Prospect of lower potash prices is ‘advantage’ Allana
Allana Potash Corp. (‘Allana’) could become one of the largest potash producers in Africa thanks to a promising project in Ethiopia. The recent breakup of the BPC potash cartel resulting from OAO Uralkali’s decision to ‘go it alone’ has shaken and stirred the potash sector. While some projects and potash producers now face greater risks of failure, others have even better chances of success. Allana is one of these because its project based in Ethiopia’s Danakil region may well be the one best suited to benefit from the new potash market dynamics triggered by Uralkali’s move.
The Horn of Africa, from where Allana’s potash will be shipped, is strategically located to serve India, China and more importantly, all of the markets where potash demand is rising fastest such as Indonesia, Malaysia and Laos – all countries featuring potash intensive palm oil production. More importantly, Allana is strategically located to serve the Africa, which is where potash consumption, now among the lowest in the world, is slated to increase fastest. Ethiopia alone will guarantee significant sales for Allana. Indeed, Ethiopia, which is home to some 90 million inhabitants, has ambitious economic growth plans and agriculture is its highest priority given that some 85 percent of the people work in that sector.
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There is room for growth because most agricultural production revolves around a vast number of small rural areas with operations smaller than one hectare. Now, there are 12.5 million hectares of arable land in Ethiopia but the potential is 50 million hectares. The country has already sought international cooperation to help improve land productivity and make fallow land available for farmers. There is no more effective way to achieve this process than through a greater use of potash. In addition, over the past decade the Ethiopian government has enacted policies to attract investment, helping it register one of the highest economic growth rates in the world (11%, expected to continue until 2014). In 2010, Ethiopia adopted new laws for the mining sector, exempting companies from custom duties and accelerated depreciation among other incentives. The government has also embarked on a series of infrastructure development projects aimed to attract foreign investors. As the Grand Ethiopian Renaissance Dam project – which will help boost agricultural activity – continues, with support from its neighbors Sudan, South Sudan and Kenya (and less resistance from Egypt since the demise of the Morsi government), the agricultural sector in Ethiopia and the greater Horn of Africa region is set for an expansion worthy to be described as a ‘Green Revolution’ for Sub-Saharan Africa (SSA). This will be an unprecedented and potash fueled development, because the SSA region has never actually experienced the kind of agricultural productivity programs of the 1950s-1970s that led to a dramatic increase in land productivity in many developing countries.
The key ingredients for these processes were – apart from good management, political will and irrigation – mineral fertilizers such as potash, which is essential to increasing yields and providing the kind of nutrients that African soils are known to lack. In the 1960’s-70’s, the use of mineral fertilizers grew considerably in Latin America while dropping in Africa. Not surprisingly, those decades (and until now) saw various famines in Africa, while food production increased in Latin America. Now, the International Fertilizer Industry Association suggests that African potash use could reach five million tons over the next few years. It is now not even close to a million tons.
A lower potash price is not necessarily a bad thing…
Perhaps the best way to increase potash prices in the long term is to lower them in the short term. In this sense the 25% average drop in potash shares in reaction to the Uralkali bombshell, will help make potash prices more affordable for those many potential customers who have stayed away because of prohibitive economics. Now, they have a chance to sample the goods and see the benefits, generating more demand. Africa is an ideal continent to deploy this strategy and for companies with favorable project economics such as Allana Potash the prospects are excellent. Farhad Abasov, Allana’s CEO said that the “market will finally start to appreciate project economics now”.
Earlier this year, Allana Potash filed its Feasibility Study which highlighted its favorable economic structure. Allana’s overall CAPEX cost is among the lowest of any new potash project at USD$ 642 million; the projected Total OPEX (loaded on ship) costs are even more impressive at USD$ 98.75/ton. At such OPEX and CAPEX even the scaremongering USD$ 250/ton prices being threatened by Uralkali will generate a handsome profit for Allana. It is highly unlikely that potash prices would fall that low. Among the junior potash plays, Allana is edging ever closer to production phase having submitted all mining permit documentation to the Ministry of Mines of Ethiopia, which could be forthcoming before the end of August according to Abrasov. Nobody outside of the Uralkali board could foresee the demise of BPC and its news hit the market like a bomb. But there are also opportunities and hope, in these dark times of potash. Allana is part of that promise and slated to reap rewards in high and low potash price regimes. Finally, consider that the short-term potash prices fall, the higher the probability that these will also be higher again in the long term. Allana Potash has a profitable project, even at a price of USD 250-300 per metric ton, which many juniors absolutely cannot say for themselves.
Allana Potash Corp. (TSXV: AAA | OTCQX: ALLRF)