Israel Chemical Ltd. and Canada’s Allana Potash (TSX: AAA; US-OTC: ALLRF) have struck a landmark deal in which ICL — the world’s sixth-largest potash producer and a leading provider of pure phosphoric acid — will provide financial support and technical co-operation for develoing Allana’s Danakhil potash project in Ethiopia. The strategic alliance includes a take-or-pay off-take agreement.
ICL will invest $25 million in two tranches for Allana units priced at 47¢ per unit. The offer price represents a 35% premium to Allana’s five-day volume-weighted average trading price on the Toronto Stock Exchange and a 45% premium to the company’s closing price on Dec. 3, 2013 — the day the two companies started negotiating the deal.
In the first tranche, which closed Feb. 12, Allana issued 22.6 million units to ICL for proceeds of $10.6 million. The second tranche, to be completed before the end of March, will involve another 30.6 million units for proceeds of $14.4 million. Once the two tranches are completed, ICL will own 19.9% of Allana’s outstanding common shares.
ICL has also agreed to buy the entire production of the project — or up to 1 million tonnes per year of muriate of potash (MOP) — with a take-or-pay commitment on at least 80% of production, or 800,000 tonnes.
Under the arrangement, Yoram Cohen, the general manager of ICL Africa and a member of ICL Fertilizer’s management team, has been appointed to Allana’s board of directors.
ICL says the agreement allows it to broaden its global sources of raw materials, increase its activities in Africa and better serve its growing customer base in India and Southeast Asia. Stefan Borgas, ICL’s president and CEO, noted in prepared remarks that ICL can add “substantial value” to the Dhanakhil project “through the deployment of production technologies similar to Dead Sea Works.”
ICL was set up in 1968 by the State of Israel as a government-owned company, with the first efforts to extract minerals from the Dead Sea. Along with potash and phosphoric acid, ICL produces a third of the world’s bromine and is a major manufacturer of specialty fertilizers and specialty phosphates, flame retardants and water-treatment solutions.
Raymond Goldie of Salman Partners in Toronto views the ICL–Allana alliance as “very positive.”
He writes in a commentary that “the ‘Goldie Principle’ posits that the strongest sign of the marketability of a proposed product that does not trade on a terminal market [such as the London Metal Exchange] is an agreement, backed by cash, between the potential producer of the proposed product and a potential purchaser of the proposed product.”
Allana received its mining licence in October 2013 and has the required approvals to complete project development and move into contracting, construction and operations.
In June 2013, Allana updated its resource estimate for the project, which includes four horizons of potash: sylvinite, upper and lower carnallite, and kainitite. Measured and indicated resources total 2.5 billion tonnes with an average grade of 17.9% potassium chloride (KCl), for 438 million tonnes of contained KCl. Inferred resources add another 1.1 billion tonnes grading 15.9% KCl for 178 million tonnes of contained KCl.
A feasibility study completed in February 2013 outlined production of 1 million tonnes MOP per year via solution mining and solar evaporation from the sylvinite zone. Based on a potash price of US$430 per tonne, the study forecast total capex of US$642 million and an operating expenditure of US$98.75 per tonne MOP delivered to the port. Payback is estimated to take 3.1 years, and the study concluded that the after-tax internal rate of return would be 33% and the after-tax net present value US$1.3 billion.
Allana also has financial support from the International Finance Corp. (IFC), a member of the World Bank Group and Liberty Metals & Mining, a member of Liberty Mutual Group. Before the financing from ICL was announced, Liberty Metals & Mining owned 17.4% of the company’s outstanding shares and the IFC 2.7%.
News of the ICL deal was made public after markets closed on Feb. 12.
On Feb. 13, Allana shares fell 5.5¢, or 10.8%, to 45.5¢, with 2.5 million shares trading hands. Over the last year the company’s shares have traded in a range of 26.5¢ to 65¢.
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