Hannam and Partners valuation for Danakali remains unchanged at $1 per share, or a 50% premium to the last traded price of $0.67. The following is an extract from a recent breakfast presentation and report.
Unique project, well advanced
DNK’s 50% owned Colluli project is currently the only fully permitted, post-BFS SOP project globally and has a number of unique advantages over its peers.
Colluli has an exceptional 1.1bn tonne reserve that is suitable for low cost, shallow, open cut mining.
The project also has the lowest capital intensity amongst global development SOP projects due to presence of existing infrastructure, and a relatively simple processing plant design.
During the Potash Breakfast, DNK suggested that the likely commissioning date at Colulli would occur in late 2020.
FEED study improves capital costs
DNK is currently completing front-end engineering design (FEED) which will lead to updated project economics in January 2018.
Preliminary capex estimates, including working capital, show a small decrease to $332m from $337m.
Operating cost estimates for FEED are currently being gathered and will be supported by contractor competitive bids in mining and power generation.
Danakali has so far improved the cost structure of Colluli through each project study phase, which supports our confidence in management’s ability to deliver a profitable SOP project in Colluli.
Small project footprint a key advantage
The key advantage Colulli has is the right combination of carnallite and kainite salts for simple, high-yield conversion to SOP at ambient temperatures.
As Colluli’s salts are already in solid form, there is no need to harvest from brines via evaporation, which significantly reduces the project’s evaporation footprint vs brine producers.
For example, N American SOP producer Compass Minerals has 40k acres of evaporation ponds, whilst Colluli’s DFS plans using only 300 acres to harvest salts on its site.
This combined with a lack of communities or other economic activity on site provides a unique advantage over SOP peers.
Offtake discussion key
Danakali is set to become a globally significant SOP producer, with just Colluli Phase 1 providing around 8% of global SOP supply (based on CRU’s 2016 total SOP supply estimate of 6.1Mt).
During the breakfast, Danakali outlined their offtake strategy which envisages having 85% of its supply under contract with 15% retained for price discovery.
The Company’s marketing strategy is partly to target end users and partly the leading fertiliser traders, and not to focus on a single party solution.
The importance of securing offtake for the 472 ktpa of production during Colluli Phase 1 and 850 ktpa during Phase 2 was emphasised by Monday’s announcement of a management change, where Danny Goeman will transition from Head of Marketing to the role of Chief Executive Officer where his focus will be on the completion of the binding offtake.
The current CEO, Paul Donaldson, will become a Non-Executive Director on the Danakali Board.
SOP a bright spot in an otherwise difficult potash market
SOP is a specialty potash product, vital in the cultivation of chloride-intolerant crops such as fruit and nuts, for which potassium chloride (aka “muriate of potash” or “MOP”) cannot be used.
The premium for SOP vs MOP has risen post the break-up of Uralkali and Belaruskali’s joint marketing deal in 2013, which caused MOP prices to fall, and as SOP demand has grown at a faster pace, especially in China.
While we believe potash in general may see more modest demand growth in the coming years, the outlook for MOP appears particularly challenged by the amount of new capacity expected to come on line.
However, we expect sticky demand from chloride-sensitive farmers and environmental limits on Chinese supply will allow SOP to sustain a healthy premium.
DNK valuation remains unchanged
Using a 0.5x NPV multiple and a $550/t SOP price forecast, we arrive at a valuation for Danakali of US$188m, or A$1.0 per share.
This implies c.42% upside to the current share price.
We will update our valuation in January following the release of updated FEED study project economics.