Danakali (DNK.ASX) is a resource company focused on the development of the Colluli SOP Potash Project in Eritrea. Colluli is estimated to have the world's largest and highest quality SOP mine with 1.1Bt of ore reserves and a mine life of 200 years. The Colluli project is a 50:50 joint venture between Danakali and Eritrean National Mining Corporation (ENAMCO).
The resource is so large that it has the potential to feed billions of people, save millions of lives, and assure food security for generations to come. Essentially, the company that controls the Danakali Depression will significantly influence the future of premium global food production for the next 200 years. With this in mind, there is a clear case for DNK to be taken over by any of the big majors (more on this later).
Quick Video Overview: https://www.youtube.com/watch?v=Bi_36PaaSs4
Quick Facts - 9th July
Market Cap: $170 Million
Share Price: $0.46
Shares on Issue: 367 Million
Cash on Hand: $27.6 M (31st March 2021 and includes the $20M Cap Raise)
Markets: ASX, LSE, OTC (a large amount of shareholders in Frankfort) and ARDs
Global Overview
The United Nations publication World Population Prospects 2012 predicts that the global population is expected to rise from 7 billion (2012) to 9.6 billion (2050) and then to around 11 billion (2100). This rapid population growth will create increasing pressure on already overburdened food production industries. As the population rises and urban centres expand, the amount of arable agricultural land will decrease therefore requiring high yielding land.
Additionally, in many parts of the world, agricultural soils are gradually becoming depleted of potassium. After many years of intensive cropping and repeated nutrient removal during harvest, many fields now require regular inputs of potassium fertiliser to boost their productivity.
Solution - Potash
To boost crop yields, farmers are beginning to employ the use of Potash fertilisers, a potassium substance used in agriculture to:
- improve plant quality and growth
- regulate carbon dioxide uptake
- regulate water uptake and loss
- improve drought resistance
- improve resistance to pests and disease
MOP
Potassium Chloride (MOP) is the most abundant form of potash making it the most commonly used potassium fertiliser. It consists of 60% K2O and 47% Cl. It is particularly effective on carbohydrate crops such as wheat, grains, and soybeans. Critically though, Chloride can be harmful to some crops and detrimental in acidic soils.
SOP
Potassium Sulphate (SOP) is the second major form of potash. It consists of 50% K2O and 17.5% S. It’s particularly effective in the cultivation of high-value foods such as fruits, vegetables, nuts and tea trees. SOP contains less than 1% chloride, but importantly contains sulphur which is a secondary macronutrient utilised for plant growth. In addition, SOP has a lower salinity index than MOP. The higher salinity of MOP can cause plants to have difficulty in absorbing water and nutrients from the soil.
Enter the Colluli Project… the world's largest and highest grade SOP mine.
The Colluli Project is located in the Danakil Depression region of Southern Eritrea and is approximately 230km by road south-east of the Port of Massawa which is situated along one of the busiest trade routes in the world (Suez Canal). The Danakil Depression is an emerging potash province, which commences in Eritrea and extends south across the border into Ethiopia at deeper levels. Note the Colluli project only has jurisdiction in Eritrea.
The Colluli Project is located just 87km from a potential port export terminal at Anfile Bay making Colluli the closest global SOP deposit to a coastline. Almost 95% of the population growth stated by the UN will occur in Africa, India and Southeast Asia with the Colluli project capitalizing on the central and well-developed trade shipping route close by. Danakali has already spent approx US$50M developing the project.
With the engineering and construction plans complete, mining permits granted and being Sanctioned by the Eritrean Government, DNK is now shovel ready to begin development and commence operations in 2022.
The Colluli Resource
The Colluli resource comprises three potassium bearing salts in solid form; Sylvinite, Carnallite and Kainitite which is rare in combination. These are the required salts to create high yielding SOP and Potash Fertiliser products.
Colluli’s Ore Resource is estimated to be 1,100Mt @ 10.5% K2 O for 203Mt of contained SOP equivalent providing a mine life of 200 years. Colluli has a significant diversification of products being SOP, SOP-M, MOP, Kieserite, Rock salts, Gypsums and Salts. This is the only basin in the world that allows for such high product diversity.
Prior studies have indicated that Colluli SOP fertiliser would be at the top of the quality spectrum. Typical SOP contains ~94% potassium sulphate where through low-cost processing, Colluli can generate SOP with a purity of 98%.
Shallowest Mineralisation
Colluli boasts the shallowest known evaporite mineral deposit globally at just 16m. This depth poses advantages through significantly reducing mining, logistical, capital and operating costs. Other global Potash mines are:
- UK: depth of 1500m with a CAPEX of US$7B
- Canada: depth of 1000+m with a CAPEX of US$4B
- Russia: depth of 500+m with a CAPEX of US$3-4B
- Colluli has a depth of 16m and an estimated startup CAPEX of just US$322M
The Colluli mine will be an open-cut pit that provides direct access to each of the mineralised layers. This surface mining will allow for controlled extraction, stockpiling and processing of the different solid form salts.
Modular Expansion
The Colluli project will adopt a modular development approach that delivers low upfront development costs yet provides a high degree of scalability.
Module 1, which is expected to finish development in 2022, is expected to produce approximately 472ktpa of premium SOP. Module 2 will increase the total SOP production to 944ktpa.
The Colluli project has adopted a modular approach for numerous reasons with the most obvious being CAPEX costs and determining the most efficient operating methods. Also due to SOPs lower market share in the Potash industry, the project doesn’t want to dislocate the current premium pricing by flooding the market with too much supply. They want to optimally match the supply with the growing demand (population growth and premium food demand).
Processing of Colluli’s Primary Production SOP Resources
Colluli is in a unique position of having solid high-quality primary ore SOP inputs, which globally is rare. A low-cost processing method has been developed that feeds the three main members (Sylvinite, Carnallite, Kainitite) into the processing plant from which the minerals Sylvite, Carnallite and Kainite are extracted and mixed to produce SOP.
This unique mix allows for SOP to be produced at ambient temperatures using conventional flotation methods providing positive impacts on processing yields, significantly reducing pond size requirements and allowing for lower energy inputs relative to Kainite brine conversion. Additionally, highly favourable weather conditions within the Danakil Depression provide extremely high evaporation rates.
The Colluli project has also developed a pioneering world-first processing design using filtered seawater which significantly reduces project development, operational, financial and market risks.
The most common industry method (50-60% of global supply) for producing SOP is through the Mannheim process, which sees the reaction of MOP with sulphuric acid at high temperatures. The raw materials are poured into the centre of a muffle furnace heated to above 600ºC. SOP is produced, along with hydrochloric acid. The Mannheim process is an extremely expensive processing technique due to the high MOP purchase input costs. When thinking of the Colluli project… The basin, which is one of the hottest places on earth, has just been a Manheim process that's occurred naturally over 5 million years.
Economics of Operations
*The estimated SOP composite sale price was set at a conservative US$569/t. The financials don’t include the diverse products available for sale (rock salts, Gypsum etc). The financial metrics are for 100% of the project where Danakali has 50% ownership.
Capital Estimates
Operating Cost Estimates
Future SP predictions
Based upon the completion of Module 1 the NPV share value would be approximately US$0.69. After the completion of Module 2, the share value would be approximately US$1.23. Remember that DNK has a 50% partnership with ENAMCO. Also, a Discount Rate of 10 is considered conservative within the industry.
Note, DNK has the intention to expand into Module 3, 4, 5 and 6. Additionally, the above calculations don’t include the sale of the other products (Kieserite, salts, gypsum) which would have a significant impact on the revenues earned. Sale of these products is expected in Module:
- Kieserite: $120/t
- Rock Salt: $40/t
- Gypsum: $50/t
- Salt: $40/t
With a relatively low CAPEX, low OPEX, mine life of 200 years and being in a premium pricing market, DNK is a cash cow in the making.
SOP Pricing & MarketsGlobally in 2017, the Potash market was worth US$8B with MOP equating for 80% of demand (70 mt/pa) and SOP just 10% (7 mt/pa). SOPs smaller market share is due to the premium foods that SOP services (fruits, nuts etc) have less food market size than the widespread carbohydrate agricultural industry (MOP).
As has been previously mentioned, over half of SOPs production is produced through the
Mannheim process which requires MOP as a core input. Recently, MOP has seen a significant price spike (
Brazillian MOP reached US$600 p/t) due to rising global food prices (greater demand for food at home during the pandemic, disrupted food chains/rising oil prices, climate change and extreme weather damaging crops). Although SOP tends to lag behind MOP in prices due to the contractual nature of SOP deals, the
MOP price spike will soon cause a price spike of SOP due to input costs being higher.
Though the price of SOP often remains stable, historically the price of SOP has been US$200 above the price of MOP. It will be extremely interesting to see where the SOP price spike ends up in a few months time.
The top potash producing countries per annum include:
- Canada: 13.3 Million MT. World’s largest producer of Potash
- Belarus: 7 Million MT.
- Russia: 6.8 Million MT
- China: 5 Million MT. China accounts for approx. 20% of global potash consumption
- Germany: 3 Million MT
- Israel: 2 Million MT
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