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Salt Lake Potash soars on huge potential operating margin

Last updated: 11:56 30 Aug 2016 BST, First published: 06:56 30 Aug 2016 BST

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Salt Lake will produce the premium fertiliser SOP

The share price graph of Salt Lake Potash Limited (LON:SO4) (ASX:SO4) makes for quite some viewing. Back in December 2014, just after the completion of a 1-for-30 share consolidation, the company’s shares in London traded at a fairly modest 4p.

The shares subsequently dipped a little, initially conforming with a widely held view amongst retail investors that consolidations bode ill for value.

But it wasn’t long before Salt Lake was confounding all expectations. The shares gradually built momentum throughout the subsequent year, closing out December 2015 at just over double that 4p post-consolidation price.

This year, though, they’ve been on a tear. Since January the shares have moved from 9p all the way up to a five-year high of 33p hit in mid-August, before settling slightly to the current 27p, still up fourfold on the calendar year.

This is more than just the positive rub-off of the sector-wide re-rating that’s been going on in the mining sector since the start of the year. It’s the results of a well thought-out change of direction that took the company away from uranium a couple of years ago and towards a focus on potash.

Along the way, the company abandoned its old name – Wildhorse Energy – and picked up its new flagship asset, the Lake Wells sulphate of potash project in Western Australia.

It’s the potential of Lake Wells that’s really driven the re-rating of the shares.

A scoping study released in Australia on 29 August and then overnight in the UK on 30 August revealed that Lake Wells has the potential to be one of only five large-scale salt lake sulphate of potash producers around the world, and one of the lowest cost.

The study envisaged development of the project in two stages. The first stage involves spending A$191 mln to build an operation capable of producing 200,000 tonnes of SOP per year. The second stage would involve spending a much more modest A$39 mln to boost production to 400,000 tonnes.

Significantly, it’s envisaged that costs per tonne will drop from A$241 during stage one to A$185 during stage two.

The study centres around the established resource of between 80 mln and 85 mln tonnes of SOP in 9,691 gigalitres of brine at an average of 8.7 kilograms of potassium sulphate per cubic meter. That figure includes a measured and indicated resource of 26 mln tonnes contained in the shallowest 20 metres of the lake.

The SOP will be extracted by a process that begins with the concentration of the brine in harvest ponds. These allow for the evaporation of the liquid to produce what are known as potassium double salts. These are then sent for processing in a main plant to produce a final SOP product, which will then be trucked south for export from the port of Esperance.

Salt Lake now plans to initiate a pre-feasibility study to undertake more detailed modelling on the project.

However, with the current SOP spot price hovering at between US$625 per tonne and US$650 per tonne, depending on the precise quality of the product, margins look very secure on that A$241 initial cost per tonne. And it’s that fact that the market has liked above all else.

 

 

 

 

 

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