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Hannam & Partners hosted a breakfast event focused on potash with presentations from Sean Mulholland, Senior Consultant on fertilisers at CRU, and Paul Donaldson, CEO of Danakali (“DNK”), developer of the Colluli sulphate of potash (“SOP”) project in Eritrea. Along with updated project economics announced last week, the event highlighted Colluli’s unique attractions, as well as several key advantages of SOP over other potash products. Danakali announced in November that it will seek a dual-listing in the UK on the LSE, alongside its existing ASX listing. In this report we provide feedback on DNK and CRU’s views on SOP, plus a review of the wider potash market.
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SMALL PROJECT FOOTPRINT A KEY ADVANTAGE
The key advantage Colulli has is the right combination of carnallite and kainite salts for simple, high-yield conversion to SOP at ambient temperatures. As Colluli’s salts are already in solid form, there is no need to harvest from brines via evaporation, which significantly reduces the project’s evaporation footprint vs brine producers. For example, N American SOP producer Compass Minerals has 40k acres of evaporation ponds, whilst Colluli’s DFS plans using only 300 acres to harvest salts on its site. This combined with a lack of communities or other economic activity on site provides a unique advantage over SOP peers.
OFFTAKE DISCUSSIONS KEY
Danakali is set to become a globally significant SOP producer, with just Colluli Phase 1 providing around 8% of global SOP supply (based on CRU’s 2016 total SOP supply estimate of 6.1Mt). During the breakfast, Danakali outlined their offtake strategy which envisages having 85% of its supply under contract with 15% retained for price discovery. The Company’s marketing strategy is partly to target end users and partly the leading fertiliser traders, and not to focus on a single party solution. The importance of securing offtake for the 472 ktpa of production during Colluli Phase 1 and 850 ktpa during Phase 2 was emphasised by Monday’s announcement of a management change, where Danny Goeman will transition from Head of Marketing to the role of Chief Executive Officer where his focus will be on the completion of the binding offtake. The current CEO, Paul Donaldson, will become a Non-Executive Director on the Danakali Board.
SOP A BRIGHT SPOT IN AN OTHERWISE DIFFICULT POTASH MARKET
SOP is a specialty potash product, vital in the cultivation of chloride-intolerant crops such as fruit and nuts, for which potassium chloride (aka “muriate of potash” or “MOP”) cannot be used. The premium for SOP vs MOP has risen post the break-up of Uralkali and Belaruskali’s joint marketing deal in 2013, which caused MOP prices to fall, and as SOP demand has grown at a faster pace, especially in China. While we believe potash in general may see more modest demand growth in the coming years, the outlook for MOP appears particularly challenged by the amount of new capacity expected to come on line. However, we expect sticky demand from chloride-sensitive farmers and environmental limits on Chinese supply will allow SOP to sustain a healthy premium.
DNK VALUATION REMAINS UNCHANGED
Using a 0.5x NPV multiple and a $550/t SOP price forecast, we arrive at a valuation for Danakali of US$188m, or A$1.0 per share. This implies c.42% upside to the current share price. We will update our valuation in January following the release of updated FEED study project economics.
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