Salt Lake Potash (LON:SO4, 29.50p) - Speculative Buy Salt Lake Potash visited our London office yesterday. Management discussed its plan to build a small-scale process plant in 4Q17 which should mean production in 2H18. It's being called a pilot plant but it could produce up to 40ktpa of high quality Sulphate of Potash (SOP) and be profitable. Based on a capex estimate of $35m and an our estimate production cost of US$300/t, a 40kt operation could produce US$10m of operating cashflow. Management also described the bigger picture and touched on the interest in SO4's projects being shown by global SOP players. This was also mentioned in yesterday's RNS.
Our view: This pilot plant development should provide catalysts for the stock over the next 12 - 18 months. However the investment case is overwhelmingly dominated by the potential for a large scale and very long life SOP operation. SO4 has a very large footprint in Western Australia with 9 potash containing salt lakes and 4750km2 of licences. It has the potential to be a major low cost SOP producer in an excellent jurisdiction with rail and power infrastructure. Also, unlike standard potash commodities, SOP's price has been strong with a very positive outlook due to its low salt content (SOP is 2.5x the price of benchmark KCL potash products such as Muriate of Potash, MOP). With a market cap of less than £40m we regard SO4 as the next Sirius, certainly in terms of upside potential. In fact unlike Sirius, SO4 has a far lower capex requirement, an established high value end product, and none of Sirius' massive underground engineering challenges. Maybe the trade should be buy SO4 and sell Sirius? We will update you in due course.
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