construction right away. We will begin some of pre-construction work this year, including EPCM work. Full construction will not be launched until early next year and take another two years to complete.

Stockhouse: Who are the key players on the Allana management side and what experience do they bring to the table to do this type of thing?

Farhad Abasov: I was the co-founder of another potash company called Potash One before joining Allana. Potash One was sold to a German potash producer in 2010 Before that, I was also involved in another junior company that was built from scratch called Energy Metals, which was sold to Uranium One.

Senior Vice-President, exploration Peter MacLean has been the architect of our very successful exploration program. He is our chief geologist and has had many years of experience in the exploration field.

Jason Wilkinson, Project Manager, Ethiopia, has been in Africa for many years and he has been running all of Allana’s operations in Ethiopia and is also a geologist.

We have three potash experts on our board, two of them previously with Potash Corp. of Saskatchewan. Both of them were Senior Vice-Presidents at PCS.

Director Yoram Cohen is General Manager of ICL Africa and a member of ICL Fertilizer’s management team.

The team is being built very quickly from its original exploration profile to transition to development and construction.

Stockhouse: How much cash does the company have right now?

Farhad Abasov: C$27 million, including the recent investment from ICL.