Allana sketches a $796M capex for Dallol

Allana Potash (aaa-t) has started painting a somewhat rosy picture at its Dallol potash project in Ethiopia with a positive preliminary economic assessment (PEA), estimating start-up costs at US$796 million.

“The PEA has exceeded our expectations and points to a very strong project for the company,” says Farhad Abasov, Allana’s president and CEO, on a Nov. 23 conference call. He adds the focus of the PEA was to evaluate and recommend the best mining method for Dallol and guesstimate the costs of bringing the operation online.

The study, prepared by Ercosplan, examined both solution and open-pit mining methods. After reviewing each scenario, Allana’s management concluded solution mining with processing using solar evaporation and standard flotation yielded higher advantages and costs structures.

Situated some 110 km from the Red Sea coast and 600 km from the deep water port of Djibouti, Dallol consists of four potash concessions in the northeastern Danakil depression.

The study envisions a solution mine producing 1 million tonnes of KCl or potassium chloride (muriate of potash) a year for an initial 30 years.

Minimal production is set to start by the end of 2014, before ramping up to 5,000 tonnes in 2015, then 50,000 tonnes in 2016, before reaching 1 million tonnes in 2017.

Using a conservative discount of 12%, the project projects a healthy after-tax internal rate of return of 36.8% and an after-tax net present value (NPV) of US$1.85 billion. Payback is pegged at 3.5 years.

At a lower discount of 10%, the after-tax NPV blooms to US$2.36 billion.

The US$796-million capex includes the estimated capex for: production, US$664 million; transportation/handling, US$38 million; and port, US$93 million.

The construction of the evaporation ponds, flotation plant, and other infrastructure are incorporated in the production capex.

For transportation, the company aims to use its own fleet of trucks to deliver the potash to the port in Djibouti, where it expects to build its own terminal.

The study forecasts total operating expenditures (opex) of US$90.54 per tonne of KCl.

Abasov says he’s confident that Dallol currently boasts one of the lowest capex and opex figures for a greenfield project in the potash sector.

“The old saying is correct that all the good stuff comes to people who wait and are patient,” he enthuses.   

Analyst Jaret Anderson of Mackie Research writes in a Nov. 23 note that the US$796-per tonne capex estimate “stacks-up well against other greenfield potash project developers targeting sylvinite ore, specifically in Saskatchewan” at about $1,000 per tonne. 

He predicts this will give Allana a leg up in securing project financing in a tough market environment.

The junior aims to fund 60% of the initial start-up cost through debt financing and the rest through equity. It is currently in talks with its two partners: International Finance Corp., a member of the World Group Bank, and Liberty Metals Mining, a member of the Liberty Mutual Group.

Anderson adds that most of the PEA findings were in-line with predictions, with the exception of the assumed cost of transportation to the port in Djibouti.

Included in the US$90.54 per tonne opex is the estimated operating cost for transportation, handling and port facilities of US$11.73 per tonne, which Anderson argues is too low.

“We believe AAA and Ercosplan are far too aggressive on this assumption, as our estimate for transportation cost is materially higher at US$50/t for the route of approximately 600 km to the port of Djibouti via roads of varying quality by truck.”

For a rough comparison, he points out it costs Potash Corp. of Saskatchewan (pot-t, pot-n) about $35-$40 per tonne to rail its product from Saskatchewan to Vancouver, over a distance of 1,500 km using a much better rail network.

Anderson predicts the project’s feasibility study, which Ercosplan began this August, will contain higher transportation costs.

Expected in the third quarter of 2012, the feasibility will consider the benefits of producing sulphate of potash, and expanding annual production from 1 million tonnes to 2 million tonnes after the third year of production.

And if all goes well, the company plans to start plant construction by the end of next year or early 2013.

Currently, the project hosts 673.1 million tonnes grading 18.6% KCl in measured and indicated, and 595.7 million tonnes at 20% KCl in inferred. The resource is based on four potash-bearing beds: sylvinite, upper and lower carnallitite and kainitite.

Allana released the PEA after the market close on Nov. 22, and the next day saw its shares drop 3.42% to $1.13 on 9.5 million shares traded.