http://www.proactiveinvestors.com.au/companies/news/65935/danakali-worth-more-than-double-current-price-says-broker-65935.html
Danakali worth more than double current price, says broker
Wednesday, December 02, 2015 by Proactive Investors
Danakali (ASX:DNK) has received a twelve month price target of $0.64 from broker Hartleys, which is more than double the last traded price of $0.285.
The following is an extract from the broker report.
Very robust potash project
Danakali has released a very strong DFS for its large potash (SOP) project in Eritrea.
Capex has been reduced significantly (phase 1 capex now US$298m), but opex has risen. The higher opex still allows for a large cash margin and short payback.
The reserve is very large (1.1t _at_10.76% K2O) with an expected mine life >200years, producing 425kt-850kt pa.
Mining is open pit mining using conventional truck and shovel and surface miners (no blasting required), with a low strip ratio (1.9x).
The Company expects first production is possible in late CY18, but we are more conservative in our model.
The Company will begin the application for a mining licence early next year, with approvals expected before year end.
Digestible capital requirement for DNK
The project is via a 50/50 JV with the Eritrean Government (ENAMCO).
The agreement states that DNK is responsible to fund 30% of the equity (implicitly this is a loan to the JV for the Governments share).
The Company anticipates that the project can be funded with 70% debt, and hence DNK requires funds for the 30% equity (~US$90m based on DFS).
Hartleys estimates Stage 1 EBITDA ~A$75m pa to DNK
We assume Stage 1 EBITDA of ~A$75m pa (DNK share), which should more than double after Stage 2 (year 5).
Our pre-tax NPV12 for DNK is ~A$500m (project NPV roughly double). Consequently, despite the large capital requirement, the project is highly economic.
Note we assume declining SOP prices in our model. Using spot prices (US$725/t), our pre-tax NPV12 for DNK is ~A$1b (project NPV roughly double), with Stage 1 EBITDA ~$120m pa ($240m pa to JV).
Our DNK base valuation is 67cps. Our spot price valuation is $1.31.
Recent deals in Eritrea
DNK trades at a discount to valuation due to a market perception that Eritrea assets are hard to monetise.
We note that Sunridge Gold Corp (SGC.tsx) recently rallied substantially in Canada after announcing it will sell its interest in the Asmara gold mine in Eritrea, to Sichuan Road & Bridge Mining Investment Development Corp. Ltd. for ~US$78m.
It shows that significant transactions do happen in Eritrea, and more than likely as a surprise.
This occurred just after the granting of the mining licence. Hence, even if the public markets don’t value Eritrean assets, significant transactions to realise value can occur.
Given the size of DNK’s project, it seems possible the asset could be sold.
Retain Speculative Buy
We retain our Speculative Buy recommendation. The Colluli project is highly economic, but it is likely to be very volatile given the country and financing risk.
We see a trade sale to a larger company as a distinct possibility. We have a twelve month price target of 64cps.
Received on Wed Dec 02 2015 - 07:04:30 EST