Kurt Worden

Transcription

1 BurnVoir Company Research 31 March 2017 Kalium Lakes Limited Kalium Lakes Ltd. (KLL.ASX) is an ASX listed sulphate of potash developer. Its assets include the 100% owned Beyondie Potash Project, currently progressing through a pre-feasibility study, and the Carnegie Potash Project, an earlier stage project which was recently joint ventured with BC Iron (BCI.ASX). Both assets are located in the East Pilbara region of Western Australia. Kurt Worden kew@burnvoir.com.au John Ciganek jpc@burnvoir.com.au This Research has been prepared and issued by BurnVoir Corporate Finance Limited ( BurnVoir ) and remains the property of BurnVoir. No material contained in this Research may be reproduced or distributed without prior written approval of BurnVoir, except as allowed by the Copyright Act. This Research is current at the date of publishing. For updates or further information regarding this research, please contact BurnVoir. BurnVoir does or seeks to undertake business with companies covered in its research and therefore, Investors should consider this report as only a single factor in making their investment decisions. For explanations regarding other important disclosures, please refer to the disclosure section at the end of this document. BC Iron JV unlocks value at Carnegie, progress at Beyondie as PFS nears completion Kalium Lakes Limited (KLL.ASX, mkt cap A$50m) has negotiated a joint venture on its second Sulphate of Potash (SOP) project, the Carnegie Potash Project (Carnegie), with BC Iron (BCI.ASX, mkt cap A$$71m). Our valuation has lifted from A$178m to A$197m on recognition of value for Carnegie. Kalium Lakes will manage the joint venture, however, it will remain focused on advancing its Beyondie Potash Project (Beyondie), generating steady newsflow over the coming quarter including drilling and pump test results, trial pond results, an updated Resource estimate, and culminating with the release of the Pre- Feasibility Study (PFS) by mid-year. From our recent site visit, we are confident Kalium Lakes management will deliver, given progress to date in the short time since listing. Carnegie Potash Project Joint Venture (CJV) BC Iron has earned its first 15% and can earn up to 50% of the CJV via staged investment of up to A$10.5 million, sole funding the CJV through to completion of a Feasibility Study (FS). We had not previously included Carnegie in our KLL valuation and the BC Iron transaction, together with a comparison with neighbouring SOP developers, form the basis of our A$18.5 million valuation for Kalium Lakes 85% interest in the CJV. Beyondie still leading the way This week we undertook our second site visit to Beyondie, and we were impressed with the company s progress since listing in late December The camp is installed (significantly under budget), over 200km of roads and access tracks have been upgraded / emplaced, drilling has recommenced, and trial pond construction is well underway. Company Data ASX Code KLL.ASX Share Price (A$/sh) 0.39 Number of shares (m) Market Capitalisation (A$m) 47.5 Free float (%) month high / low (A$/sh) 0.20/0.46 Average daily volume ( 000 shares) 134 GICS Industry Group Materials Earnings Summary (June YE) 2017F 2018F 2019F 2020F Reported Profit ($M) (0.9) (0.8) (2.0) 27.9 EPS ( ) (0.01) (0.01) (0.02) 0.18 P/E (x) na na na 1.79 CFPS ( ) (0.03) (0.01) P/CF (x) na na EV/EBITDA (x) na na na 2.8 KLL Share Price Performance Significant upside remains Kalium Lakes share price has performed strongly since listing three months ago, and is currently trading at double the IPO price. Notwithstanding, plenty of upside remains, given our indicative valuation for Kalium Lakes based on a 24 year, 150ktpa SOP operation at Beyondie is A$1.05/sh (US$500/t SOP, real, 0.75 AUDUSD). At spot SOP (US$575/t SOP, mid-point of market range) and currency (0.764 AUDUSD), it increases to A$1.56/sh. From a peer comparison perspective, Kalium Lakes has closed the gap to its key peers, arriving at the lower end of the A$50-80 million trading range for those companies. In our view Kalium Lakes is rapidly demonstrating why it should be at the top of that range, given: Among the SOP projects, Beyondie is the closest to infrastructure, has the highest grade, and is the most advanced (PFS almost complete, has key approvals for pilot scale operations); and Carnegie (Kalium Lakes 85%, BC Iron 15%) is comparable in size and adjacent to the flagship Lake Wells Projects of Salt Lake Potash (SO4.ASX) and Australian Potash (APC.ASX), and has attracted a reputable JV partner in BC Iron to sole fund it through to FS completion. Sum of Parts Valuation NPV Undiluted Diluted A$M A$/sh A$/sh Beyondie Potash Project (100%) Carnegie Joint Venture (85%) Corporate (33.2) (0.21) (0.18) Tax Shield Debt Cash Total Value of Common Equity BurnVoir is currently acting as Corporate Finance Adviser BurnVoir Corporate Finance Limited

2 BC Iron pursues SOP strategy with Kalium Lakes On 1 March 2017 Kalium Lakes announced a joint venture agreement with BCI Iron Limited (BCI.ASX, A$71m mkt cap) with respect to its second Sulphate of Potash (SOP) project, the Carnegie Potash Project (Carnegie). BC Iron may earn up to a 50% interest in the Carnegie Joint Venture (CJV) by sole funding the CJV through to completion of a Feasibility Study. Kalium Lakes will manage the CJV. Table 1. Key Terms of the CJV Stage Milestone / Activity Expenditure BCI JV Interest Stage 1 Provide mobile camp, Complete Scoping Study $1.5m 30% Stage 2 Complete Pre-Feasibility Study $3.5m 10% Stage 3 Compete Feasibility Study $5.5m 10% Total $10.5m 50% Source: Kalium Lakes, BC Iron BC Iron had flagged to the market previously its desire to diversify into SOP and base / precious metals, and that it had conducted a review of Australian SOP projects for potential investment. BC Iron s decision to partner with Kalium Lakes is a validation of the asset quality and management The decision to joint venture with Kalium Lakes is significant, as it affirms the quality of Kalium Lakes SOP assets, recognises Kalium Lakes expertise and intellectual property in the SOP sector; and validates Kalium Lakes experience and ability in project development and execution. The CJV will allow Kalium Lakes to remain focussed on Beyondie, while advancing a second SOP asset. BC Iron can fast-track Carnegie given its ability to leverage Beyondie intellectual property and its significant cash balance. BC Iron has already earned a 15% interest in the CJV. Carnegie comprises E38/2995 (granted), E38/2973 (pending) and E38/2982 (pending), shown below. Figure 1: Satellite image of the Carnegie Potash Project, with tenement /application boundaries overlain K+S has recently entered the WA solar salt sector Source: Kalium Lakes Mardie Project future synergies in the broader salt market Kalium Lakes has also secured a right to acquire up to 50% interest in BC Iron s Mardie Project (Mardie) at certain development stages. Mardie is a located on the coast approximately 100km southwest of Karratha, Western Australia. BC Iron is undertaking a Scoping Study for a conceptual 3Mtpa solar salt operation at Mardie, which has the potential to offer synergies for both the CJV and Beyondie. The project area includes a significant number of salt lakes, naturally prospective for solar salt production. Northern Western Australia already hosts several significant solar salt operations, including Rio Tinto s Dampier Salt and Mitsui s Onslow Salt. Recently, German company K+S acquired the Ashburton Salt Project south of Onslow, which is aiming to produce 3.5Mtpa salt at a development cost of A$350 million. BurnVoir Corporate Finance Limited 31 March

3 Figure 2: Regional topographic map of the Carnegie Joint Venture and nearby SOP projects Source: BC Iron, Kalium Lakes BurnVoir Corporate Finance Limited 31 March

4 Carnegie is adjacent to and larger than SO4 s Lake Wells Project, and APC s Lake Wells Project CJV adds $18.5 million to our indicative valuation We had not included Carnegie in our valuation previously, given its early stage, and Kalium Lakes focus on Beyondie. An indicative valuation can be derived via: BCI s A$10.5 million investment (plus provision of a camp that BurnVoir estimates could be valued at up to A$500,000), indicates that the Carnegie Project might be worth A$22 million (100% basis); and Direct comparison with the neighbouring SOP developers and their valuations. Carnegie is located immediately north of Salt Lake Potash Limited s (SO4.ASX) flagship Lake Wells Project, and Australian Potash Limited s (APC.ASX) Lake Wells Project. Each of these projects is smaller in area than Carnegie (assuming the two pending ELAs are granted), although both companies have advanced their projects to Scoping Study stage. APC and SO4 have enterprise values of A$23.4 million and A$63.5 million, respectively. Assuming these companies are valued on their key assets, Carnegie at Scoping Study stage could have a comparable value. However, since Carnegie is awaiting formal grant of two tenements, and it is at early exploration stage, a discount should be applied when making a comparison using this approach. We have valued Kalium Lakes 85% interest in the CJV at A$18.5 million, in line with the BCI transaction, and supported by APC s current enterprise value, at the lower end of the Lake Wells peer range. On the current capital structure, this equates to A$0.13/sh (fully diluted basis). Table 2: Sum of Parts Valuation Summary at 30 June 2018 Our NPV has lifted from A$178m to A$197m on inclusion of Carnegie. Sum of Parts Valuation Previous Report This Report NPV Undiluted Diluted NPV Undiluted Diluted A$M A$/sh A$/sh A$M A$/sh A$/sh Beyondie Potash Project Carnegie Joint Venture (KLL 85%) Corporate (35.8) (0.25) (0.21) (33.2) (0.21) (0.18) Tax Shield Debt Cash Total Value of Common Equity estimates Other Valuation Impacts In addition to the inclusion of the CJV, we have updated our financial model for the 31 December financials. We have not changed the production or economic assumptions in our model. The NPV has lifted from A$178.1 million to A$197.4 million on inclusion of Kalium Lakes interest in the CJV. On a per share basis, this impact has been tempered by a better than expected IPO participation (we had assumed A$5 million capital raise at A$0.20/sh, rather than A$6 million), the updated post-ipo capital structure, and revisions to our Bankable Feasibility Study (BFS) funding assumptions. Table 3: Sensitivity Analysis of Kalium Lakes (NPV/ Share Impact from Changing SOP Price, AUDUSD) NPV per Share SOP Price (US$/t SOP) (A$ per share) AUDUSD estimates Negative NPV Base Case BurnVoir Corporate Finance Limited 31 March

5 Beyondie Site Visit activities ramping up We undertook our second site visit to Beyondie in late March, and were impressed with the company s progress. During the three months since listing, Kalium Lakes has upgraded / installed over 200km of tracks and roads, mobilised and installed its camp (significantly under budget), commenced a drilling program, and begun installation of its pilot ponds. These activities are captured in the images below. Figure 3. Beyondie Camp and trial evaporation ponds Figure 4. Beyondie Camp, salt lakes in the background Figure 5. Trial evaporation ponds under construction Figure 6. Examining trial evaporation pond construction Figure 7. Casing for the next production bore Figure 8. Drill rig preparing to drill next production bore BurnVoir Corporate Finance Limited 31 March

6 22/12/ /12/2016 5/01/ /01/ /01/ /01/2017 2/02/2017 9/02/ /02/ /02/2017 2/03/2017 9/03/ /03/ /03/ /03/2017 Closing Price (A$/Share) Million Shares Kalium Lakes Ltd. Strong Performance Since Listing Kalium Lakes Limited commenced trading on the ASX on 22 December The IPO was oversubscribed, raising over A$6 million from institutional, high net worth, and retail clients. The stock has traded strongly since, providing investors with over 200% return in three months, and achieving an average volume of 130, ,000 shares traded daily. This performance is presented in Figure 9. Figure 9. Kalium Lakes Limited Share Price and Volume History since IPO Daily Volume Traded On-Market Daily Close Price Source: Bloomberg Positive newsflow to continue In the three months since listing, Kalium Lakes has: acquired and installed the Beyondie Camp (under budget); upgraded the 78km Beyondie access road, and put in over 120km of access tracks and drill pads for the drilling program; commenced drilling at Beyondie; commenced trial pond construction; and negotiated and executed the CJV. Now that operations are well underway and the weather is improving at Beyondie, we anticipate strong newsflow over the coming quarter, including drilling and pump testing results, initial trial pond construction and testing, a Mineral Resource update, and release of the Beyondie PFS by mid-year. Table 4: Key Announcements since the IPO Date Announcement Shar 23/12/2016 Official Quotation 13, 11/01/2017 Resource Statement and Technical Report 6, 17/01/2017 Site Works Commenced and Initial Orders Placed 5, 30/01/2017 Quarterly Cashflow Report 5, 30/01/2017 Quarterly Activities Report 23/02/2017 Pre-Feasibility Study Nearing Completion 27/02/2017 Overseas Research and Development - Tax Offset 2, 01/03/2017 Carnegie Potash Project Joint Venture 1, 09/03/2017 Drilling Recommences and CDO Appointed 1, 13/03/2017 Half Yearly Report and Accounts 1, 15/03/2017 BCI Earns First 15% Interest in Carnegie Potash Project 1, 24/03/2017 Beyondie Infrastructure Installed Under Budget Source: ASX BurnVoir Corporate Finance Limited 31 March

7 Peer Analysis Kalium Lakes peers have been busy The Australian SOP sector has been active in the first quarter of In addition to Kalium Lakes significant progress, its peers have made the following announcements: Goldphyre Resources Limited: renamed itself to Australian Potash Limited (APC.ASX) and published a Scoping Study for its Lake Wells Project; Reward Minerals Limited (RWD.ASX): published an updated JORC Resource for the LD Deposit, comprising an in-situ Mineral Resource of 596Mt SOP, and a Drainable Mineral Resource of 153Mt grading 11.35kg SOP/m 3 brine. The company also announced that Gary Lethbridge will replace Michael Ruane as Managing Director, effective today; Salt Lake Potash Limited: announced that it had achieved flow rates of 1l/s from a 50m long trench at its Lake Wells Project, and that its Lake Ballard project is capable of producing halite, kieserite (a magnesium sulphate), and potassium-rich salts. Agrimin Limited (AMN.ASX): announced that it had appointed Danish group Aalborg CSP A/S to design and deliver a solar heating system for the Mackay SOP Project. The company is also currently undertaking a $13.2 million share placement and non-renounceable rights offer to fund the PFS for the project. Rum Jungle Resources Limited: changed its name to Verdant Minerals Limited (VRM.ASX), and has refocussed its attention on the Ammaroo Phosphate Project in the Northern Territory. Relative Valuations: How do they stack up now? In Figure 10, we compare the market capitalisations of each Australian SOP company. Since listing, Kalium Lakes has closed the gap with the more advanced peers (RWD, AMN, and SO4), reaching the bottom end of the A$50 million - $80 million band. In our view, Kalium Lakes should be positioned at the top of this range, given: Beyondie is the closest to existing infrastructure, has the highest grade, and is the most advanced (PFS almost complete, key approvals for pilot scale operations in place), and has brine-laden basal sands, from which over 5 million litres of brine have been extracted during initial pump testing; and Carnegie (Kalium Lakes 85%, BC Iron 15%) is comparable in size and adjacent to the Lake Wells Projects of SO4 and APC, and has attracted a reputable JV partner in BC Iron to sole fund the project through to completion of a Feasibility Study. Figure 10: Market capitalisations of the ASX-listed Australian brine SOP developers (at 31 March 2017) Kalium Lakes has rerated since listing; in our view, it should be valued at the top end of the range. Source: Kalium Lakes, Company reports. NB: Agrimin is currently undertaking a $6.2 million entitlements issue (not included). BurnVoir Corporate Finance Limited 31 March

8 EV/Resource t contained SOP peer analysis Unlike the Canadian (CIM) code, the JORC 2012 Code does not contemplate reporting of brine Mineral Resources and Reserves. As such, there is some uncertainty as to whether direct comparisons can be made with reliability. Given Reward Minerals has updated its Mineral Resources and published a Drainable Resource estimate, we have updated the EV/Resource charts below for investors to compare. Figure 11: EV/Resource t SOP (Total Brine Volume basis) Figure 12: EV/Resource t SOP (Drainable Brine basis) Source: Kalium Lakes, Company reports, BurnVoir estimates Source: Kalium Lakes, Company reports, BurnVoir estimates Table 5: Post IPO Capital Structure and Share Register Name Number % Vince Smoothy Super Pty Ltd 40,339, Kumarina Holdings Pty Ltd 13,218, Hazelden Corporate Pty Ltd 6,629, Mr Brett William Hazelden + Ms Tanya Phyllis Bozikovic 5,854, Thomas Ellis + Sally Ellis 5,000, Coola Station Pty Ltd 3,315, Mr Daniel George Clark + Miss Johanne Gillingham 2,265, P Goyder Superannuation Pty Ltd 2,155, JP Morgan Nominees Australia Pty Ltd 1,997, BlueBay Asset Pty Ltd 1,881, Nowheretogo Pty Ltd 1,657, Mr Philippus Rudolph Van Niekerk + Ms Jean-Maree Van Niekerk 1,657, Equity Trustees Limited 1,500, Mr Dale James Champion + Mrs Anita Maria Champion 1,431, Mr Edward Earl Marshall 1,385, DDH1 Drilling Pty Ltd 1,352, RJC No 1 Pty Ltd 1,077, Newlife Capital Pty Ltd 828, Mr Stacey Radford 657, Hazelden Corporate Pty Ltd 625, Top 20 Shareholders 94,832, Source: Kalium Lakes BurnVoir Corporate Finance Limited 31 March

9 This Research has been prepared and issued by BurnVoir Corporate Finance Limited ( BurnVoir ) and remains the property of BurnVoir. No material contained in this Research may be reproduced or distributed, except as allowed by the Copyright Act, without the prior written approval of BurnVoir. This report has been prepared and issued (in Australia) by BurnVoir Corporate Finance Limited (ABN / AFS Licence No ) ( BurnVoir ) and is subject to the disclosures and restrictions set out below. Analyst Certification The research analyst(s) identified on the cover of this report individually certify that in respect of each security or issuer that the research analyst covers that this report accurately reflects his or her personal views about any and all of the subject issuer(s) or securities. Disclosure BurnVoir has been appointed Corporate Finance Adviser to Kalium Lakes Limited. 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