ICL and Allana form a strategic alliance to take advantage of growing potash demand in Asia and Africa

Potash ReviewIsrael Chemicals (‘ICL’, TASE: ICL) and Allana Potash (‘Allana’, TSX: AAA | OTCQX: ALLRF) have established an alliance to develop Allana potash mine in the Danakhil region of Ethiopia. Under the deal, ICL has acquired USD$ 23 million in shares and warrants of Allana Potash Corp or 16%. ICL is one of the world’s leading mineral fertilizer producers. Should ICL exercise the warrants included in the ‘units’, the total investment would amount to some USD$ 87 million or about 37% of the company. Moreover, ICL has also signed an offtake arrangement from the Danakhil project; Allana and ICL started negotiations for the deal last December. Allana is at an advanced stage in the project, having already completed the definitive feasibility study (FS) and secured the necessary mining license needed to start construction of the mine itself.  As part of the agreement, ICL will offer Allana technical advice on the mine development as well as marketing assistance for the product.

The FS feasibility study suggests that Allana has the potential to produce about a million tons of high-grade potash a year. ICL is the world’s sixth largest potash producer and it sold about five million tons of potash in 2013 and has mines in Spain and Great Britain as well. In turn, ICL – which was highly coveted by Potash Corp (NYSE: POT) in 2012 and 2013 as it sought strategic partnerships to gain better access to the emerging markets where potash demand has been most intense such as India, China and Indonesia. Had the ICL bid been successful, Potash Corp would have overtaken the Russian OAO Uralkali as the world’s largest producer, giving it even more market influence. Potash Corp had targeted ICL also because of its closer geographic position. Israel’s proximity to the Suez Canal would have given Potash Corp a significant advantage in selling and delivering potash to markets in China, India and other Asian powers.

The Israeli government faced internal pressure to block the sale. Moreover, even as ICL’s deal with Allana eases access to Asian markets, it opens the door to Africa, which is the continent where potash consumption will grow fastest as many countries start to pursue more effective agricultural policies. Sub-Saharan Africa was second only to South East Asia in the intensity of economic growth over the past decade. 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, will 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% of the people work in that sector.

Africa has continued to experience growth even as Europe and North America have struggled to recover from one of the worse recessions since the Great Depression. Resources, mining, oil and gas explorations have fueled Africa’s growth, but agriculture has also emerged as an important factor. 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 metric tons. While in Europe, the gross domestic product shrank by 11% in the last five years, it rose by 29 percent in Africa. Allana’s FS suggests it is on track to reach production by early 2015, while all the other aspects of the project are also proceeding on target, including the relevant roads and the port in Djibouti. Allana has measured and indicated sylvinite resources in 2013 of 327.42 million tons of 28.31% KCl and inferred sylvinite resource of 90.76 million tons at 27.80% KCl. Once in production, Allana will offer ICL a more sustainable future. Indeed, ICL’s potash plant on Dead Sea has faced growing criticism from environmentalists. The tourism sector is complaining of receding waters and the growing and spreading concerns  could lead to ICL having to shut down the ‘Dead Sea Works’, given that it has been blamed for of the problem.

Allana’s project in the Danakhil offers some of the best economics in the industry with very low operational and capital investment costs (OPEX and CAPEX); in simple terms, Allana will be one of the cheapest potash mines to build and operate with operating costs expected to be USD$ 100 per ton (to port). This is well below the peer group average, providing a healthy return even if potash prices remain at the current USD 300/ton (based on CANPOTEX’s recent China contract). In addition, the FS noted that the CAPEX of around 642 million dollars would also be among the lowest in the industry, largely because the Danakhil deposit is found at relatively shallow depths. While some projects and potash producers have faced greater risks of failure in the wake of the lower prices, caused by the collapsed of the CANPOTEX/Russian-Belarussian duopoly last summer, others like Allana have actually gained 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. ICL’s expertise and market access have merely confirmed Allana’s value.




Potash Corp beats Q1 Expectations but gives up on bid for Israel Chemicals

ProEdgeWire-China-is-changing-the-Rules-in-the-Potash-Markets1-300x194Potash Corp (NYSE: POT) has announced its first quarter results, beating expectations, reflecting rather bullish prospects for the potash market in 2013. Potash Corp increased its profits significantly and remains confident for the rest of the year’s prospects. The Saskatoon based Company showed a first quarter profit of USD$ 556 million, which represents a 13% increase from Q1 2012. Significantly, the results suggest increased potash sales, almost doubling from 1.2 million tons to 2.2 million tons, even if at a lower average price (from USD$435 to USD$ 363/ton). Potash Corp’s results suggest a rebound in demand, establishing a strong foundation for the rest of the year and for the sector in general. Buyers in China and India have returned to the market in late 2012 after the break and potash demand has picked up noticeably, even if prices are not expected to increase significantly. Since the start of the fiscal year 2013, potash production has increased by 37% compared with the previous year.

Prices are not expected to drop below the USD 400/ton barrier set for the China contract last December. Nevertheless, even as it announced its very strong results, Potash Corp decided to scrap its planned and much discussed takeover bid for Israel Chemicals Ltd (ICL, the world’s sixth largest potash producer) in the wake of strong political and labor opposition. Israel’s new Finance Minister, Yair Lapid a populist, was the main force behind the government’s opposition to the deal. Had the ICL bid been successful, Potash Corp would have overtaken the Russian OAO Uralkali as the world’s largest producer, giving it even more market clout. Potash Corp is facing increased competition in Saskatchewan itself from players that remain outside the Canpotex selling system.

Apart from the Russo-Belarusian Uralkali (with its own marketing agency (BPC), these include ICL itself, Germany’s K+S Ag and potentially BHP Billiton, whose proposed USD$ 14 billion Jansen potash project in Saskatchewan is but a signature away from being approved by the Board. Perhaps, with Potash Corp failing to secure ICL, the BHP plans for the Jansen mine are even closer to being inked. Potash Corp’s ambitions for ICL were an attempt to shift the current potash balance of power, perhaps fearing the emergence of BHP Billiton as a new potash giant. Canpotex and BPC can maintain their ‘price before volume’ model if its members continue to control over 50% of the market, something the ICL addition would have enabled.

The new strategy would rely on the ‘cartels’ such as Canpotex to change their approach. Rather than selling through individual contracts to big volume purchasers; the more dominant market share would allow Canpotex members to sell higher volumes at lower prices. Those same low prices would be help to discourage competitors from pursuing new mines, also reducing the current space for juniors. Surely, Potash Corp’s vanished bid for ICL has not discouraged it from finding other routes to achieve a bigger market share. Indeed, Potash Corp had targeted ICL also because of its closer geographic position. Israel’s proximity to the Suez Canal would have given Potash Corp a significant advantage in selling and delivering potash to markets in China, India and other Asian powers.

At present, Uralkali is more competitive in that respect. The geographic aspect of these emerging potash market wars hints to the likelihood of Potash Corp seeking to acquire control of other potash projects in a strategic location, to ease its reach and expansion to key markets. The demise of the Brazilian Vale’s USD$ 6 billion Rio Horizonte potash project in Argentina has also left more room for expansion. However, foreign investment adverse policies in Buenos Aires have discouraged all major players-except perhaps a Chinese government backer player-from picking up the project where the Brazilians left it. The solution might be sought somewhere near the Red Sea and the Indian Ocean, an ideal location – even better than what ICL would have provided.

The Dallol potash project in Ethiopia being developed by Allana Potash (TSX: AAA |TCQX: ALLRF) is an ideal candidate. Allana recently filed its feasibility study with the Ethiopian Ministry of Mines, putting it on track to reach production by early 2015, while all other facets of the projects are also proceeding on target, including the relevant roads and the port in Djibouti. Allana has measured and indicated sylvinite resources as at February 2, 2013 of 327.42 million tons of 28.31% KCl and inferred sylvinite resource of 90.76 million tons at 27.80% KCl. Once in production, Allana will not be able to compete with ICL in yearly output; nevertheless, it will have a more sustainable future. ICL’s potash plant on Dead Sea has faced growing criticism from environmentalists. The tourism sector is complaining of receding waters and the growing and spreading concerns  could lead to ICL having to shut down the ‘Dead Sea Works’, given that it has been blamed for of the problem.