Danakali Limited

Company Overview: The company is engaged in the exploration and development of potash and advancing the Colluli Potash Project (CPP), which is located in Eritrea, East Africa. The project is a joint venture between Eritrean National Mining Corporation (ENAMCO) and Danakali. The Colluli resource consists of three potassium-bearing salts in solid form: Sylvinite, Carnallitite and Kainitite. The company was listed on ASX in October 2003.

DNK Details

Favourable Market to Aid New Revenue Stream and Business Growth: The company’s Colluli Potash Project is 200-year life of mine Project (Rock Salt Resource), which indicates another potential revenue stream from Colluli and bolsters the primary business model of Colluli. As per the company’s report, the global industrial salts market size is likely to touch the toll of US$15.9 billion by 2025 and simultaneously, demand is forecasted to grow at a CAGR of 2.4% by 2025. The spot price of rock salt has soared up to US$60 per tonne because of the seasonal character of the deicing industry, which is the main rock salt user. The company believes that the salt rock resource inventory reflects a waste product that overlays the potash, and the said by-product could support the Colluli Potash Project with a new revenue stream. The company is optimistic that the new generation of sodium-ion battery development is an opportunity that adds other potential end uses for its mined Rock Salt.

Q4FY21 Financial and Operational Summary:

• During the quarter ended 31 December 2021, the company reviewed the potential growth option of Magnesium Chloride (MgCl²) at Colluli and resultantly decided to produce potentially economic MgCl² from two sources at its Sulphate of Potash (SOP) production operation.
• DNK revaluated Sodium Chloride (NaCl) resource at Colluli and came out with confirmation of the presence of 347 Mt of Rock Salt resource.
• In addition, the company continued its discussion with potential third-party investors, ENAMCO and senior lenders for financing projects.
• The company made an investment of an additional $1.9 million to further develop the Colluli Potash Project. As on 31 December 2021, the company had a cash balance of $22.8 million.

1HFY21 Financial and Operational Summary:

• For the half-year ended 30 June 2021, the company witnessed improvement in losses to $0.47 million as compared to $1.67 million as on 30 June 2020. As a result, basic loss per share per share improved to -0.13 cents per share against -0.53 cps in 1HFY20.
• As on 30 June 2021, the company had cash and cash equivalents of $25.73 million against $9.73 million as on 31 December 2020.

Cash Position (Source: Analysis by Kalkine Group)

Change in Directors’ Interest: On 1 February 2022, Seamus Ian Cornelius has made a change to holdings in the company by acquiring 150,000 fully paid ordinary shares at a consideration of $50,479.

Top 10 Shareholders: The top 10 shareholders together form around 38.43% of the total shareholding, while the top 4 constitute the maximum holding. Africa Finance Corporation and Well Efficient Ltd. are holding a maximum stake in the company at 14.38% and 9.50%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: DNK recorded a current ratio of 44.51x in 1HFY21 as compared to 35.86x in 1HFY20. On the leverage side, the company recorded a nil debt-to-equity ratio in 1HFY21.

Liquidity & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Strategic Risks: DNK’s growth is fully dependent on the success of a single asset in a remote region in Eritrea. Any adverse event affecting the Colluli Potash Project (Project) could impact its operations.
• Price Risk: The company’s operational and financial performance could be impacted by the adverse movement in the prices of commodities globally.
• Climate Change Risk: DNK’s performance could be impacted by an extreme change in climate, which could temporarily pause its operations.

Outlook: The company believes that the Colluli Potash Project will produce an estimated 128 Mt of Rock Salt in the first 60 years at a production rate of 1.8 million tpa from Modules 1 and 2. Looking forward, the company would be benefited from the potential use of rock salt in the battery industry, which is a raw material for a new generation of sodium-ion-batteries (SIB). The rock salt is being used in chemical industry, maintenance of roads and streets, textile and tanning industries, food industry and oil industry, etc. There is no economic substitutes or alternatives of rock salt in most of the applications, which happens to be a key positive catalyst for business growth.

Technical Insights: DNK prices witnessed significant downside movement in the past 3 months. However, the prices are now taking support of the downward sloping trend line on a monthly chart. Prices are also taking support of the upward sloping trend line that further supports a bullish stance for the stock. RSI (14-period) is hovering at ~40 on a daily chart indicating the stock is trading in a mid-zone. There is a positive RSI divergence with the price clearly visible on the chart that further increase the possibility of upside in price. Immediate support levels are AUD 0.310 and AUD 0.215, while immediate resistance levels are AUD 0.425 and AUD 0.505.

Stock Recommendation: The stock of DNK is currently trading near to its 52-week low level of 0.320, offering a decent opportunity for accumulation. The stock has been corrected by ~13.74% in the past one month, respectively. In addition, the stock is trading at a P/BV multiple of 1.7x as compared to the industry median (Chemicals) of 5.2x on a TTM basis. Thus, it can be said that the stock is undervalued at the current trading levels. Considering the valuation on a TTM basis, improvement in losses, decent liquidity position, nil debt to equity ratio, optimistic long-term outlook, current trading levels, technical factors mentioned above, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.345, as on 04 February 2022.

DNK Daily Technical Chart, Data Source: REFINITIV

Note: The purple line reflects the RSI (14-day period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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