The Conversation (0)
Potash Investing News spoke with Allana Potash’s senior vice president of corporate development, Richard Kelertas, who offered us a look at the company.
Potash Investing News spoke with Allana Potash’s senior vice president of corporate development, Richard Kelertas, who offered us a look at the company.
Potash Investing News: What’s going on right now with potash? What’s driving demand? What’s driving prices?
Richard Kelertas: Potash is an essential nutrient that is required in the soil in most countries. Outside of Europe and North America farmers don’t apply enough of it. It’s essential for plant health, root development, drought resistance, and a whole list of things. It is also required for proper uptake nitrogen and phosphate in the soil, as well. Even if you apply nitrogen and phosphate, without potassium, you end up getting issues, in terms of proper uptake by the plant. Not only that, but it provides a lot of other benefits and increases yield. If you apply just nitrogen and phosphate, your yields are not as high as they could be. You apply potash to the soil and your yields increase dramatically, depending on the site conditions, the crop type, and as far as whether it’s drought conditions or non-drought.
Demand is being driven, obviously, by the requirements that we feed ourselves and also changing diets throughout the developing world. There are more people now entering the middle class than ever before. The middle class can be defined as not starving and not being on a subsistence diet. As many people are moving into the middle class in developing nations throughout the world, their diets change; they want to eat more meat, pork, chicken, more protein.
As that takes place, the requirements for animal feed increase dramatically. The amount of land that’s available for staple crops for feeding humans actually declines, and the amount of agricultural land that’s been required for animal feed crops goes up. The return on a farmer’s meat/protein production over time is much higher than just on basic staple crops in most parts of the world, hence the incentive to use more potash.
PIN: I didn’t realize that.
RK: While the energy inputs are quite high, the requirements for fertilizers go up, in that there is more demand for yield on the agricultural land that is needed for not only animal feed crops, but also for subsistence crops.
Potash demand has been growing for the last 30 or 40 years at about 2 to 3 percent a year. It reached a high point of about 62 million tons a year back in 2007, and it has since dropped off because of inventory and a slowdown in the general economy. Also, agricultural activity has slowed down in some regions because of drought and other factors, like regional conflicts and things of that nature. This has brought demand down to about 52-55 million tonnes per year to date. This is potash for KCl used for agriculture. There are many other uses for potash, but the industrial uses are tiny compared to the agricultural ones.
PIN. Yes. Most people know that potash is used for fertilizer.
RK: Right. The pricing has fluctuated from about $60 to $70 a tonne during the ‘60s, ‘70s and the early part of the 80’s and as high as $1,000 a metric tonne in 2008, but that only lasted a couple of days, as I recall. The global financial collapse and the great recession of 2007-08 then caused prices to plummet to about $300 per tonne. They reached a recent high of about $525 to $530 several month ago. The current price is about $400 to $430 depending on the regional market.
At current prices, most producers make a half-decent profit, except those at the very high end of the cost curve. Global potash producers in 2012 operated at about 80 to 82 percent. You have to have prices around $500 per tonne if potash producers want to operate around 100 percent. In that demand scenario we could see shipments of about 60 million tonnes per year.
Where we are right now is that the markets are a little bit on tenterhooks. The Chinese and Indians have built some inventory. There’s also a belief that potash applications only have to take place every two or three years, rather than every year. That’s the case in jurisdictions where potash has been used efficiently and also on a regular basis, like North America, Europe and South America.
In other parts of the world — China, India, the developing world (Africa certainly) — there has been below normal potash use, and hence an opportunity for increases in application rates. Yet many farmers feel that since it is the most expensive nutrient (N,P,K) they tend to skimp on it and use the cheaper nitrogen and phosphate nutrients. This is what is currently happening in India. The fact that India has also reduced its subsidy for farmers to use potash (and other nutrients as well) has caused a real demand slowdown in the country, which is the second-largest consumer of potash. China is number one and Brazil is number three. Brazil imports all, basically 95 percent, of the potash it requires. China imports 60 to 70 percent, and India about 85 to 90 percent.
The question now is, what’s supply going to be like in 5 to 10 years? As you’ve seen, the operating rate of a lot of producers is low now because they’ve had to take downtime to balance the market. This is especially true for Canpotex and the BPC (Belarusian Potash Company) oligopolies. They feel that they should control the price, and since price is better than volume, they’ve been pretty good so far in keeping volumes down to a reasonable level so that the market isn’t unbalanced. The key problem has been the overhang of some extra supply that’s coming on. PotashCorp is the only one that’s got any real brownfield capacity that’s coming onstream, starting next year in New Brunswick. There has been some talk of other brownfield expansions throughout the world, but they have basically either been delayed or pushed it back.
In terms of greenfield projects, there are numerous ones that are being proposed, but several of the larger potash producers have backed off: Vale, Mosaic, and also Uralkali says that if BHP builds their big [Jansen] plant in Saskatchewan, they will not go through with their planned expansions.
If built it would be a massive project and would likely sour the global potash price for years if it comes onstream in three to four years, however we’ll see if it goes ahead. BHP has a lot of figuring to do.
PIN: Yes. I’ve been reading about that.
RK: It’s anybody’s guess on its status, but the feeling in the market is that this project may be delayed. It won’t be abandoned, I don’t think, but could be delayed certainly by 4 or 5 years. If that’s the case, for the next 4 to 5 years we should have a balanced market because it will take BHP a long ramp-up period before they can get that thing up and running, and producing potash.
PIN: Okay, so we are looking at a balanced market for the next 4 to 5 years until 2018 or 2019. How will Allana in that case play into the role of potash producer once you finally get into the production stage?
RK: This is the interesting point, because a lot of projects now have been either delayed, postponed, or cancelled. We think that these days in this environment, getting financing for new project may be very difficult. We have had numerous inquiries from buyers, trading houses, agents, also end producers of fertilizers that need raw material, who have told us that they would like to break away from the Canpotex/ BPC oligopolies and start buying from independents. They would like to get going on buying from independents sooner rather than later, so they don’t want to wait until 2018 or 2020 to be able to get some supplies. They would like to be able to get some supplies by 2015-16.
Hence, if all goes well with our financing arrangements, which we’re working on right now, both on debt and equity, we possibly might be able to put a shovel in the ground to start construction at the end of this year or early next.
PIN: That’s not so bad.
RK: No it’s not. With solution mining, as you know, you don’t need a tremendous amount of capital or time and effort to get down to 1,500 meters with deep shaft or open pit mining. Our resource is to be found at 100 to 300 meters depth. Therefore we can use solution mining, and we have got plenty of water and the costs are extremely low. If we put a shovel in the ground at the end of this year, we could be producing our first potash by sometime in 2015.
PIN: Is that around the same time as when people are looking to secure a supply that’s outside of this oligopoly?
RK: That’s right.
PIN: As far as Ethiopia goes, I saw a release earlier this month about Germany boosting its support for the agricultural sector. How is Allana’s presence in Ethiopia helping change the agricultural market of the country?
RK: Two ways: First, by our presence in developing the actual natural resource, because Ethiopia doesn’t have any potash supply. The country doesn’t use any potash currently in farming activity and has to import almost 100 percent of its urea and DAP requirements. Second,by actually going through with a mine development plan and mine construction/production, the country will be able to not only be a net exporter of potash, but also will have a captive source of supply for itself. To encourage potash use in Ethiopia, we’ve linked up with the Agricultural Transformation Association and we issued a press release regarding our involvement last month. We’ll be purchasing fertilizer for the time being because we’re not producing it as yet. We’ll also be educating farmers regarding the use of potash and showing them the beneficial economics of doing so.
PIN: Definitely. It also looks like once you have everything set up in 2015, optimistically, you have your market right there.
RK: Not for the entire production because we want to get up to 1 million tonnes by 2017, but certainly 100,000 to 200,000 tonnes can move into Ethiopia quite easily by that time. Once we get this education program setup and running, we might be able to sell 100,000 to 200,000 more tonnes into the country. Hopefully, not only can Ethiopia show the rest of East Africa how productive agriculture can become with the use of potash, but then, we can also think about expanding our presence in Africa later on. We think that Africa will be the next Brazil, in terms of potash demand, over the next 10 to 15 years.
PIN: Getting more into your project, how does theDanakil Depression in Ethiopia compare to potash deposits in Saskatchewan or Brazil?
RK: We’ve completed quite a few drill holes, 67 and several that are still ongoing. If the geology is contiguous or similar throughout the whole depression, that area could be quite large; with the potential for well over a billion tonnes (in the measured, indicated and inferred categories – on our property and other in the region) of potash. It is much shallower and much easier to extract using solution mining, because of the very high climate, because of the very shallow nature of the deposit and the flat topography. You can construct solar evaporation ponds with lots of piping over a very large area.
PIN: As you say, Ethiopia is a really hot region. How does Allana Potash use that to its benefit?
RK: Yes, that’s right. We are in the Guinness Book of World Records as the hottest place on Earth. The temperature can get as high as 55 degrees Celsius, in the summertime during the day. It’s also very, very dry; it only has a couple of centimeters of rainfall in the mountains every year, but that also provides us with plenty of useable water in our underground aquifers that we can access under our property for solution mining.
PIN: Water isn’t the concern, then?
RK: Right. We have plenty of water. It’s close to the surface and right in the area where we are going to be mining. Also, we have some of the highest solar evaporation rates in the world because of the very high temperatures and the fact that we have a constant breeze blowing across our property and it’s very dry and not humid. Our solar evaporation rates are up to an average of 1 centimeter per day, which means that will keep our cost low by using massive solar evaporation ponds; 5 kilometers long x 1 kilometer wide.
PIN: Does that give you a higher recovery rate to do it through this method?
RK: Not necessarily a higher recovery rate, because that depends on the geology. What it does do is it makes the turnaround time in the solar evaporation ponds a lot shorter. We can actually spend more time harvesting and processing the crystals, rather than waiting for the evaporation of the brine to take place.
PIN: You released a feasibility study earlier this year. Could you please explain a little bit how these results are good for investors?
RK: Sure. Investors, especially with the recent implosion in junior mining space, are demanding very high IRRs, just to even consider investing. We have a stated IRR of 33 percent on our project, with a $430 per tonne long-term potash price. From what I’ve seen this is the highest IRR of most of the junior potash projects that have pre-feasibility and feasibility studies published.
The most important aspect of these robust returns is that our capital expenditure per tonne is extremely low; it’s only US$645 a tonne. If you compare that with Saskatchewan which is more than double that and you compare it with other solution mining projects which are 30 to 40 percent higher (at capacity per million tonnes per higher per year), we’re quite happy with the numbers. Because of our location, because of our solar evaporation process, and the fact that we don’t have to use expensive fossil fuels for our solar evaporation process, as well as free water, we are in a position to keep our capital expenditure cost low. Next is our low operational costs — all in including transportation by truck to the port facility, loading and offloading and putting it on the ship — will be less than US$100 per tonne (not including sustaining capex per tonne). That will make us one of the lowest-cost greenfield projects on the planet.
PIN: That’s not a bad position to be in.
RK: Right. The other interesting thing is that we’ve seen a tremendous pick up in the infrastructure build by the Ethiopian Government, by the army, by the country of Djibouti, and by the Arab Development Authorities that are actually building the port facilities in Djibouti. We are extremely fortunate that we’ve been able to negotiate excellent terms with the Ethiopian Government. They’re building all the roads, they’re going to be building rail lines as well; they’ve already started on a couple. The Djiboutian Government and the Arab Development Authority will be building most of the port facility to our specifications but we’ve earmarked about $18 million for it in our feasibility study for storage. If you compare this to other projects that have to put in rail lines or port facilities, we are very happy with the infrastructure situation.
PIN: Your environmental and social assessment was recently approved by the Ethiopian Mines Ministry. How big of a milestone is this for the company?
RK: Because of the location that we’re in, and it’s pretty remote, we wouldn’t be similar to somebody who is operating a potash mine in Saskatchewan, for instance, or near an urban area in the US or Europe. We still spent a good 16 months on it, and produced a multi-faceted document. Even though you’re in the desert, there are native fauna and flora to consider and protect. There are nomadic tribes that live in the area, the Afari people, and they have a salt trade that’s been going on for 2,000 years. We had to make sure that was all covered off and all local concerns were signed off on. All the different tribal groups were consulted. We issued, many position papers on community development programs that we would enter right after the approval of the ESHIA. Potable water for the residents of that area, education programs, health care, and so on and so forth. It was a big milestone for us to achieve because we spent a lot of time on it, there were many facets to the study including consultation with local government and tribal approvals and so in the end it was successful.
PIN:What’s next, now that you have this in line?
RK: The next catalyst will be the mining extraction license. We are optimistic that it will be granted in the next few months. The environmental aspect of the mining license was one of the biggest hurdles. I would say half of the heavy lifting that needs to be done for the mining license has been done already, but the Minister of Mines and all the other Ministers have to go through it of course; cross all the T’s, dot all the I’s. They haven’t issued too many mining licenses or extraction licenses before. So since Ethiopia is a relatively new mining jurisdiction, they want to get it right and they want to make sure they have all their bases covered. We’re not rushing the process. We’re working with the government closely to answer all their questions and meet all of their concerns.
PIN: You mentioned earlier about financing that you are working on. How are you going to be financing this project moving forward, because capital markets have become increasingly difficult recently?
RK: We have a soft commitment from a consortium of export development banks for about US$700 million in debt financing. These soft commitments have to be turned into firm commitments, and that’s what we’re working on now. The banks that make up this consortium are in the process of making all the due diligence. They have all the technical and feasibility study information in hand. and we should have some idea of their final decision this fall.
We intend to fund the project 60 to 65 percent with debt, 30 to 35 percent with equity. The key component after debt financing is the equity financing. Coming to the market now and trying to raise $150 million to $200 million in equity would be very detrimental to our stock’s dilution factor. so we are looking instead at strategic off-take agreements.
We’re speaking with numerous organizations; some are sovereign wealth funds, some are independents, some are fertilizer producers, some are trading houses and agents, and even some potash producers that want to invest in a different geographical jurisdiction. The strategy is that we can get off-takes for 200,000 or 300,000 tonnes each, and a commitment from these off-takers for equity, either at the project level or the corporate level, where they would put in X-amount of millions to secure their off-take at favorable commercial rates, but also have a position in the project.
We also have well over $20 million in the bank, so we’re well-funded; we can keep the lights on and we don’t have to depend on the equity market that some others are doing just to keep their exploration hopes alive and their administration expenses paid. We’re in a good place right now.
PIN: It seems like in this market, that’s where you need to be; well-funded, well-positioned, with all your ducks lined up in a row. My last question is: once you finally do come into production, which you’re expecting in 2015, where are you looking to market your potash?
RK: Obviously Ethiopia, and also India and China since we’re so close to them. The Middle East and rest of Africa but that will be a work in progress. We can get down to Indonesia, Malaysia, Laos, and Cambodia very efficiently, as well.
PIN: It looks like Allana is in a good place. I can’t wait to see when it all comes together.
RK: I have to tell you that the rest of us are waiting just as excitedly as you are.
Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. The opinions expressed in these interviews do not reflect the opinions of INN and do not constitute investment advice. All readers are encouraged to perform their own due diligence.