With a profile such as this and a mine life in excess of 200 years, one would expect the company would be trading at a premium valuation, but not so.
The supply-demand metrics for SOP as a fertiliser are expected to grow as they have tended to track population growth, as well as being supported by diminishing arable land.
Adding further traction to the story is that investors only have to wait until 2021 at the latest until the project comes into production.
Analysts at Baillieu Holst Research are more positive, forecasting a profit $15.8 million in 2020.
Bell Potter more conservative but fundamentals are strong
Bell Potter analyst Duncan Hughes is forecasting first production of 460,000 tonnes of SOP to occur in 2021, generating a net profit of $88 million.
Having crunched the numbers on the underlying metrics of the project, it is essential to gain an understanding of its superior position as an emerging global supplier.
It is also worth noting that the project is a 50:50 joint venture between Danakali and the Eritrean National Mining Company (ENAMCO).
Consequently, the government has a vested interest in the success of the project, particularly given its large scale and the boost it will provide to the economy.
Prospective territory with supporting infrastructure
Colluli is about 180 kilometres southeast of the capital Asmara and a similar distance from the port of Massawa, which is Eritrea’s key import/export facility.
The Danakil Depression is an emerging potash province, which commences in Eritrea and extends south across the border into Ethiopia.
It is one of the largest unexploited potash basins globally with over 6 billion tonnes of potassium bearing salts suitable for the production of potash fertilisers having been identified.
Colluli is also only 75 kilometres from the Red Sea coast providing unrivalled future logistics benefits, which could offer additional competitive advantages.
The project is on the Eritrean side of the border, giving Colluli a significant advantage relative to all other potash development projects in the Danakil Depression.
Other developers need to ship from the Tadjoura port in Djibouti, over 600 kilometres by road from the closest project on the Ethiopian side of the border.
Far superior product with economies of scale
Colluli boasts the shallowest mineralisation in the Danakil Depression with mineralisation commencing at 16 metres below-surface.
In addition, the potassium-bearing salts are present in solid form, not necessitating production from SOP brines.
Shallow access to salts in solid form provides Colluli with significant mining, logistics and economic advantages which equate to better margins and more competitive pricing.
Cost advantages drive down capital expenditure
These aspects of the deposit provide capital and operating cost advantages over other global potash developments.
The project also carries a significantly lower level of complexity as a consequence of predictable processing plant feed grade and production rates.
Shallow mineralisation also makes the resource amenable to open cut mining, a proven, high productivity mining method.
Open cut mining provides higher resource recoveries relative to underground and solution mining methods.
Three potassium bearing salts
The Colluli resource comprises three potassium bearing salts in solid form - Sylvinite, Carnallitite and Kainitite.
These salts are suitable for high yield, low energy production of SOP, a high-quality potash fertiliser carrying a price premium over the more common Muriate of Potash (MOP).
The SOP premium over MOP has been gradually increasing and more recently accelerating to a level of 130%.
SOP is chlorine-free and is commonly applied to high-value crops such as fruit, vegetables, nuts, and coffee.
Economic resources for primary production of SOP are geologically scarce and there are few current primary producers.
1.3 billion tonnes resource
The JORC 2012 compliant resource for Colluli is estimated at nearly 1.3 billion tonnes at 11% potassium oxide for 260 million tonnes of contained SOP equivalent.
The ore reserve was updated in February.
The ore reserve estimate for Colluli is estimated at 1,100 million tonnes at 10.5% potassium oxide for 203 million tonnes of contained SOP equivalent
The Colluli mineral resource also comprises 85 million tonnes of Kieserite, a premium fertiliser suitable for magnesium deficient soils.
FEED confirms quality of Colluli project
In late January, the Front-End Engineering Design (FEED) for Colluli was completed, reaffirming the outstanding project economics and world-class nature of the resource.
FEED firmly established Colluli as the most progressed, economically attractive and fundable SOP greenfield development project globally.
The FEED provides off-takers and funders with a high level of study detail and accuracy and it is the final study stage before project execution.
The project net present value is US$902 million with an internal rate of return of 29.9%.
Duncan Hughes responded to the FEED findings in saying: “The size and quality of the Colluli reserve give it strategic value as the project has the lowest capital intensity of SOP developers globally.”
This is a big call given the multi-billion-dollar multinationals that have dominated this space for decades, but the numbers support his assessment.
Robust profit margin at US$525 per tonne
Hughes said: “The end product is a high-grade pure product likely to fetch a premium to peers, and the company is expected to produce the world’s lowest cost SOP on a free on board (FOB) basis."
He is forecasting an industry-leading FOB cost of US$258 per tonne for phase I of the project, reducing to US$242 per tonne when combined with phase II.
This leaves a healthy profit margin based on his SOP price assumption of US$525 per tonne in 2021, a level he believes is sustainable out to at least 2023.
The project is fully permitted and ready to advance into engineering and construction after funding is secured.
Completion of the FEED was an important development in terms of clearing the way for financiers as it provided a high level of study detail and accuracy.
A key near-term development could be the securing of offtake agreements.
On this note, Hughes said: “The company is securing offtake and funding for phase I, and we view this as a potential game changer as it will significantly de-risk the world-class project.”
Hughes values the project at $1.08 per share, suggesting the stock is trading about 55% shy of his valuation.