Danakali Limited DNK.ax
by Portis, July 2021
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 grade 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
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 (large amount of shareholders in Frankfort) and ARDs
The United Nations publication World Population Prospects 2012 predicts that the global population is expected to rise from 7billion (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
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.
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.
Colluli 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 are quite 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 purity of 98%.
Colluli boasts the shallowest known evaporite mineral deposit globally at just 16m. This depth poses advantages through significantly reducing mining, logistical, capital and operating cost. 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.
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)
Overview of the Colluli EPCM Phases
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 millions of 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.
|Metric||Module I||Module II|
|Plants, ponds, and mine development||US$130M||US$97M|
|Owners costs and EPCM||US$56M||US$41M|
|Working capital (including working capital contingency)||US$20M||-|
|Capital intensity (excluding working capital )||US$640/t||US$534/t|
|Incremental Module II capital intensity||US$427/t|
Operating Cost Estimates
|Metric||Module I||Module I & II|
|Mine gate cash costs||US$165/t||US$149/t|
|FOB cash costs||US$238/t||US$222/t|
|Total cash costs||US$258/t||US$242/t|
Mine Gate Production Costs for Global SOP Producers in 2018
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 discounr rate of 10 is considered conservative within the industry.
Note, DNK has 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 & Markets
Globally 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) has less food market size than the the wide spread 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 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
Capital Funding Requirements
The only thing holding the Colluli project back is the required capital funding for Module 1, being approx US$330M (including contingencies). Once operating, DNKs cash flows will pay for Module 2 and so on.
Under Eritrean law, a maximum of US$280M debt is allowed for the project.
Debt - required $280M
DNK has already reached a US$200M debt agreement with two leading African institutions, Afreximbank and AFC, both highly reputable African institutions with extensive experience in providing financing to projects across the continent. AFC is also a major shareholder with 16.5% of issued capital. Generally banks don't buy equity into mining projects... AFCs holding is a clear 3rd-party validation to the quality of the project as they would have done a lot of due diligence.
For the remaining US$80M, Institutions often like to see works on the ground being completed, which DNK have just begun, before committing final debt funding. It’s believed that this remaining US$80 of debt is currently being negotiated with both African and European Banks.
Equity - $50M
Colluli has also recently completed a capital raising of US$20M which has funded the initial infrastructure requirements (roads, workers camp, water facilities) . These works are currently underway and an announcement is expected soon on their progress. It is believed that the final US$30M will be easy to raise as it’s the ‘last money in’. Once initial works are completed, the project will be significantly de-risked and essentially ready to begin operations.
Recently, Danakali has made changes to its board to re-energize the development of the project.
This year Neils Wage left his CEO role at DNK. Neils was from the ‘big end of town’ having also worked from BHP where things move at an extremely slow pace. Neils clearly wasn’t the man to run a small-cap ASX listed company and also held no shares...a bad sign.
Seamus Cornelius, a corporate lawyer and former partner of one of Australia’s leading law firms, was appointed Executive Chairman (he now also acts as CEO) for DNK. Seamus has been on the board of DNK since 2013 and his passion for the project is visibly evident through his interviews. He also holds a significant amount of shares in the company… a great sign!
Eritrea Sovereign Risk
Whilst Colluli is a world-class project the most evident risk is the prospect of investing in Eritrea. Though the country has had a significant turnaround in recent years with the UN sanctions being lifted allowing other countries to freely engage in trade and finance and the conflict with Ethiopia being resolved 3 years ago. The sanctions were initially applied by the UN in 2009 after Eritrea was accused of backing militant groups in neighbouring countries. Eritrea always denied the accusations and when sanctions were lifted in late 2018, various press reports indicated that there had been no concrete proof that the Eritrean state had been involved in such activity.
Ethiopia and Eritrea fought a brutal independence war that ended in Eritrea’s sovereignty in 1993. However, the last few years has seen an improvement in relations between the two countries with peace officially declared in July 2018. This triggered a softening of some of the tough conscription policies that were widely publicised and were seen as the key driver behind a significant number of asylum seekers leaving Eritrea.
Eritrea is noted to have a stable government that promotes principles of self-reliance. Key economic drivers include mineral exports, agricultural output and infrastructure development. Eritrea was the only sub-Saharan African country to meet its Millennium Development Goals by 2015. Great emphasis is placed on community as well as social outcomes, such as access to education, health, food and equitable access to services. Rapid diplomatic progress has been achieved in the Horn of Africa in 2018 and 2019.
The government has set parameters for mining projects and has aggressively pursued foreign investment. The Eritrean mining code is based on Western Australia’s long-established code, and as a result is easy to follow, without the hurdles which often cause delays in less established mining jurisdictions. To date, the Eritrean Government has been strongly supportive of all the mining projects in the country with no issues in permitting or license tenure. There are currently two operational mines in Eritrea, the Bisha copper-gold-zinc mine and the Zara gold mine, both 60% owned and operated by Chinese groups
Colluli has already signed a binding take-or-pay offtake agreement with EuroChem, Europe’s leading mineral fertiliser producer. EuroChem has agreed to purchase, market and distribute up to 100% of Colluli’s SOP production for the first 10 years of operations with the ability to extend the agreement for a further 3 years afterwards. Colluli has the option to retain and sell up to 13% of its products through alternative sales channels.
EuroChem, which is headquartered in Switzerland, achieved revenues of US$6.2 B in 2020 placing it within the world top-5 producers of nitrogen, phosphate, potash and complex fertilizers. EuroChem is 90% owned by Andrey Melnichenko, the 95th wealthiest person in the world (7th in Russia).
Share Price History & Trends
DNK was first listed on the ASX in 2003 for $0.20 under the name South Boulder Mines. The early years of DNK saw the share price slug along until in 2010 the company acquired the Colluli project and saw Sprott Asset Management contribute significant funds to the company.
In 2011 and 2012, DNKs share price significantly rose from $0.10 to $6.25 (over 6,000%) in a matter of months off the back of BHPs US$40B take-over bid for Canada’s Potash Corp. Though the bid was eventually denied by the Canadian government, it set off a flurry of investments into the potash industry hence DNKs price spike.
Realising the significance of the Colluli asset, the Eritrean government re-negotiated their agreement with DNK and agreed upon a 50:50 joint venture. At the time the market reacted to the change of ownership and the share price drifted lower.
In recent years the share price has been trading somewhat sideways as JPMorgan, who invested $10 Million into DNK, had to close their resource fund due to restrictions placed by the American government over ‘spoofing’ trades in the precious metal markets. This sell off has acted as a handbrake on DNKs share price and as of this year, the remaining JPMorgan parcel was sold off.
With the hand brakes off the share price and the project's initial development just beginning things are starting to look exciting for shareholders.
Given the monumental size and future cash flows of the Colluli project, there is a strong possibility of DNK being taken over by a large multinational company in the near-term future. Throughout history, the largest and best in class assets across the globe eventually become owned by major companies.
So why hasn’t a take-over bid occurred yet? Simply put, the larger companies have been watching the progress of the project from the sidelines all the while expecting DNK to fail so they could acquire the project more cheaply. Given the recent commitments from Afreximbank and AFC for capital funding, this is obviously not going to occur. With so much interest surrounding the Colluli project, a bidding-war is likely to eventuate with only the highest price offered being accepted. As soon as the first take-over offer is provided, it will be a frenzy for other parties offering bids as they don’t want to miss out on such a valuable asset.
The potential takeover company list includes:
- Sabic: Massive state-owned Saudi Arabian chemical manufacturing company
- Yara Fertiliser: Owns a Potash project in neighbouring Ethiopia, which isn’t as economically viable due to the resources being deeper in the ground.
- Eurochem: DNKs offtake partner
- Nutrien: Canada’s largest potash company
- Mosaic: Canada second largest potash company
- BHP: Purchased Canada’s Jansen Potash Project for US$7.5 B
- K+S: Europe’s largest supplier of potash
- Gazprom: Already have a joint venture with ENAMCO on another project
- Nestlé: World's largest food company
- Qinqhai Salt Lake Industry: China’s largest potash producer
- Itochu: Japanese global fertiliser, foods and materials trading firm
- Africa Finance Corp: DNK largest shareholder at 16.5%
Considering that the Colluli project is in a league of its own, the question of a take-over is more not if… but when and for how much.
UN Report on Impact of DNK Potash
In 2019, the United Nations initiated an independent report on the potential contributions that the Colluli project could have on Eritrea’s Sustainable Development Goals.
The report concluded that the Colluli project provided five key factors that significantly contributed to the achievement of 13 of the 17 Sustainable Development Goals.
Danakali also has an extensive ESG framework for the Colluli project.
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