Jeremy Raper

Jeremy Raper

30-10-2022

13:07

OK that $TWTR 💸 burning a hole in your pocket? Can't bear to not have a hairy event driven trade on? This one has shades of $RAP.AX, another deep dive in micro-cap 🇦🇺 event land, my favorite hunting ground of late...but big boy pants only please, DYODD, etc etc 👇👇

Danakali $DNK.AX is a one-asset wannabe miner with 50% ownership of a potash (SOP, not MOP) development in Etritrea (yes, that Eritrea). Eritrea has been sanctioned for much of last few yrs so been impossible to get any kind of financing...so they pulled the plug and sold...

...to the Chinese a few weeks ago, see here: Cpl things up front. This is a non-binding deal (for now), subject to DD etc, which we will come to, but should turn into binding offer in next few weeks.

Let's talk nos. $121mm net USD post costs + residual cash on hand today, less a couple quarters of min running costs is about 57-58c a share of 'value' ref current FX (64 AUD/USD). Even 90% of net proceeds - what they say they'll pay out - is 46c. Stock today is 37-38c 🤔

Per PR, this should be done and dusted in say 4-5mos from now. Realistically even if mgmt DOESN'T wind up and return everything as long as binding deal is signed the return from here is still v good (22% gross, maybe 60%+ annualized). If we get it all back ofc return is 😎

OK so a few buckets to diligence: 1) odds of turning into binding agreement; 2) odds of overbid/etc; 3) odds of getting back the whole cookie (full wind-up). Bucket 1) most important. 'Let's dig in' 😃

Basically you have a Chinese SOE taking over the Aussie interest in the project. @respeculator knows the actual economics far better than me - you can see paying $160mm for this is cents, literally cents, on the dollar, even ref pre-Ukraine SOP prices

This thing apparently has a risked NPV of $250-$450mm ref SOP prices less than half of where we are...OK so the Chinese are getting a good deal. This is a pretty strategic asset in a HORRID geography. But the Chinese are comfy when others arent...

...bec they are the largest provider of FDI into Eritrea by a country mile. Moreover this specific acquirer is part of a larger construction firm that has already built a number of projects (roads etc) in country. Seems promising.

Another angle - the other actors. Collusi is a 50/50 JV b/w the Aussies at $DNK.AX and the Eritrean govt (ENAMCO). Obvi they want this thing built, unfort no way an Aussie/any Western corporate can fund this thing in medium term. Enamco wins if this change of control happens.

Then look at $DNK.AX register - do they want this to happen?

Africa Finance Corp is basically a development org to get infrastructure built in Africa. They invested to get this done, not to sit on sidelines. Obvi Chinese involvement solves many issues. Well Efficient is an HK/Greater China PE shop of some kind. Prob not anti-China....

And Cornelius is the exec who built this thing and is now signing off on brokering the sale. Fluent in Chinese as well, by the way. Must see writing on the wall and this is best possible exit for him/the co. In sum - seems like most all actors - Etritrean govt, shareholders -

want this change of ownership. Despite it being non-binding now this is clearly long-term and strategic, and price is a bargain in current environment. You generally want to be swimming with the tide of most participants' desired action. OK moving on to 2) odds of overbid.

This is interesting bec the geography is 💩💩 but the asset is v attractive. There is really only one potential over-bidder: Eurochem, the Russian/Euro huge fertilizer player. These guys:

Eurochem has no current biz in Africa but signed an offtake agreement - crucial towards potentially funding Collusi - in 2018 They have been waiting vainly for their SOP ever since (endless delays, you know the drill). See here:

Eurochem is an interesting beast. They could def afford to bid, they know the asset, and they need to waive the offtake agreement in any case to do this deal. They will have chance to bid on it, for sure. I don't personally think they try to enter bidding war...but its possible.

Obvi w current SOP and low $ value of a potentially huge asset, even small overbid could create a lot of excess value for $DNK.AX. We get a free look at all of this from current prices - but it is not what I am playing for. Moving on to 3) maximizing value here.

Most cryptic piece of recent PR is this idea that somehow this podunk one project co will retain something close to $30mm AUD and have a go at developing something new. I find this totally unrealistic and would likely not be supported by shareholders...

...meaning I think the odds of pushing for (and getting) a full wind-down of the co, and thus 58-60c of total value in <6mos, is actually pretty good. Africa Finance will not care to stay invested once the project is sold off, they may well sell down or simply support a wind down

...but otherwise the register is pretty open and a ton of shares have already moved into arb hands. This will continue to occur as the case gets publicized and if or when a binding agreement is signed. Would not be difficult to imagine an about-face and simple return...

...of all capital once the Collusi transaction has been consummated. Certainly this is something I would push for. But the beauty is even if this is TBD there is still latent value here. There is some option value to residual cash and 10% of Collusi proceeds...

...even if mkt never believed it woudl all be returned. 50% haircut on the residual non-distributable value still gets you a low-mid 50c stock in a few mos...with upside as the Pacific Peso gets reamed (USD contract asset) and further upside if Eurochem joins the party.

This is def a Big Boy Pants situation, much like $RAP.AX, principally bec this is still not a definitive deal (tho a v strategic buyer, which comforts me) and ofc the jurisdiction is a tricky one. So caveat emptor, and play small if you play at all. Then again I think 35% spread

to theoretical post-close total value is far too wide. Think this trades low-mid 40s on a definitive deal and into the 50s as reg approvals come through early next year. V good chance this is a 60-80% IRR all told. Yes I know its illiquid, don't at me 🤷‍♂️🤷‍♂️

Think thats about it. H/t @respeculator for the lead! DYODD, GLTA ✊✊👊👊



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