Danakali (DNK) - Technical Analysis

Danakali Limited is a resource company focused on the Colluli SOP (Sulphate of Potash) Project in Eritrea, East Africa. The company’s strategy targets the development of a world-class potash project that will become pivotal for global and African agriculture. Colluli is expected to provide an outstanding economic, social, and community dividend through a positive impact on infrastructure, job creation, and sustainability in Eritrea. It has industry-leading capital intensity, highly attractive economic returns, significant multi-commodity potential, and the potential to become the world’s first zero-carbon SOP producer. 

Merlin Marr-Johnson caught up with Seamus Cornelius, Executive Chairman, and Dr. Rod McEachern, CEO, Danakali Limited. 

Mr. Cornelius is a corporate lawyer and former partner of one of Australia’s leading international law firms. He has a high degree of expertise in cross-border transactions, particularly in the resources and finance sectors. He has been based in China since 1993 and brings over 2 decades of corporate experience in legal and commercial negotiations. He has also advised global companies including major resource companies and banks on investments in China and has advised Chinese State-owned entities on investments in overseas resource projects. Seamus is currently the Non-Executive Chairman of Buxton Resources Ltd, Element 25 Ltd, and Duketon Mining Ltd. 

Dr. McEachern has over 3 decades of experience in the potash industry. He is responsible for the safe and environmentally responsible production of potash as the Vice President of Operations for Arab Potash Company and as General Manager of Nutrien’s Allan Division. He also served as the Director of Process and Product Innovation for Nutrien, which included responsibility for new product development, process development for all Nurtien potash expansions, and advanced process control. His educational credentials include a Ph.D. in Physical Chemistry. 

Company Overview

Danakali Limited’s mission is to build the longest life fertiliser production company of the 21st century, that increases global food nutrition for 200 years, supporting farmers and nourishing communities with sustainable zero-carbon products where the world needs it most. The company was founded in 2001 and is headquartered in Subiaco, Australia. It is listed on the Australian Stock Exchange (ASX: DNK). STB Eritrea Pty Ltd and Duketon Nickel JV are the company’s subsidiaries. 

Danakali Limited is developing the Colluli potash project located in Eritrea, East Africa. It's a massive, open-cut potash mine in the Danakil depression. The company plans to produce SOP (Sulphate of Potash), a premium potash fertiliser. The company is looking to produce SOP for 200 years. Module 1 will produce 472,000t, which will be followed by a quick expansion. The company is prioritising the process refinement for processing Colluli ore into SOP. 

The company has been working on the Colluli product for the past 10 years. The project is based in Eritrea, east of the Red Sea. The company carried out a PFS (Preliminary Feasibility Study) on the project 8 years ago, which was followed by a DFS (Definitive Feasibility Study). Next, the company conducted a Feed Study. 

For the past 2 years, the company is working on gaining a better understanding of the development of SOP from the ore. It seeks to determine the most effective method to process the ore into SOP. 

The Global SOP Market

Danakali Limited has 1.1Bnt of near-surface MOP (Muriate of Potash), which equates to about 200Mt of SOP. The annual production and demand for SOP is around 7Mt globally. The company is looking to produce 1Mt/year SOP for a period of 200 years. The company’s reserves can effectively supply the current global demand for 30 years. The deposit is massive in size and is largely unmatched within the SOP space. 

Project Demographics

The elevation at the Colluli deposit is around -110m below sea level, contributing to an adversely hot climate. The hot and dry climate facilitates the use of solar ponds for evaporation. 

The deposit is a fairly young evaporative basin that is estimated to be around 50-60 million years old. As the basin is quite shallow, it is expected to be relatively new. The entire basin is a giant evaporative deposit with relatively little clay soil cover on top with a 10m thickness. 

Operational Strategy

Danakali Limited’s Stage 1 of the operation will comprise trucking the end product in containers to the port of Massawa which is located 250km-270km away. In the longer term, the company intends to build a port at Anfile Bay. This new port will effectively reduce the trucking distance by around 75km. 

Since the current operating environment lacks competitive haulage, the company’s domestic costs are a bit higher. The estimated costs are between $30-$40c/t/km. Due to the higher costs, the company has prioritised an Anfile Bay export facility in the future. Not only does it reduce the trucking distance, but it will also enable the company to send bigger trucks as it's not on a public highway. The journey from Colluli to the port of Massawa requires the use of the national coastal highway which limits the number of tons that can be transported. These factors make transportation significantly expensive. 

Danakali Limited has already conducted a PFS on the port at Anfile Bay. It has determined the costs, feasibility, and ideal location in the vicinity. The company anticipates that it will take under 5 years from the time production commences before moving into Module 2 and relocating the trucking operations from Massawa to Anfile. 

Based on the feedstock, the initial CapEx (Capital Expenditure) for the project is estimated at $302M. The company is looking to self-finance. In fact, the company has modelled project modules 1 and 2 on the basis that module 2 is self-financed. As all the ports in Eritrea are run and owned by the government, the company will pay usage fees while the government operates the port at Anfile. This would lead to a massive reduction in the company’s haulage costs. 

The Manufacturing Process

Danakali Limited has 3 minerals at Colluli, namely kainite, carnallite, and sylvanite ore. The sylvanite ore can easily be converted into potassium chloride. These minerals are present in a series of different stratigraphic levels, sylvanite, carnallite, and kainite. Since these are separate, the company can devise a mine plan to extract these in an orderly fashion and transport them into plants for a run of mine stockpile. 

While sylvanite and kainite ore can tend to cake up if exposed to rain over a period of a couple of weeks, it can still be used to make SOP. However, carnallite absorbs moisture from the air and converts into the brine. Although the Danakali depression is an extremely dry place, the company cannot let the carnallite sit in the open for longer periods. 

In case of occasional rainfall, the company can dewater the pits and utilise the water. Though the company has to be careful while managing the carnallite stock. A by-product of the process is bishopite, a mineral that is known for being deliquescent. The company has developed plans for effective mining management to remedy any problems that might arise due to moisture uptake. 

Danakali Limited is looking to mine all the different mineral layers and feed them into the plant. The carnallite ore will be upgraded to kainite ore. In precise terms, the ore gets converted to a similar mineral called lemoynite which the company then needs to recover, and upgrade. Following this, the material can react with potash to form SOP. 

The upgrading of ore is a common process for potash mining all around the world. It requires the crushing of the carnallite ore to a certain size, following which froth flotation is used to separate the potassium chloride from the sodium chloride, or in the case of the carnallite, separation of lemoynite from the sodium chloride. 

The froth flotation is carried out in saturated brine. The saturated brine is used to slurry the ore while it's being crushed, de-slimed, and floated. Following this, the brine is recovered and recirculated. When the plant starts operating, some of the material gets dissolved, however, once the material enters the brine, it gets recirculated. Once the plant reaches a steady-state, the ore is crushed and slurried into a pulp in the saturated brine. It does not get into the solution. It is then recovered from the pulp by way of flotation and centrifuging. During the process, the carnallite and the kainite react with water. The former gets decomposed in the brine solution and precipitates out as potassium chloride. Potassium chloride or KCl is called the Muriate of Potash or MOP. 

Since Danakali Limited has 2 minerals, it can recover MOP through froth floatation from the sylvinite and carnallite ore. The company can also recover lemoynite through the flotation of the kainite ore. Both materials are mixed in the right ratio and pulped together in a brine. The resultant mixture is then pumped through a series of agitated tanks where the solids are recovered by centrifuge. Next, the solids are re-pulped in seawater for a certain length of time to avoid any contaminants from the brine. 

The brine solution needs to be as pure as possible. The brine is displaced with fresh seawater and the solids are recovered as pure SOP. Notably, the company has worked extensively on the extraction and processing work in the past year. 

5-10 years back, the extraction process was expected to run on reverse osmosis or purified water. However, the company was able to convert the lemoynite and potassium chloride mixture into high purity SOP by use of seawater. This is achieved by the introduction of seawater predominantly in the second stage. The resultant brine from the second stage gets recirculated back to the first stage, going back into kainite processing. This enables the reuse of the seawater, through a process called counter-current flow. 

The company utilises the purest seawater at the end of the process, recycling it back to the front end of the lemoynite conversation, following which, it is recycled back further upstream in the plant. This enables the company to achieve direct quantitative conversion of the lemoynite and the potassium chloride into SOP, ensuring that consistent high purity SOP is obtained. 

SOP is the company’s main product with a planned 472,000t/year output. At Colluli, the company can also recover and sell the potassium chloride as MOP if it's the right grade. Furthermore, the company can also convert the lemoynite into SLPM, another product that can be sold. In the short term, the company is focused on selling SOP as the main product, however, in the long term, the company is open to making other products and by-products. 

Gating and Supply Decisions

Danakali Limited is focused on 4 major gating decisions in terms of market, capital, port, and road. 

Considering the size of the market, a 472,000t yearly supply could continue providing SOP for the next 400 years. The annual SOP demand for the world market is around 7Mt. Across Europe, the Middle East, Africa, and India, SOP is a 2Mt/year market that is expected to grow at a rapid pace. 

In the past 2 decades, the company’s greenfields operation in Danakil is the only successful project globally, excluding China. The company had to choose between building a port nearby that could have a larger supply and the existing port of Massawa which limits the number of tons that can be trucked. 

The company decided to bring the project into operation at the earliest and produce roughly 472,000t SOP annually. Once this is achieved, the company would have successfully overcome the critical constraints, namely the market size, product, capital, and access to infrastructure. Once these issues have been remedied, the company can grow rapidly and self-fund the operation. 

Danakali Limited plans to supply the finished material through 40t trucks. Since the company can only send one container at a time, a truck is expected to be dispatched every 20 minutes. 

Financing Considerations

The Colluli project has an NPV (Net Present Value) of 900Mt. Module 1 of the operation is projected to generate $43M/year in free cash flow post-tax and post-debt. This comes out to AUD$60M. 

Notably, Eritrea was under UN sanctions until late 2018. The sanctions weren’t related to mining, however, the association of the country name with UN sanctions led to the loss of a significant number of potential investors. Following the lifting of the sanctions in late 2018, Danakali Limited was able to sign a $100M senior secured product debt with AFC (Africa Finance Corporation) along with an additional $100M from AFRI EXIM  Bank (African Export-Import Bank). The securing of $200M in senior debt was achieved in late 2019.

Following the advent of the pandemic in Q1 2020, the markets collapsed. This was a less-than-ideal timing as the company had closed out the equity piece, having secured two-thirds of the funding through the standard senior debt from AFC and AFRI EXIM Bank. 

In November 2021, the United States enforced sanctions on a number of individuals and entities in Eritrea. These sanctions had nothing to do with the company or its joint venture partners, but the news related to sanctions again led to a loss of potential investors. These sanctions, the bad timing due to the ongoing pandemic had an adverse effect on the capital pool available for the company on the equity side. 

The imposed sanctions were targeted and intended to stop foreign investment from countries that are connected to the United States. These sanctions have limited the available capital pool for the company. 

Apart from Danakali’s Colluli project, there are 2 operating mines and 1 under development in Eritrea. The major foreign investor for these projects is Chinese companies. Russia and China are 2 countries that have shown little concern regarding the US sanctions. 

Danakali Limited is currently in talks with various parties including entities in the Middle East for funding. In fact, had it not been for the US sanctions, it would have already closed a funding deal by now. 

Notably, the Colluli project is a joint venture between Danakali Limited and ENAMCO (Eritrean National Mining Corporation). The project has a 200 years mine life at 1Mt annual supply of SOP. The Danakil depression is a massive future potash-producing Basin. The company currently has a 200Mt resource, however, it anticipates that the Basin has a minimum of 1Bt potash reserves that can only be accessed through the Colluli project. Any future joint venture partner with ENAMCO could probably have 1,000 years of potash production through this project.

Danakali Limited is a once-in-a-lifetime asset that is set to dominate the SOP market once expansion starts into other areas. The company forecasts that people would lament having not invested in such a technically robust project in 5-10 years’ time. 

To find out more, go to the Danakali website