Danakali has been rated a Speculative Buy by broker Hartleys.
Danakali last traded at $0.74. The following is an extract from the report.
Mining licence granted
Danakali Ltd recently announced that it has been granted the mining licences for its very large and economic SOP potash project in Eritrea.
This is an important milestone.
There have not been many mining projects in Eritrea and hence confidence in the approvals process timeline has been low (not for any other reason than a lack of applications for mining licences has meant there have not been many processed).
Now that the licence has been granted, and timing for first production has been significantly de-risked, we believe the Company could move quickly to sign offtake agreements (the Company is already in very advanced discussion with several parties as per ASX releases in late CY16).
Following offtake we would expect financing to follow quickly. The Company has already appointed Fluor as the EPC contractor for FEED.
The reserve is very large (1.1Bt @10.76% K2O) with an expected mine life >200years, producing 425kt-850kt pa at low cash costs (~US$290/t CIF).
The project is unique in its scale, open-pit mining, favourable combination of potassium bearing salts suitable for production of SOP, SOP-M and MOP and ability for low cost expansions to lift production.
Digestible capital requirement for DNK
Phase 1 capex is estimated at US$298m. 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 modelling.
The award of the mining licence now suggests our timetable is conservative. The project is via a 50/50 JV with the Eritrean Government (ENAMCO).
The agreement states that DNK is responsible to fund the equity (implicitly this is a loan to the JV for the Government’s 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 estimates).
Hartleys estimates Stage 1 EBITDA ~A$80.5m pa to DNK
We assume Stage 1 EBITDA of ~A$80.5m pa (DNK share), which should more than double after Stage 2 (year 5).
Our pre-tax NPV12 for DNK is ~A$550m (project NPV roughly double). Consequently, despite the large capital requirement, the project is highly economic.
Our DNK base valuation is $1.31/shr. Using spot prices (US$540/t), our pretax NPV12 for DNK is ~A$375m (project NPV roughly double), with Stage 1 EBITDA ~$60m pa ($120m pa to JV).
Our spot price valuation is $0.70/shr.
Retain Speculative Buy
We retain our Speculative Buy recommendation. The Colluli project is highly economic.
Financing is the final hurdle to development and hence we also expect offtake soon. We see a trade sale to a larger company as a distinct possibility.
We have a twelve month price target of $1.22.
We note the last Company to receive a mining licence in Eritrea was Sunridge Gold in 2015, and it was taken over shortly afterwards.
Our fair value takeout price (discount to valuation, but with no more dilution) is >$1.80/shr.