Update on Allana Potash: Closing Position

As some of you will remember, I bought stock in a little potash company back in late 2010. Today Allana Potash released its NI 43 101 report which is official resource estimate of the company's Danakhil Potash Project. The news was below expectations to say the least and the stock acted accordingly.

The company reported:

•NEW MEASURED AND INDICATED MINERAL RESOURCES OF 673 MILLION TONNES WITH CONTAINED KCl OF 126 MILLION TONNES

•INCREASE IN INFERRED MINERAL RESOURCES TO 596 MILLION TONNES WITH CONTAINED KCl OF 119 MILLION TONNES

This is, of course a major increase for Allana's resource estimate, but a far cry from the rumored 1 billion tons. Another major disappointment was the KCI (the potash) grade of only 18.65% in the measured and indicated classification. Again--this was much lower than the expectations of around 25% and even a tad lower than past historical drilling on the site indicated. 

The major analyst covering the stock (Dundee research) seems to be quite optimistic regarding the company. They think the report means the company could increase potash production from an estimated 1 million tons per year. This is hard to see happening, considering the CEO of the company mentioned that production would be capped at 1 million tons per year because of poor infrastructure in Ethiopia. Granted, if infrastructure improved, then the company could increase production, but this is a long way out (2016+).
 
Overall, this was a slightly underwhelming report. I am selling my position for the short-term and will reevaluate matters latter. I picked up this stock back at .41 and sold today at 2.04. This resulted in a 400% return in just over 9 months. Still I was hoping for more.
 
I will keep an eye on Allana Potash. At some point it may fall back to a bargain level.
 
Black Swan Insights

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Update on Allana Potash: Closing Position

New Investment: Allana Potash Inc.

UPDATE June 6, 2011---Closing Position

About Allana Potash Corp

Allana Potash Corp. is a publicly traded company with a focus on the acquisition and development of potash assets. The Company's flagship project is its Ethiopia Potash Project in the Danakhil evaporate basin which has an inferred mineral resource of 105,200,000 tonnes with a composite grade of 20.8 % KCl. Allana also has potash claims in Argentina adjacent to Vale's Rio Colorado project.

Company Website: http://www.allanapotash.com/

Stock Symbol: AAA.V on the Toronto Stock Exchange and ALLRF on the American pink sheets

Investment Thesis

As everyone knows, the global potash market is run by two cartels: Canpotex in Saskatchewan and the Belarusion Potash Company in Belarus. Between the two, they control 90% of world potash production, which makes large potash projects outside of these two areas increasingly valuable. Allana has such a deposit in Ethiopia located in the Danakil Depression. The company has a historical resource of 105.2 Mts. with a composite grade of 20.8% KCl and hopes to expand the resource during its current drilling program. Historical drilling conducted in the 1960's outlined a possible deposit of 171 million tons at a composite grade of 31-34%. One of the advantages of the deposit is that it is near the surface (easier to mine), which should help make Allana a low-cost producer. Furthermore, the deposit has good access to water, an important ingredient for mining. The only knock against the deposit is that current infrastructure is not great. The deposit is not near a port and lacks a railway to link to the nearest port in Djibouti. However, the government has plans to construct the required infrastructure to support the project.   

An important deposit like Allana's Dallol Project, which is located outside of Saskatchewan, should be considered a major strategic deposit and, in my opinion, has a good chance of being acquired before production commences. The obvious buyer would be a Chinese government-affiliated company because China has made it a national priority to acquire important global resources to support domestic consumption. Potash is one of those vital resources needed to improve the country's crop yields. China has already signed trade deals with Ethiopia to help develop natural resources and improve infrastructure in the African country.

Timeline

The company is currently drilling to expand the resource. If everything goes according to plan, the company will complete a feasibility by the end of 2011. After that, the company should begin mine and plant construction during 2012 and could be in production by mid to late 2013.

Management

The company is run by Farhad Abasov, who used to be VP for Uranium One, and has 15 years of experience in business. From what I have seen, management is very shareholder friendly. The major accomplishment for management was an off-take/financing deal with China Minerals, where the Chinese company made a strategic investment in Allana and agreed to fund 35% of the capital costs associated with the mine (estimated at $280 million). This deal not only reinforces the strategic importance of Allana's deposit, but also shows that management is financially savvy (pretty rare for resource companies). Using other people's money to construct your mine is the right way to go from a shareholder perspective.

Financial Position

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New Investment: Allana Potash Inc.