Douglas Friedman

Douglas Friedman
Contributor since: 2013
Interesting Clip regarding Development of MS market:
I see no reason why they wouldn't be admitted to the exchange. If they are admitted that in and of itself will not cause dilution. However, I would not be surprised if the equity participants in the financing prefer the AIM securities over the Toronto Venture exchange or the US pink sheet so the dilution from the financing would likely flow there.
Hey Mack,
Some thoughts below on the events and developments since the last article for you.
Mining License:
- It took longer then ideal to attain, but has been passed
- License is for both the Allana Package and the Nova Package
- Looks like income tax will be 25% with 5 year tax vacation
- Potential that tax holiday gets extended
Macro Landscape:
- Obviously this has significantly deteriorated in the MOP market, not the case for SOP
- At the end of the day, I believe this is a play for Russia to acquire Belaruskali. This is not something I am banking on and there is no clear time-line here. The closest example to this was the natural gas pipelines in 2011 between Russia and Belarus.
LMM Board:
- Diana stepping down from the board has certainly weighed on the stock.
- The party line is that she was promoted to head 2 other groups at LMM and simply doesn't have the time. This does not seem logical.
- There are a few other possibilities here.
- As they own >14% of the Company despite not having a Board member their filing requirements do not change so there is no benefit there. Besides with ~38mm shares there is no way they could liquidate even if they wanted to.
- Another possibility is that Diana / LMM was conflicted with one of the strategics and therefore had to step-down.
- At this point there is simply no way to know.
Nova 43-101 Package:
- This has also put pressure on the stock from Nova shareholders dumping their shares into the market.
- Between the original acquisition and the Nova resources they had ~41mm shares that were released from escrow.
- As you noted in your question the SOP on the Nova land package is certainly interesting / exciting especially given the shallow depth.
- However, the reality is that this provides upside in the case of an acquisition or production down the road, but is not something that can be monetized in the short-term. The current financing / feasibility is geared towards the original package and that is what will be targeted. Once that is up and running, this provides further upside, but is not particularly useful in the short-term.
- There are no major updates here.
- Have been numerous leaked articles around ICL and development banks, but those are just that - leaked articles and cannot be relied upon.
In Summary:
- The macro landscape has been painful and the market is basically in a "show me" state.
- Still think there are multiples of upside, but will happen in legs.
- Financing should get underway in the next month or two, which will hopefully get things moving in the right direction.
- In addition there is always the possibility of a take-out by Yara, ICL or others.
Ignoring all cash burn, liabilities, etc. there appears to be a max upside from the royalty deal of $180mm. With a current market cap of ~$75mm this effectively prices in a better than 40% chance that the drug is not only re-introduced, but also hits all of their sales targets.
Do you really believe this is a reasonable probability?
Happyshorter and Triatleta - I plan to do an update for Seeking Alpha over the next week or two as I finish up work and will address all of these questions in there.
This is a point I have been gone back and forth on. Was definitely in your camp originally. Have seen a number of articles leaked recently (one linked below) that point to the debt financing being $600mm on the $642mm project.
Michael - thanks for the write-up on Western Potash and there is no doubt it is a safer jurisdiction. I have looked at this one on a high level so have limited knowledge on this project, but the biggest impediments I had to it were as follows.
1.) Getting a little over $3bn of financing in the current market for mining companies is an extremely daunting task. In the case of Allana it only requires $642mm of financing and they have access to the IFC, Import / Export African banks and other development banks that reduce both the risk of the financing as well as the cost of financing. Counter-intuitive to think there is a better chance of financing in a higher risk jurisdiction, but that is certainly the case here.
2.) While the economics of the project are attractive and have competitive cash costs (~$120 / tonne), there are no additional resources or potential upside. The free call options of the Nova land package and 3 additional layers of Potash for Allana, which are not considered in the project economics make it especially attractive.
3.) Finally my base case value used Potash prices of $350 / tonne, while the upside uses $400 / tonne. While I cannot say with any confidence where the actual price will be, it is worth pointing out that the Western Potash numbers use $450 / tonne and $470 / tonne for standard and granular potash, respectively.
Having said all that, as far as projects in developed nations, this is certainly one of the more attractive ones I have come across.
JR_Ewing - this is a great point and worth elaborating on.
Specifically Yara does not have any aquifers on their current land package, while Allana has ~160 million cubic meters of water with a 35 - 55 million cubic meter / year re-charge rate. Without access to the aquifers solution mining is obviously not an option. As a result, any project Yara considers will currently require much higher capex spend as they will need to pursue an open pit or traditional mine. Acquiring Allana can eliminate this issue for them.
Having said that, I am hoping this does not happen because at the current valuations even a significant premium would be a large discount to fair value.
Yes - the price targets are adjusted for dilution. Specifically the assumptions are $100mm of dilution at .60 cents per share and $100mm of dilution at .80 per share for the base and upside cases, respectively.
Why they will likely be diluted at a higher price than today has to do with the sequence of events. First in the process is the mining license, then comes committed debt financing (have soft commitments here already) and finally comes equity so by the time you are raising the equity a great deal of the risk will have been taken off the table. There will also likely be a resource update announcement for the Nova property prior to any equity raise.
Yes - the price targets account for the dilution. Specifically the base case considers $100mm of dilution at 60 cents per share and the upside case is $100mm of dilution at 80 cents per share.
The reason the dilution price is higher than the current price has to do with the sequence of events. The first step being the license, then converting the soft commitments to firm commitments on the debt and then finally the equity. In addition, there will likely be an update on the Nova resources. As a result, by the time the Company is focused on the equity one would expect the project to be significantly de-risked.
This is the Company that originally got me looking at the space and one that I shorted for a long time.
Given the mess that is their capital structure and the predicament they face from a land perspective (passport potash owns acreage within their package, not to mention the National Petrified Forest overlaying a portion of the land pacakge) this is not a Company I would be long for fundamental reasons.