salt lake potash - taylor collison · market capitalisation (m, undil.) $116.6m cash &...
TRANSCRIPT
2 April 2019
Salt Lake Potash (ASX: SO4) Speculative Buy
Price Target $1.21
Colin McLelland Contact: 0439 412 537
Security Details
Ordinary Shares 204.6m
Unlisted Performance Shares 17.5m
Unlisted Options & Perf’ Rights 32.9m
Market Capitalisation (m, undil.) $116.6m
Cash & equivalents (31/12/2018) $12.0m
Share Price (1/04/2019) $0.57
52 week high/low $0.620/$0.425
Share Price Graph
Directors
Ian Middlemas Chairman Tony Swiericzuk MD &CEO Clint McGhie CFO and Company Sec. Mark Pearce Non‐Executive Director Bryn Jones Non‐Executive Director
Major Shareholders
Lombard Odier Asset Mgt. Ltd. 11.6% Ian Middlemas 5.7% Fidelity (various) 5.0% JP Morgan Asset Mgt. 4.2%
Investment Highlights
• Salt Lake Potash (SO4) enjoys a capex advantage through its ability to use unlined evaporation ponds and the infrastructure available in the Goldfields region. The location of the Goldfields Salt Lakes Project (GSLP) also suggests an opex advantage over competitors with more remote projects.
• SO4 has a (relatively) new MD and has strengthened its development team with three senior appointments – all ex-FMG, as is the MD.
• Despite the July 2018 release of the Scoping Study into a Demonstration Plant at Lake Way, we can’t make the economics work at that scale and we assume a production level of 200ktpa as per the Lake Wells Stage 1 Scoping Study. SO4 has confirmed it is “reviewing a larger scale scenario”, with technical results expected in the current half. SO4 is currently constructing the initial ponds at Lake Way.
• We note the MD’s performance rights are all based around 200ktpa levels – something the 50ktpa Demonstration Plant does not envisage. The recent appointment of executives from FMG means SO4 now has in-house experience of “continuous” development. We would be very surprised if the executives had been appointed to oversee a Demonstration scale development.
• SO4 has now demonstrated it can produce salts from both Lake Wells and Lake Way, and has demonstrated SOP production from Lake Wells salts, with Lake Way SOP production pending.
• SO4 now has MOUs in place with Mitsubishi Corporation (Mitsubishi, April 2018) and Sinofert Holdings Limited (Sinofert, October 2018). In both cases the MOU agreements include the provision of strategic advice on marketing - key, in our view.
• We maintain coverage on Salt Lake Potash (SO4) with a Speculative Buy recommendation and a revised NPV based Price Target of $1.21/share, subject to review as the development pathway is clarified.
Salt Lake Potash Ltd.
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Figure 1: The salt lakes making up the Goldfields Salt Lake Project
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Goldfields Salt Lakes Project (GSLP)
The Goldfields Salt Lakes Project is made up of multiple salt lakes, as shown in Figure 1 on the previous
page. Most salt lakes within the GSLP benefits from the infrastructure advantage of its location in the
Goldfields Region. Existing infrastructure includes:
• the Goldfields Highway,
• the Great Central Road,
• the Goldfields Gas Pipeline,
• multiple railheads (Malcolm, Leonora, Menzies and Kookynie), and
• access to ports at Geraldton, Freemantle (rail access) and Esperance (rail access).
The diversification benefits of having access to multiple export ports should not be under-estimated,
particularly for a single commodity Company.
As a concrete example of the infrastructure advantage of its location, SO4 intends to use excess power
available at the Wiluna Gold Mine power plant at Lake Way, whereas Kalium Lakes (ASX KAL) has
estimated A$39m in capex for the extension of a gas pipeline and the construction of a power station for
its Beyondie project.
The GSLP is a highly scaleable resource, and there appears strong potential to develop an integrated
project sourcing brine from multiple salt lakes within the project. We model production at a rate of
approximately 600ktpa by 1H 2030 from just two of the salt lakes within the portfolio. However, at that
level, SO4 would be producing what is approximately 9% of the current global SO4 market. Given the
Company’s cost curve position, it should be able to gain that market share by displacing higher cost
producers (as a worst case). The key challenge, and the key risk in our view, will be establishing demand
for the product without the excessive initial discounting that would conflict with SO4’s positioning of its
SOP as a premium product in the marketplace.
Historically, SO4’s focus was on Lake Wells (just one of the salt lakes within the broader GSLP), with a
Scoping Study released in August 2016. Early in 2018, post the signing of an MOU with Blackham
Resources (ASX BLK), the development effort appears to have been re-focused on Lake Way (again, just
one of the salt lakes in the broader GSLP), with a Scoping Study on a Demonstration Plant at Lake Way
released in July 2018.
With the development experience recently added to SO4’s management team, we expect the Company
is now less risk averse and is prepared to manage any issues that may arise from a move straight to larger
scale development. We can’t make the economics of a Demonstration Plant at Lake Way work and we
model a ramp up to a 200ktpa straight away (over two years) at the Lake Way operation for this reason.
Beyond initial development at Lake Way, we await clarity on the development pathway for an integrated
SOP operation, potentially drawing on the resource of any, or all, of the salt lakes in the GSLP. Two
priorities outside of Lake Wells and Lake Way include Lake Ballard ( which the rail line crosses) and Lake
Irwin, which is substantially closer to the railhead than Lake Wells.
Brine grade is also significant. Higher grade requiring lower volumes of brine to be pumped and
evaporated. Lake Way is a stand-out for initial development with a grade of 15.1kg/m3. After that, things
are less clearcut. With a maximum average resource grade in the Exploration Target (JORC Exploration
Targets are required to present a range) of greater than 8kg/m3, Lake Irwin makes a strong case for future
development and, given its location, it may be developed as a brine source ahead of Lake Wells.
Salt Lake Potash Ltd.
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The Lake Wells Scoping Study demonstrated that capital intensity for expansions is lower than the capital
intensity to build the initial plant capacity. It is possible that this could see an integrated development
following the initial development of Lake Way, in preference to the development of Lake Wells. Despite
the relatively advanced status of studies at Lake Wells, we are now not confident that Lake Wells will be
the next development undertaken within the broader GSLP project.
SO4 has a large playa area of over 3,300km2 (and a much larger total tenement area) across multiple salt
lakes in the Goldfields region of WA. The large playa area is significant, giving SO4 comfortably sufficient
space to build evaporation ponds on the lakes. At a simple level, higher production requires increased
surface area of evaporation ponds – a capex and earthmoving exercise.
Figure 2: Support infrastructure installed at the Williamson Pit (Lake Way)
– highlighting that space is not at a premium for SO4 at the GSLP
Given its relatively remote location, we consider that Lake Wells more than likely represents the high-
water mark for capital intensity and operating costs (although Scoping study estimate accuracy means the
actual could be 30% higher than the estimate) within the broader GSLP. Lake Way and Lake Wells are the
only two lakes in the portfolio more than 200km by road from the nearest railhead. Lake Ballard and Lake
Raeside are each just 20km from a railhead – 90% closer than Lake Wells.
There is currently no SOP production in Australia and the WA government appears keen to support the
nascent industry - in December 2018 SO4 announced the government will introduce specific potash
Mining Licences that will reduce rents by ~88% for the first five years and by ~75% thereafter.
New Management SO4 is now led by Tony Swiericzuk, who was appointed in October 2018, and commended in November.
Mr Swiericzuk is ex-Fortescue Metals (ASX FMG) and from 2012 to 2017 was General Manager of the
Christmas Creek Mine with responsibility for the construction, commissioning and ramp-up of the project.
From 2009 to 2011 he was General Manager Port Operations in Port Hedland. He has strong experience
in operations, development and logistics, which should serve the Company well as it transitions to
developer and onto production.
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Transportation costs are a significant operational impost on potash projects, having been estimated at
30% and 25% of FOB costs in SO4’s two Scoping Studies to date. Mr Swiericzuk’s experience in optimising
logistics is likely to prove every bit as valuable to SO4 shareholders as his experience in overseeing
development and ramp-up of projects.
In addition, FMG’s Christmas Creek mine used to pump ~45GL of water annually in managing the water
table to enable successful iron ore mining, giving Mr Swiericzuk valuable experience in water
management.
Market the Key Risk – but we model greater scale at Lake Way
We see relatively low resource risk for the GSLP despite the early stage of resource definition. Similarly,
while exact capital and operating costs remain uncertain, we do not see them as the key risk for the GSLP,
particularly given the development experience the Company has now acquired, through the bolstering of
the Senior Executive team in December 2018.
Sulphate of Potash (SOP) is a premium fertiliser product, and SO4 will be a relatively small entrant
(initially) to that global market. The Company may be marketing the first SOP produced in Australia. In
our view, marketing is the key risk for SO4. Successfully establishing a market presence and establishing
its product as a known market entity should significantly de-risk the greater GSLP.
In this regard, the importance of the MOU’s with Mitsubishi Corporation (Mitsubishi, April 2018) and
Sinofert Holdings Limited (Sinofert, October 2018) should not be under-estimated. In both cases, the MOU
agreements include the provision of strategic advice on marketing. Each (non-binding) agreement gives
the counter-party rights to up to 50% of the SOP production from SO4’s Demonstration Plant at Lake Way,
and, in the case of Sinofert, this extends to 50% of all production from the GSLP.
Despite the need to establish market credibility, the Lake Wells Scoping Study highlights the value upside
of greater scale. We cannot make the economics of the Demonstration Plant work, and have effectively
transplanted Stage 1 of the Lake Wells Scoping Study results to Lake Way. We highlight that the MD’s
performance rights and Stage 1 of the Lake Wells Scoping Study were based around 200ktpa, not the
50ktpa envisaged for the Lake Way Demonstration Plant.
Not only does the Demonstration Plant make no sense economically, the MD is not incentivised to pursue
it. Indeed, a current review process to consider a “larger scale scenario” at Lake Way is underway, with
technical results of the review anticipated to be released towards the end of JunQ19.
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Fertilizer Basics
The six macronutrients required by plants are: nitrogen; phosphate; potassium; sulphur; calcium, and
magnesium. There are no substitutes for these. Sulphate of Potash, (SOP, also known as Potassium
Sulphate - K2SO4) contains two of the six macronutrients required by plants (potassium and sulphur).
Testing (and real-world practice) has shown that crop yields increase with application of SOP, as can be
seen (with tomatoes) in the photo below:
Figure 3: Impact of fertilizer application rates (Source: Potash Ridge – Feb ’17 Investor Presentation)
Muriate of Potash (MOP, also known as potassium chloride - KCL) contains 46% chloride, while SOP
contains 18% sulphur and has almost no chloride. SOP is a premium product used principally for specialty
crops such as fruits, vegetables and tree nuts: products where taste and appearance are just as important
as yield.
While MOP and SOP are both potassium fertilizers, SOP is a premium fertilizer and is priced accordingly.
It also has a smaller global market (~1/10th the size) with differing supply and demand dynamics to those
exhibited in the larger MOP market. It appears an under-supplied market.
Globally, the Mosaic Company (NYSE: MOS) was, until recently, the leader in potash production (although
focussed on MOP) with 2018 production of 8.8 million tonnes and with 2019 guidance of 9.0-9.4 million
tonnes. Mosaic has a stated potash production capacity of 11 million tonnes and is forecasting global
production of 69m (MOP) in 2019. In January 2018, Potash Corp of Saskatchewan completed its merger
with Agrium, creating Nutrien, now the largest global producer of potash (again MOP focussed). Nutrien
is guiding for 2019 potash production of 13-13.4 million tonnes and expects a global market of 67-69
million tonnes. In comparison, SO4 sizes the global SOP market at approximately 7mt in 2019.
SOP is also most suitable for regions affected by high salinity soils. When chloride concentration in the
soil solution increases, plants take it up on the account of essential anionic nutrients, especially nitrate.
High concentrations of chloride may cause toxic effects and even crop failures. Even where crops are not
immediately damaged, sustained use of MOP degrades soils over time through the accumulation of salt.
100lb/acre 200lb/acre 300lb/acre
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Figure 4: Fruit leaves exhibiting salt damage (Source: Potash Ridge – Feb ’17 Investor Presentation)
As the world population grows and arable land per capita falls, demand for fertiliser is expected to
increase. There is also a relationship between country GDP and fertiliser use, with higher GDP leading to
higher fertiliser use. As such, the demand picture for SOP appears robust.
Secondary processing In addition to primary production, MOP can be upgraded to SOP through the Mannheim Process (energy
and emissions intensive as well as expensive), a process that involves the addition of sulphuric acid to
MOP in a Mannheim furnace to produce SOP and a hydrochloric acid by-product.
Figure 5: The secondary processing inputs and outputs
(Source: Potash Ridge – Feb ’17 Investor Presentation)
The production of hydrochloric acid as a by-product is important. Where demand for HCL is weaker than
demand for SOP, the disposal of excess HCL is a significant complication that prevents there from being a
straight arbitrage between the price of MOP and SOP. As a result, the price of SOP is largely determined
by the economics of high value crops rather than the input cost of MOP.
Salt Lake Potash Ltd.
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The cost curve below highlights the split nature of operations. Primary SOP production dominates the
lower end of the cost curve, before a sharp jump in costs as secondary processing becomes the means of
production. High cost production is generally from China, but also includes some European production.
Figure 6: The SOP cost curve (Source: SO4 Company presentation)
There is no widely accepted spot price series to follow for either SOP or MOP. However, recent transaction
prices are made available on various subscription services. Prices vary with quality, but SO4 quotes a
current price range of US$500-650/t for SOP and approximately US$300/t for MOP, implying a simplistic
(rather than-value-in use) premium for SOP over MOP of US$200-350$/t.
The Mining Process
Unlike many mining operations, the production of SOP from brines appears a simple process (there is no
doubt much technical work behind this apparent simplicity). The engineering value add behind brine
extraction and evaporation pond design would appear to be in the minimisation of pumping
requirements, and therefore power consumption (6% of operating costs in the Lake Way Demonstration
Plant Scoping Study). Given sufficient space exists, construction of solar evaporation ponds appears
largely an earthmoving exercise.
Once the ponds are in equilibrium, the time taken from brine entering the system to being harvested as
a salt, should be around nine months for SO4. The entire process uses off-the-shelf equipment and even
where specialized equipment (such as an amphibious excavator) is used, it is readily available.
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Figure 7: The SOP production process
Brine is pumped from trenches and/or bores into a series of solar evaporation ponds which see the
concentration of potassium increased to around 8-9%, but with chloride levels remaining high. Potassium
double salts are then mechanically harvested, in a process the Lake Wells Scoping Study estimated would
take70 days (20 days for draining and drying the salts, 50 days for harvesting)
The harvested salts are subsequently fed into a processing plant, where they are crushed and milled and
dissolved back into potassium rich liquor (using a circulating potassium rich intermediate brine). The
resulting thickened salt slurry solution is converted to schoenite in a sulphate solution at ambient
temperatures. The liquor then passes through a flotation stage and the chloride is floated off. Heating the
resultant schoenite slurry to 48 degrees Celsius sees the crystallisation of the schoenite to SOP. The SOP
is then filtered, dried and packed. Final product format (powder, granulated etc) is about meeting
customer requirements and maximising product revenue, and SO4 is still evaluating this. Regardless, it
will be using readily available equipment used widely in the sugar industry.
The industry wide average for SOP is a range of K2O of 50-52%, with NaCl ranging from 0.3% - 1.0%. SO4
has demonstrated it can produce a very high quality SO4 product. SO4’s current expectations are for K2O
at around 53% with a very low NaCl content at 0.1%. SO4 needs to do more work to understand if it will
be rewarded for such a high-quality product, or if projected returns are improved by targeting production
of a lower specification product at a lower unit cost.
SO4 has already demonstrated an ability to produce high quality SOP from salts produced at Lake Wells.
Pilot plant production of SOP from salts produced at Lake Way is currently underway at the SRC (finalising
the Company’s process flowsheet, prior to sign-off).
The Lake Wells Scoping Study anticipated production of 200ktpa SOP, produced from shallow, low cost,
trenches and bores and subsequently by deeper (120m) bores for production of 400ktpa SOP. Trenches
are simply dug with an excavator with an example design shown in the Lake Way Demonstration Plant
Scoping Study.
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Figures 8 & 9: Cross Section Example of a Trench Design, and example trench at Lake Wells
SO4 has successfully tested on-lake evaporation ponds constructed from in-situ clay materials. The capex
saving compared to lined ponds is significant (~95% for large scaled ponds, Amec Foster Wheeler
estimated that comparative costs for 400ha of on-lake ponds were $1.6m unlined and $42.2m using HDPE
liner).
Figure 10: Successfully tested clay lined evaporation pond at Lake Wells
For large projects this can make the difference between manageable project capex requirements and
implausible ones. The Company is continuing to trial alternative construction methods for evaporation
ponds, seeking to further reduce capital costs and associated construction time.
Lake Way – More than a “Demonstration plant” assumed
In March 2018, SO4 announced an MOU with BLK to study the potential development of a SOP operation
based at Lake Way. In July 2018, SO4 released Scoping Study results for a Demonstration Plant at Lake
Way. In January 2019, the Company announced successful production of salts from Lake Way. Production
of final product from Lake Way salts is currently being undertaken through pilot testing by the
Saskatchewan Research Council (SRC), to obtain sign-off on the Company’s process flow sheet.
SO4 has announced it expects to release the technical findings of a review into a larger scale scenario at
Lake Way in the current half. While much of SO4’s data is likely to be at a higher level, we expect this will
be badged as a Scoping Study.
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Figure 11: Lake Way and the Williamson pit
In return for the use of its tenements, BLK will gain a 4.0% royalty on SOP production (from these
tenements only) and has been granted rights to any gold within SO4’s extensive tenement holdings. We
understand formalisation of these agreements is well advanced and the agreements should not be unduly
impacted by any possible events involving BLK.
The Demonstration Plant was to be constructed on the Mining License held by BLK, with a Native Title
Agreement already in place. Construction of the initial Lake Way ponds (previously the “Williamson
ponds”) has now started, with A$13m raised by the Company in November 2018 to fund initial on-lake
infrastructure.
Mining ceased at the Williamson Pit in 2006, and the pit has since filled with water. The annual process of
seepage and rainfall, followed by evaporation, has concentrated the salts substantially, leading to an
average SOP brine grade of 25kg/m3, containing 32kt of SOP.
We note that the March 2019 announcement regarding the commencement of construction made no
mention of “demonstration scale”, referring instead to “commercial scale” evaporation ponds.
Valuation Considerations – on an NPV basis the Demonstration Plant doesn’t work
Simplistically, SO4 has assumed revenue per tonne of A$667/t and cash costs (FOB) of A$387/t for the
Demonstration Plant, delivering a gross operating margin of A$280/t (42%) with a capital cost (including
contingency and indirect costs) of A$49m. Despite an attractive operating margin, the operation needs to
produce a total of 175kt to repay the capital investment prior to any consideration of the time value of
money. This production was not envisaged in the Demonstration Plant study. Simply put, the
Demonstration Plant, as per the Scoping Study, makes no economic sense. The Scoping Study alludes to
the attraction of expanding production, stating “expansion of production beyond the demonstration plant
would capture substantial economies of scale”.
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If SO4 were able to achieve the A$241/t cash cost estimated for the Lake Wells Stage 1 operation (2016
Scoping Study) the gross operating margin would improve by 52% to A$425/t. Given the recent
development skills added by the Company, we expect this opportunity to prove compelling, and it is what
we model, pending further information becoming available.
The Scoping Study announcement suggests the Demonstration Plant is intended to run for between one
to three years (varies between “12-24 months” and “2-3 years”). We would need to model several years
longer than this to deliver even a break-even NPV for the Demonstration Plant our assumed SOP price of
US$500/t and a 10% discount rate. High depreciation charges mean the project is unlikely to deliver
accounting profits at the envisaged scale – hence (in our view) the review into “a larger scale scenario”
for Lake Way, and our decision to assume planned Lake Wells Stage 1 scale production will occur at Lake
Way first.
We see the real value of the Demonstration Plant as in the proof of concept, and the ability to gain market
acceptance for the end product without resorting to substantial initial discounting, together with the
possible proof that partially lined ponds are not needed for harvest ponds. Value is not in the continued
operation of the project at this smaller scale. Pending SO4’s findings from its review into a larger scale
operation, we currently assume ramp up to a 200ktpa rate by DecH2022.
What is Currently Being Built?
The initial Lake Way ponds (previously Williamson Ponds) comprise approximately one third of the total
Demonstration Plant pond area of 389ha. The evaporation ponds have a total capex estimate of A$7.8m,
suggesting the initial ponds will cost approximately A$2.6m to build. A further A$1.6m is estimated for
the total trench extraction network (total 30km, initial Lake Way ponds approximately 2km for 6.7% of
total), so we estimate the initial capital outlay at a modest A$2.7m in total.
Figure 12: Layout of initial Lake Way ponds
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The initial ponds will consist of:
• Two evaporation ponds (both simple structures with the lake surface untouched for the most
part):
I. Kainite Harvest Pond 500m x 500m (25 Ha); and
II. Halite Pond 2,000m x 500m (100 Ha);
Figure 13: Kainite harvest pond in the foreground and halite evaporation pond in the distance, with berms being
constructed from the new causeway
• A 2km long and 4m deep trench will also be constructed running parallel to the ponds which will
provide additional brine feed into the pond network;
• A 1.4km causeway from the Williamson Pit to the Kainite Harvest Pond;
Figure 14: New causeway from the Williamson Pit
• Associated piping and pumping infrastructure. Note that while de-watering will be paid for by
SO4, it will be managed by BLK.
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Timing
SO4 has committed to dewatering the Williamson Pit by 30 June 2019 – a process expected to take 76
days to complete. SO4 is aiming to have the initial Lake Way ponds ready to accept brine by 9 April 2019.
While the high-grade brine in the Williamson pit should reduce the timeline for production of salts, the
production of saleable end product at a commercial scale at Lake Way is not imminent. The Scoping Study
estimated 9-12 months would be needed for fabrication and installation of the process plant. Assuming a
decision is taken when the Feasibility Study is expected to be complete, SO4 expected to commission the
plant in early 2020, using stockpiled salts. The longest lead items required have a lead time of
approximately nine months.
Given the published timeline for commissioning, we expect further studies are close to the critical path
for development. We model first sales in JunH2021 with production of 27kt of SOP assumed in the half.
We assume a continued ramp up to a 200ktpa rate in the DecH2022. A Stage 2 expansion at Lake Way
may offer lower capital intensity than the initial development of Lake Wells (as may another lake
altogether), hence our emerging uncertainty around the development timeline for Lake Wells.
Capital and Operating Costs
The Scoping Study for the Demonstration Plant estimated capital costs at A$48.9m (including indirects
and contingency) and operating costs at A$387/t, including a 4% royalty to BLK. Given the expected
lifespan our modelling of this scenario delivers a negative NPV. You would not build it. However, our site
visit highlighted that SO4 are rapidly developing at Lake Way, and the Company has recently acquired
significant development experience.
SO4 has estimated a “whole of lake” resource for Lake Way (73mt) that is approximately 90% of the low
end of the exploration target for Lake Wells (80-85mt) on a drainable basis. Given that:
• the resource scale (8.2mt drainable) is there to support a larger operation,
• the economics of a small operation don’t work, and
• the Company has said it is reviewing a larger operation
we have effectively transferred the Stage 1 production levels, capital and operating costs from the Lake
Wells Scoping Studs to Lake Way, in our modelling. We have added the 4% BLK royalty to these costs for
production from within the BLK tenements (492kt assumed). Pre this royalty, we assume the following
production and costs at Lake Way:
Demonstration Plant Our Model
Annual Production (tpa) – steady state 50,000 200,000
Capital Cost* A$49m A$224m
Operating Cost** A$387/t A$241/t
* Capital Costs based on an accuracy of -10%/+30%.
**Operating Costs based on an accuracy of ±30% including transportation & handling (FOB) but before royalties and depreciation. Private
royalty of 4% payable on production from BLK tenements
Clearly, there is risk involved in this approach, but we do not expect the Demonstration Plant to be built
as per the Scoping Study. It makes no economic sense. We await clarification from the Company on the
development pathway and timeline at Lake Way, and for other lakes making up the broader GSLP.
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Lake Wells – Scoping Study (2016)
The Lake Wells Sulphate of Potash (SOP) Project Scoping Study was released in 2016. Since that time, SO4
has concluded a Native Title Agreement for the area, secured a Mining Lease, and signed an MOU to study
cost sharing benefits with Australian Potash (ASX APC), given APC’s project is adjacent to SO4’s Lake Wells.
Figure 15: MOU with neighbouring Australian Potash to study cost sharing
However, with the apparent near-term production focus on Lake Way, and with lakes Irwin and Ballard
both offering demonstrable transportation advantages over Lake Wells, we are now uncertain of the
development timeline. We now conservatively assume first sales of SOP in 2025.
The Scoping Study was based on a two-stage development plan for Lake Wells, with production remaining
at Stage 1 levels until the initial capex had been repaid from cashflow (under our modelling this takes four
years):
• Stage 1 was based on shallow trenching and bore production with 100% of brine feed drawn from
the near-surface Measured Resource.
• Stage 2 also included pumping additional brine from the deeper Inferred Resource, to increase
production to 400,000tpa of SOP.
Key results for Stage 1 and Stage 2 from the Scoping Study included:
Stage 1 Stage 2
Annual Production (tpa) – steady state 200,000 400,000
Capital Cost* A$224m A$44m
Operating Cost** A$241/t A$185/t
* Capital Costs based on an accuracy of -10%/+30%.
** Operating Costs based on an accuracy of ±30% including transportation & handling (FOB Esperance) but before royalties and depreciation.
Further work is currently underway to refine parameters to feed into higher level studies.
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At this stage of study, we would typically assume capital costs at the upper end of the stated study
accuracy (i.e.+30%). However, given SO4 has entered into a cost sharing agreement with neighbouring
APC we are comfortable that the risk to capital (Stage 1 (200ktpa) A$223.7m, Stage 2 (400ktpa) A$43.9m)
and operating costs (Stage 1 A$240.84/t, Stage 2 A$185.10/t) is likely on the downside in this instance.
Given Lake Wells is on the North East extremity of the GSLP it would appear that this project should
represent the worst-case scenario in terms of capital intensity and operating costs for development and
operation of the other salt lakes in the GSLP.
SO4 Valuation – A$1.21/share
We use a sum of the parts NPV valuation for SO4, with a 10% discount rate delivering a Base Case valuation
estimate at A$1.21/share. Our bull valuation is A$1.40/share. Our bear valuation is A$0.96/share.
Unrisked NPV (A$m) Risked NPV (A$m)
Lake Way A$234m A$154m
Lake Wells A$344m A$52m
Exploration A$116m
Corporate Costs -A$29m
Cash & Other A$17m
Total A$682m, A$2.66/share A$310m, A$1.21/share
Lake Way – A$0.60/share - modelling a larger scale operation
The small scale, short life, Lake Way Demonstration Plant project generates positive annual cashflow once
sales begin, but is unable to offset the earlier capex investment. In our view it won’t happen as per the
Scoping Study.
In valuing Lake Way, we have assumed production from the JunH2021 with production of 82kt SOP in the
first twelve months, with production steadily ramping up to an annualised steady state rate of 200ktpa
by DecH2022. We assume higher unit costs before steady state production is reached. We assume a mine
life of 31 years and model life of mine SOP production of 6.9mt (~91% of the LOM production we model
at Lake Wells). We value the Lake Way project at A$154m (A$234m unrisked, - risked to 66%), or
A$0.60/share. We use the capital and operating costs of the Demonstration Plant Scoping Study initially,
before adopting the Stage 1 parameters from the Lake Wells Scoping Study. This may well prove to be
incorrect, but it is the best information available to us at this time.
Lake Wells – A$0.20/share - uncertain of development timing
Given our current uncertainty around the development timeline for the Lake Wells project, we have
increased our risk weighting from 50% previously to 85% now, giving the project just 15% of its unrisked
value, as well as pushing first sales back to what may prove a very conservative 2025.
In valuing Lake Wells, we have assumed Stage 1 production from DecH2025 and Stage 2 production from
DecH2029. In each case we assume a 6-12 month ramp-up period (with higher unit costs) before steady
state production is reached. We value the Lake Wells project at A$52m (A$344m unrisked), or
A$0.20/share.
Exploration – A$0.45/share – there is value in the remaining seven salt lakes in the GSLP
Lake Wells and Lake Way represent just two of the salt lakes in the broader GSLP, and on a drainable basis
represent between 26-55% of the global drainable Exploration Target for the broader GSLP.
Salt Lake Potash Ltd.
Taylor Collison Limited 17 | P a g e
We attribute a nominal Exploration Value of A$116m (A$0.45/share), set as 20% of the Lake Wells and
Lake Way valuations combined, as a proxy for the inherent value in the potential integrated development
of the broader GSLP.
Corporate Costs – (A$0.11/share) – a long life impost
Given the long life we assume at Lake Way scoping study we model ongoing corporate costs to 2056,
leading to a corporate impost of A$29m (A$0.11/share) on our valuation for the Company.
SOP Prices and FX
SO4 assumed an SOP price of US$525/t in the Lake Wells Scoping Study and US$500/t in the
Demonstration Plant Scoping Study. In both cases the AUD:USD FX rate was assumed to be 0.75.
We have modelled flat US$ SOP prices, while our assumed FX rate varies as shown below:
Scenario JunH19 JunH
2019
DecH
2019
JunH
2020
DecH
2020
JunH
2021
DecH
2021
JunH
2022
DecH
2022
JunH
2023
Long
Term
Base Case SOP (US$/t) 500 500 500 500 500 500 500 500 500 500
A$/US$ 0.72 0.75 0.80 0.78 0.75 0.75 0.75 0.75 0.75 0.75
SOP (A$/t) 694 667 625 641 667 667 667 667 667 667
Bull
scenario
SOP (US$/t) 600 600 600 600 600 600 600 600 600 600
A$/US$ 0.75 0.80 0.80 0.90 0.85 0.85 0.85 0.85 0.85 0.85
SOP (A$/t) 800 750 750 667 706 706 706 706 706 706
Bear
scenario
SOP (US$/t) 400 400 400 400 400 400 400 400 400 400
A$/US$ 0.71 0.70 0.68 0.68 0.65 0.65 0.65 0.65 0.65 0.65
SOP (A$/t) 563 571 588 588 615 615 615 615 615 615
Our valuation scenarios make no changes to assumed capital or operating costs and only alter the revenue
line. It is also worth noting that the impact of price changes in early years is muted, as it is mostly limited
to relatively low sales levels from Lake Way. The Long Term price applies to both Lake Wells and Lake
Way, but given we assume first production from Lake Wells in 2025, the project is unaffected by early
price fluctuations.
Salt Lake Potash Ltd.
Taylor Collison Limited 18 | P a g e
Funding risk
SO4 remains unfunded for development of the Lake Wells project, the GSLP or even completion of the
full Demonstration Plant, as studied, at Lake Way. Typically, we would assume a nominal capital raising,
diluting our valuation for a greater number of shares to fund expected capex.
SO4 had A$12.0m in cash at the end of 2018 and forecast expenditure of A$5.5m in MarQ2019. There is
no evidence that SO4 expects to slow its capital burn rate, meaning the company will likely need further
funding towards, or shortly after, the end of JunQ2019.
In this instance, with SO4 owning 100% of the projects and with the Lake Wells Scoping Study estimating
first quartile operating costs at scale, we assume other sources of funding - such as offtake funding, pre-
payments or joint ventures may be available.
Given no market ability to hedge production, we would expect any project debt to be provided by non-
bank lenders, but would expect SO4’s predicted bottom quartile positioning on the industry cost curve to
give debt providers a great deal of comfort. We note ASX listed Kalium Lakes (ASX KLL) has secured A$74m
of debt from the Northern Australia Infrastructure Fund (NAIF) and agreed terms for a further A$102m
from German KfW IPEX-Bank. This A$176m of debt represents 81.5% of the proposed Stage 1 project
capex for its Beyondie project in the Northern Territory.
However, at this stage, SO4 remains unfunded and more conservative investors may choose to await
greater clarity around the funding solution.
Valuation sensitivity
Our valuation for SO4 at various US$ SOP prices and AUD/USD FX rates (on a constant basis) is shown in
the table below:
SOP Price (US$/t)
AUD:USD
350 400 450 500 550 600 650
0.65 0.59 0.96 1.33 1.70 2.08 2.45 2.82
0.70 0.40 0.75 1.09 1.44 1.78 2.13 2.47
0.75 0.24 0.56 0.89 1.21 1.53 1.85 2.18
0.80 0.10 0.40 0.70 1.01 1.31 1.61 1.91
0.85 -0.02 0.26 0.54 0.83 1.11 1.40 1.68
Salt Lake Potash Ltd.
Taylor Collison Limited 19 | P a g e
GSLP - Resource
SO4 has published JORC resource estimates for Lake Wells and Lake Way and has published Exploration
Targets for a further seven of the lakes in the GSLP (as well as Lake Wells on a drainable basis).
Note JORC Resource estimates are calculated on the assumption that it never rains again. The 9mm of
rain received by the site the day prior to our site visit exposes this assumption for the fallacy it is. The
resource estimate assumes a finite resource at a point in time, whereas in reality, rainfall and associated
lake recharge will add to the resource somewhat over time.
Lake Wells - JORC Resource Classification Bulk Volume
(million m3)
Porosity Brine Volume
(million m3)
Average SOP (K2SO4)
Concentration
(kg/m3)
In situ K2SO4
Tonnage (Mt)
Measured 5,427 0.464 2,518 8.94 23
Indicated 775 0.464 359 8.49 3
Inferred* 18,521 0.368 6,275 -2,015* 8.68 54 – 59
Total 24,723 0.392 9,154 – 9,691 8.74 80 -85
*Using Porosities of 0.22 – 0.30 for the Fractured Siltstone Aquifer (aircore drilling prevented porosity analysis of an intact sample)
The Mineral Resource Estimate at Lake Wells totals 80-85 million tonnes of SOP. The Mineral Resource
estimate is based on an average thickness of 52m. The brine pool remains open at depth and laterally in
a number of areas.
Lake Way – “Whole of Lake” JORC Resource
SO4 previously (July 2018) published a resource for Lake Way based solely on the Blackham tenements
(55km2) to a depth of just 6m. SO4 has now released an updated “whole of lake” resource for Lake Way
(an additional 87km2). Just using the Measured and Indicated resource categories for the drainable (rather
than the far higher stored) resource would deliver the following mine lives at Lake Way:
• Demonstration Plant 50,000tpa – 64 years (164 years using total drainable resource)!
• 200,000tpa – 16 years (41 years using total drainable resource)
• 400,000tpa – 8 years (20 years using total drainable resource)
Classification Bulk Volume
(million m3)
Porosity Brine Volume
(million m3)
Average SOP
(K2SO4)
Concentration
(kg/m3)
In situ K2SO4
Tonnage (Mt)
Measured (Williamson Pit) 1.26 NA 25.5 0.03
Measured (Lake) 1,060 43% 456 15.4 6.9
Indicated (Paleochannel) 686 40% 274 13.6 3.7
Inferred 10,216 40% 4,096 15.2 62.2
Total 11,963 4,826 73
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Taylor Collison Limited 20 | P a g e
Remaining Lakes – Exploration target
SO4 has released Exploration Targets for seven other lakes, as well as estimating a drainable resource
from the JORC in-situ resource for Lake Wells. The drainable resource is the quantity of brine expected to
be amenable to extraction under gravity. The stored resource is of only academic interest in that regard.
Lake Playa Area
(km2)
Average grade (kg/m3) Stored (Mt) Drainable (Mt)
SOP (min) SOP (max) SOP (Min) SOP(Max) SOP (Min) SOP(Max)
Ballard 626 3.5 4.7 42 53 3.1 18.0
Barlee 350 1.9 4.3 10 21 0.8 8.1
Irwin 306 4.8 8.1 25 43 1.9 15.0
Marmion 339 3.0 5.1 20 34 1.6 11.0
Minigwal 567 3.8 8.3 45 98 3.4 31.0
Noondie 386 4.2 6.0 35 50 2.8 16.0
Raeside 89 2.1 7.0 6 20 0.4 5.4
Way* 172 15.1 73 8.2
Wells** 477 8.7 8.8 80 85 9* 29*
Total GSLP 3,312 336 477 31.2 142
*Drainable resource as per the JORC estimate
** Estimation of a drainable resource from the JORC estimate of stored resources
The JORC resource for Lake Way (73mt stored) on a whole of Lake basis, substantially exceeded (by 38-
161%) the March 2018 Exploration Target (28mt -54mt stored) for the lake, with upside coming from the
paleochannel and the Inferred resource in the southern area of the lake.
Lake Wells and Lake Way represent just two of the salt lakes in the broader GSLP, and on a drainable basis
represent between 26-55% of the global drainable Exploration Target for the broader GSLP.
Note that using the total minimum drainable SOP tonnage for all salt lakes in the GSLP (31 million tonnes)
implies a 155 year life for the complex at a production level of 200ktpa (Lake Wells Scoping Study Stage
1) and a still very lengthy 78 years at the Stage 2 steady state level of 400ktpa across the global resource.
There is significant scope within the resource to scale up production levels at an integrated GSLP project.
Even at 1mtpa, the mine life would be 31 years. An integrated project would need to produce 1.6mtpa to
achieve a mine life as short as 20 years!
While the preceding ignores real world recovery factors and market demand, it nonetheless shows the
GSLP has the potential to be a truly significant source of supply, particularly in the context of a current
SOP market estimated at 7mtpa (1.6mtpa is 23% if it all displaces existing production and 19% if it creates
new demand). It highlights the key role marketing will play in the successful development and
optimisation of the GSLP, and the importance of marketing as the key risk in our view.
Salt Lake Potash Ltd.
Taylor Collison Limited 21 | P a g e
ASX-listed Potash Brine Developers
Salt Lake Potash
(SO4)
Australian
Potash
(APC)
Kalium Lakes
(KLL)
Agrimin
(AMN)
Reward
Minerals
(RWD)
Market Cap’. A$117m A$31m A$92m A$99m A$16m
Net Cash (as at
31/12/2018)
A$12.0m A$5.4m* A$5.3m A$10.4m A$3.2m
Project Name Lake Way
Demonstration
Lake Wells Lake Wells Beyondie Mackay SOP Lake
Disappointment
Status of Project Ongoing Pre - Feasibility DFS Underway BFS Complete DFS
Underway
DFS Underway
Steady state
production
50ktpa Stg 1 :200ktpa
Stg 2: 400ktpa
Stg 1: 150ktpa
Stg 2: 300ktpa
(yr 6)
Stg 1: 90ktpa
Stg 2:180ktpa
426ktpa 408ktpa
Mine Life (years) 2-3 (artificially
limited)
20+ 20 30+ 20 23
Initial Capex A$49m Stg 1 A$224m
Stg 2: A$44m
Stg1: A$175m
Stg 2: A$163m
Stg 1: A$216m**
Stg 2: A$125m
A$545m*** A$451m
Operating Cost
(C1)
A$387/t Stg 1: A$241/t
Stg 2: A$185/t
Stg 1: A$368/t
Stg 2: A$339/t
Stg 1: A$224/t
Stg 2: A$182/t
A$296/t*** A$335/t
Capital Intensity
A$/t SOP
A$980/t Stg 1: A$1,120/t
Stg 2: A$670/t
Stg 1: A$1,167/t
Stg 2: A$1,126/t
Stg 1: A$2,400/t
Stg 2: A$1,894/t
A$1,230/t*** A$1,105/t
*Includes A$4.2m gross proceeds from 2019 rights issue
**Debt funding now organised with A$74m approved from NAIF (20/2/19) and agreed terms for a further A$102m from German
KfW IPEX-Bank (19/3/19)
***Converted from USD at an exchange rate of (AUD/USD) = 0.75
Aspirational SOP production from these ASX listed juniors (other than SO4) amounts to 1.3mtpa, or
approximately 19% of the current global market (ignoring whether the ratio between proposed capex and
current market capitalisation suggests development is likely).
This again highlights the importance of marketing in SO4’s development plans. SO4’s position on the cost
curve means it can afford to gain market share by undercutting incumbent suppliers, but the Company
wants to compete on quality not on price. Gaining market share at the premium price desired is the key
risk in our view.
Salt Lake Potash Ltd.
Taylor Collison Limited 22 | P a g e
Directors and Management
Ian Middlemas
Chairman
Mr Middlemas is a Chartered Accountant, a member of the Financial Services Institute of Australasia and
holds a Bachelor of Commerce degree. He worked for a large international Chartered Accounting firm
before joining the Normandy Mining Group where he was a senior group executive for approximately 10
years. He has had extensive corporate and management experience, and is currently a Director with a
number of publicly listed companies in the resources sector.
Tony Swiericzuk
Chief Executive Officer
Mr Swiericzuk is a Mining Engineer with outstanding credentials as a builder and operator of mining
projects, having recently been General Manager of the Christmas Creek Mine from 2012 to 2017. He
oversaw the construction, commissioning and ramp-up of this project from 15Mtpa to 60Mtpa in his initial
two year period, then proceeded to optimise the operation and help drive FMG to become the world’s
lowest cost iron ore producer.
In his initial years at FMG Mr Swiericzuk was General Manager Port Operations in Port Hedland and
managed the ramp up from 20Mtpa to 60Mtpa from 2009 to 2011.
Bryn Jones
Non-Executive Director
Mr Jones is a Chemical Engineer with over 20 years management experience in industrial processing in
commercial and mining operations around the world, including potash and phosphate projects.
Mark Pearce
Non-Executive Director
Mr Pearce is a Chartered Accountant and is currently a Director of several listed companies that operate
in the resources sector. He has had considerable experience in the formation and development of listed
resource companies and has worked for several large international Chartered Accounting firms. Mark is
also a Fellow of the Governance Institute of Australia and a Fellow of the Financial Services Institute of
Australasia.
Clint McGhie
Chief Financial Officer & Company Secretary
Mr McGhie is an experienced Chartered Accountant and Company Secretary who commenced his career
at a large international accounting firm and has since been involved with a number of ASX and AIM listed
exploration and development companies operating in the resources sector, including Apollo Minerals
Limited, Berkeley Energia Limited and Sovereign Metals Limited. Mr McGhie is also an Associate Member
of the Governance Institute of Australia (Chartered Secretary), and a Fellow of the Financial Services
Institute of Australasia.
Salt Lake Potash Ltd.
Taylor Collison Limited 23 | P a g e
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Date Prepared: March 2019
Analyst: Colin McLelland BE, GDAFI, MBA
Release Authorised by: David Cutten