Danakali Limited

DNK Details

This report is an updated version of the report published on the 06 May 2022 at 3:55 PM GMT.

Danakali Limited (ASX: DNK) is a resources company that operates Colluli Potash Project located in East Africa. The Colluli resource contains three potassium-bearing salts - sylvinite, carnallitite, and kainitite.

Colluli Potash Project Update and Q3FY22 Operational Highlights:

• The company is progressing to become a leading exporter of premium Sulphate of Potash (SOP) with its Colluli Potash Project.
• JORC estimate gave a mine life of over 200 years at a 1.0m TPA of SOP.
• As per the mine plan, Colluli Potash appears to be an open pit mine with cost-effective as the plant is in proximity to tidewater and does not require intensive energy inputs.
• DNK estimate the project to have a lower capital cost at $640/t, as compared to the Australian brine projects of $1,100/t.
• The long-term outlook for the weighted average price of Colluli SOP has been increased to US$762/t in the light of the ongoing Ukraine Russia war crisis.
• DNK appointed Mr Greg MacPherson as the Chief Financial Officer effective from March 1, 2022.
• During Q3FY22, the company increased its investment in the Colluli project. It had posted a negative operating cash flow of $1.75 million and closed the period with a cash balance of $19.06 million as of March 31, 2022.

Cashflow Summary (Analysis by Kalkine Group)

Key Risks: DNK has nil core operating revenues, an increase in exploration related expenses over and above the estimates may drain the existing cash balance. The ongoing supply chain disruptions, labour shortages and lockdown fears are the near-term headwinds.

Outlook: DNK laid down an operational level strategy to reach SOP production. Besides Sulphate of Potash, DNK identified Rock Salt, Gypsum, Kainite, Bischofite, among others, for potential mining opportunities.

Stock Recommendation: The stock of DNK has been corrected by ~22.85% in the past three months. The stock of DNK just recovered from its 52-week low price of $0.240. On a TTM basis, the stock has been trading at a Price/Book Value multiple of 1.3x as compared to the industry median of 2.3 (Basic Materials). This indicates the stock is undervalued at current trading levels. Considering the ongoing progress in the production of Sulphate of Potash (SOP) from the Colluli Potash Project, JORC estimate, increase in the weighted average price of Colluli SOP, undervaluation as indicated by the TTM valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.255, as of 06 May 2022, 10:40 AM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

DNK Daily Technical Chart, Data Source: REFINITIV 

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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