Danakali (ASX:DNK) Low-cost Potash Resource for High-Growth Fertilizer Market
Danakali Managing Director Paul Donaldson weighs in on the Colluli potash project and the growing opportunities in the fertilizer market.
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Danakali (ASX:DNK) is developing the world’s shallowest-known potash resource, known as the Colluli potash project in Eritrea, Africa. The large, world-class deposit is comprised of a rare, yet favorable blend of three important potassium-bearing salts in solid form. The deposit’s unique salt composition will allow for the production of chloride-free potassium sulfate (SOP), a high-quality fertilizer with limited production centers globally, as well other potash products such as SOP-M and potassium chloride.
The JORC 2012 mineral resource estimate for Colluli totals 1.289 billion tonnes at 10.76 percent potassium oxide for contained SOP of 260 million tonnes. The company completed a positive definitive feasibility study for the project in November 2015. First production is targeted for Q4 2018.
The Investing News Network (INN) spoke with Managing Director Paul Donaldson to learn more about this exciting project and the growing opportunities in the fertilizer market. Here’s what he had to say.
INN: Please give us some background on Colluli and explain what makes it unique compared to its peers.
PD: The Colluli potash project is located in the Danakil region of Eritrea, East Africa. The Colluli tenements cover over 200 square kilometers and contain a mineral resource of nearly 1.3 billion tonnes of potassium-bearing salts. The resource is still open to the southeast. The project itself is a 50/50 joint venture between Danakali and the Eritrean National Mining Company.
We completed a positive definitive feasibility study in November last year, and that yielded a 1.1-billion-tonne ore reserve containing over 200 million tonnes of SOP, which is the potash type that we’ll be focusing on for the initial development.
There are five main differentiators for Colluli. Firstly, the suite of three key potassium-bearing salts within the resource: sylvinite, carnallitite and kainitite. This suite of salts allows for the production of a wide range of potash fertilizers. There are four potash fertilizers that are primarily seen in the market today: potassium chloride, SOP, potassium magnesium sulfate and potassium nitrate. Colluli has actually got the capability to produce three of the four potash types. Importantly, the combination of salts allows for ambient-temperature, high-yield production of SOP.
The second differentiator is the shallow depth of mineralization, which commences at 16 meters; that makes Colluli the shallowest evaporate deposit in the world, and amenable to open-pit mining, which ultimately results in better resource yields. Conversion is over 90 percent for Colluli, which is a very large recovery for a potash deposit; that’s in contrast to solution mining, which can be as low as 20-percent recovery, and underground mining, which is around 40 percent.
The third differentiator is its proximity to the coast. Colluli is the closest SOP deposit to a coastline anywhere in the world at the moment. It’s only 75 kilometers from the Red Sea coast, and only 180 kilometers from the port of Massawa, which is the key import/export facility in the country.
The fourth differentiator is the monetization potential of other products within the resource, including rock salt, magnesium chloride, magnesium sulfate and gypsum. Lastly, the fifth advantage is geographical location. Eritrea is located at the epicenter of increasing population growth, decreasing land and changing dietary preferences primarily in Southeast Asia, the Middle East and Africa itself.
INN: The differing categories of fertilizers can cause confusion for some investors. Can you explain the difference between SOP and muriate of potash (MOP), and what the difference means for end users and prices.
PD: Let’s just start with defining potash. Potash is a generic term given to a variety of potassium-bearing salts or manufactured chemicals primarily used as fertilizer. It’s essential and non-substitutable. And it improves yields, water efficiency and disease resistance for crops. Varieties of potash are differentiated by chemistry. MOP, otherwise known as potassium chloride, tends to be the most commonly understood potash type, and it does represent quite a large portion of the global market. SOP is not as well understood.
The fundamental differences are geological abundance, concentration of production centers and also crop application and market pricing. Potassium chloride has got a high level of geological abundance, and its production centers are primarily located in Canada, Russia and the Middle East. As the name suggests, it is comprised of potassium and chlorine. It’s suitable for crops such as wheats, corns and beans, but it’s not suitable for chloride-intolerant crops, including high-value crops like fruits, nuts and vegetables. It’s also not suitable in arid areas where there’s insufficient water to wash the chlorides away, leading to chloride toxicity.
For high-value crops and arid regions, SOP is the more suitable potash type. Sulfur is considered the fourth-most-important macronutrient. SOP has limited geological resources that are economically exploitable, meaning there are insufficient primary supplies to meet the overall global demand. To close that supply gap, 50 percent of the world’s SOP supply is manufactured in secondary production facilities. Secondary production of SOP is carried out by combining potassium chloride with sulfuric acid via a thermal conversion process; however, that process is quite expensive. Multiple passes through the process are required to achieve high purity, which increases the cost of production.
In terms of market prices, the high costs associated with secondary production result in a substantial price premium of SOP over potassium chloride, and historically that premium’s been somewhere around 30 percent. In the last three or four years in particular, that premium has gone up to over 80 percent.
INN: As mentioned, you recently completed a very positive definitive feasibility study on Colluli. Can you tell us more about the results of the study and what you think will interest investors the most?
PD: We’re very happy with the definitive feasibility study results. We’re taking a modular development approach comprising two 425,000-tonne-per-annum production modules spaced five years apart. Phase I of the project has a development capital of approximately US$298 million and gives an NPV of US$439 million, as well as an IRR of approximately 25 percent. Construction of Phase 1 is expected to commence at the end of 2016. Phase 2 has a capital cost of only US$175 million and increases the NPV to $860 million and an IRR of 29 percent.
In terms of what makes this an attractive project, there’s a lot of positive differentiators. What’s most exciting is the low start-up capital, the extremely low capital intensity, the right position on the operating cost curve and the expandability. Relative to the resource size itself, the buy in of $298 million is actually a very low capital investment for a long-life potash project.
The expandability is huge, with a 200-year expected mine life with the modeled production rate from the two modules. So there’s a lot of room to grow. And as I mentioned earlier, the incremental capital is also very low. And it’s got a huge amount of upside potential, including the diverse range of salts in the resource.
INN: Political risk is always a concern for investors. What has been Danakali’s experience working in Eritrea?
PD: We’ve had positive experiences working in Eritrea, and we’ve got a good relationship with our joint venture partner, the Eritrean National Mining Company. They are also focused on project delivery and are working collaboratively with Danakali on the development.
Although the mining industry in Eritrea is in its infancy, they actually do have a 100-percent success rate in converting positive feasibility studies into operating mines. They’ve got two successful mines in production. There’s a third in their pipeline. There is a stable government with almost 25 years of stability. The country is very much focused on economic development and health and education improvements. So our experience to date has been very good.
INN: What’s next for Colluli this quarter and through 2016?
PD: Following the completion of the definitive feasibility study in November of last year, we’re now moving into funding discussions. Our main objectives for this year are to secure funding and get offtake agreements in place. We’re moving into the mining approval process currently and expect to submit our application by the end of this quarter. We’re also moving into the front end engineering and design process, which is about de-risking the construction schedule and shortlisting potential tenderers so that as soon as the funding presents itself we will be able to finalize the contracts and move into construction.
INN: Danakali has targeted the fourth quarter of 2018 for first production at Colluli. What’s the market outlook for SOP in 2018 and beyond?
PD: Yes, we’re targeting the fourth quarter of 2018 for first production. At this stage, we’ve got about a 22-month build. It’s obviously reliant on the length of the approval process and on securing the funding, but we believe that the timeline is realistic and achievable.
In terms of the market outlook for SOP in 2018 and beyond, the United Nations forecasts 10 billion people on the planet by 2050. Population growth will undoubtedly lead to increased food consumption and agricultural yield will have to increase by up to 70 percent to meet that consumption, which means that the demand for fertilizers will continue to grow. We’re especially excited for what that means for SOP going forward, as it not only helps to increase agricultural yields of high-value crops such as fruits, vegetables and nuts, but also is more suitable in an environment where water efficiency improvements are paramount. We see water efficiency as being a big challenge in the future, and given the chloride-free nature of SOP, it has very good growth demand fundamentals.
Given the fact that over 50 percent of the world’s current SOP supply is provided by high-cost secondary production, and we’ve got a proven economically exploitable SOP resource, we are very excited about not only the SOP market, but also the future of the broader fertilizer market. For example, Colluli is also capable of producing magnesium sulfate, which is ideal for magnesium-deficient soils such as those found in South America and Western Asia. So not only do we see positive growth fundamentals going forward, but we also see positive opportunities within the existing market for a unique resource like Colluli.
Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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