Why are the Numbers So Important and Compelling?
A Comparative Analysis
By Karmanow – Guest Contributor
If we consider “complete debt financing” for construction we can see why Allana stands out as very cost effective compared to her peers. Lets use a 10% interest rate and principal and a repayment of 10% per annum as well. Lets look through the eyes of major strategic investors and what they need in order to make the numbers work…and mitigate risks for their shareholders. In order to attract debt financers…there appears to be benefits to the saying.. ” less is more ”…now lets look at what the breakeven point is for potash selling at $400 per ton using the model below we can see all 3 juniors make money.. Assuming similar Opex Costs we can then apply the same formula: $400 -$100 opex = $300 per ton x 1 m tons per year = $300m NOI
– AAA $136m debt costs = $164m earnings per 1m tons
– ELM $185m debt costs = $115m earnings per 1m tons
– WPX $200m debt costs = $100m earnings per 1m tons
– BHP $300m debt costs = $ 00m earnings per 1m tons
Now when a Strategic Investor is poised to invest hundreds of millions of dollars they must look at all scenarios and look at the risk of Potash selling again at $300 per ton …we can see just how Allana can tolerate lower prices and still make good cash flow…The same can not be said for other juniors …the risk might be to great..? As Mr. Doyle CEO Potash Corp. has stated many times…some projects will just not get built because they need potash selling at $500 per ton in order to make the numbers work..he appears correct!
Allana will be a “Cash Machine” (ATM) if potash prices move up $500 per ton or $600 per ton in two years from now…remember Vale is NOT going ahead with its huge mine in Argentina…and BHP has NOT given the complete green light to Jansen in Saskatchewan.
– AAA $136m debt costs = $64m earnings per 1m tons
– ELM $185m debt costs = $15m earnings per 1m tons
– WPX $200m debt costs = $00m earnings per 1m tons
– BHP $300m debt costs = ($100m) earnings per 1m tons
Then, the same Strategic Investor must review the total risk of debt. In order to get revenue…each mine has a varying amount of proposed tons mined per year…and each have a level of debt per year using the total debt formula.
AAA Allana Potash $ 136m per year from revenues
ELM Elemental Resources $ 370m per year from revenues
WPX Western Potash $ 560m per year from revenues
BHP Jansen Mine $ 2.400Bn per year from revenues.
AAA Allana Potash – Ethiopia: Total capital costs of $680m for a 1Mt per annum of MOP from a Solution Mine. So, $680m capex per 1m tons = (10% interest = $68.0m + 10% principal repayment per year = $68.0m = $136m owed per year to finance per 1m tons. …Important to note that AAA will only owe $136m per year from revenues.
ELM Elemental Resources – West Africa: Total initial capital costs of US$1.85bn and production of 2Mt per annum of MOP from a “conventional underground mine” with a 23 year life of mine. So, per 1Mt per annum the capital cost is $925m.
$925 (10% interest = $92.5m + 10% principal repayment per year = $92.5m = $185m owed per year to finance per 1m tons…and for Elemental with a planned 2m ton mine and the cost will be $370m per year from revenues.
WPX Western Potash – Sask.: Total capital cost estimated now at $2.91bn and production of 2.8m tons MOP per annum. Total capital costs of $2.91bn for a 2.8Mt per annum of MOP from a Solution Mine. So, $1.0bn capex per 1m tons = (10% interest = $100m + 10% principal repayment per year = $100m = $200m owed per year to finance per 1m tons. ..and for Western Potash with a planned 2.8m ton mine the cost will be $560m per year from revenues.
BHP Jansen Mine – Sask.: Total capital cost estimated now at $12.0bn and production of 8m tons MOP per annum. Total capital costs of $12bn for a 8Mt per annum of MOP from a Conventional Mine. So, $1.5bn capex per 1m tons = (10% interest = $150m + 10% principal repayment per year = $150m = $300m owed per year to finance per 1m tons. ..and for BHP’s Janzen Mine with a planned 8m ton mine the cost will be $2.4Bn per year from revenues.
It is also important to review the following comparison in light of Allana having a current market cap of $132m… Allana has one of the lowest “capex per proposed 1m tons per year” at about $700 and Opex at $90 per ton. When major money is looking at a project they must consider the actual cost and return ratios. When we compare the actual proposed cost of debt financing a 1m ton mine….the numbers are revealing for those using the “complete debt financing” method for valuation purposes so that we are comparing apples to apples. We all know that there are multiple methods of financing but in order to do a valid comparison we must apply constant variables.
Comparison of estimated cost of capex for the last 3 juniors that sold:
2008: Anglo Potash “Jansen Project” $1529 per 1m ton capex
2010: Athabasca Potash “Burr Project” $1047 per 1m ton capex
2011: Potash One “Legacy” $ 996 per 1m ton capex
Current Market CAP of Allana: minus cash for Allana (.48 cents x 275 m shares outstanding=$132m–$30m cash on hand= $102m market cap / 275m shares = .37cents
Valuation By A Different Metric – Jeremy’s Share Price Projections here – Thanks Jeremy! 😉
- PDAC 2013: Ethiopian minister sees Allana project as catalyst (africapotashblog.wordpress.com)
- Yara Sees Purchases Within Months to Boost Fertilizer Sales (africapotashblog.wordpress.com)
- Allana Potash – Mining Ancient Sea Beds In Support of the United Nation’s Millennium Development Goals (africapotashblog.wordpress.com)
- Allana Potash and its potential Role in African Security (africapotashblog.wordpress.com)
- Allana Potash Announces Positive Feasibility Study at its Danakhil Potash Project (africapotashblog.wordpress.com)
- Ethiopian Agricultural Transformation Agency and Allana Potash Corp. Sign MOU to Promote Potash Use as Soil Nutrient in Ethiopia (africapotashblog.wordpress.com)
- Allana Feasibility Study: One of best Greenfield Potash Plays in the World (africapotashblog.wordpress.com)
- Mining to be Ethiopian economic backbone as Allana outlines progress (africapotashblog.wordpress.com)