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Danakali watches Anglo’s move on Sirius as potash space heats up

Anglo American’s offer for Sirius Minerals values the UK potash project holder at £386mln (US$508mln).

Danakali Ltd - Danakali watches Anglo’s move on Sirius as potash space heats up
Danakali is at the pre-development stage of the Colluli Potash Project in Eritrea

Danakali Ltd (ASX:DNK) (LON:DNK) (OTCMKTS:SBMSF) is closely watching the progress of Anglo American plc’s (LON:AAL) takeover bid for Sirius Minerals PLC (LON:SXX) as the potash market heats up.

The global mining giant’s offer for Sirius, which owns the Woodsmith Potash Project in the UK, values the target at £386mln (US$508mln).

Danakali’s keen interest comes as it is in the pre-development stages of the world-class Colluli Potash Project in Eritrea.

Demand for world-class projects

A report prepared for Danakali by Numis said: “Anglo American's potential offer for Sirius Minerals  ... highlights the potential for consolidation in the potash space and the demand for world-class projects, of which Colluli is one.

“In contrast to Woodsmith, Colluli is near-surface, with lower capital intensity and produces a product for which there is an established global market and pricing mechanism.”

Anglo’s proposal represents a premium of 34.1% to the closing price of 4.1 pence per Sirius share on January 7, 2020, and 46.5% to the volume-weighted average price of 3.75 pence per share since the September 17, 2019, strategic review announcement.

The Board of Sirius has indicated to Anglo American that it expects to be able to recommend a firm offer for Sirius if made at the price stated in the initial offer.

Strong interest in potash

Danakali said that Anglo had the resources to develop the asset and was looking to shift away from commodities such as thermal coal.

The LSE and ASX listed company said the offer indicated that major miners were taking a strong interest in potash and other green commodities.

In its report, Numis said: “We retain a Buy recommendation for Danakali and a target price of 70 pence based on 0.6x NAV, with the main upcoming catalysts being finalising the project funding package and commencing development.

“DNK achieved a number of key milestones in 2019, securing both project debt and a strategic investor to underpin the development of Colluli.”

“Fits well with Anglo’s strategy”

Anglo said in a statement: “Anglo American identified the project as being of potential interest some time ago, given the quality of the underlying asset in terms of scale, resource life, operating cost profile and the nature and quality of its product.

“The project has the potential to fit well with Anglo American’s established strategy of focusing on world-class assets, particularly in the context of Anglo American’s portfolio trajectory towards later cycle products that support a fast-growing global population and a cleaner, greener, more sustainable world.”

Anglo went onto say: “The use of fertilisers is one of the most effective ways to improve agricultural yields and therefore help to address the anticipated future imbalance between food, feed and biofuel demand and supply caused by a fast-growing global population and limited additional land availability for agricultural use.”

Numis report

Following are extracts from the Numis report:

Sirius has faced material headwinds with the funding package for its Woodsmith project in North Yorkshire, with the shares down 75% in the past 12 months and 86% from their peak in August 2016.

As a Tier I diversified miner with a market cap of £30bn, AAL would be better positioned to fund and develop an asset of this scale.

In our view, this would be a strategic move by AAL that recognises the importance of potash in a world where maintaining crop yields in the face of a rising global population is a clear priority.

Colluli offers lower technical and execution risk with manageable capex

Total capital expenditure for the development of both phases of Colluli to produce 944kt/year

of SOP is US$524m, based on the FEED study; US$550 per t of SOP capacity.

The capital cost to develop a 10Mt/year operation at Woodsmith is US$8.77bn; US$877/t of polyhalite production capacity.

The Colluli deposit is located near to surface in a very sparsely populated area with transport to port by truck.

Woodsmith occurs at a depth of >1,500m and, as the deposit is located in a national park, transport to port would be by a capital-intensive underground conveyor system.

Colluli is a long-life asset with a reserve of 1.1Bn t at 10.5% K2O that hosts 203Mt of contained SOP. The ore from Colluli is amenable to processing at ambient temperatures and pressures, with cash costs in the lowest quartile for the SOP industry at US$242/t.

... and is selling into a developed market

Colluli will produce Sulphate of Potash (SOP), which is a well-developed global market. The SOP market is approximately 7.1Mt/year, with SOP used for higher-value crops.

The SOP market remained relatively robust in 2019, with pricing at around US$500/t, despite the impact of weather and record Chinese exports. Our long-term modelled SOP price is US$600/t.

By contrast, Sirius’s polyhalite product has no large-scale current market or established pricing mechanism.

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