Allana Potash Corp. (TSE:AAA) (OTCQX:ALLRF) announced late Tuesday the "extremely positive" results of a preliminary economic assessment (PEA) for its Danakhil potash project in Ethiopia, with the potential to expand production at the site to two million tonnes of muriate of potash (MOP) product per year.
The economic study, conducted by Ercosplan, yielded, on an after-tax basis, an internal rate of return (IRR) of 36.8 percent and a net present value (NPV) of US$1.85 billion based on a 12 percent discount rate.
The results have exceeded management's expectations, said president and CEO Farhad Abasov on a conference call this morning, with the project having "one of the lowest capex and opex in the world" in the potash industry.
Indeed, estimated total capital expenditures, which include production, transportation and handling and port facilities in Djibouti are $796 million, including $128 million in contingency. Total operating expenses are estimated at $90.54 per tonne of KCI (the composite grade of all four potash-bearing beds including sylvinite, upper and lower carnallite and kainitite), 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 study looked at both open pit and solution mining methods, Allana said, but following a review of costs, solution mining and processing using solar evaporation and standard flotation yielded "significant advantages".
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 (SOP) output as well during the ongoing feasibility study, due out in the third quarter of 2012.
"The production CAPEX of about US$664 million (total CAPEX including production, port and other infrastructure of about US$796 million), makes this project one of the lowest cost and potentially highest return potash projects worldwide," said Abasov in a statement.
"Similarly, the production OPEX is very robust at US$70/tonne (total OPEX including production, transportation,port handling and on the ship of about US$90/tonne) and is one of the lowest among greenfield potash projects currently under development.
"ERCOSPLAN used a conservative discount rate of 12% and modeled the initial production stage one million tonnes of MOP production annually."
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.
The company said production capital costs of $664 million for the project included cavern development, solar evaporation ponds, brine processing and infrastructure.
Solar evaporation of the saturated brine solution is possible at the Danakhil project due to the year-round hot temperatures and very little rainfall. Salts harvested from the ponds will be processed by standard flotation to create an MOP product.
Transportation of the product to Djibouti will be completed through a company-owned fleet of trucks, with port costs based on Allana constructing its own port terminal in Djibouti, including product unloading and storage, shipping facilities and supporting infrastructure.
Sustaining capital expenditures have been estimated at a rough US$44 million, before cavern or process design optimization, the company said.
The mineral resource estimate used for the PEA was completed in June and includes in-situ measured and indicated resources of 126 million tonnes of KCl and inferred resources of 119 million tonnes. Total measured and indicated resources 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.
Abasov said that most of the initial MOP product will be coming from sylvinite layers, with the mine life expected to increase once other potash-bearing beds are used.
The company is planning to start production with one million tonnes at the initial stage, intended by year 2017, and then ramp up to two million tonnes after year three, which would coincide with the planned completion of rail capacity for potash transport in the region. Start of construction at the project is anticipated for the end of 2012-early 2013, with minimal output expected by the end of 2014.
In the PEA, which assumed a potash price of US$500 in 2013, Ercosplan recommended that the feasibility report due next year include hydro-geological studies to identify large water sources, as well as rock mechanical test work and a pilot solution mining operation, among other items. Allana has initiated these studies and is currently mobilizing additional drilling equipment for hydrogeological studies, it said.
"The PEA also allows Allana to move forward confidently with its project finance plans and ongoing talks with potential strategic partners," added Abasov.
In fact, the company said it plans to finance the capex of the project with both equity and around $480 million in debt to be raised from non-commercial, development agencies. Allana has retained BNP Paribas as an advisor on this front to secure the arrangement. The equity portion of the capital, meanwhile, is expected to come from either existing or new strategic partners, potential off-take agreements, or a market raise.
Allana already has financial support from two strategic investors, IFC, a member of the World Bank Group, and Liberty Metals and Mining.
The company has recently intersected strong potash mineralization at its Ethiopian project, including an intercept of 40.27% KCI over 2.56 metres, announced in October. Allana plans on further drilling to the east, with a steady flow of results anticipated. An updated resource estimate is expected in the next quarter.
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