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Danakali drives Colluli Project towards zero-carbon SOP production

The sulphate of potash (SOP) project in Eritrea is set to be a global game-changer with the potential to become the world’s first zero-carbon producer of SOP.

Danakali Ltd - Danakali advances Colluli Project towards zero-carbon SOP production

Danakali Ltd (ASX:DNK, LSE:DNK, OTC:SBMSF) ended FY2021 in a strong financial position with A$22.7 million in cash as it advances the Colluli Sulphate of Potash (SOP) Project in Eritrea, East Africa.

Promisingly, the project is set to be a global game-changer with the potential to become the world’s first zero-carbon producer of SOP.

Colluli hosts the world’s largest JORC-compliant solid salt and sulphate of potash reserve, weighing in at 1.1 billion tonnes.

Colluli Project

The principal activity of Danakali during FY20211 was progressing pre-development activities and financing for the project, situated about 177 kilometres southeast of the capital Asmara.

Colluli is a joint venture between the Eritrean National Mining Corporation (ENAMCO) and Danakali with each having 50% ownership of the joint venture company, Colluli Mining Share Company (CMSC), which is responsible for the development of the project.

The JORC-2012 compliant mineral resource for Colluli is estimated at 1.289 billion tonnes at 11% K2O for 260 million tonnes of contained SOP equivalent.

Large ore reserve

The JORC-2012 compliant ore reserve estimate for Colluli is estimated at 1.1 billion tonnes at 10.5% K2O for 203 million tonnes of contained SOP equivalent.

Danakali intends to develop Colluli to its full potential by adopting the principles of risk management, resource utilisation and modularity, using the first module as a platform for growth.

CMSC is fully permitted, having entered into a Mining Agreement with the Eritrean Ministry of Energy and Mines (MoEM) and was awarded Mining Licences for the exploitation of mineral resources within the Colluli tenements.

Robust economics

A FEED study has firmly established Colluli as an economically attractive greenfield SOP development project.

The FEED results reaffirm the robust project economics of Colluli with industry-leading capital intensity.

This, combined with forecast first quartile operating costs, resulted in a Project Net Present Value (NPV10) of US$902 million and Internal Rate of Return (IRR) of 29.9%. The Danakali economic outcomes were an NPV10 of US$439 million and IRR of 31.3%.

The Colluli Front-End Engineering Design (FEED) modules are:

  • Module I – 472,000 tonnes per annum SOP production; and
  • Module II – Additional 472,000 tonnes SOP production commencing in year 6.

The massive Colluli ore reserve has significant capacity to underpin further expansions and support decades of growth beyond Modules I and II.

Contract progress

Danakali is making progress with contracts to progress development of the project.

The Mining Services Contract is undergoing final negotiations with the preferred mining services provider. Earth Moving Worldwide (EMW) is the preferred contractor for Colluli’s mining services scope, which covers the pre-production period (development) plus the first five years of production.

This contract is complete for all material matters and execution will follow successful completion of the project financing.

Aggreko (LSE:AGK) has been appointed as the preferred power supply contractor for a 12MW HFO power plant at Colluli.

Under the five-year Built, Own, Operate Transfer (BOOT) contract, Aggreko (LSE:AGK) will supply, commission, operate and maintain the power plant, then transfer the equipment to CMSC.

Aggreko will provide the funding for the power solution which provides certainty over delivery of this preferred solution.

The Power Contract is complete for all material matters and execution is expected during 2021.

A contract with RA International (RAI) to provide the camp at Colluli is well advanced and early shipment of the accommodation camp and infrastructure building to Eritrea has been negotiated with RAI. Execution of the contract is expected during 2021.

The company has engaged DRA Global (DRA) to support project execution through the provision of Engineering, Procurement, Construction and Management (EPCM) services.

The scope of DRA’s contract includes:

  • All aspects of design, project management, procurement, construction management and supervision;
  • Commissioning of the complete process plant and associated infrastructure; and
  • Awarding and overseeing major contracts such as early works, earthworks, structural, mechanical, piping, electrical and instrumentation works, laboratory and permanent camp.

In addition, multinational professional services company Turner & Townsend has been engaged to support the Owner’s Team.

Diversification potential

Colluli also has diversification potential beyond SOP, including the option to produce additional potash and salt products such as MOP, SOP-M, kieserite, gypsum, magnesium chloride and rock salt.

The SOP resource also comprises an 85 million tonnes kieserite (magnesium sulphate) resource. Kieserite is a suitable fertiliser for magnesium-deficient soils.

A 347 million tonnes rock salt (sodium chloride) resource has also been established at Colluli. Unprocessed rock salt can be used for de-icing, processed rock salt can be used as table salt.

Project financing

Development finance institutions Africa Finance Corporation (AFC) and African Export Import Bank have executed documentation for the provision of US$200 million in senior debt finance to CMSC.

In addition to CMSC senior debt, AFC made a strategic equity investment in Danakali for A$31.8 million, which was completed on December 10, 2019.

Furthermore, on May 12, 2021, the company successfully raised A$20.3 million in a heavily oversubscribed offer to institutions and sophisticated investors and senior Danakali executives.

Lower costs and higher volumes

As open cut costs are lower and volumes are higher than underground mining, is generally safer, and can be more easily expanded, Colluli will be one of the lowest-cost SOP producers in the world.

With a depth of just 16 metres, capital expenditure, including working capital, is US$320 million, with a production target of about 1 million tonnes per annum.

Promisingly, Danakali’s test-work program proves that it can produce SOP using only filtered seawater, lowering the opex and capex costs tied to the compound’s production.

Colluli has access to solar, wind and one of the world’s greatest geothermal energy systems.

Potential for zero-carbon

Colluli is the only resource in the world that is ideal for SOP production that can be extracted in solid form.

It also has access to solar, wind and one of the world’s greatest geothermal energy systems – the East African rift.

In May 2021, the company demonstrated economic, construction, operational and environmental optimisations at the Water Intake Treatment Area (WITA) using filtered seawater during extensive test work in the pre-development process for SOP.

It will now rely on a combination of beach well intake, smaller pumping stations and greater renewable energy to pump filtered seawater to the SOP processing plant at the Colluli mine site.

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