Salt Lake Potash (SO4) – The upside of Emmerson plus the quality of Danakali!
Salt Lake Potash (SO4) is an AIM/ASX listed-potash company looking to produce sulphate of potash (SOP) from nine salt lakes in Western Australia which total over 3,300km² (latest share price: 26p ask, market cap £53million).
The company recently appointed a new CEO and raised money to “fund construction of the Williamson Ponds and dewatering of the Williamson Pit, as well as ongoing development of on-lake infrastructure, exploration and feasibility studies, and general working capital”.
SOP is a premium, environmentally-friendly product. I have previously discussed the benefits of SOP on this website.
The nine salt lakes are close to infrastructure and two shipping ports.
(Source Salt Lake Potash)
Fundraising – A$13m at 23p equivalent
Salt Lake have just raised A$13m at a price of 23p equivalent. The cornerstone investor is a “significant international investment fund” while management are taking over 7% of the new shares. My hunch is that the institutional investor doesn’t want to be named because they either want to purchase more shares or be involved with any future raises before the valuation starts to more accurately reflect the potential. See the fundraising RNS.
Director Holdings – yes, they do hold!
It’s a bit difficult to find out that directors hold shares. Unhelpfully, their names do not appear on the share register – the companies they hold the shares through do. Prior to the recent raise, directors owned over 10% of the shares. I have asked the company to show director holdings more clearly on their website.
Country Risk – Western Australia
Western Australia is both mining friendly and first world. I prefer investments in stable countries as financing in a stable jurisdiction is simpler and rule of law is more likely to be followed. Salt Lake already has approval to construct ponds at Lake Way.
New CEO – Tony Swiericzuk
Mr Swiericzuk was previously Director of Business Development and Exploration at Fortescue Metals (Australian ticker FMG, market cap A$13bn). He has overseen the construction and optimisation of one of the world’s lowest-cost iron projects.
Upon his appointment, he stated:
“A deep dive into Salt Lake Potash’s high quality technical work, business model and relationships has convinced me that it is easily the best company to lead the development of the sector in Australia. Its multi-lake holdings in proximity to the Goldfields infrastructure is paramount and offers great potential to achieve cost savings and economies of scale, as we did in the iron ore sector.”
Tony is no doubt well connected, technically capable and well-placed to accelerate the development of Salt Lake into a leading potash producer.
Salt Lake brine extraction
Salt Lake brine extraction is very simple – dig a trench, let it fill with brine, allow mother nature to evaporate the water content, harvest and process:
(Source: Salt Lake Potash. The presentation also includes the chemical processing information for those interested.)
Salt Lake have de-risked the process by digging demonstration trenches and analysing the product:
(Source: Salt Lake Potash.)
Salt lake has two memoranda of understanding that set out the basis for offtake agreements. Mitsubishi and Sinofert each have offtake rights for up to 50% of SOP production from the 50ktpa demonstration plant. Corporate executive Jo Battershill discussed the MOU’s and company progress recently here.
In order to de-risk financing, minimise dilution and reduce risk, Salt Lake has a multi-stage approach to becoming a globally significant SOP producer:
Stage 1 – Lake Way 50ktpa Demonstration Plant
Salt lake plans to build a 50ktpa demonstration plant to validate the technical and commercial viability of the project which will de-risk the project and allow for larger fundraising in the future to decrease capital costs. A feasibility study is due by year end which will facilitate debt funding. Note that all NPVs are calculated using a 10% discount rate.
Scoping study assumptions:
- Capex cost A$49m
- Cash costs per tonne A$387
- SOP price A$667/t
- Pre-tax NPV A$71m (£39 million at A$1 = 56p)
- IRR 28%
- EBITDA A$14m (EBITDA £8m)
Or using the current SOP price A$820:
- Pre-tax NPV A$134m (£75 million)
- IRR 44%
- EBITDA A$21.65m (EBITDA £12m)
Stage 2 – Lake Way 200ktpa
Once the demonstration plant is proven successful, the company will be well-placed to raise funds for a larger operation.
Scoping study assumptions:
- Capex cost A$191m
- Cash costs per tonne A$241
At current SOP price A$820:
- Pre-tax NPV A$781 million (£435 million)
- IRR 61%
- EBITDA A$115 million (EBITDA £64m)
Stage 2.5 – Lake Way 400ktpa
Once stage 2 capex is repaid, a modest amount of incremental capital will double production. I have used stage 1 calculations and once capex is paid off, deducted $39m capex required in the third year. From the fourth year, I’ve used the 400ktpa figures.
Scoping study assumptions:
- Stage 2.5 cash costs per tonne A$185
- SOP price A$667/t:
At current SOP price A$820:
- Pre-tax NPV A$1562m (£850 million)
- IRR 70%
- EBITDA A$115m in Stage 2 (£64 million) followed by A$254m in Stage 2.5 (£141 million).
Stage 3 – Other Lakes
Once Salt Lake has proven the process, its ability to pay back debt and the project economics, then raising funds to develop from the eight other lakes should be straightforward. In aggregate, these should be able to sustain millions of tonnes of SOP production.
At current prices SOP prices, Salt Lake trades at less than 10% of NPV from one 400ktpa operation supports a pre-tax NPV of £660m which means that SO4 trades at more than a 90% discount to one of many possible operations. The projects are attractive from both a financial and environmental position. The green credentials should help with fundraising. The company has always had incredible prospects but hasn’t been in a position to capitalise upon them. With a feasibility study soon to be released, equity raise out of the way, offtake agreements and a new CEO I believe firmly that the next 3 – 6 months will be transformational for Salt Lake.
Bonus Reading – Peer comparisons
In making my investment into Salt Lake Potash I have also evaluated other companies listed in London:
Sirius Minerals (SXX) – market cap £1.1bn, Polyhalite product (similar to MOP), UK
Sirius minerals is developing a huge polyhalite project in North Yorkshire. The project is incredibly capitally intensive for example they recently announced another $400m – $600m was required. The internal rate of return is likely to be below 20% now (they haven’t announced updated figures). The project would not be built were it not for government support. Such is my dislike for the project economics I’d almost go as far as to suggest it as a shorting opportunity.
Kore Potash (KP2) – market cap £49m, MOP product, Democratic Republic of Congo
I have not analysed Kore Potash in sufficient detail to have an opinion on it as an investment. I do however prefer investing int Western Australia and believe that Salt Lake will more easily obtain financing for its project for three reasons – country risk, MOU’s and construction permits.
Emmerson (EML) – market cap £22m, MOP product, Morocco
I believe Emmerson to be a good investment, particularly around the current price, for the reasons outlined previously. Why pay more than twice Emmerson’s market cap for Salt Lake? Emmerson is at the beginning of its journey and so there is no scoping study, no MOU’s, and no life of mine available. Given that Salt Lake has a world class resource and will be finance-ready by year-end, and trades at a huge discount to NPV, paying more than twice for Salt Lake is justified.
Danakali (DNK) – market cap £110m, SOP product, Eritrea
Danakali has an incredible project but the market cap reflects that, as covered here. As well as trading at a fraction of NPV, Salt Lake’s project is much easier to finance due to lower country risk, whether or not that is justified.
At the time of publication, the author holds a long position in SO4.