Allana Potash has "first mover advantage" in Ethiopia, says Salman Partners

Allana Potash (TSE:AAA) received a "buy" recommendation and 12-month target price of $1.20 Tuesday from equity research firm Salman Partners, saying the potash explorer has a "first mover advantage" in Ethiopia.

Allana is advancing the Dallol potash project toward a full feasibility study for the construction of a one to two million tonne per year solution mine using solar evaporation, with first production targeted for the end of 2014.

The Dallol potash deposit, Allana’s principal project, is located in the Danakhil Depression, a desert area in northeast Ethiopia, south of the border of Eritrea. The deposit lies at the northern end of the Ethiopian Afar State, approximately 100 kilometres from the Eritrean Red Sea coast and 600 kilometres by road from the deep-water port of Djibouti.

Salman analyst Andrea Rubakovic said the hot Danakil climate is "ideal" for these mining and processing methods, as it "significantly reduces the high capital and operating costs that accompany most potash mining operations".

Last November, the company announced the results of the preliminary economic assessment for its Dallol potash project. 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 exceeded management's expectations, 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.  Solar evaporation methods avoid the use of costly natural gas-based heating to evaporate water (energy accounts for approximately 30-40 percent of a conventional solution potash mine’s costs).

Aside from the low cost potential, Salman also noted in its report Allana's large and growing resource. The company's holdings contain "significant historic exploration data", Rubakovic said, and Allana is conducting its own exploraiton program to upgrade the already "sizeable" NI 43-101 compliant in-situ potash resource of 244.5 million tonnes at a grade of 19.3% KCI.

"Allana's substantial resource will now allow it to proceed with a feasibility study this summer, and to realistically consider multiple million tonnes per annum production phases," Salman said.

The Dallol project also has a range of strategic benefits, the capital markets firm said, as it is "uniquely situated to appeal to key import markets of India and China."

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

The company is currently in discussions with multiple strategic partners, the research report noted, which may result in further investment and off-take agreements.

Catalysts for the miner's stock price in the next 12 months include a revised NI 43-101 compliant resource estimate in the second quarter, off-take and debt financing agreements in the second quarter, a bankable feasibility study in the fourth quarter, and finally initial production in late 2014.

Allana’s properties have a size of approximately 158 square kilometres and are bounded to all sides by properties of other owners, Salman said.

Notable neighbours in the potash basin include the world’s largest mining company, BHP Billiton (NYSE:BHP) and Sainik Coal Mining, an Indian-based coal mining company.

Its deposit is relatively shallow, with mineralization in some portions of the property at a depth of less than 200 metres. As a comparison, the solution mines in Saskatchewan are generally targeting mineralization at 1,500 metres depth or greater, the report noted.

"We believe the current share price represents a good entry point into the stock in light of the 40% drop in share price since the beginning of the year," concludes Salman's Rubakovic.

Salman's report estimated Allana’s current cash balance at approximately C$65 million, which in the firm's view, is "sufficient to carry the company through the release of its bankable feasibility study expected in Q4 2012, while also providing flexibility to pursue various strategic alternatives that may arise."

Earlier this month, Allana announced it had intersected strong potash mineralization in three holes at Dallol, prompting it to extend its drill program in the southern boundary of Ethiopia.

Hole 35 intersected 5.7 metres of 31.3% potassium chloride (KCl) in the sylvinite zone and included a higher grade interval of three metres of 39.1% KCl. The hole also intersected 7.5 metres of 20.3% KCl in the underlying kainitite zone.

Allana Potash was changing hands at around 51 cents Tuesday Morning, up roughly three percent.