Might see some volatility tommorow but I think the market would have already expected SO4 to be in a very bad situation nonetheless. Luckily the capital raising for Kalium has already occured and the second tranche is subject approval before institutional investors can get allocated other shares. From my understanding, they have already subscriped to the second tranche, but a yet to provide the funds as shareholders have to approve it.
I guess it will be a waiting game for us holders and financiers will be looking with beady eye on Kaliums operations and progress. I doubt an SO4 situation would occur here but we are not out of the woods yet. Will be waiting for the commercial production annoucement or at least some annoucement which they can demonstrate they can pump significant volumes of feed salts into the plant without a problem. A first sales annoucement may also help in determining the exact margins the product is offering and working backwards to determine the cost of production which should provide insight into cash flow and debt servicing. I think Macquarie Capital last time stated the companies total costs rose by 8%.
I think the financing situation will be a positive for holders as a buffer to see exactly how much cash flow and profits the company can generate. Principal repayments do not begin until the start of 2024 so it will only be interest for the first couple of years of operation. Plus improved payout terms with K +S. At $170m and an average interest of 3.2%, that will be around $10-12m allocated to service debt for the first few years. Owners royalties will also be deferred until the first debt payment is made in 2024.
Hence if we assume 90,000 tonnes by the end of 2022 and 120,000 tonnes at end of 2023 with the average SOP price of $800A ($600 US 0.75FX) and $A375 AISC (mining, processing, site administration, product haulage to port, port costs, head office corporate costs, sustaining costs) would yield earnings of arounds $89.25m and then a 5.75% (WA and native title) royalty. As royalties are gross revenue less shipping whilst AISC includes more than shipping you could just roughly reduce earnings to around $80m. Then $10-12m for interest would leave $70m. Account for 2 years worth of deprecation @20 D&A (Kerr Allen) a year which would leave $30m in taxable income and hence a $9 million tax outflow leaving cashflows of $61m after 2 years. However we do have deferred tax losses from previous years which can reduce tax and help with CF for the first few years. This analysis was quite crude but I do believe their is sufficient CF here to service debt repayments once they begin and reduce the need for equity in future expansion. However the point here is that the financing conditions are very favourable for the company in the first few years or as Morgans puts it "accomodating to right size the business".
Overall, Kalium not a great investment, but not a dud. I think it will offer decent returns but much below on what previous holders were expecting given what we know now. Much could change for the better or the worse in future which could change valuations such as an updated resource, magnesium byproducts and revise costings.
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