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Date : 08/06/2021

Salt Lake Potash Limited

ASX :

SO4

Market Cap : $304.15 Million

Buy

52 Week Range : $0.355 - $0.620

Share Price : $0.37

SO4 is pioneering the new Australian export industry of sulphate of potash, and Salt Lake is on the brink of becomming a major world producer. A "Buy" from us.

Company Analysis

Salt Lake Potash Ltd. (ASX: SO4) is a mineral exploration company. The Company’s principal activities include exploration and development of resource projects. Its segments include the U.S. and Australia’s Potash. SO4 holds a range of Salt Lake brine projects in Western Australia, South Australia, and the Northern Territory. Its primary focus is the advancement of the Lake Wells’ Project, which is located approximately 80 kilometres north of the Great Central Road and over 180 kilometres northeast of Laverton in the West Australian Goldfields. The Project consists of over 1,130 square kilometres of exploration licenses, covering the Lake Wells playa and the area immediately contiguous to the Lake. SO4 also holds exploration licenses or applications covering all or parts of Lake Irwin and Lake Minigwal and Lake Ballard in Western Australia, Lake Lewis in the Northern Territory, and Lake Macfarlane and Island Lagoon in South Australia.

SO4 on track to be a major world player in the SOP industry ahead of its Australian’s competitors

SO4 is on the verge of becomming a major producer in the global scene, it is just a matter of time. All the dots are aligned, and we believe FY22 will be the year where SO4 will connect the dots. The firm produces a relatively higher grade of Sulphate of Potash (SOP) and at a reasonably low cost of production. We are also confident that SO4 is capable to sell its product for a 10% premium. That certainly will boost the company’s revenue. It is also worth noting that the market demand is growing leading by the U.S. and China. China is the largest consumer of SOP which accounts for more than 45% of the global demand. With a population of 1.3 billion, China is also by far the world’s largest tobacco, fruit, and vegetable producer. For these premium crops, SOP is the best-suited fertiliser. If we look back at the past twenty years, the demand for SOP in China has massively grown at a rate of point five million tonnes each year in the early 1990s to one point nine million tonnes from 2011.

SO4 has also managed to have already entered into binding agreements for 96% offtakes as of the end of 2020. The offtakes that have been secured are coming in from all over the world – North America, South America, Europe, Africa, and Asia. This significantly de-risks the investment as even in its very early stage, SO4 has been able to diversify and is not heavily reliant on a particular market. But the market that SO4 is focussing in now is China and the growing Asian markets in particularity. SO4 belongs to the five Australian developers which are currently ramping up capacity to be able to sell SOP from Western Australia’s underground, brine-rich salt lakes. Looking at the competition landscape, SO4 appears to set to be the first firm to achieve commercial production which we believe is feasible in the second quarter of this year (Q2-2021).

Competitors vs SO4 Projected SOP tonnes per year Expected first sales
Salt Lake Potash Ltd. (SO4) ~224,000 Q2-2021
Kalium Lakes (KLL) ~180,000 Q3-2021
Australian Potash (APC) ~150,000 Mid-2023
Agrimin (AMN) ~450,000 2024
RewaRD mINERALS (RWD) ~400,000 Not confirmed yet

Company Updates

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The finish line is in sight

That is no exception for SO4. Businesses around the world have been affected by the pandemic. However, SO4 has since last year well progressed despite the disruption caused by the global health crisis. SO4 is expected to be the first Australian SOP producer to reach commercialisation which is expected to be the second quarter of this year. Furthermore, SO4 will also contribute to replacing Australia’s imported SOP supply with its competitor Kalium Lakes (KLL). This year is definitely the last mile from a long marathon for SO4 before the victory. The company is setting up a new SOP fertiliser export industry with a strong production volume that is planned to generate more than A$ 250 million in export earnings for a full year. We are really confident about it as we see things getting materialised lately with SO4 working on exporting bagged and containerised fertiliser from Fremantle port and bulk product from Geraldton port. We can expect Salt Lake Potash to overtake its competitors and be the first into production.

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Source: Salt Lake Potash Ltd. Company’s Data.

Production is accelerating to meet global demand by FY22

Recently, SO4 has stockpiled about 27 thousand tonnes of potassium-rich kainite and schoenite salt harvested from the first evaporation ponds train. Production is expected to ramp up in the following months and reach by FY22 245 thousand tonnes per annum leading the Australian SOP production.

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Source: Salt Lake Potash

SO4 is well-financed to reach full potential

SO4 financials have not been their strongest point for a couple of years, however, it is going to change. Earlier this year, SO4 received a total of 20 million new fully paid ordinary shares at an issue price of 40 cents per share. The company has successfully completed its share purchase plan after increasing the offered size to A$ 8 million from its initial target of A$ 5 million following strong demands. The fund enabled the company to achieve financial close on its A$ ~178 million debt facility and draw the initial tranche of A$ ~135 million to finalise the development of the Lake Way Project. The recent capital raising allows SO4 to fully concentrate on ramping up its production capacity with a multi-lake expansion opportunity that will surely propel the company’s revenue anticipated for early FY22.

Industry Analysis

We anticipate a tremendous positive momentum for the Sulphate of Potash (SOP) market for the years to come. The current SOP market condition is very nascent and as of this moment in time, it looks like Australia and SO4 are going to be the main global player in this industry. SO4’s projects are near completion and as we foresee production coming out, a lot of value that still has not been recognised yet will start to materialise. There is a group of ASX listed companies that are expected to deliver SOP in the coming months. The domestic SOP industry is thus emerging. SOP is looking to eat into the market for MOP.

Sulphate of potash has a current price bracket of US$ 500 – US$ 650 per tonne. The variance of the price over the last decade is 4%, drawing arguments that it does not behave like a commodity, which are usually very sensitive to supply and demand. MOP has a variance of 14% over the same period. This indicates the resilience of the market for SOP and the strong foundations that manufacturing firms in this space can lay down. There has been an ongoing shift in sources towards lower chloride products, and prices have remained stable despite Covid19 throwing commodity prices into a frenzy.

The SOP industry is also supported by the food and fertiliser prices which moved higher during the second half of 2020 with the trend continuing further throughout 2021. The United Nations FAO food index has risen for the last eleven consecutive months and has recorded its highest monthly average since 2014. We believe it is just a matter of time for SO4 to take off and follow the global growing demands for fertilisers.

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Source: Salt Lake Potash

Investment Thesis

Financial Summary

For the six months ended of December 31, 2020, SO4 revenues increased by 30% to A$ 128 thousand. Net loss decreased by 87% to A$ 1.8 million. Revenues reflect Government grant and increases in income of A$ 80 thousand. Lower net loss was due to Exploration and Evaluation Expenses which decreased by 85% to A$ 1.8 million.

Six reasons that reveal that SO4 is a great deal

SO4 may be a hidden gem among the SOP producers in Australia. We are just a couple of weeks before witnessing SO4 become the first sulphate of potash exporter leading the new Australian export industry. The SOP market is expanding tremendously and SO4 is capturing a piece of this emerging industry that is now worth just over A$ 5.2 billion a year. Australia is expected to export 90% of its SOP production and SO4 has the necessary infrastructure to lead. SO4 has a scalable portfolio of assets such as Lake Way which is expected to output 245 thousand tonnes of SOP every year by the end of FY22. SO4 is also increasing its production capacity with its multi-lake expansion. The company is now working on a strategic review to quickly exploit a second lake project. SO4 has also demonstrated its ability to execute its plan on time and with the combination of the recent capital raising, the production offtakes, and the exports, SO4 is on the right trajectory for a terrific FY22. All in all, what we like about SO4 is a (1) solid portfolio with (2) latent sources of value and (3) high margin output. SOP is an (4) in-demand product with price remaining stable even through the current period of global uncertainty. SO4 has all the (5) regional infrastructure ready and is expected to commercialise its production in just a couple of weeks. Until today, the company has delivered its projects on time with an (6) exemplary operating capability and is pioneering the Australian SOP new export industry.

Recent funding is lowering financial risk

There is one thing that weighs on the SO4 profile is its degree of financial leverage. SO4 has taken the necessary measure to lower the risk of its financing structure and de-risk its operating budget. With the recent capital raising, the firm repaid its debt earlier which allowed it to improve its cash headroom with monthly unrestricted cash low bottoms at A$ 20.3 million instead of A$ 11.8 million. SO4 is expected to realise an EBITDA of A$ 111 million from its projected SOP output of 245 thousand tonnes per annum which will bring a solid free cash flow of A$ 78 million which is expected for the second half of 2021. With SOP price stability to remain and the ramp-up in production, SO4 is expected to double its earnings year-over-year by FY23 with an estimated 60% margin.

Technical Analysis

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Trend

SO4 has been trading sideways throughout FY20 and the first half of FY21 between its lower range of A$ 35 cents and upper range of 61.5 cents per share. Strong volume has been witnessed in the early month of 2021 due to the A$ 20 million raised capital from new fully paid ordinary shares issued at 40 cents. The 40 cents per share is a psychological level that acts as the near-term price equilibrium. SO4 is technically under selling pressure as attested by the multi-year downward trend line which suggests a possible retest of the 31 cents area which relate to the COVID-19 low from March 2020. We think that SO4 might be temporarily overbought and may consolidate between 31 cents and 40 cents until the end of August this year. It seems that market participants are waiting for the next report to decide whether to buy or exit their positions on SO4.

Key price levels

On the upside, the 23.6% Fibonacci retracement level from the all-time high and COVID swing low is the current resistance level which limits SO4 to rise above 44.5 cents. We think that a clear breakout of the psychological level of 50 cents will bring attention to investors, therefore pushing the share price to the multi-year resistance at 61.5 cents. SO4 shares have the potential to double in just a few months as we recognise the current price action as in a state of “wait and see” by market participants.

Volume and momentum

Volume remains unchanged since the last 200-day. The price action remains neutral in the near term, evolving in a range between A$ 45 cents and 50 cents per share.

Trade consideration

  • Market participants might be interested to enter at key support level: A$ 40 cents and A$ 31 cents.
  • Primary target price above $A 62.5 cents per share
  • Secondary target price at $A 1.0 per share
  • Consider reducing exposure below A$ 30 cents
  • It is recommended exiting the trade below A$ 29 cents

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Recommendation

We are issuing a “Buy” recommendation for SO4. This company may be the hidden gem on the ASX. SO4 is pioneering the new Australian export industry of sulphate of potash (SOP) and Salt Lake is on the brink of becomming a major world producer. The firm produces a relatively higher grade of Sulphate of Potash (SOP) and at a reasonably low cost of production. SO4 has also managed to already enter binding agreements for 96% offtakes as of the end of 2020. Looking at the competition landscape, SO4 appears to set to be the first firm to achieve commercial production which we are just a couple of weeks away from it. All in all, what we like about SO4 is a solid portfolio with latent sources of value and high margin output. SOP is an in-demand product with price remaining stable even through the current period of economic uncertainty. SO4 has all the regional infrastructure ready and is expected to commercialise its production in just a few weeks.

 

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