Danakali Ltd (ASX:DNK) holds a 50% interest in a truly Tier 1 asset in Eritrea
Danakali Ltd is continuing to advance its Colluli SOP potash project in Eritrea. Recent FEED optimisation studies have shown that SOP output capacity can be increased by 47,000 tons per annum (tpa) to 472,000 tpa, by debottlenecking the processing plant configuration.
Further optimisation of the plant site and pond materials are underway. The Company has also said that offtake discussions are advancing towards binding agreements, expected to be announced later this year.
Offtakes should be arriving soon
We would expect that financing would follow offtake agreements and could be a major catalyst.
The Colluli project is attractive for a number of reasons including its large reserve (1.1Bt @10.76% K2O) giving it an expected mine life >200years, producing 472 – 944,000 tpa at low cash costs (~US$290/t CIF) for phase I development capex of US$298m.
The project is unique in its scale, open-pit mining, favourable combination of potassium bearing salts suitable for production of SOP, SOP-M and MOP and ability for low cost expansions to lift production.
Upcoming catalysts for DNK
We view the negotiations for binding offtake agreements as significant, with the Company believing that binding agreements should be finalised later this year.
Other possible catalysts include further optimisation study results and advancements in financing.
Hartleys estimates Stage 1 EBITDA ~A$80m pa to DNK
We assume Stage 1 EBITDA of ~A$80m pa (DNK share), which should more than double after Stage 2 (year 5). Our pre-tax NPV12 for DNK is ~A$570m (project NPV roughly double).
Consequently, despite the large capital requirement, the project is highly economic. Our DNK base valuation is $1.23/shr.
Using spot prices (US$540/t), our pre-tax NPV12 for DNK is ~A$360m (project NPV roughly double), with Stage 1 EBITDA ~A$60m pa ($120m pa to JV). Our spot price valuation is $0.60/shr.
Retain Speculative Buy
We retain our Speculative Buy recommendation. The Colluli project is highly economic. Financing is the final hurdle to development and hence we also expect offtake soon (expected by the end of the year).
We see a trade sale to a larger company as a distinct possibility. We have a twelve-month price target of $1.17, implying funded EV/EBITDA of 7.5x.
We assume construction begins mid next year (CY18), which appears realistic if binding offtakes and financing are completed in the next six months.
We note the last Company to receive a mining licence in Eritrea was Sunridge Gold in 2015, and it was taken over shortly afterwards. Our fair value takeout price (discount to valuation, but with no more dilution) is >$1.70/shr.