Yara's Ethiopia deal implies strong prospects for potash companies like Allana

Recent developments in the potash space bode well for companies such as Allana Potash (TSE:AAA)(OTCQX:ALLRF).

Allana is a junior mineral exploration company focused on developing potash mineral properties in Ethiopia and Argentina.

Last week, Norwegian fertilizer group Yara International upped its stake in Ethiopian potash company Ethiopotash BV to 51 percent from 16.67 percent.

Ethiopotash is developing a potash resource in the Danakil Depression of Ethiopia, directly adjacent to Allana Potash's own Dallol project.

The potash mineralization in the Danakil Depression is well known with small-scale potash mining carried out intermittently from the early 1900s.

"Estimated capacity for the Dallol project is 1 million to 1.5 million tons potash per year, with resources of more than 30 years mining," Yara said in a statement.

Yara's move to increase its stake in the area indicates that Ethiopia's Danakil basin is going to develop into a significant source of potash over the coming years, with Allana strategically positioned to benefit.

Allana announced Tuesday a boost in mineral resource estimates at its Dallol project, increasing measured and indicated resources by more than 90 percent.

The measured and indicated mineral resource estimate now totals 1.3 billion tonnes with an average grade of 19.32% potassium chloride (KCl), representing approximately 250 million tonnes of KCl.

Exploration drilling continues in the northern part of Allana's property as part of the program to expand the mineral resources and in-fill gaps in the drilling pattern, with technical studies in support of a feasibility study also in progress.

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.

As for the industry as a whole, the head of the world's biggest potash supplier believes that, after an unsteady start to 2012, there is reason to believe the market is picking up.

Last week, PotashCorp (TSE:POT)(NYSE:POT) CEO Bill Doyle predicted that global potash consumption will hit a record in 2012 with shipments of between 53 and 56 million tonnes, implying a huge rebound after a weak first quarter.

The bellweather in the industry posted a drop in first-quarter earnings and sales volumes.

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

Analysts believe that Allana's presence in Ethiopia gives it access to funding from sources to which other resource companies may not have access.