Agricultural prices have been bottoming out since 2012 after a large decline in 2011, as I pointed out here. Similarly, many potash producers have seen a huge decline in their stock prices. Once the trend changes, it will be time to buy back into the potash sector. One of the best speculative investments out there is Allana Potash (ALLRF.PK).
Allana Potash has a market cap of $150 million while it has cash on hand of $65 million after issuance of shares at a price of $0.80/share on 10 January 2012. Eric Sprott's Sprott asset management bought in at $1.55/share. Today the share price is only $0.76/share. Speaking of a bargain:
Last year we saw a huge increase in stock price to $2/share due to very high grade drill results with grades in the range of 40 to 50% on shallow depth (as shallow as 100 metres). Mostly, it is during this drilling phase that share price will go up in anticipation of good results. But since Allana Potash disclosed its NI-43-101 compliant resources on 20 June 2011, the share price started to plummet, which was accelerated by the decline in food prices. It disclosed that the average grade of resources was 18.65% KCL, which was digested negatively by investors.
Of course this is only an average grade, as there are lower grades and higher grades available all over the property. Production will typically start on higher grades as this is more economically viable. As Allana Potash has measured and indicated resources of approximately 200 million tonnes of KCL, while production is only 1 to 2 million tonnes per annum, it has more than enough resource sites to choose from to start production.
Even though Allana Potash continued finding high grade resources later on: 44% on 06 December 2011, 40% on 18 October 2011, 38% on 22 September 2011, its share price kept going down as investors were looking out for financing deals and a better agricultural price outlook. I believe that time has come now.
First let me indicate that the management board is very experienced and has Farhad Abasov as CEO of the company. He has been vice president of Potash One and Uranium One, of which Potash One has been bought out by K+S. What I especially like about the company is that they are in close proximity of India and China, the biggest domestic food consumption markets of the future.
They already initiated an Environmental and Social Impact Assessment on 24 August 2011, which will be reported on later this year together with the feasibility study by ERCOSPLAN. They have enough cash on hand for the feasibility study. They also initiated BNP Paribas to search for the necessary financing deals. In return BNP Paribas received warrants exercisable at $US 0.94 for 5 years (which are worthless right now as the share price is still under $US 0.94). Essentially it's in BNP's interest to get the stock price back above $US 1 again. Moreover, Allana Potash already completed its Preliminary Economic Assessment, indicating very strong conditions.
The after tax internal rate of return is 36.8%, which is above average (almost too good to be true). To give some examples on IRRs from other potash producers:
- Potash One: 30.1%
- Western Potash (WPSHF.PK): 22.7%
- IC Potash (ICPTF.PK): 26%
- Karnalyte Resources (KRLTF.PK): 22%
This high IRR of Allana Potash is attributed to the low cost solution mining where they use the high temperature and geothermal energy in Ethiopia for solar evaporation. Furthermore, their CAPEX is only $800 million (at 1-2 million tonnes/annum) with infrastructure included, while other companies have much higher CAPEX if compared to production rate.
- Potash one: $3.25 billion at 2.86 million tonnes/annum
- Western Potash: $3.3 billion at 2.8 million tonnes/annum
- IC Potash: $706 million at 800000 tonnes/annum
- Karnalyte Resources: $2 billion at 2.1 billion tonnes/annum
Production OPEX of Allana Potash is $70/tonne ($90/tonne total OPEX), which is lower than industry average:
And finally, as there has been concerns about high energy costs in Africa, infrastructure will be provided by the Ethiopian government. It is anticipated that the railroad and port upgrades at Djibouti will be completed before Allana Potash initiates production in 2015. The construction period is 1 year.
The conclusion is that Allana Potash is very undervalued. Once construction starts next year, I believe the share price will start moving up. Consider that Allana Potash has lower CAPEX, higher IRR and similar OPEX as Western Potash, while Allana's market cap is lower than Western Potash's.
Disclosure: I am long ALLRF.PK.