If redundant, please disregard. I found interesting several bits and pieces of information in the report, namely that Yara does not have enough water for its project whereas Allana does, that Allana might try to secure a portion of the BHP property next door and that the project derisking is progressing nicely (technical + infrastructure). I believe that the below information is pertinent to anyone interested in the company. GLTA
Ethiopian Tour Highlights: Danakhil Confidence Rising;
Upgrading to OP2
We recently travelled to Ethiopia to participate in a site tour of Allana’s
Danakhil Potash Project (Danakhil) and meet with senior government officials.
We are increasing our target price to $1.25 (vs. $1.00 previously) and upgrading
our rating to Outperform (vs. Market Perform previously) predicated upon our
belief that: i) many of the key technical risks facing Danakhil, while not entirely
resolved, are rapidly being addressed; ii) a large number of key milestones
(catalysts) will transpire over the next six months; and iii) Allana’s risk-reward
proposition has improved considerably given the recent share price decline.
If you ever had any preconceived notions about Ethiopia, you should probably
throw them out. We certainly have. By most accounts, the country bears little
resemblance to its former self, shedding many of the deep scars inflicted by the
former autocratic regime during the 1970s and 1980s. Today, in contrast, the
Federal Democratic Republic of Ethiopia is heralded as one of the great African
success stories, widely regarded as a beacon of growth, stability, and good
governance in an otherwise volatile continent.
We came away from our Ethiopian tour with far greater confidence in Allana’s
ability to further advance its flagship Danakhil Potash Deposit toward
production. While challenges remain, most notably infrastructure, our tour of
the project’s advanced pilot facilities (i.e. production well, evaporation ponds)
and meetings with senior Ethiopian government officials indicate that Allana
has made large technical and business development strides since we first
initiated coverage back in March. As such, we believe the company has set the
stage for a favourable DFS report by year-end, one of several key catalysts we
expect over the next six months.
Our $1.25 target price is based upon a 0.47x P/NAV target multiple applied
against our $2.67/share Danakhil NAV estimate.
Ethiopia is a well-governed, politically secure country where private sector mining
development will continue to flourish, in our view. While infrastructure and human
capital still remain relatively primitive, we are encouraged by the government’s recent
track record and aggressive plan (see below for more) to address these critical issues.
Collectively, we believe these attributes bode well for development-stage companies
like Allana who, based upon our initial impressions, are helping the government build a
strong foundation for the country’s future potash sector.
Danakhil Overview & Tour Highlights
We came away from our Ethiopian tour with far greater confidence in Allana’s ability to
advance its flagship Danakhil Potash Deposit toward production. While several
challenges remain, most notably infrastructure, our tour of the site’s advanced pilot
facilities and meetings with senior Ethiopian officials suggest that Allana has materially
de-risked the project since we first initiated coverage earlier this year (see our Mar-29-
12 Initiation of Coverage: “African Salt, Developing the Danakhil”, price: C$0.71).
For ease of navigation, we have structured our tour synopsis into four major
components, including: A) a quick recap/overview of Allana’s Danakhil project based
upon the company’s most recent technical reports and strategic updates; B) a recap of
the most salient highlights/takeaways from our recent site tour; C) we review notable
changes to our financial model and estimated project NAV; and D) we discuss the future
anticipated milestones and our revised thesis/outlook on the company.
A. Danakhil Recap: World Class Deposit; Full Steam Ahead
Allana’s flagship Danakhil Potash Deposit is located in the remote north-eastern corner
of Ethiopia within the storied Dallol basin. Notwithstanding several issues still to be
addressed, we regard Danakhil as a world-class potash project boasting a long list of key
B. Tremendous Strides Made; Key Technical Risk Fading
Allana’s Danakhil potash project has made tremendous progress over the past eight
months, in our view, addressing many of the key technical risks we previously deemed
of major concern. Specifically, we highlight the following key developments:
i) Ample Water in the Sandbox
First and foremost, we understand that Allana has successfully secured and
delineated sufficient water to support its baseline 1.0 mln tpy solution mine—and
likely any future expansions (potentially to 2.0 mln tpy).
? Nova Acquisition Bolsters Strategic Water Resource—Allana’s recent
acquisition of neighbouring Nova Potash—which closed just yesterday—was
instrumental in securing this water resource, in our view, providing greatly
enhanced access to the robust aquifer beneath the basin’s westernmost alluvial
fans (see Exhibits 3 and 4). Based upon initial test work, we understand the
fresh water component of the aquifer is ~100m thick, boating a total resource
estimated at ~500.0 mln m3 and a healthy annual recharge rate estimated at
~60.0 mln m3/year. Allana’s project, for context, is projected to consume only
~16.0 mln m3/year, or roughly one-quarter of the annual recharge, suggesting
there is more than enough water to facilitate the project.
Drill Program Tapping the Resource—Allana’s ongoing drill program in the
western alluvial fans has provided strong confirmatory evidence of the basin’s
estimated water resource. At the time of our visit, 13 of 18 observation holes
were complete, including one production well already feeding the company’s
initial pilot solution well (see below for more). According to discussions with
staff on the ground, all 13 holes had successfully struck water, typically at ~20m
in depth (shallow), with most wells planned for ~50m in total depth. Flow rates
have also been reportedly healthy, ranging from 75m3 to 150m3/day. For
context, Allana’s 1.0 mln tpy solution mine is estimated to require ~2,000
m3/day of water at full production, or the equivalent of 14 to 18 production
wells (depending on average flow rates). To bolster its available resource and
establish greater feedstock flexibility, the company intends to pursue further
well drilling on its recently acquired Nova lands, an endeavor that we suspect
will be fruitful given the land’s westernmost position in the basin along the key
? Water Access = Strategic Value to Other Players in the Basin—Allana’s control
over this healthy water resource not only solidifies its own future, in our view,
but also bolsters the company’s strategic value to other players in the basin—
most notably Yara International. As one of the world’s largest fertilizer
enterprises, Yara is the controlling (51.0%) stakeholder in Ethiopotash B.V., a
potash development company with a large land position adjacent to the
northern reaches of Allana’s own Dallol concessions. By its own account, Yara is
pursuing SOP production from the large, widely-prevalent Kainitite resource in
the basin (vs. AAA targeting MOP from Sylvinite), with plans to eventually
produce between 1.0 mln – 1.5 mln tpy over a 30-year period. However,
according to multiple anecdotal accounts, we understand that Yara currently
remains short of the water necessary to fully advance its project. While larger
sources of water could ultimately be piped in—a sizeable water resource exists
~18km away—we believe a tie-up, or some sort of long-term contractual
arrangement with Allana is likely the more palatable, value-creating solution
for the Norwegian-based giant.
BHP Land Base to be Carved Up & Reallocated; Strategic Parcel Desired—Our
discussions with the Ethiopian Minister of Mines also revealed that BHP’s massive
land base in the basin is likely to be carved up and reallocated. While not critical to
Allana’s current plan, we understand that the company is keen to secure the
westernmost parcel directly to the south of their current concessions, most likely as
a defensive move to protect its strategic water position and, to a lesser extent,
further augment its mineral resource.
ii) Embracing the Heat! Preliminary Technical Work Yielding Favourable Results
Allana has also made large strides toward proving out the feasibility of its
processing plan, including the efficacy of its evaporation capabilities and flotation
? First Pilot Well Progressing as Planned—Allana’s first pilot solution well is
progressing as planned. At the time of our visit, sump leaching (stage 1) was
already complete, with the company well into the undercut leach phase (stage
2), effectively undercutting (mining) the upper carnallite layer below the
coveted sylvinite member (see Appendix B). At just over 100m in depth, the
cavern size at the time of our visit was ~500m3, on-track for the targeted 720m3
before the production leach (of sylvinite) could begin.
? Embracing the Heat!; Pilot Evaporation Ponds Proving World Class—Not
surprisingly, the Dallol basin’s searing 40°C+ heat has proven highly efficacious
in the evaporative process, yielding preliminary rates of ~1.0 cm/day, in-line
with rates achieved in similar projects within the Australian desert, and
comparing positively to Utah/Arizona and Dead Sea projects. In order to
expedite the initial tests at its six pilot ponds—prior to its first production well
flowing—Allana and its technical advisors elected to create a “synthetic” brine,
one understood to be consistent with the chemistry and physics of its sylvinite
zone. While not a traditional practice per se, we understand there is good
reason to believe the eventual production brine, which is expected to flow
imminently, will perform in a very similar fashion.
? Preliminary Flotation Tests Suggest Healthy Recoveries—Based upon our site
tour discussions, we understand that preliminary flotation tests and related
processing optimization are generating strong recoveries. For context, Allana
shipped ~925 kg of harvested crystals from the aforementioned evaporation
tests to an ERCOSPLAN lab in Germany for flotation studies. We understand
that these studies, while yet to be finalized, are generating recovery rates in
the range of 85%-90%, which are good when compared with other potash
flotation projects. We expect the company to release the final results from
these studies sometime in early November (see Catalyst list below for more).
iii) Infrastructure Still Primitive, but Improvement Initiatives Gathering Momentum
One of the most obvious challenges still facing Allana’s Danakhil project, in our
view, is the region’s primitive infrastructure. Fixed link rail and power infrastructure
remains non-existent, for instance, forcing all camps in the region to rely heavily
upon the rustic road network and fuel oil generators. That being said, despite our
lackluster assessment of the current infrastructure, there was plenty of evidence to
suggest that momentum is gathering to develop the basin’s future infrastructure—
including a basket of short-term and long-term options.
? Road Construction Activity Buzzing—Road construction activity was seemingly
everywhere we went in the basin (see Exhibit 8). Throughout the course of our
tour, we came across at least three different sites where extensive road work
was being completed, including both government and company-sponsored
crews and equipment. In many instances, sufficient grade development and
drainage infrastructure was in place to indicate that asphalt would be soon to
follow. In this context, we came away with an added degree of comfort that
the Ethiopian government is making tangible progress toward properly linking
the basin with port facilities in Djibouti via a paved highway—with current
plans suggesting the final 150km segment from Afdera to the Dallol basin will
be complete by the end of 2013.
? Long-Term Rail Option Still Viable—As noted previously, rail construction
remains a cornerstone of the Ethiopian government’s bold infrastructure plans.
We had the opportunity to meet with the head of Ethiopian Railways Corp.,
Getachew Betru, who confirmed the green-light has been given and contracts
awarded for construction of a 675 km rail line from Mek’ele terminating at
Tadjoura Port in Djibouti. Financing has been secured, with 40% committed by
the government of Ethiopia and the remainder provided by a syndicate of
Chinese, Turkish, and Indian banks and development agencies (see Exihibit 9).
The linkage from Allana’s Danakhil project to this new line is, however, yet to
be confirmed. Nevertheless, our discussions and review of plans already under
way have given us added confidence that longer-term, Allana will likely have
access to this rail network, giving it a lower-cost link port and, as a result, a
lower opex with greater reliability.
? 70 MW Fixed-Link Power Supply Study Underway by EPPCo.—We have also
learned that the Ethiopian Electric Power Cooperation (EPPCo.) is currently
finalizing a 70 MW power supply feasibility study for the Dallol basin. Initiated
at the request of Yara/Ethiopotash, commentary out of EPPCo suggests that
the dedicated power line will likely span the 160km between Mek’ele and the
Dallol basin (see Exhibit 9). Importantly, EEPCo’s Chief Corporate Planning
Officer, Mekuria Lemma, recently commented that the line is being designed to
accommodate the demand of all major industrial users in the basin. Details on
timing admittedly remain unclear at this point; however, Yara has specifically
requested that it be complete by 2014 to accommodate the start-up of its 1.0
mln - 1.5 mln tpy SOP solution mine. We believe developing this line would be a
material positive for Allana insofar that: i) the $30.0 mln in CapEx currently
budgeted for a power plant could likely be scaled back; and ii) the reliability
benefits associated with a fixed-link line system would likely be material.
iv) CapEx Budget Likely Shrinking; Economics Improving
One of the most notable takeaways from our Ethiopian tour was confirmatory evidence
that Allana’s CapEx budget is likely to shrink as large provisions in its original budget are
transferred to third parties.
? Djibouti Port Costs Covered—Most notably, we highlight that the Djibouti
government has committed to upgrading its Tadjourah Port—with funding to be
provided by the Arab Fund for Social and Economic Development and the Saudi
Fund for Development. Potash loading facilities, site storage and infrastructure, and
EPCM and site start-up costs are to be included in this development. We have
therefore reduced our associated port-related costs by ~75% (see Exhibit 10).
? Third-Party Trucking Likely—Management also indicated its strong preference for a
third-party trucking fleet (vs. owned, as in PEA) in order to transport its final
product to port. While expected to save the company up to $30 mln in upfront
CapEx, we do expect this to increase associated OpEx costs (see Exhibits 10 and 11).
? Our CapEx Estimate Drops 14% to $715 mln—On a net basis, we have reduced our
total Danakhil CapEx estimate to $715.0 mln (vs. $831 mln previously). Our new
figure is also ~$80 mln below the $795.60 mln figure contained in Allana’s PEA
(Nov-2011), which we believe will come down in the DFS expected to be filed this
quarter. We note that a total of ~$135 mln in contingencies (PEA & RJL) are
included in our estimate. Taken together, this drop in expected CapEx is a positive
development that we believe will ultimately help improve the Allana’s ability to
fund the project.
C. NAV Revisions
Consistent with the discussion outlined above, we have made several revisions to our
Danakhil Project model. Specifically, these include:
? Lower Capex—We have reduced our CapEx estimate to US$715 mln (vs. US$831
mln previously), taking into account the Djibouti government’s commitment to
undertake port development costs and Allana’s anticipated decision to employ
third-party trucking providers for transportation. As noted previously, while this
may seem like a large reduction, our estimate still includes ~$135 mln in
? Higher Opex (Marginally)—We have bumped our Transport/Port OpEx assumption
to US$23.00/MT (vs. US$18.00/MT previously) to account for the incrementally
higher operating cost associated with the use of third-party trucking providers.
? Nova Acquisition & Share Count—We have increased our fully diluted share count
to 298.4 mln (vs. 250.6 mln previously) following yesterday’s closing of the
previously announced Nova Potash acquisition. For conservatism, we assume all
share-based earn-outs are achieved over the next 12 months.
? FX—We have increased our CDN$/US$ FX assumption $1.00 (vs. $0.98) to more
accurately reflect prevalent forex trends.
On a net basis, the aforementioned changes result in a 3.4% increase to our Danakhil
NAV. Specifically, our revised Danakhil NAV is $798.6 mln (vs. $772.2 mln previously).
Due to our higher fully diluted share-count assumption, however, our NAV per share has
been reduced to $2.67/share (vs. $3.08/share previously).
D. Catalyst Rich Horizon; Key Milestones Expected
Another reason to become more constructive on Allana shares, in our view, pertains to
the large number of key milestones on the near-term horizon, the bulk of which we
expect over the next three to six months. Specifically, these include:
Technical Update(s) 4Q12 ? Expect company to release favourable results pertaining to its processing and flotation testing.
? Expect the company to release a water resource update.
Bankable DFS 4Q12 ? Bankable feasibility study remains on-track for completion in 4Q12; we believe it will contain a favourable conclusion.
? We expect this will serve as an important catalyst to secure debt financing and strategic partners (see below).
? Testing/technical work on processing of sylvinite (evaporation, floatation) should be completed by this time.
4Q12-1Q13 ? AAA's close proximity to Asian markets & attractive project characteristics lead us to believe there is a good probability
that an off-take agreement will be arranged with a strategic partner in exchange for a percentage of annual production.
? This same party, or another party (likely Indian or Chinese), may take a strategic position in AAA as well, in our view.
1H13 ? Post-DFS, expect the company to announce commitments for a debt financing package, currently being arranged by BNP Paribas, whose representatives also attended the recent site tour.
? We expect this to serve as a significant catalyst for the stock.
2H13 ? Upon completion of the DFS and securing of debt financing, Allana would be in a position to begin initial construction.
? Initial work will likely include detailed engineering, ground clearing, grubbing, and earthworks.
? Start of construction, in addition to ongoing construction updates will act as significant catalysts, in our view.
Take-Out / Acquisition 2013+ ? As Allana continues to de-risk its Danakhil project, it becomes a more attractive acquisition candidate.
At the same time, we foresee several key milestones
transpiring over the next three to six months. As a result, we have elected to raise our
rating to Outperform (vs. Market Perform previously). Finally, we like that Allana
remains well financed, with our current forecast indicating the company will still have
~$20 mln on hand at year-end when it completes its DFS, suggesting investors are
currently paying just ~0.19x our estimated Danakhil NAV for a world-class, potash