Capital Funding RequirementsThe only thing holding the Colluli project back is the required
capital funding for Module 1, being approx
US$330M (including contingencies). Once operating, DNKs cash flows will pay for Module 2 and so on.
Under Eritrean law, a maximum of
US$280M debt is allowed for the project.Debt - required $280MDNK has already
reached a US$200M debt agreement with two leading African institutions, Afreximbank and AFC, both highly reputable African institutions with extensive experience in providing financing to projects across the continent. AFC is also a
major shareholder with 16.5% of the issued capital. Generally, banks don't buy equity into mining projects... AFCs holding is a clear 3rd-party validation of the quality of the project as they would have done a lot of due diligence.
For the remaining US$80M, Institutions often like to see works on the ground being completed, which DNK have just begun, before committing final debt funding. It’s believed that this remaining US$80 of debt is currently being negotiated with both African and European Banks.
Equity - $50MColluli has also recently completed a capital raising of US$20M which has funded the
initial infrastructure requirements (roads, workers camp, water facilities). These works are
currently underway and an announcement is expected soon on their progress. It is believed that the final US$30M will be easy to raise as it’s the
‘last money in’. Once initial works are completed, the project will be significantly de-risked and essentially ready to begin facility development.
Management teamRecently, Danakali has made changes to its board to
re-energize the development of the project. This year Neils Wage left his CEO role at DNK. Neils was from the ‘big end of town’ having also worked from BHP where things move at an extremely slow pace. Neils clearly wasn’t the man to run a small-cap ASX listed company and also held no shares...a bad sign.
Seamus Cornelius, a corporate lawyer and former partner of one of Australia’s leading law firms, was appointed Executive Chairman (he now also acts as CEO) for DNK. Seamus has been on the board of DNK since 2013 and his
passion for the project is visibly evident through his interviews.
He also holds a significant amount of shares in the company… a great sign!Eritrea Sovereign RiskWhilst Colluli is a world-class project the most evident risk is the prospect of investing in Eritrea. Though the country has had a
significant turnaround in recent years with the UN sanctions being lifted allowing other countries to freely engage in trade and finance and the conflict with Ethiopia being resolved 3 years ago. The sanctions were initially applied by the UN in 2009 after Eritrea was accused of backing militant groups in neighbouring countries. Eritrea always denied the accusations and when sanctions were lifted in late 2018, various press reports indicated that there had been no concrete proof that the Eritrean state had been involved in such activity.
Ethiopia and Eritrea fought a brutal independence war that ended in Eritrea’s sovereignty in 1993. However, the last few years have seen an improvement in relations between the two countries with peace officially declared in July 2018. This triggered a softening of some of the tough conscription policies that were widely publicised and were seen as the key driver behind a significant number of asylum seekers leaving Eritrea.
Eritrea is noted to have a
stable government that promotes principles of self-reliance. Key economic drivers include
mineral exports, agricultural output and
infrastructure development. Eritrea was the only sub-Saharan African country to
meet its Millennium Development Goals by 2015. Great emphasis is placed on the community as well as social outcomes, such as access to education, health, food and equitable access to services. Rapid diplomatic progress has been achieved in the Horn of Africa in 2018 and 2019.
The government has set parameters for mining projects and has
aggressively pursued foreign investment. The Eritrean mining code is
based on Western Australia’s long-established code, and as a result is easy to follow, without the hurdles which often cause delays in less established mining jurisdictions. To date, the Eritrean Government has been strongly supportive of all the mining projects in the country with no issues in permitting or license tenure. There are currently two operational mines in Eritrea, the Bisha copper-gold-zinc mine and the Zara gold mine, both 60% owned and operated by Chinese groups.
Offtake AgreementsColluli has
already signed a binding take-or-pay offtake agreement with EuroChem, Europe’s leading mineral fertiliser producer. EuroChem has agreed to purchase, market and distribute up to 100% of Colluli’s SOP production for the f
irst 10 years of operations with the ability to extend the agreement for a further 3 years afterwards. Colluli has the option to retain and sell up to 13% of its products through alternative sales channels.
EuroChem, which is headquartered in Switzerland, achieved revenues of US$6.2 B in 2020 placing it within the world top-5 producers of nitrogen, phosphate, potash and complex fertilizers. EuroChem is 90% owned by Andrey Melnichenko, the 95th wealthiest person in the world (7th in Russia).
Share Price History & TrendsDNK was first listed on the ASX in 2003 for $0.20 under the name South Boulder Mines. The early years of DNK saw the share price slug along until in 2010 the company acquired the Colluli project and saw Sprott Asset Management contribute significant funds to the company.
In 2011 and 2012, DNKs share price significantly rose from
$0.10 to
$6.25 (over 6,000%) in a matter of months off the back of BHPs US$40B take-over bid for Canada’s Potash Corp. Though the bid was eventually denied by the Canadian government, it set off a flurry of investments into the potash industry hence DNKs price spike. Realising the significance of the Colluli asset, the Eritrean government
re-negotiated their agreement with DNK and agreed upon a 50:50 joint venture. At the time the market reacted to the change of ownership and the share price drifted lower.
In recent years the share price has been trading somewhat sideways as JPMorgan, which invested $10 Million into DNK, had to close their resource fund due to restrictions placed by the American government over ‘spoofing’ trades in the precious metal markets. This
sell-off has acted as a handbrake on DNKs share price and as of this year, the
remaining JPMorgan parcel was sold off. With the hand brakes off the share price and the project's initial development just beginning things are looking
exciting for shareholders.
Take-Over potentialGiven the monumental size and future cash flows of the Colluli project, there is a strong possibility of DNK being taken over by a large multinational company in the near-term future. Throughout history, the largest and best in class assets across the globe eventually become owned by major companies.
So why hasn’t a take-over bid occurred yet? Simply put, the larger companies have been watching the progress of the project from the sidelines all the while expecting DNK to fail so they could acquire the project more cheaply. Given the commitments from Afreximbank and AFC for capital funding, this is obviously not going to occur.
With so much interest surrounding the Colluli project, a bidding war is likely to eventuate with only the highest price offered being accepted. As soon as the first take-over offer is provided, it will be a frenzy for other parties offering bids as they don’t want to miss out on such a valuable asset. The potential takeover company list includes:
- Sabic: Massive state-owned Saudi Arabian chemical manufacturing company
- Yara Fertiliser: Owns a Potash project in neighbouring Ethiopia, which isn’t as economically viable due to the resources being deeper in the ground
- Eurochem: DNKs offtake partner
- Nutrien: Canada’s largest potash company
- Mosaic: Canada second-largest potash company
- BHP: Purchased Canada’s Jansen Potash Project for US$7.5
- BK+S: Europe’s largest supplier of potash
- Gazprom: Already have a joint venture with ENAMCO on another project
- Nestle: World's largest food company
- Qinqhai Salt Lake Industry: China’s largest potash producer
- Itochu: Japanese global fertiliser, foods and materials trading firm
- Africa Finance Corp: DNK largest shareholder at 16.5%
Considering that the Colluli project is in a league of its own, the question of a take-over is more not if… but when and for how much.
In 2019, the United Nations initiated an independent report on the potential contributions that the Colluli project could have on Eritrea’s Sustainable Development Goals. The report concluded that the Colluli project provided 5 key factors that significantly contributed to the achievement of 13 of the 17 Sustainable Development Goals.
Danakali also has an extensive
ESG framework for the Colluli project.
Resources
(20min delay)