Allana Potash Continues To Drift Amidst Ag Malaise
- Allana shares continue to drift lower, despite a strong and engaged strategic partner in Israel Chemicals.
- If efforts to increase royalties and taxes on resources produced in Israel stick, Allana’s Ethiopian Danakhil project may become even more valuable to ICL.
- Allana still needs to secure project financing, but these very risky shares look undervalued below $0.80/ADR.
The bloom is definitely off of the ag bull market, as lower crop prices have soured investors on seed, ag equipment, and fertilizer companies. None of that is positive for Allana Potash (OTCPK:OTCPK:ALLRF, (AAA.TO)), nor is the fact that potash pricing remains stuck around $350 per ton. These shares have continued to weaken since the company announced a major tie-up with Israel Chemicals (OTCPK:ISCHY) and since my last piece. While the Global X Fertilizers/Potash ETF (NYSEARCA:SOIL) is down about 2% since my mid-March update on Allana, the company’s shares themselves are down another 20% or so.
Granting that investors were disappointed in the terms of alliance with ICL, and granting that there is still more dilution likely on the way (as the company still needs to raise debt, and probably equity, to fund its Danakhil project), I continue to believe these shares are undervalued. By no means is Allana anything other than a high-risk investment, but ICL appears committed to the project, and I believe the current price doesn’t give much credit to the value of the project.
While I generally recommend avoiding “F-type” ADRs and buying shares on local exchanges when possible, Allana’s ADRs are more liquid than most unsponsored ADRs. Even so, I’d advise owning the Toronto-listed shares when/where that is an option.
Some Progress, But Not Headline-Grabbing Stuff
Allana isn’t just sitting on its hands. There is a lot of work for the company to do as it moves toward building the mining capex needed to turn the Danakhil project in Ethiopia into a potash-producing asset.
The company has successfully relocated two villages, and received a water extraction permit from the Ethiopian government. With the permit covering 30M cubic meters/year, Allana has more than enough to cover the 18.5M or so cubic meters it will need to produce 1Mtpa of potash and some left over for production expansion. The ECPM contractor selection process is ongoing, and the company is presently working on optimizing the project (including hydrology work and in-fill drilling).
Elsewhere, important logistics projects are moving forward, including the construction of a road and port.
That’s all well and good (and necessary), but it is not the sort of activity that is going to lead to the market reconsidering the shares. What could prompt such a move is the company’s ongoing efforts to obtain financing for the project. Management expects to secure debt financing in the late fall or early winter. Investors shouldn’t expect great terms (this is a risky project in a risky jurisdiction), and there is a risk of delay in securing the financing, but less onerous terms or a creative structure could be a positive.
Developments At ICL Should Be Generating More Interest
While things at Allana have been fairly quiet, the same cannot be said of the company’s partner, ICL. The company is exploring the sale of its German cleaning/disinfectants business, a move that would make the fertilizer business even more prominent, and is pursuing a dual listing in the U.S.
More specific to Allana, ICL has relocated a managing director from its Cleveland Potash operation to Danakhil to help oversee the project. ICL has also been active in lobbying the Ethiopian government for support on the Danakhil project and sponsoring educational programs via Ethiopia’s Agriculture Transformation Agency on fertilizer application – part of a wider effort to start developing the African fertilizer market.
All of that may pale next to what happened in May, though. ICL lost on arbitration ruling regarding royalties, and saw Israel’s Sheshinski Committee recommend higher taxes and royalties on natural resources produced in Israel – a 5% royalty and a 42% natural resources tax to be applied after an 11% operating return calculated on depreciated assets. In response, ICL froze $1 billion in planned investments in its Dead Sea operations, and indicated that further investments in Israel are likely not viable under that sort of structure.
I would think that this should make the Allana Danakhil asset even more valuable to ICL. True, ICL has other projects in countries like Brazil and Vietnam, but this project should be able to produce a meaningful amount of potash in a relatively short time. I’d also note that Allana just recently announced that it had engaged a company to conduct a preliminary economic assessment of its kainitite resources at the Danakhil site. Kainitite can be processed into sulphate of potash (or SOP), a more valuable form of potash than murate of potash (or MOP) that is the initial focus of the project.
All told, it seems to me that Israel Chemicals is looking at the prospect of reduced expected economic returns from its Dead Sea potash assets, while it looks to increase its presence in the potash market and sell more into emerging markets like India, the Mid East, and Africa. I should think that would make Allana’s Danakhil project even more valuable to the company and perhaps motivate an outright acquisition of the remaining shares of the company, given the current slump.
No Change To My Outlook
While it is true that low crop prices have led investors to flee the ag sector, I don’t believe that the current price of corn or potash should have too much bearing on a project/company that won’t be producing for a few years. What’s more, fertilizer is still under-applied in many parts of the world, and I believe that demand for fertilizers like potash will continue to grow.
In valuing Allana, I use a lower assumed price than management’s feasibility report ($375/t versus $430/t), higher opex cost assumptions ($80/t-plus), and a higher discount rate. I also assume that the project will be expanded in 2024, though, so my life-of-project production forecast is higher. Including expected dilution and financing, I believe Allana shares should still trade at almost C$0.90/share, or just a bit under $0.80/ADR.
The Bottom Line
If Allana shares continue to drift lower, I believe ICL has to at least consider stepping up and buying up the remaining shares. At a minimum, I would think that such a transaction would lead to lower project financing costs. Taking the bearish side, what’s the rush? The off-take agreement lets ICL control the project’s expected production, and that would likely discourage a rival bidder, so other than an unexpected spike in potash prices, ICL might be thinking that there’s little risk of the share price of Allana running away from them.
Allana is the sort of stock/investment where it’s tempting to run the numbers over and over again, because it seems strange that the shares trade where they do. Even though the ICL deal was more dilutive than investors may have wanted, ICL’s commitment to the project is a positive, and the NAV looks attractive even with more conservative pricing and cost assumptions. Again, this is a high-risk opportunity, but one that I’m finding increasingly appealing as the shares drift lower on no apparent negative news, and in the face of what I believe ought to be positive news regarding the importance of Allana/Danakhil to ICL.
Israeli manufacturer of fertilizers and specialty chemicals Israel Chemicals Ltd had recently submitted to US regulatory authorities, documents seeking its registration with the New York Stock Exchange. ICL has permits to extract potash and bromine from the Dead Sea.
The application placed the nominal fundraising target at USD522.4 million with an initial public offering volume of 62 million ordinary shares. The company is a subsidiary of Israel Corp and is the second largest company in terms of market value listed on the Tel Aviv Stock Exchange.
The company was established back in 1968 as a government owned corporation. In 1992, the Israeli government decided to privatize the company, thus had it listed on the Tel Aviv bourse. In 1995, the government sold its controlling interest to Israel Corp., allowing the company to hold 52.4% shareholdings in ICL.
The second largest shareholder in ICL is Potash Corp of Saskatchewan Inc’s Israeli subsidiary, who owns 13.86% of ICL.
The Israeli government though still has approving authority on any sale or transfer of assets of ICL to any other company. This may prove to be a sticking point since they don’t own any shares in the company to be listed on NYSE.
The application had identified Morgan Stanley & Co and Barclays Capital Inc as lead bookrunners in the IPO. Also included are Goldman, Sachs & Co and Deutsche Bank as bookrunners with BMO Capital Markets Cop as co-manager for the IPO.
The move was precipitated by the Israeli government’s thrust to update its current policy on royalties and taxes for non-oil and gas natural resources. Just last May, a government panel had recommended the imposition of a new tax on mining companies in the country. In this scenario, ICL would be hit the hardest.
In response, the company may focus its efforts abroad should these recommendations come into force.
With the IPO, only Israel Corp’s shareholdings would be diluted, lowering from the current 52.4% to just 46.68%. The company would be listed under the symbol ‘ICL’ on the NYSE board.
The sales of ICL declined by 13% to just USD1.54 billion in the quarter ending June 30. This was attributed to the fall in prices as well as a decline in the volume sold. The company reported an adjusted profit earning of USD214 million for the period, which was lower than the previous quarter’s USD316 million.
Included in the application is a 30 day option granted to the underwriters to purchase an additional 6.2 million shares. Part of the sale would be structured as a derivative transaction to allow the selling shareholder with exposure to possible increases in the price of ICL shares. Alongside this provision is the corollary rejoinder that there is also protection when there are losses in the share price.
ICL’s shares are currently traded in the Tel Aviv Stock Exchange and the registration with the New York Stock Exchange would pose no issue for the company, shareholders and future buyers of the shares during the initial public offer.
Company, Authority sign Dire Dawa–Dawale road upgrading project
The Ethiopian Roads Authority yesterday signed an agreement with Chinese CGC Oversees Construction Company to upgrade 220-kms Dire Dawa–Dawale road at a cost of 3.9 billion Birr.
Shandong was also another Chinese company which won the bid to consult the project.
Signing the agreement, Authority Director General Zaid Wolde-Gebriel said that the road would be an alternative to connect Ethiopia to Djibouti port and ease the traffic burden of Awash- Mille-Djibout road which is now serving beyond capacity.
Cognizant of the traffic congestion on Awash-Mille-Djibouti road, the Authority conducted research to look for an alternative road which it finally identified Dire Dawa-Dawale road to connect the country to Djibouti with relatively shorter distance., he said.
According to him, the road is expected to serve as the second import-export corridor thereby accelerating trade.
He also said that the road would be completed with quality standards in three years time as the company is experienced in the area.
Company Vice President to Ethiopia Kin Lijing for his part said that the company would finalize the project on schedule. He said that so far, the company has undertaken survey work for 100-kms. He noted that the construction of this road would be done in accordance with all quality specifications.
Some 85 per cent of the project fund is from Chinese Exim Bank in loan and the remaining 15 per cent would be covered by the government of Ethiopia.
Solar Cookers Get Hot
By Glenn Zorpette
Guro Grytli Seim, the CEO of Morpho Solar, and Catlin Powers, COO of One Earth Designs, prepare a meal on a One Earth solar cooker.
Of all the innovations that could markedly benefit humankind, a reliable solar cooker remains one of the most imperative. Countless people across the developing world still cook their food by burning wood or even cow dung, causing respiratory problems and severe deforestation in some regions.
The quest for a practical solar cooker has gone on for decades and produced dozens of models ranging from $70 cheapies to $400 deluxe models. But none of them have caught on significantly for use in the developing-world because they can’t store heat. Without the ability to store heat, a cooker cannot be used, for example, on cloudy days.
But now a group based at the Norwegian University of Science and Technology (NTNU) in Trondheim is reporting a breakthrough in solar cookers. They say it will lead, within a year and a half, to the production of practical solar cookers that can store enough heat during a sunny day to work for an entire additional day, even if it is cloudy. The breakthrough was recognized with a US $8,000 award from the Norwegian Ministry of Petroleum and Energy this past August.
“Our vision is to solve problems in developing countries,” says Guro Grytli Seim, the CEO of a company, Morpho Solar, that was formed recently to capitalize on the Norwegian advance. She notes that nine Ph.D. students and 20 Master’s degree candidates worked on the heat-storage technology, with funding from the university, the Norwegian Investment Fund For Developing Countries, and the electric utility Trønder Energi. The system uses the principle of phase-change to store and release heat. The key ingredient is a salt with a melting temperature of 220 °C, Seim says. Sunlight concentrated by a parabolic reflector melts the salt; when heat is needed, the salt is allowed to solidify, which releases heat.
The system can have a thermal efficiency of 80 percent, Seim explains. For comparison, an electrical system based on photovoltaic cells and batteries would be only about 15- to 20-percent efficient.
The team also developed two different techniques to transfer heat from the parabolic collector to the cooking surface. These technologies, one based on steam and the other on oil, allow the sunlight-collecting parabolic dish to be outside a home and the cooking surface to be inside.
The project began in 2011 with Asfafaw Haileselassie Tesfay, a mechanical-engineering researcher at NTNU. Tesfay came to Norway from his native Ethiopia, which has a particular need for a solar cooker. Eighty five percent of Ethiopians lack access to electricity. And the country has been severely deforested: 40 percent of Ethiopia’s land was once covered by forest; the figure is now 4.6 percent.
Ethiopian cuisine, too, has a very specific requirement: a cooker that can reach a temperature between 200 °C and 250 °C. Such a temperature is needed to bake injera, a spongy pancake that is eaten with most meals in Ethiopia. Tesfay says the experimental cooker built by him and his colleagues can sustain a temperature of 220 °C (430 °F) for 24 hours, even if clouds roll in. This capability was demonstrated in March during trials with the cooker at Mekelle University in northern Ethiopia, he adds.
Seim says that Morpho Solar plans to complete a prototype of a commercial model in early 2015, and begin production in 2016. The company will begin selling the cooker in Europe and in the United States as well, under an agreement with Cambridge, Mass.-based One Earth Designs, one of the largest makers of solar cookers. Morpho’s strategy is to establish the product in the developed world before selling it at a lower price in developing countries, Seim explains. She is confident that it will appeal to environmentally conscious suburban families.
“It reduces your carbon footprint,” she notes. “And it’s fun. Many people value showing their kids that you can make food using only the sun. It’s less hassle, because you don’t have to buy charcoal or gas. You don’t have any recurring costs. We see that as a value proposition as well.”
Aluto-Langano geothermal plant to be operational in April
The government of Ethiopia is striving for the operationalization of the Aluto-Langano geothermal power plant with installed capacity of 70mw power in this fiscal year, the Ministry of Water, Irrigation and Energy said.
Energy Study and Development Follow-up Director, Gosaye Mengistie told ENA over 78 percent of construction of the geothermal plant has so far finalized. It is expected that the plant will commence operation in April.
Launched in 2013, the expansion of the Aluto-Langano geothermal power plant will increase the country’s generation capacity from geothermal to 70mw power from the current 7mw.
The expansion project is financed by assistance from a 12 million dollar grant from the government of Japan, a 13 million dollar loan from the World Bank and 10 million dollars from the Ethiopian government.
Located in the Rift Valley Lakes Region, the Aluto Langano Geothermal Power Plant is the first geothermal power plant in Ethiopia. The plant was established in 1998 as a pilot plant to test the geothermal resources in the area.
The nation has set target to generate 1,000mw power from two geothermal plants, Tendaho and Corbeti geothermal plants, in the coming few years, he added.
The Tendaho power plant due to be undertaken in Afar regional state, north eastern part of the country, will have a capacity to generate 100mw power.
The nation has also signed agreement with a US- Icelandic private developer Reykjavik Geothermal (RG) to construct Africa’s largest geothermal plant. The Corbeti geothermal project the country due to built with 4 billion USD will be Africa’s largest geothermal plant, with 1,000mw installed power.
Construction of this plant, which will be undertaken in two phases, each with 500mw installed capacity with an eight to 10 year period.
These projects are part of the government’s plan to raise power output to 10,000mw by 2015, in order to meet the growing demand.
It is estimated that Ethiopia has a potential to generate up to 5,000mw power from only geothermal.
“Althou the nation has huge potential for geothermal energy, it doesn’t so far benefit from it. We set target to undertake various activities and change this situation.” he said.
Twenty two power generator sites, with huge geothermal potential have identified so far in the rift valley system, he added. Activities are being undertaken to develop this potential.
“First we have been conducting survey on about 18 places with huge geothermal potential. But now the number of places identified as having with huge potential has reached 22.”
Places like Dalol, Tendaho, Abi, Tiye, Meleka, Dafan, Fentale, Gedemesa, Tulu, Moye, Aloto Langano, Corbeti, and Abaya are among the places identified with huge geothermal potential.
Development of renewable energy will have economic and environmental benefits, said the Director. These projects will help the nation realize the vision to build green economy by 2025.
Utilizing the country’s potential for geothermal energy would help address the increasing demand for electricity, he added. It is estimated that the country’s demand for electricity increases by 25 to 30 percent annually.