) continues to attract broker attention as the company progresses the Colluli project.
Broker Baillieu Holst has rated Danakali
as one of its top stock picks in the small-mid cap sector.
The following is an extract from the report.
Breaking new ground
DNK is proposing to develop Colluli, the lowest cost sulphate of potash (SOP) project in the world.
Located in Eritrea, the project will be developed in two stages – firstly at 425ktpa, before expanding to 850ktpa.
We forecast that the project should be able to generate an operating margin of US$300+/t of product, excluding any co-products which may be produced.
Colluli has the potential to disrupt the SOP market and displace high cost capacity.
A unique development:
SOP is typically produced by utilising the Mannheim process, which converts potassium chloride to SOP using sulphuric acid or through the evaporation of potassium rich brines.
Danakali, on the other hand, will mine potassium rich ore which has 20-30 times the concentration of typical potassium rich brines.
The other differentiating factor is that mining of the ore will be via an open pit starting at 16 metres instead of highly capital intensive underground operations or via solution mining.
The price of SOP has been much more resilient than potash fertilisers which in part attribute to the value in use and the cost of production.
SOP is a chloride free nutrient which is ideally suited to high value salt intolerant agricultural produce and in areas where salt has become a problem in soils.
Industry expectations are for SOP demand to increase by 30% in the period 2015 to 2023 and DNK is well placed to help fill the expected 2mtpa increase in demand.
The price of SOP has managed to hold at around US$540-550/t at a time when muriate of potash prices have fallen from US$500/t to 300/t.
Share price drivers:
DNK and its JV, ENAMCO (the government mining company), have recently had the mining agreement and license granted by the Eritrean Government.
The next news should be on offtake agreements (backing up the MOU’s already in place), more definition following the FEED optimisation and bidding process, and the progress of financing discussions.
DNK has been largely overlooked by the broader market because of the product it intends to produce and the location of the development.
After visiting the proposed development site and having discussions with government representatives, we feel that the development risk is somewhat overplayed.
Our valuation for DNK is $1.49ps and we have taken into account the potential dilution from an equity issue to derive our target price of $1.02ps.