Date : 11/09/2020

Salt Lake Potash Limited

ASX :

SO4

Market Cap : $277.93 Million

Buy

52 Week Range : $0.28 - $0.90

Share Price : $0.48

A low-cost producer with a strong earnings outlook and a capable management team gives this stock a “Buy” recommendation.

Company Analysis

Salt Lake Potash Limited (SO4) is a mineral exploration company that is in the business of producing Sulphate of Potash (SOP). Salt Lake Potash produces premium grade organic Sulphate of Potash (SOP) in WA – with a vision of becoming the world’s most sustainable and rewarding fertiliser producer.

There are two methods that are predominantly used in the manufacturing of Sulphate of Potash (SOP). 65% of the global market for fertilizers follow an old, expensive, and environmentally unfriendly method known as Mannheim process (MOP). Salt Lake Potash uses a solar brine process – laying potash in lakes under the sun to produce premium quality organic SOP.

Product

Salt Lake Potash operate in a very stable and relatively captured market. Farmers need SOP regularly to reduce the levels of chloride in their crops. SO4 claims to have already tested pricing and have decided to price their product at a conservative USD 550/tonne. The firm believes that premiums can be added on to this price due to the superior water-soluble trait that their product entails. This trait also opens high irrigation markets that desire high potassium and low chloride content in the SOP.

The company already has buyers for 92% of its production from 6 buyers across the world. Their strategy to diversify their sales into different markets looks to have kicked off. The CEO expects the company to start generating cashflows in the 2nd quarter of 2021.

Industry Analysis

Sulphate of Potash has a current price bracket of USD 500 – USD 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.

Competitors

Salt Lake Potash primarily has 3 competitors in Australia – Agrimin, Danakali, and Reward Minerals.
Agrimin’s Mackay Potash Project has just been approved and a definitive feasibility study is now underway with an aim to produce 450,000 tonnes of SOP per annum.
Danakali’s Module 1 project is expected to start production in 2022 to produce 472,000 tonnes p.a.
Reward Minerals boasts itself as the world’s lowest capital intensive SOP manufacturer.

Salt Lake Potash has a distinguished, highly qualified, and experienced management team. Their strategy to be able to generate cash flows by early 2021, with a rightly priced product gives them an edge over their competitors. Adding to this, the firm still has 8 other lakes lined up for development.

Company Updates


Source: TradingView.com

Salt Lake Potash (SO4) has successfully raised a completely underwritten AUD 71 million in equity on the 11th of August. A Retail Entitlement Offer has also been completed by eligible shareholders to raise AUD 27 million in equity at AUD 0.50/share.

Prior to the inflow of equity capital, on the 5th of August, SO4 announced that its Lake Way Project is has received AUD 203 million in a debt financing package.
These recent updates has successfully placed Salt Lake Potash’s Lake Way Project in a fully funded state.

Investment Thesis

SO4 does not have enough strength in its past financial performance to indicate tremendous performances to come. However, it is in the manufacturing sector and the fertilizer production industry. The firms in this space always prepare for a long marathon, rather than a short sprint.

The premium fertigation market is growing with a compounded annual growth rate of 5%-10% based on regions. SO4 has already secured offtakes for 92% of its production capacity of 245,000 tonnes a year from just one of the nine plants. The company expects free cash flow to kick in early 2021. This indicates a very scalable portfolio in the medium and long term.

The firm is expecting margins of 63% before taxes at its price of USD 550/tonne – owing to its low cost, high-margin manufacturing process. The product is also expected to sell at a premium of 20% due to its water-soluble nature. SO4 is also backed up by strong economics in its road to profitability with capital expenditure sitting at just AUD 264 million per annum, which is relatively low for an industry that is associated with high costs of production. An EBITDA of AUD 111 million is also expected over the course of 2021.

The lake project itself is forecasted to generate NPV of AUD 469 million, with an internal rate of return of 28%. SO4 has laid down a solid foundation for the long term in the production of SOP. This is backed up by its strong financial health.
The payback period for the initial outlay is 3.6 years for the Lake Ways Project – with a selling price of USD 550/tonne, SO4 should be able reach its break-even point in 3.6 years and become profitable.

The Debt-Equity Ratio of SO4 emphasis a strong financial backbone with a very balanced capital structure, which is extremely rare to see in a firm that operates in an industry with very high fixed costs.

As an investor in SO4, the below points make a strong case for the company:

  • A scalable low-cost global producer
  • Enough Liquid Assets for unforeseen expenses
  • An easily understandable business model
  • Strong earnings outlook
  • A growing demand in the market
  • An unrivalled management team with lots of experience

Recommendation

With the company’s projects both existing and future, assets and infrastructure backed by an excellent management team we believe Salt Lake Potash (SO4) ticks the boxes for an investment with a medium to long-term outlook, for further upside and thus giving it a “Buy” recommendation.

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