Allana Potash "top pick" reiterated by Dundee Capital, continues to de-risk project

Dundee Capital Markets reiterated Tuesday its sector "top pick" for Allana Potash (TSE:AAA), after the junior potash explorer received non-binding indications of interest from potential lenders totaling more than $600 million, for funding the company's Dallol project in Ethiopia.
The announcement of initial discussions with potential lenders was made on Monday, and interest was received for around 65 percent of the total estimated capex for the project - which exceeds the amount of debt financing Allana was originally planning to use.
Allana said it expects the technical and commercial commitments for the project to be completed by late 2012, allowing for the closing of the project debt financing and start of construction in early 2013.
In a research report, Dundee analysts Richard Kelertas and Liliana Tzvetkova said: "We consider this announcement to be a positive development in the company's financing activities as the expressions of interest from potential lenders de-risk the project and further highlight its potential."

"The above mentioned interest also demonstrates the acceptance of the company's targeted capital structure (65% debt/ 35% equity plus prorate shares financing from Liberty Metals and Mining and IFC) by the potential lenders and Allana's ability to access financing despite the world's tough economic conditions."

Dundee has a "buy" rating on Allana, with a 12-month target price of C$2.00. The potash explorer is currently changing hands at around 72 cents.

Allana Potash already has financial support from two strategic investors, IFC, a member of the World Bank Group, and Liberty Metals and Mining, and recently announced the closing of a $20 million private placement financing.

According to the Dundee report, upcoming share price catalysts for Allana include an updated resource estimate expected for the first or second quarter, formal debt financing agreements, a bankable feasibility study and possible offtake agreements.

The company expects to issue an updated estimate this month or next, which will include its recent infill and exploration drilling results.
Given the positive results from these holes, Dundee said it expects Ercosplan, Allana's technical consultant, to assign additional tonnage to the measured and indicated categories from inferred, as well as increase the total resource as a result of drilling on the eastern bloc.
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.

Meanwhile, with regards to formal debt financing, Dundee expects "several international banks and sovereign wealth funds" will participate in the debt financing round. Management mentioned the International Development Bank and Export Development Canada (EDC) as some of the names that might be interested in its debt financing, Dundee said.

The bankable feasibility study for the project is expected around the end of the third quarter, for the construction of a one to two million tonne per year solution mine using solar evaporation - targeted for start up by late 2014 or early 2015.

The study is a key milestone for the project and will include details on all relevant resource/reserve data, project capex/opex. marketing, logistic, port, and engineering plans.
Dundee also noted that Allana's management has reaffirmed that it is "actively seeking" offtake agreements with multiple parties, including China and India, for a sizeable portion of eventual production. This would allow the potash company to raise the bulk of the equity financing necessary to finance the project "with little or no additional capital raises", Kelertas and Tzvetkova said.
"Compared to its peers, we believe it is a bargain," they concluded.
Last 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 (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 exceeded management's expectations, said 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. The Ethiopia project also hosts shallower deposits, which means the company is not required to drill that deep, allowing for cost savings.
The ongoing feasibility study will consider additional MOP and sulphate of potash (SOP) output.
Dundee Capital Markets' valuation assumed a 13 percent discount rate, a US$450/mt MOP price, and an eventual ramp up to 2.5 million tonnes capacity by 2020.