Allana nails water supply while UK analyst floats Israeli takeover possibility
With potash prices being what they are, there are not too many companies in the sector that at present would get a “buy” recommendation. That Allana Potash (TSX: AAA) has received such a nod from brokers Whitman Howard, based in London, is something to note, especially in view of the thinking behind it. Analysts Roger Bade and Neil Pidgeon say that, at C35.5c a share, Allana is capitalised at around C$115 million and trades at “a very attractive” 75% to 90% discount to project net present value. Then they throw this in the ring: “At current potash prices, a 40% discount to NPV looks more appropriate, particularly it seems likely that ICL would want to mop up Allana prior to a production decision. Buy.”
They’re referring to the fact that Israeli potash producer ICL (TASE:ICL) is a 16.38% strategic investor. ICL’s holding could increase to 35% on the exercise of warrants and also includes an off-take for 800,000 tonnes of muriate of potash, or 80% of planned production. Apart from the possibility of a takeover bid, Whitman Howard found a lot they liked at Allana.
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That view might be enhanced by today’s update that the company’s Danakhil project in Ethiopia has received its water rights from the Ethiopian government. And these are on the generous side: the country’s Ministry of Water, Irrigation and Energy has granted Allana an exclusive right to extract about 30 million cubic metres of water a year which, as the company says, greatly exceeds the requirements for planned MoP production of 1 million tonnes a year, that requiring 18.5 million cubic metres a year of water. In addition, ICL is continuing to test the aquifer and commercial cavern work, talks on debt financing are advancing, while construction of loading facilities at Tadjoura Port in Djibouti is proceeding.
The full announcement can be read the news section here at Investor Intel, so let us turn our attention to Whitman Howard’s report.
The analysts see the project in production by the end of 2016. They say the deposit benefits from being shallow (depth down to just 450 metres) and its being located in a hot, dry location, which climate speeds up the solar evaporation of solution brines. They see the project as well endowed in terms of infrastructure: with only a few gaps, new tarred roads lead to Tadjoura Port, and railways are planned for at least half the route. Initially the potash will be trucked to the port 550km away; meantime, construction of various rail routes is under way as Ethiopia spends $7 billion on rail projects before the end of 2015. The availability of the Weldiya-Tadjoura railway is expected to halve the company’s trucking distances with significant transport savings.
The project is strategically important for Africa which urgently needs its own source of potash if soil depletion, a problem across the continent, is to be addressed and then more foreign investment attracted to African agribusiness. As Bade and Pidgeon note, with potash projects in both Eritrea and Republic of Congo faced with problems, Allana is likely to be Africa’s only potash producer for some time.
The company also seems to have met the preconditions set by the World Bank and African Development Bank that Allana find itself a strategic partner with an off-take agreement. ICL was the answer to that. “As this has now occurred, progress towards project financing could be swift,” opines Whitman Howard.
Potash demand in Africa is rising at between 5% and 6% a year. The continent’s present potash consumption is less than 750,000 tonnes a year, or under 1.5% of the world total. ICL sees the Danakhil mine as allowing it to increase significantly its sales in Africa, as well as being more economic than ICL’s Dead Sea Works for supplying customers in India and Southeast Asia.
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