Potash producers Allana, Western "best positioned" with cash, says Mackie Research

Potash producers Allana Potash (TSE:AAA) and Western Potash (TSE:WPX) are among the best positioned with regard to their cash position, Mackie Research Capital said in a new report Wednesday.

Mackie said that with $55 million and $25 million on their balance sheets, respectively, Allana and Western Potash could survive the next two years in which they chose to tighten their belts and restrict cash outlays.

The firm has a "Speculative Buy" rating on Allana and Western Potash, with a $1.65 target price for Allana and a $2.75 target for Western. Allana is currently trading at around 95 cents, while Western is changing hands at $1.10.

The research note also highlighted that Verde Potash (CVE:NPK), with under $10 million in cash on its balance sheet and less than a year's worth of liquidity, is more exposed to inhospitable capital markets than its peers in the potash space.

Mackie pointed out that companies can adjust their cash burn rates to meet changing conditions.  The exercise of warrants and options can act as a source of capital and companies can often get creative in finding new sources of funding, such as strategic partnerships or farm-ins.

The report noted that Allana has "arguably the best liquidity position" of any of the names in its potash coverage universe. With an estimated $55 million in cash on hand, Allana should be able to sustain its recent spending pattern for over three years, without the need for an equity offering.

With a comfortable cash balance, Mackie Research said it was "full steam ahead" for the company's development plans. A scoping study is targeted for release in the fourth quarter of this year, followed by a bankable feasibility study in September 2012.

Allana's potash project in Ethiopia is comprised of four concessions in the nation's Danakil Depression, totalling approximately 160 square kilometres.

An updated NI 43-101 compliant resource report in late June of the company's Dallol project in Ethiopia estimated total measured and indicated resources of 673 million tonnes, with an average grade of 18.65% potash, or KCI, (the composite grade of all four potash-bearing beds including sylvinite, upper and lower carnallite and kainitite).
Inferred mineral resources stand at 596 million tonnes with an average grade of 19.96% KCI.

Turning to Western Potash, Mackie said that the company had a "significant" cash position at approximately $25 million. At $3.1 million per month, the company has the second-highest cash burn rate in Mackie's coverage universe and has only about 8 months of liquidity, based on the rate seen during the first half of this year.

The research firm said this may overstate the severity of the situation, as the company completed its drilling last year and is set to publish its pre-feasibility study in the coming weeks, with a bankable feasibility study targeted for August of next year.

Western's spending may also decrease once a pre-feasability study is published, which could allow the company to make it through the publication of a bankable feasibility study targeted for August 2012, although this appears less than certain, Mackie Research said.

Meanwhile, Mackie said that Verde Potash, with approximately $9 million of cash on its balance sheet and a cash burn rate of approximately $1.3 million per month, has liquidity of approximately seven months - the lowest of the companies in its greenfield potash universe.

The industry report did point out though that Verde's management has successfully scaled back the company's cash burn rate during the global financial crisis of 2008 and that it has a number of non-potash assets that it could seek to tap for cash if capital markets became too inhospitable.

Verde is engaged in the completion and analysis of drilling results at its Brazil-based Cerrado Verde potash project, Apatita phosphate and Calcario limestone properties, as well as its Cambridge process research and development work with Hazen Research in Denver. Mackie Research has a "Speculative Buy" rating on Verde with a $12 price target.