Pat McKeough responds to many requests from members of his Inner Circle for specific advice on stocks as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.

This week an Inner Circle member asked us about one of the Canadian commodity stocks operating in a risky part of the world (a week ago, Pat reported on a Canadian mining stock whose big property is in Eritrea: see the article here.) Allana Potash is developing a project in neighbouring Ethiopia. While the property holds mineable potash, a mine is still in the planning stages. Pat examines Allana’s progress toward building that mine, including a major strategic alliance it has formed, and assesses the company’s prospects for success.

Q: Hi Pat: Just wondering if you could revisit Allana Potash and comment in the wake of its securing of financing, new strategic partnerships and imminent production? Thanks.

A: Allana Potash (symbol AAA on Toronto; www.allanapotash.com) is focused on developing its Danakhil potash project in Ethiopia. The deposit, which is located in the Danakhil Depression area, holds over 24 million tonnes of mineable potash.

Allana’s property has a history of potash exploration and mining. There was small-scale production there in the 1920s, and the property was extensively explored in the 1960s, when nearly 300 holes were drilled.

Operating in Ethiopia entails considerable political risk. As well, the region’s roads are poor, and power and water infrastructure is underdeveloped.

Still, Allana has completed a positive feasibility study on the project. This report envisions a mine on the site, as well as processing facilities and port and road improvements. In all, this project would cost $642 million U.S. to build.

The mine would produce one million tonnes of potash a year, with the potential to double that if exploration finds more reserves. Danakhil is about 600 kilometres by road from the deepwater port of Djibouti.

Allana plans to use solution mining to extract potash from Danakhil. This process uses water to dissolve a mineral (potash, in this case) into a solution that is then pumped out of the deposit through vertical boreholes or abandoned mine workings. It is then crystallized and purified into the finished product. Solution mines are cheaper to build than conventional potash mines, mainly because they do not require a shaft.

Strategic alliance with Israeli Chemicals brings major funding on board

The company has experienced management: its CEO was senior vice-president of Potash One, and was a vice-president at Uranium One. However, experienced management is of little help if the property turns out to be uneconomical.

In February 2014, Allana entered into a strategic alliance with Israeli Chemicals (ICL), one of the world’s largest fertilizer producers, with annual sales of $6.3 billion U.S. Under the deal, ICL has agreed to buy $25 million in units of Allana at $0.47 a unit. Each unit consists of a common Allana share, one and a half Series A common-share purchase warrants and half of a Series B common-share purchase warrant.

Each whole Series A warrant will be exercisable at a price of $0.54 per common share, and each whole Series B warrant at $0.60 per common share. Both are exercisable for 36 months from the date of issue. If all warrants are exercised, ICL’s total investment will equal $84 million.

In addition, ICL has agreed to buy the Danakhil project’s entire output, up to one million tonnes a year, with 80% of that commitment guaranteed. ICL will use the potash to sell to its growing customer base in India and Southeast Asia. In addition, ICL will help develop and operate the project.

The company hopes to begin building a mine soon, with completion projected for 2017.

In the Inner Circle Q&A, Pat considers the political risk Allana must overcome and looks at whether the company—even with its strategic alliance—will be able to raise the money it needs in order to begin construction of its mine. He concludes with his clear buy-hold-sell advice on this stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

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