Salt Lake Potash’s Lake Way project is mostly derisked, so where’s the re-rating?

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This week I caught up with Salt Lake Potash Limited’s (ASX:SO4, LON:SO4) chief executive officer, Tony Swiericzuk (writes Proactive’s mining analyst, Dr Ryan Long).

Swiericzuk is a seasoned executive director and general manager, having spent the best part of 10 years working with Fortescue Metals Group (ASX:FMG) as a director of business development and exploration, and also as general manager of the Christmas Creek Mine and Port Hedland.

Salt Lake Potash is on the cusp of making the transition from a developer to a producer as it completes the final stages of construction at its Lake Way Sulphate of Potash (SOP) Project (Figure 1), located in Wiluna, Western Australia.

Evaporation Ponds at Lake Way

Figure 1: Evaporation Ponds at Lake Way

Funding Risk – Equity Closed, Debt Closure Near-Term

In the near-term, we are anticipating that Salt Lake Potash will announce the closure of its A$203mln debt facility with Taurus Mining Finance Fund No.2 LP and the Clean Energy Finance Corporation, which will be a major de-risking milestone for the business.

The company has already completed a A$98.5mln equity financing, at a price of A$0.5/per share, which closed in September. Raising this large amount of equity during a global pandemic was a substantial achievement for the company, and by itself is a significant de-risking milestone, but despite this, the company’s shares have traded sideways since the completion of the equity financing.

Once closed, the debt combined with the closed equity funding should not only cover the capital cost of constructing the project –  A$264mln (including A$18mln of contingency) – but also the working capital requirement while the company ramps up its operations. As a result, the risk of further dilution to shareholders is low.

Development Risk – Development Nearing Completion

Three on-lake pond trains and 62km (kilometres) of associated trenches have now been constructed at Lake Way, with the fourth pond train under construction. Water bores have been installed in the paleochannel and the evaporation ponds are precipitating potassium-rich harvest salts.

 

Water bores

Figure 2 Water bores and precipitated harvest salts at Lake Way

Dry commissioning of the processing plant at Lake Way is expected to commence in December, with wet-commissioning likely to commence in early-February, which should mean the company starts production of SOP by the end of the first quarter of 2021. While some development and commissioning risk remains, the company is reaching the end of the construction process and the development risk continues to reduce with each week that Salt Lake Potash advances the project.

Project Economics Risk – Robust Project Economics

A bankable feasibility study (BFS) for Lake Way was completed in October 2019 and returned a post-tax net present value using an 8% discount rate (NPV8) of A$479mln and a post-tax internal rate of return (IRR) of 28%, assuming a modelled sales price of US$550 a tonne (t) and a C1 cash cost of US$205/t.

At full production of 245kt per annum of SOP, the project is expected to generate average underlying earnings (EBITDA) per annum of A$111mln and average annual post-tax free cash flow per annum of A$78mln.

Offtake Agreements Risk – Offtakes In place

Salt Lake Potash already has six offtake agreements in place for 92% of its 245kt per annum production of SOP, with the balance of 21,000t earmarked for the domestic market and other opportunistic demand.

What’s Next – Growth and Potential Yield

Lake Way is only one of 11 lakes, covering an area of 5,0000km2 within the West Australian goldfields owned by Salt Lake Potash. Over the long-term, the company plans to re-create its success at Lake Way by expanding operations to a number of other lakes within its concession holding. Resource definition work is currently underway at both Lake Ballard and Lake Marmion, and previous studies have been completed at Lake Wells, which could feasibly come into production in 2023 and 2025 respectively.

The company is also considering paying a dividend at the appropriate time, once its debt level is reduced and the company is confident it can internally fund its growth initiatives, making it attractive to yield-seeking investors.

With Salt Lake Potash’s Lake Way Project now largely de-risked and the share price yet to re-rate, the company’s market capitalisation appears undemanding at this level (A$299mln), with the company trading on an estimated enterprise value (EV)/EBITDA ratio of 3.6, assuming the forecast EBITDA from the BFS and closure of the debt financing.

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