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Allana Potash says updated resource, new equity sources expected for 2012

With a recently-completed, positive preliminary economic assessment (PEA) under its belt, Allana Potash (TSE:AAA) (OTCQX:ALLRF) is expecting a host of developments in the new year, including securing equity capital from a new set of strategic investors to support its project in Ethiopia.

In late November, the company announced the results of the PEA for its Dallol potash project for production of one million tonnes, with the potential to expand output at the site to two million tonnes of muriate of potash (MOP) product per year at a later stage.

The economic study, conducted by Ercosplan and based on solution mining with a solar evaporation method, yielded, on an after-tax basis, an internal rate of return (NYSE:IRR) of 36.8 percent and a net present value (NYSE:NPV) of US$1.85 billion, based on a 12 percent discount rate.

The results exceeded management's expectations, said president and CEO Farhad Abasov, with the project having "one of the lowest capex and opex in the world" in the potash industry, especially when compared to Saskatchewan players in Canada.

Solar evaporation of the saturated brine solution is possible at the Dallol project due to the year-round hot temperatures and very little rainfall, in contrast to Saskatchewan. Salts harvested from the ponds at Dallol will be processed by standard flotation to create an MOP product.

The Ethiopia project also hosts shallower deposits, which means the company is not required to drill that deep, allowing for cost savings, added Abasov.

Indeed, total capital expenditures, which include production, transportation and handling and port facilities in Djibouti are estimated at $796 million, including $128 million in contingency. Total operating expenses are estimated at $90.54 per tonne of KCI with a projected payback period of three and a half years.

The PEA report is based on an operation that produces one million tonnes per year of a standard MOP product, over an initial estimated mine life of 30 years. The company also said that there is potential to ramp up operations to two million tonnes of MOP product per year after the third year of full production, with Allana currently considering additional MOP and sulphate of potash (NYSEARCA:SOP) output as well during the ongoing feasibility study, due out in the third quarter of 2012.

CEO Abasov said the company, after determining solution mining as a preferred method over open pit, is on track with the feasibility study that is now focused on process and design optimization. This includes further reducing costs through the optimization of certain parts of the operation, including cavern sizes and solar evaporation ponds, and the outsourcing of infrastructure expenditures.

In the PEA, transportation costs to Djibouti are based on a company-owned fleet of trucks, while port costs are based on Allana constructing its own port terminal in Djibouti, including product unloading and storage, shipping facilities and supporting infrastructure.

Additional studies to be included in the upcoming feasibility report will include geotechnical drilling for rock mechanic test work, pilot solution mining cavern test work and evaporation pond test work on the salt plain.

Currently, large bore drilling equipment is being mobilized to the site to conduct drilling for water resources and to facilitate the solution mining cavern work. One drill rig is occupied with geotechnical drilling, while the second rig continues with in-fill drilling and resource expansion drilling on the east side of the property, the company said.

An update to the NI 43-101 compliant technical report is expected by the end of the first quarter of 2012, with Abasov expecting substantial additions to resources on the eastern side, and an upgrade to the measured and indicated category on the western side.

Another significant advantage of the Ethiopian potash project is that it will be one of the nearest suppliers of potash to India and China, the two largest importers of potash, with India importing around 6.5 million tonnes of the fertilizer per year.

The strong project attributes and economics have allowed Allana to advance talks with new potential strategic partners for off-take agreements and other partnership structures. Abasov told Proactiveinvestors that it is currently in discussions with large, global potash buyers and agricultural companies, from which it expects developments sometime in the first half of next year.

Allana already has financial support from two strategic investors, IFC, a member of the World Bank Group, and Liberty Metals and Mining.

The remainder of the financing for the capex of the project will come from around $480 million in debt, to be raised from non-commercial, development agencies. Allana has retained BNP Paribas as an advisor on this front, and said the process in now in "full swing".

By the end of the first quarter, CEO Abasov expects to have a "good understanding" of those interested in providing debt financing for the project, which could prove to be a significant catalyst to the company's share price.

Looking to 2012, investors can also expect a steady flow of more drilling results, with the feasibility study expected to move up a certain amount of resources to reserve status.

Total measured and indicated resources now stand at 673 million tonnes, with an average grade of 18.65% KCI, with total inferred mineral resources of 596 million tonnes at a grade of 19.96% KCI.

The company is planning to start production with one million tonnes at the initial stage by 2015, to reach peak production by year 2017. Start of construction at the project for caverns and evaporation ponds is anticipated as early as late 2012, with minimal output expected by the end of 2014.

At a discount rate of 10 percent, after-tax net present value of the potash project jumps to $2.36 billion, and at a discount rate of eight percent, net present value climbs to $3.04 billion.

Based on recent positive drilling results in the western portion of its concession and the positive PEA, Dundee Capital Markets assigned the company a "Top Pick" rating and a 12 month price target of C$2.00, while Fraser Mackenzie rated Allana as a "Strong Buy" with a target price of $1.65.

Allana closed Wednesday at 82 cents on Toronto's main market. Its potash project is comprised of two potash concessions, located in Ethiopia's northeastern Danakil Depression, totaling approximately 160 square kilometres.