Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.

Allana Potash (TSX: T.AAA, Stock Forum; 80 cents)
www.allanapotash.com

Shares outstanding: 226 million
Financing closed this week: $20 million at 80 cents

We are introducing Allana as a mid-to- long-term speculation within the agriculture industry.

It is a development-stage potash company in Ethiopia with an in-situ potash resource of 245 million tonnes near the Eritrean border.

Most recent analyst coverage & 12-month targets (average $2.03/share):

(1) Mackie Research -Sept 11 - $1.65; (2) Union Securities - Aug 11 - $2.40; (3) Fraser Mackenzie - Dec 11 - $1.60; (4) Dundee Capital - Dec 11 - $2.70; (5) Cormark Securities - Nov 11 - $1.80

Further analyst coverage should be enroute in Q1/12 as the recent financing was a syndicate of underwriters led by Dundee Securities, National Bank Financial, Cormark Securities, Macquarie Capital, and Fraser Mackenzie.

Survival of the fittest

Turbulent may be a gross understatement when describing micro and small-cap companies in 2011 but for the handful of Canadian-listed potash exploration companies it was survival of the fittest and a year that culminated in seeing the cream rise to the top.

It was a year ago when investors and speculators watched companies like Passport Potash (TSX: V.PPI, Stock Forum; 30 cents) rocket to gains of 500% within six weeks. However as the chart to the left demonstrates, those gains have been completely wiped out.

Allana Potash gained almost 200% in that same period but like so many smaller companies this past year, it has been on a downward slope. Fundamentally it has done very well as the business model continues to evolve but selling associated with broad-based risk aversion has overwhelmed the share price. Moving forward into 2012, this may work to the advantage of new speculators if they have the risk tolerance and patience.

Divergent sector opinions

Allana is only the second agriculture stock I have followed this past year. The first was Hemisphere GPS (TSX: T.HEM, Stock Forum; 90 cents) November 25th at 58 cents.

http://www.stockhouse.com/Columnists/2011/Nov/25/Micro-cap-a-
market-leader-trading-at-fire-sale-pri

Hemisphere has now gained 50% but the outlook for this year remains positive and I will continue to follow the company through 2012. Coincidentally in that report, I mentioned National Bank Financial. In October, National Bank analyst Robert Winslow downgraded his view on the agriculture sector. Following that industry report, National began dumping HEM stock in the 60-cent range and drove the share price into the ground. In my November 25th report, I stated that I disagreed with that analyst’s opinion of the agriculture sector. Fortunately their decision to dump millions of shares of Hemisphere was to the advantage of smarter buyers. 

Recently, National Bank Financial issued a bearish outlook for the fertilizer industry. In particular, they warned on Potash Corp of Saskatchewan and said the cyclical sector was headed for a downturn. Not surprising it was the same analyst (Robert Winslow).  If I was a client of National Bank and missed out on short term gains of 50% on HEM.T thanks to Mr. Winslow’s agriculture sector call, I would not be very happy. 

In January, BMO Nesbitt Burns had an entirely different take (versus National Bank) and issued a bullish outlook for the sector. Analyst Joel Jackson believes demand for fertilizer is set for a rebound soon and forecasts potash prices to rise 5 to 10 percent in 2012 (although he believes nitrogen and phosphate prices will fall). Overall his outlook for the agriculture sector was positive.

It is common to see professional analysts with divergent opinions of a sector but it is frustrating to watch the money managers follow their opinions so closely that it results in the share price destruction of the smaller public companies. In the case of Hemisphere I watched National Bank dump over four million shares in weeks. Fortunately their call was wrong and we were able to catch the stock near a bottom.

Allana Potash has a lot more stock outstanding than Hemisphere and the business models are entirely different, so the stocks will also trade entirely different. Allana has tremendous liquidity and extensive analyst coverage (as I have shown near the top of this report). There is no guarantee that more extensive analyst coverage will result in more positive gains for 2012 but it sure helps.

Leading Indicator - Potash Corp of Saskatchewan (PCS)

Industry giant PCS recently announced they will be idling production at three of their potash mines due to slow demand, seasonal adjustments, and recent weakness in food commodity prices. These are temporary production declines but it does demonstrate that the industry is not as strong as it was a year ago. The world will continue to consume massive amounts of fertilizer but the industry is not without its share of volatility.

"We've had a longstanding history of matching our production to market demands, and I would say we're seeing a little bit of seasonal softness right now," Mr. Johnson said. "We'll get a better look at what the market looks like when springtime starts."

While supply is controlled by the majors, it still leaves plenty of room for high-quality projects like Allana. The challenge will often be financing but world development agencies would love nothing more than to see large-scale mining projects in Ethiopia. This “should” work to Allana’s advantage.

“Potash prices should be protected by the limited supply base, centred on cartels in North America and the former Soviet Union, despite evidence of weakening global demand. The nature of the global potash market, with limited participants on the supply side, creates a less volatile trading environment. This tends to shield the potash market from the severe shifts in prices." [Rabobank]

Preliminary Economic Assessment

In November 2011, Allana released a PEA on its Danakhil potash project in Ethiopia. The study shows an internal rate of return (IRR) of 36.8 per cent and an after-tax net present value (NPV) of $1.85-billion (U.S.) based on a 12-per-cent discount rate.  Further details of the report are available on its website.

Capital expenditures to put a mine into production (earliest start-up would be 2016) are estimated at $800 million. According to Allana President and CEO, Farhad Abasov, this would be “one of the lowest-cost and potentially highest-return potash projects worldwide.” 

The production capex includes costs associated with cavern development, the solar evaporation ponds, brine processing and infrastructure, including power. Solar evaporation of the saturated brine solution is possible at the Danakhil project due to the year-round hot temperatures averaging 40 degrees Celsius and very little rainfall. Transportation capex costs are based on a company-owned fleet of trucks and all support such as maintenance. Port capex costs are based on Allana constructing its own port terminal in Djibouti, including product unloading and storage, shipping facilities, and supporting infrastructure, such as power and minor road construction.

Feasibility study work is continuing and on schedule for completion in the third quarter of 2012.

Other helpful information

There is little point wasting time here to review further details of its potash project when more than sufficient information is available on its website.  I would suggest starting with their most recent Powerpoint presentation:

http://www.allanapotash.com/i/pdf/CorporatePresentation.pdf

For detailed background information on Ethiopia and that country’s business environment, I would suggest using the CIA Fact book. 

https://www.cia.gov/library/publications/the-world-factbook/

Disclosure: Danny Deadlock owns 7,500 shares of Allana Potash (TSX: T.AAA)