A Canadian / Chinese partnership to commercialize Africa’s first modern-day potash mine may yet get the ultimate endorsement from the world’s largest mining company, BHP Billiton (NYSE: BHP), by way of a takeover bid. So says Robert Winslow, a potash analyst at one of Canada’s leading investment banks, Toronto-based Wellington West Capital Markets, in reference to Toronto-based Allana Potash Corp. (TSX.V: AAA).
“If BHP covets assets in multiple basins, Allana is an obvious target,” he announced earlier this month in a research paper, in which he alluded to BHP’s recent acquisition of another junior Canadian potash explorer, Athabasca Potash (TSX: API), at the heart of Saskatchewan’s prolific potash fields.
Notably, BHP also has potash claims in close proximity to Allana’s land holdings in Ethiopia’s Danakil Potash Basin, which is shaping up to exhibit a “similar scale to Saskatchewan and Russian basins” (which collectively host most of the world’s largest potash reserves), Winslow also notes.
As of lately, BHP and other multinational mining powerhouses, as well as a tiny handful of potash explorers, have been jostling for position to access rich potash reserves – against a backdrop of rising crop prices and the imperative to boost crop yields to feed a burgeoning global population.
In particular, the challenge to significantly boost China’s agricultural output is a call to action for Allana Potash, according to its president, Farhad Abasov. That is why the tiny mineral explorer plans to expand the overall size of its Ethiopian potash deposit within the next few weeks by way of drilling -- and with an initial cash infusion from its new Chinese partner.
Ethiopia’s historic potash fields, known as the Danakil Basin, have never before experienced any meaningful mining activity and still offer considerable untapped potential, Abasov says. This is especially the case at the company’s expansive property, which has only seen small-scale production in the past. Now it is being groomed for a new lease on life as a full-scale mining operation after languishing for the last eight decades.
China Minerals United Management purchased a $2 million equity stake in Allana last November in what the company’s management refers to as a “strategic off-take / financing agreement.” In other words, China Minerals is hoping to secure a long-term potash supply consisting of 20% of the mine’s future output, and at discounted prices (at least until China Minerals has recouped all of its expenditures on the mine development process).
In return, the deep-pocketed company, which is closely allied to one of the largest fertilizer companies in China, has agreed to commit 35% of the project’s estimated overall US $280 million in mine construction costs. That said, Allana will remain the sole owner of the project.
Allana has made a shrewd move by joining forces with Chinese financial backers, according to Phillip Williams, a mining analyst with the high-flying Toronto-based investment firm Pinetree Capital (which saw its net asset value [NAV] per share increase 80% to $2.39 at the end of last year’s third quarter, compared to a $1.33 NAV per share as of December 31, 2008).
“This deal has put Allana on the map. It’s a serious validation for the company and the potash resources that it has. With China’s big appetite for commodities, they’re a natural fit for Allana,” Williams says.
Allana’s land holdings are only about 100 kilometers from the city of Mekele, giving the company ready access to mechanized equipment, labor and other logistical support. In the intervening years, the mine site and surrounding area have been intermittently explored. As the property has a well-documented drilling history, Allana has been able to build upon this drill data to complete an official (NI 43-101 compliant) mineral resource estimate consisting of 105 million tonnes of potash, averaging a favourable grade of 20.8%.
However, the deposit still has plenty of “big picture” scope for additional growth, Abasov says. This is why his company’s new Chinese partner is particularly attracted to the logistics in favour of a richly mineralized, low-cost mining operation that could be in business for many years to come.
“To date, we have 105,200,000 tonnes of potash already outlined in the inferred category. Yet, we’re ultimately targeting a potential resource of up to four to five times this size, which would be world-class,” Abasov says.
The company’s 2010 drill program consists of two phases over the next few months. Together, they are intended to expand the deposit’s overall size, while also providing detailed enough drill data for a follow-up feasibility study (an initial blueprint for a mine), Abasov explains.
This drill-delineated assessment of key capital expenditures and other start-up costs is also expected to demonstrate the mine’s amenability to being a prospectively low-cost producer.
“We’re very confident that a future mine in this particular geological environment could be one of the lowest cost producers in the world,” Abasov says.
By which he means that the deposit is amenable to low cost solution mining (involving the flooding of drill holes with hot water to dissolve the potash for extraction). This allows for a scalable rollout of mining operations that Allana believes could have the mine up and running in record time – by around 2013 or early 2014.
Conversely, “brownfield” (conventional) mines elsewhere in the world typically take 5-7 years to build and each involves daunting costs of around US $2-3 billion. This hefty price tag is one of the reasons why the commercialization of new potash mines during the past few decades has been a very rare event.
Then there’s the fact that the world’s supplies of potash are tightly controlled. In fact, over 150 nations import potash but only a dozen or so actually produce this indispensible agricultural nutrient (of which Canada, Russia and Belarus account for about 80% of global output).
Furthermore, the furnace that runs China’s booming economy has to be constantly stoked, which is why the world’s new superpower is scouring Africa for inexpensive supplies of natural resources. Ones that can be locked-in over the long-term. Hence, Africa’s scarce potash deposits are of great strategic value. Especially since the Chinese clearly begrudge the high prices they have been paying in recent years to Canpotex – the marketing arm of Canada’s potash cartel.
This reality is underscored by the fact that China balked at renewing its annual purchasing contract last year after months of tense negotiations. Instead, a deal was struck in last December with Belarusian Potash, the world’s biggest exporter of the soil nutrient, at a deeply discounted US $350 a ton.
China has publicly acknowledged that it needs to at least double its application of fertilizers to maximize its crop yields in order to produce better quality food and in more plentiful quantities. Hence, China’s National Development and Reform Commission is encouraging state-owned and private Chinese mining and oil companies to forge close economic ties with underdeveloped African nations.
In the case of Ethiopia, this is obviously a shrewd move as this historically war and famine ravaged nation is now a politically stable developing economy with a democratic government. In recent years, Ethiopia has also implemented investor-friendly legislation, including legal safeguards for foreign mining companies, such as constitutional protection from expropriation.
Disclosure: No positions