Danakali Ltd (ASX:DNK) is focused on the Colluli Project in Eritrea, with Somers and Partners making a site visit. The broker found the country to be safe, and they have assigned a Buy recommendation and $1.03 target price to Danakali.
The following is an extract from the report.
Initiating Coverage: World Class Project but Perceived Country Risk
Colluli Project is world class and production will be low cost Economically exploitable resources of sulphate of potash (SOP) are geologically scarce and this is the world’s largest undeveloped SOP reserve with a mine life in excess of 200 years.
The size and quality of the Colluli reserve give it significant strategic value.
Open pit mining of solid minerals rather than a brine allows for an easier and lower cost processing and mining path than peers.
The solid form salt removes the need for capital intensive evaporation ponds used in salt lake and solution mining projects thus reducing capital intensity and the environmental footprint of the project.
The project has the lowest capital intensity of SOP developers globally.
The project is well located close to an operating port with capacity and access to the world’s growing SOP markets and is expected to produce the world’s lowest cost SOP on an FOB basis.
Premium Product Expected to be in Demand
The end product is a high grade, pure product likely to fetch a premium to peers.
Product samples of Colluli SOP have been produced. Offtake demand for the quality product is likely to be high.
The company currently has eight non-binding MOUs with potential offtakers and is looking to progress these to binding offtake this year.
Funding likely to come with Offtake and will Represent De-Risking Event
A mining licence application is in progress. The next step is to secure the ~US$300m funding.
This will be a challenge for DNK, given their market capitalisation of A$50m.
A strategic funding agreement with a potential off-taker is one of the more likely forms of debt funding in Eritrea.
Company Undervalued Compared to Peers and in Our Model
DNK looks undervalued by the market currently, based on our valuation and peer analysis.
Our model is conservative and assumes a long term SOP price of just US$500/t compared to consensus views on prices in excess of US$600/t.
Initiate with a BUY Rating and Price Target to A$1.03/share
Our SOTP valuation based price target consists of a risked 0.75xNAV on an NPV10 valuation of the company’s 50% ownership of the Colluli project.
Our valuation also accounts for 35% of initial capex and working capital to fund the project as unpaid capital and our target price is diluted accordingly.
We assume cash of A$5.4m at 30 June and include a small A$10m value for reserve upside and potential for revenue from additional products such as rock salt and gypsum that are not modelled or included in DNK’s DFS.