Allana Potash sketches US$796M capex for Dallol

Allana Potash (AAA-T, AAA-V) is painting a rosy picture of its Dallol potash project in Ethiopia, with
a positive preliminary economic assessment (PEA) that estimates start-up costs at US$796 million. 

“The PEA has exceeded our expectations and points to a very strong project for the company,” Farhad Abasov, Allana’s president and CEO, said on a Nov. 23 conference call.

Prepared by Ercosplan, the study examined solution and open-pit mining methods. After reviewing each scenario, Allana’s management concluded that solution mining with processing using solar evaporation and standard flotation yields the best advantages and cost structures.

Located 110 km from the Red Sea coast and 600 km from the deepwater 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 potash muriate a year for an initial 30 years. Production could start by the end of 2014, ramping up 1 million tonnes by 2017. 

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

The US$796-million capital expenditure (capex) includes the following estimates: production, US$664 million; transportation and handling, US$38 million; and port, US$93 million.

The production capex incorporates building the evaporation ponds, flotation plant and other infrastructure. 

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 potassium chloride (KCl). 

Abasov says he’s confident that Dallol 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 wrote 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 in talks with its partners: the World Bank’s International Finance and Liberty Metals Mining, a member of the Liberty Mutual Group.

Anderson adds that most of the PEA findings were as predicted, with the exception of the assumed cost of transportation to the Port of 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 [U.S.] fifty dollars per tonne for the route of approximately six hundred kilometres to the port of Djibouti via roads of varying quality by truck.”

For a rough comparison, he points out that it costs Potash Corp. of Saskatchewan (POT-T, POT-N) $35 to $40 per tonne to rail its product from Saskatchewan to Vancouver over a 1,500-km distance. 

But Dallol’s transportation cost estimates were done by Ercosplan based on distance, truck type and number, fuel quantity and fuel cost, refutes Abasov in an email. 

“I do not know why PotashCorp pays thirty-five to forty dollars per tonne for rail transport. But it is in Saskatchewan and on rail and three times longer distance, so [I am] not sure how it applies to us.”

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

Expected to be completed in 2012’s third quarter, the feasibility study 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 could start building the plant by the end of next year, or early 2013. 

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 carnallite, lower carnallite and kainite. Allana plans to post an updated National Instrument 43-101 resource in early 2012. 

Allana released the PEA after the market-close on Nov. 22, and the next day saw its shares drop 3.4% to $1.13 on 9.5 million shares traded.