Will Africa Become Its Own Best Customer For Ethiopian Potash?

Will Africa Become Its Own Best Customer For Ethiopian Potash?

Africa has huge potential for future agriculture production given its land, labor and water resources. One Canadian company developing potash production capacity in Ethiopia believes potash use could reach 5-to-7-million tonnes a year continent-wide by 2020 – if enough work is done to promote the benefits of potassium as a nutrient in African soils.

But potash analysts point to a difficult market with potash prices on a downward trend and project financing not easy to come by. And with a number of new projects and expansions already under construction, this may not be the time to invest in new potash production capacity.

Ethiopia’s Ministry of Mines in October issued a mining license for a potash project being developed by Canada’s Allana Potash Corp. at Dallol in the Northern Afar region, bringing potash production in the country – and Africa – one step closer to reality.

With the large-scale mining permit, Allana now has all the required regulatory approvals to complete the development phase of the project and move directly to contracting, construction and operations.

The Canadian junior resource firm is targeting initial production in the Danakil Depression in 2015 and hopes to ramp up to full production of 1 million tonnes a year by 2017.

The potash project is based on a single license consolidating two adjacent mineral exploration licenses totaling 312-square kilometers. In June, Allana updated its mineral resource estimate at the development, increasing by a massive 85 percent the project’s measured and indicated mineral resource to 2.4 billion tonnes of potassium chloride with an average grade of 17.9 percent representing approximately 438 million tonnes of contained potassium chloride.

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The company proposes using solution mining of the sylvinite reserves and solar evaporation of the saturated brine solution. The concession’s proven and probable sylvinite reserves, which lie at a shallow depth (100-300 meters), are estimated at 23.7 million tonnes of potash­. Site testing and pilot works have been completed. Solar evaporation of the saturated brine solution is possible due to the year-round hot temperatures – 40-plus degrees Celsius – and very little rainfall.

Allana is proceeding with the engineering, procurement and construction management (EPCM) selection process with a number of engineering firms participating, and according to the company’s senior vice president, Corporate Development, Richard Kelertas, the company anticipates having an agreement in principal in place for the EPCM within the next few months. Construction of the production facilities is expected to take approximately 18-to-24 months

In addition to local African markets, Kelertas said Allana is looking to target India, the Middle East, China, and the entire Pacific Rim as potential markets for potash from its Danakil operation.

The potash to be sold overseas will need to be trucked 554 kilometers to the port of Djibouti, where the Djibouti Port & Free Zones Authority will build a new export terminal, known as the Tadjoura Terminal. Allana plans to construct a potash storage warehouse, with an initial 50,000 tonnes of capacity, which later will be increased to 150,000 tonnes, and a simple conveyor system for potash handling to a ship loader.

The company also intends to invest in a fleet of between 100-125 road trucks to transport the potash to the terminal.   Allana said road construction is underway to link the Dallol area to Afdera where paved roads provide access to Djibouti. Ethiopia has also received financial commitments from China and India to construct some 5,000 km of railway in the country, including access to the Danahil potash region. Consequently, Allana said it ultimately plans to add facilities to handle rail cars at the Tadjoura terminal.

Total estimated capital expenditure (capex) for Allana’s potash development is $642 million, according to a feasibility study prepared for Allana by Germany’s independent consulting and engineering group Ercosplan. The $642 million includes $18 million for transportation including the truck fleet and $24 million for building the potash storage warehouse and conveyor system at Tadjoura.

“We will secure financing through a combination of debt (65 percent of the project costs) with a group of export development banks/development financial institutions and equity (35 percent of the project costs) with strategic offtakers, existing strategic partners and from equity markets, if necessary,” Kelertas said.

Allana signed formal mandate letters in August with prospective lenders within a lender group representing loans in excess of the target amount of 65 percent debt expected to be needed to finance initial construction of the project.

The company has financial backing from two significant strategic investors. Liberty Metals and Mining Holdings, a subsidiary of Liberty Mutual Group, holds a 14.23 percent interest in Allana; and IFC, a member of the World Bank Group, owns a 2.8 percent interest in the company.

Difficult market

Many industry analysts point to the difficulties junior resource companies face in securing financing for their projects, not just for new potash developments but across the commodities spectrum.

Paul Burnside, principal consultant for potash at London-based analysis firm CRU, said juniors already faced problems raising capital before all the current turmoil in the potash market following major Russian producer Uralkali’s withdrawal in July from the export marketing partnership it had with Belarus producer Belaruskali.

Belarus Potash Company (BPC) was one of two marketing alliances established to sell potash to world markets. Together they accounted for around 70 percent of global exports of the nutrient.

Uralkali’s decision to maximize its sales volumes rather than maintain prices created tremendous uncertainty in global potash markets. Prices of the nutrient had been on a downward trend since the start of 2012 but since the BPC break-up, the slide has accelerated with some key price points now nearing three-year lows. Potash buying in most markets too has dried to a trickle since the Russian producer announced its change in sales strategy as importers hold off purchases in expectation that prices will fall further.

“With so much uncertainty over future pricing, and the amount of capacity already under construction, now doesn’t look like the time to be investing in new potash production capacity,” Burnside said. “Even after recent price falls, we’re still looking at a considerable period of overcapacity in the potash sector, so the question is: do we need any more projects being built?”

If an industry is expanding and companies are building new capacity, two things have to happen, he said. Either the demand is growing fast enough to absorb the new capacity coming online or the new capacity has to be absorbed through capacity rationalization by all producers producing less or by the highest-cost producers shutting down.

“CRU has a fairly aggressive demand growth forecast for potash, despite the stutters we’ve seen in recent years,” Burnside said. “And even allowing for delays and cancellations, I expect new supply to keep pace with demand growth for at least the next 10 years.”

However, the current state of the potash market has not impacted Allana’s confidence about the timing and economics of its Danakil project, Kelertas said, since the project will be low cost from both an opex/tonne and capex/tonne perspective.

The Ercosplan feasibility study put the production opex of Allana’s Danakil project at $64.72 per tonne and total opex (loaded onto ship) at $98.75 per tonne. Average netbacks on potash to key export-loading ports (Vancouver, Canada; Baltic Sea; Jordan and Israel) range from $275-$375 a tonne currently. Twelve months ago, these netbacks typically would have averaged $440-$500 a tonne.

Burnside believes the Allana project has a number of factors in its favor, including its location. Being close to major potash markets such as India and China give potash shipped from Ethiopia a fairly high freight advantage over a producer in Saskatchewan, Canada, for example. However, the advantage over suppliers out of Israel and Jordan to those markets is much less, he said.

“Any freight advantage has to offset the hundreds of millions of dollars that has got to be put into building the project,” Burnside said, explaining the problem with potash is even if you have a competitive opex, the cost curve is relatively flat.

“I don’t see any way a producer can have such an opex advantage that it outweighs the capital burden. Add them together, and any new potash project is going to be towards the top end of the cost curve.”

Furthermore, at present Allana is not being helped by the fact that it probably is best placed to serve the Indian market. Burnside said Indian potash demand has “fallen off a cliff since the country’s government reformed its fertilizer subsidy which has driven Indian farmers away from buying potash and phosphate”

He believes a strategic investor might be attracted to a project such as Allana’s Danakil potash development. Such an investor could be one of the Indian and Chinese fertilizer groups or a big mining company which would view the project as a long-term strategic asset, aimed at security of supply, rather than the decision to invest being based on purely economic factors.

The current slide in global potash prices is impacting the attractiveness of project investment, even if there is the belief that prices are going to bounce up in five-to-10 year’s time.

“A potash mine is a long-term investment, but the return on investment is still sensitive to the revenues coming in the first few years of operation,” said Burnside, adding that the anticipated life of Allana’s Danakil operation is just 25 years.

Greenfield projects

Allana is one of several companies pursuing potash extraction projects in Ethiopia and Eritrea. Norway’s global fertilizer company Yara International has held a controlling interest in Ethiopotash since April 2012. Allana and Yara are the more advanced potash extraction projects in Ethiopia.

Ethiopotash is targeting an initial annual production of 550,000 tonnes of potassium sulphate at Dallol with a targeted startup date of late 2017, according to Bernhard Stormyr, director of communications at Yara International. However, a final investment decision on the project has yet to be made, Stormyr said. Yara purchased an initial 16.67 percent interest in Ethiopotash in 2009 and increased its ownership to 51 percent and took management control in late April 2012. Today, Yara owns about 56 percent of the Ethiopian company and is partnered by XLR Capital Cyprus Ltd., a company with Indian backers.

In Eritrea, Australia’s South Boulder Mines has been actively exploring potash at Colluli in the Danakil region of the country since 2009, and has since identified a contained potassium chloride resource of 194 million tonnes covering an approximate 500-square-kilometer area. Once operational, the Colluli project will be the only open pit potash mine in the world and the world’s shallowest potash deposit, starting at just 16 meters below the surface.

South Boulder Mines initially was targeting the sylvinite reserves only to produce potassium chloride, but said it now has identified the potential to develop the Colluli project into “a multi-commodity agri-chemical business” producing potassium chloride, potassium sulphate, magnesium sulphates and industrial salt, using all the principal minerals in the deposit, according to its September 2013 Quarterly Activities and Cashflow Report.

The Australian company in May reached an agreement with Eritrean National Mining Corporation (ENAMCO) to form a joint venture company to own and operate the Colluli project. This deal was finalised early this month, and enables the joint venture company, Colluli Mining Share Company, to be formally incorporated and established. The relevant licenses for the project will be transferred to the new firm. South Boulder Mines and ENAMO will each have a 50 percent ownership.

Burnside said he is doubtful, however, that all of the potash projects being proposed in Ethiopia and Eritrea will go ahead. However, he concedes that if the decline in potash prices sparks a sufficient boost in demand in the next few years, a new 1-million tonnes a year junior possibly could enter the market “without disrupting things too much.”

Africa’s potash potential

Allana will consider shipping some 100,000-200,000 tonnes a year of potash to the Ethiopian market alone after its Danakil project ramps up to full capacity, Kelertas said. Historically, Ethiopian farmers have relied on only two fertilizers to supplement the nutrient content in their soil – phosphorus in the form di-ammonium phosphate (DAP) and nitrogen in the form of urea. Based on data from the International Fertilizer Industry Association (IFA), Burnside estimates that Ethiopia is importing 5,000 tonnes K2O – or approximately 8,000 tonnes of potash – a year at most at the present time.

However, trials conducted to date by various stakeholders, including Ethiopia’s Agricultural Transformation Agency (ATA), have demonstrated the need for using potash-containing fertilizers in many agricultural areas of the country. Allana is partnering with the ATA to demonstrate, through a series of systematic local balanced fertilizer field trials, the important role of potash fertilizer to farmers, in blends or as straight fertilizers. The two signed a memo of understanding in February.

To help Ethiopia’s smallholder farmers increase crop production, the ATA, in partnership with the Ministry of Agriculture (MOA) and the Regional Bureaus of Agriculture, is facilitating a variety of soil-related interventions, including the development of four NPK (Nitrogen, phosphorus, potassium) fertilizer-blending facilities in key regions throughout the country. Potassium, alongside other key nutrients, would be supplied to Ethiopian soils via these new fertilizer blending facilities.

Continent-wide, Africa’s consumption of potash remains very small with annual consumption currently estimated at around half a million tonnes K2O (approximately 800,000 tonnes of potash), according to the FAO.

About a quarter of this is used in South Africa, while Algeria, Morocco, Egypt, Ghana and Ivory Coast are the other significant African users of potash.

Burnside believes this could change if enough work is done to promote the benefits of potassium as a nutrient and provided the potash is priced on an export-parity basis rather than competing with imports.