Joel’s Resource Report – diluted into oblivion or great opportunity? #SO4

Joel’s Resource Report – diluted into oblivion or great opportunity? #SO4

At the time of publication the author holds a long position in Salt Lake Potash

AIM and ASX listed Salt Lake Potash is a soon to be potash (fertilizer) producer. The company is rapidly moving to first production from the first of 9 salt lakes that In early July I covered Salt Lake where I discussed my confusion as to why the company hadn’t raised equity given the structure of the convertible loan note they’d issued.

Roll forward a few weeks and Salt Lake have announced debt and equity raises to fully fund construction and accelerate work on the next lake/project. The equity element sees the share count more than double which (to me) is disappointing as it reduces the discount to NPV. As (perhaps) a gesture of goodwill existing shareholders will have the chance to participate at the placing price, details are as follows:

(Source: Salt Lake Potash)

Following completion of the equity placings (there’s two – one institutional, one retail) – there will be approximately 550,360,363 shares in issue.

At 31 pence Ask Salt Lake’s newly diluted market cap will be £170m.

In order to gauge the upside, let’s compare the market cap with the Lake Way BFS economics:

(Source: Salt Lake Potash)

Based on an SOP price of $550 the projects NPV is £257 million (converted from AUD into GBP).

Salt Lake’s share price would need to move up by 50% to trade at NPV. As the project is in a safe jurisdiction I can imagine the project moving towards NPV as the project is de-risked.

De-risking events of the next nine months include:

(Source: Salt Lake Potash)

Additional Upside

Salt Lake has stated that there are “Latent sources of value:

  • Multiple opportunities to improve Lake Way numbers beyond those outlined in the BFS.
  • Numerous continuous improvement opportunities currently being implemented at Lake Way.”

The value of these sources of value are difficult to calculate however the Salt Lake team has many of the Fortescue members who were responsible for developing one of the lowest cost iron ore mines in Australia – management pedigree exists.

One of the reasons that Salt Lake elected to raise additional equity is for resource definition with a decision to determine the next lake due in H1 2021:

(Source: Salt Lake Potash)

If we assume that Salt Lake’s next project has a similar NPV to the first, that the company does not dilute shareholders and that royalty/asset level investment reduces the see through NPV to Salt Lake to shareholders by 25% the next lake could be worth £190m.

Potential Total NPV across both projects £447 million.

Potential discount to both projects NPV 160%.

My view

The amount of equity issued by Salt Lake is disappointing because it massively reduces the potential returns from owning Salt Lake shares. Management have (in my opinion) chosen to expedite future growth instead of financial returns for  shareholders. CEO Tony Swiericzuk discusses the equity raise here:

More positively, the project is now substantially de-risked and I still think there could be circa 50% upside in the short to medium term.

However, given management’s penchant for issuing shares like confetti, I’m not sure that this’ll be the last equity raise. If Salt Lake manage to develop the next lake without equity, I’d look for shares to trade around 80 pence per share in about three years. Shareholders could still do well from here, but the risk of dilution remains.

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