Allana Potash Corp. (AAA), the Canadian developer of a $642 million potash mine in Ethiopia, says predictions of a global oversupply of the crop nutrient are overblown because competing projects are being put on hold.
World potash production capacity will rise 38 percent to 96.5 million metric tons by 2017, while demand will increase 26 percent to 66 million tons, according to Green Markets, a fertilizer industry information provider.
Supply forecasts include mines that aren’t yet in production and may be shelved or canceled because of rising construction costs, said Farhad Abasov, Toronto-based Allana’s chief executive officer.
“On paper it seems like there is quite a bit of supply coming on line,” Abasov said in a May 28 telephone interview from London. “In reality only a handful of them will hit production.”
Soaring expenses are beginning to exact a toll on proposed potash mines around the world. Vale SA, the third-largest mining company, in March suspended its Rio Colorado project in Argentina after the estimated cost almost doubled to about $11 billion. Last month, U.S. producer Mosaic Co. (MOS:US) deferred a capacity expansion in the Canadian province of Saskatchewan and JPMorgan Chase & Co. analysts said BHP Billiton Ltd. (BHP) is likely to shelve its Jansen potash project.
It’s only a matter of time before more developments, some with a price tag of more than $1 billion, are hobbled by complex geology, a lack of committed financing, and rising costs, said Spencer Churchill, a Toronto-based analyst at Paradigm Capital Inc.
“Allana is unique because it has found a large, high-grade potash deposit that is near-surface and faces fewer challenges than the traditional greenfield projects,” Churchill, who has a buy rating on Allana, said in a May 23 note.
Allana fell 3.9 percent to 50 cents at the close in Toronto. The shares have advanced 6.4 percent in Toronto this year, the fifth-best performer on an index of 37 fertilizer stocks compiled by Bloomberg Industries.
Allana posted a net loss of C$3.86 million ($3.79 million) and no revenue in the quarter ended Jan. 31. It had C$28.6 million of cash at the end of the period, according to data compiled by Bloomberg.
Potash, a form of potassium and one of three essential crop nutrients, is applied to plants to help them strengthen their root systems and resist drought.
Abasov isn’t alone in regarding industry concerns about excess supply as exaggerated, Peter Prattas, a Toronto-based analyst at Cantor Fitzgerald LP, said May 30 in a telephone interview.
“We share the view,” said Prattas, who rates Allana a buy with a C$1.25 price target. “The fears come from the fact that there is overcapacity, but there certainly isn’t oversupply.”
Jansen, which is located in Saskatchewan, is under review at Melbourne-based BHP. The project may eventually cost close to $15 billion, Bank of of America Merrill Lynch analysts said in a June 4 note.
BHP Chief Executive Officer Andrew Mackenzie, who is slashing capital spending after a decline in commodity prices, said June 6 that potash “is a great option but it’s just an option” and that Jansen must meet certain criteria if it’s to proceed.
Meanwhile, major producers such as Potash Corp. of Saskatchewan Inc. and Russia’s OAO Uralkali (URKA), the world’s two biggest, “will not choose to ramp up their production to anywhere near full production because their bias is always price over volumes,” Prattas said.
Bill Johnson, a spokesman for Potash Corp., referred to CEO Bill Doyle’s comments on an April 25 conference call when he said that “we always think that price is more important than volume.”
Rob Litt, a spokesman for Mosaic, declined to comment on the outlook for potash demand and supply. No one at Uralkali and Brazil’s Vale was immediately available for comment.
The potash industry is dominated by producers in North America and the former Soviet Union that together accounted for 56 percent of supply last year, according to Green Markets, a unit of Bloomberg LP, which is the parent of Bloomberg News. Uralkali shipped 9.5 million tons in 2012 and had 11.5 million tons of capacity, the Green Markets data show.
Uralkali said May 29 it reduced its rail exports of potash to China, cutting supply in the spot market and strengthening its position in talks for the nation’s next fixed-price supply contract.
Abasov, a former senior vice president at Potash One Inc. who left the company about three years before it was sold to German fertilizer producer K+S AG (SDF) in 2011 for C$361 million, is proposing to build a mine in Ethiopia that would flush water-soluble underground potash deposits with brine. The resulting liquid solution from the development, part of Allana’s Dallol exploration area, would be pumped to evaporation ponds on the surface.
Last month, Allana said Ethiopia approved the company’s environmental, social and health impact assessment for Dallol. A feasibility study was completed in February.
The Ethiopian mine is well-situated geographically to supply fertilizer buyers in India and China and to meet growing demand for crop nutrients in Africa, Abasov said. Allana forecasts the development will have a 33 percent internal rate of return and a payback period of 3.1 years, assuming a potash price of $430 a ton, according to the company’s website.
Allana, which plans to start construction of the mine by the end of this year and begin production three years later, is in talks with lenders and potential buyers of its potash, Abasov said. International Finance Corp., a World Bank unit, and Boston-based Liberty Metals & Mining Holdings LLC, a subsidiary of Liberty Mutual Holding Co., are Allana shareholders.
“Our project is right in the sweet spot because it has great economics, it is food-related and it is in a country that needs a lot of development,” Abasov said.
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