der goldreport special report · 2016. 6. 21. · special report 2 22.06.2016 the share price...
TRANSCRIPT
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DER GOLDREPORT Special Report
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22.06.2016
Introduction
Dear friends and readers,
As I have already implied in the issue on 03.06.2016, I
recently had the opportunity to carefully review a company
which I am going to introduce to you today.
The Commodity sector has a great upwards potential as well
as downwards. Our portfolio (up 95% since 1st of January)
has proved that a share price doubling and more is not
uncommon.
If a mining company finds a new deposit, +500% or even +1000% are possible.
Nevertheless, exploration remains exploration and the risks are accordingly high. Only a
few deposits make it into the production stage.
However, there are some success stories, and when the market is euphoric, they go
through the roof. Unfortunately, sooner or later they get forgotten. A company finds a
massive deposit and the stock price goes up, but after the euphoria-phase ends the dull-
investor-phase begins. Resource calculations have to be completed; scoping-studies as
well as environment surveys, an extensive prefeasibility study and finally the definitive
feasibility study have to be done. These stages are exhausting, they last too long and the
costs are accordingly high. The charts of some companies often look like this:
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The share price rockets upwards in the discovery phase, but then the reality comes back
and the investment community finds out that there is actually a long way to go until the
company can make a profit.
The development stage lasts approximately 2-3 years, sometimes even longer.
The market will not wake up until a production is foreseeable and the most important
milestones like the definitive feasibility study as well as financing are clarified.
Today we are going to talk about so much more than you can even imagine.
A gold discovery is fine. It is even better, if the result of the discovery is a 100,000
ounces per year gold production.
But none of such 100,000-ounces-p.a.-production mines can change the world, dictate
the gold price or upstage other mining companies from the market. The leading gold
production companies are unassailable from the vantage point of the present. A small
company has almost little to no chance for becoming a new BARRICK GOLD or a new
NEWMONT MINING.
The company I want to introduce to you today (some of you will know the company
from the past) has discovered a project that neither can be found anywhere else on the
globe nor will it be possible to find a similar one in the near future, as it is simply
impossible from a geological point of view.
The project is unique in so many ways. I am sure, when the project comes to the
production phase, it will get the whole market mixed up and some large producers may
even have to break down the tents.
I know, these are big words and unfortunately I can`t tell you if it will come this way for
certain.
But if it comes this way – and the chances are not too bad – I would be too upset not
having told you about the project at an early stage. So here we go.
Yours sincerely,
Hannes Huster
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Too good to be true?
Is this small Australian company capable of
changing the shape of the industry?
DANAKALI (ASX: DNK, Securities Code Number: A14UCJ )
The company description will be long.
To understand the whole story, please take some time to read the whole issue. You also
can print the issue so that you can reread it again and again comfortably.
Before having a closer look at the company, let us talk about the fertilizer or potash
sector in general.
Everybody knows K+S (KSAG88), known as Kali + Salz in the past. The DAX company has
a market value of about 4 billion EUR and was recently a takeover target of POTASH
CORP. (USA: POT).
K+S had revenues of 1.37 billion EUR in the first quarter, 608 million EUR of it result
from potash and potassium products.
To cut a long story short, potash - this is the sector we are going to talk about today.
Potash and potassium products are used as fertilizers. There is a distinction between
natural fertilizers which have a modified living organism origin and artificial fertilizers.
To make it very short, in this issue we will focus on SOP, Sulfate of Potash. This is a
fertilizer which is preferred by farmers for the purpose of fertilization in order to
improve the taste of the foods everybody like so much – vegetables, fruits and even
coffee.
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K+S offers this fertilizer (KALISOP) and describes it as follows:
Source: http://www.kali-gmbh.com/uken/fertiliser/products/sop_gran.html?display=Usage
K+S also describes the SOP extraction method, which will be essential at a later time
point:
Source: http://www.kali-gmbh.com/uken/fertiliser/products/sop_gran.html?display=OrganicUsage
SOP is the king of fertilizers. It is a natural fertilizer which was formed due to the
evaporation of sea water. Now these deposits are used for production of high-quality
SOP. SOP is also certified for ecological farming, which to my mind has a great future.
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Six million tonnes p.a. market
Now let us talk about the size of the market and its finesse.
Round about 6 million tonnes SOP are used p.a. globally, a number which is also
continuing to rise: more people – more food – more fertilizers.
The product is in demand not only because it is a natural fertilizer and it intensifies the
taste and transportability of food but also because there is no chloride in it. Chloride
is a big problem to the agricultural sector, especially in water-scarce areas.
Source: http://www.kali-gmbh.com/uken/fertiliser/products/sop_gran.html
50% natural – 50% mechanical
Almost 50%, which means 3 million tons SOP p. a. are produced out of natural
occurrences. The core issue is that the process of extraction takes a very long time
(approximately 18 months). Brines are dried out until the salts are left only. But this is
only the first step, as the salts have to be separated from each other as well.
The second 50% (approximately 3 million tons) are produced in a mechanical way. The
production process is called the Mannheim-Process. The so called “normal Potash”
(MOP, KCl) is mixed with chemical products and heated up to 600 degrees. The result of
the process is SOP and some waste products.
This process is not only expensive (high production costs plus the plant costs of
approximately 200 million USD) but also harmful to the environment.
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We will return to the “artificially produced” SOP after we have talked about the costs
and the prices.
Due to the positive characteristics of SOP, very small natural deposits and the huge
demand, SOP is traded at a significant price premium to MOP/KCl. One tonne of SOP
was priced at around 700 USD lately, whereas one ton MOP was priced at 300 USD
(even at a lower price):
Source: http://www.danakali.com.au/images/stories/media/2016/DNK_Proactive_Investors_Presentation_April2016.pdf
Thus, SOP is a premium product, which is traded for more than double the price of MOP
or KCl. The interesting thing is that there is a kind of price limit to the downside for
almost 50% of the market.
As I have already mentioned, 50% of the offered SOP originate from the Mannheim-
Process. For this purpose the producer has to buy MOP or KCl (300 USD per tonne) first,
so that it can be mixed with other “ingredients” and turned into SOP. The costs of the
mechanical production of SOP amount 500-550 USD pro tonne on average. If the market
price drops below this level, some SOP suppliers will disappear.
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Summary
What we learn from Part I. is that SOP has many advantages, especially because it is
used for foods fertilization. For animal feed purposes MOP or KCl is still used.
For the sustainable and environmentally friendly cultivation SOP is preferred.
The natural deposits are rare and these are extracted through drying out of brines,
which is a long lasting process. After that the salts have to be separated.
The mechanical production – Mannheim-Process is very cost-intensive, environmentally
unfriendly and expensive.
COLLULI: A Wonder of Nature
Now we come to the really interesting part – DANAKALI and its COLLULI project.
Putting it simply, nature did its work on the COLLULI project in the past few million years, which
other companies from the SOP-sector have to make up for in a mechanical way.
The COLLULI brine has been dried out for thousands of years and the salts have been separated
in a natural way. Now all the layers rest on top of each other, waiting to be extracted.
The following graph illustrates the structure of the deposit
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There is a sand layer on the top of the deposit, which is not a real surprise as the project
is situated in a desert. At a depth of 16 meters (!) is a thick rock salt layer (which is an
add-on product and can be used on the roads in winter). Underneath the rock salt
layer different salt states are located. These can be extracted and used for SOP
production.
If you have ever dealt with potash companies before, you will have already noticed the
major difference: the deposits can be operated in open pit mining, which is unique
worldwide.
Potash deposits in the well-known reservoirs in Canada, Russia or Germany are usually
situated at a depth of 800 m to 1500 m. The construction costs amount to
approximately 1 billion USD, usually significantly higher.
Keeping to the K+S, let us have a look at the company´s newest project. Several years
ago K+S was on a growth path and took over the POTASH ONE project in Canada. The
company had discovered the LEGACY MINE and K+S remunerated POTASH ONE´s
shareholders lavishly (311 million EUR cash, round about $470 million).
Meanwhile, it turned out that not only the takeover price was too optimistic but K+S has
had a struggle with cost overruns during mine construction as well. Now we should be
aware of the dimensions those areas have and those logistic problems involved.
Source: http://www.k-plus-s.com/de/pdf/2015/legacy-projekt.pdf
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The picture depicts conventional methods of KCl mining in a cross section.
The deposits are situated at a depth of 1,500 m and the layer´s thickness amounts 33 m.
Many conventional mines are mined in this way. The capital costs amount to several
billion US-Dollars.
K+S expects investments in the amount of 4.1 billion CAD until 2022, after which further
700 million CAD will follow.
The COLLULI project starts already at a depth of 16 m. No shaft is needed. The
company can start with a huge open-pit and then the material will get extracted. The
financial as well as operational risks are significantly lower.
Additionally you have to know that K+S is able to extract only KCl out of the +4 billion
CAD mine. As I have already mentioned, it´s a product which is traded with 300 USD per
ton. The company estimated the value at 200 CAD per ton. … But at full capacity only…
Larger and more valuable than LEGACY
Let´s have a closer look at the size of the deposits.
The LEGACY project has reserves of 160 million tons KCl and resources of 982 million
tons KCl.
The DANAKALI COLLULI project has reserves of 216 million tons SOP (a product which is
twice as expensive and DANAKALI has 35% more reserves) and resources of stunning
1.28 billion tons SOP (+31%)!
We have here a project which is a showpiece, which surpasses K+S with its reserves
and resources in about 30% and furthermore, the project shelters SOP-deposits, which
obtain the double market price.
I think these few numbers show us the dimensions of what we are talking about.
Hereafter the product value, so you can get a better idea of the products. If I calculate
with 300 USD per ton of KCl from K+S and take into consideration only the reserves,
then I will expect a value of 48 billion USD situated in the LEGACY mine.
If I calculate cautiously with 600 USD per ton SOP from DANAKALI project and take into
consideration only the reserves, then I have to expect a value of 129 billion USD!
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DANAKALI has already produced SOP…and that´s not only for
the first but for the FIFTH time!
Another huge benefit of DANAKALI is the fact that the company has already produced final
products. It is hard to find another company that present a market-ready product.
The DANAKALI deposit starts on the surface and with this kind of flat deposit the company had
the chance to increase the reserves, as the drilling is easy and cost-efficient.
Out of thousands of drill cores some parts were taken out (altogether 4 tons) and processed to a
market-ready product in Saskatchewan Research Council (SRC) in Canada.
The results were so outstanding that the management repeated the tests at least 5 times. Just
to make sure. As the final product, which was produced from the drill cores was better than all
existing SOP-products.
SOP produced by DANAKALI has a pureness of 52.50% whereas KALISOP from K+S 50%
Source: http://www.danakali.com.au/images/stories/media/2016/DNK_Proactive_Investors_Presentation_April2016.pdf
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Source: Hannes Huster, DER GOLDREPORT
I have taken some pictures of DANAKALI products for you.
As you can see, the picture depicts SOP-M from DANAKALI. It is a SOP with added
magnesium. A further developed product, which can be produced with the help of the
same plant and with a minimal capital expenditure (further scoping studies will be
released) only!
SOP-M Soluble (left on the picture) is a very fine powder, which becomes a price-
premium product on the market as a rule. SOP-M Standard (middle on the picture) is a
middle-sized granulate and SOP-M granulate (right on the picture) is a more rough
granulate. The fine powder SOP-M Soluble can be dispersed while watering, which
contributes to water savings.
Product demand has surpassed capacity already!
The market-ready products have been sent to some interested buyers. The reaction
was overwhelming. DANAKALI managed to get 8 (!) non-binding letters of intent from
companies from North Africa, Europe, Middle East and North America, which would
like to buy the products. Asian markets have not been entered yet. Already now
DANAKALI has potential buyers for 800,000 tons of its product, whereas the company
can produce “only” 425,000 tons while the first production phase.
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Source: http://www.asx.com.au/asxpdf/20160419/pdf/436llszcpjnsq8.pdf
Interim conclusion DANAKALI is not just an extraordinary project but can also show an unbeatable product
range already. The production has been overseen by the worldwide recognized
Saskatchewan Research Council from Canada, which requires a high standard of quality.
The non-binding letters of intent surpass the capacity of the first module twice.
The management works on the letters of intent in order to turn them into purchase
agreements. Nevertheless the aim is not only to get off-take agreements but a certain
return from the customers.
Best-case scenario would mean one or two exclusive off-take agreements which
ensure the purchasing of the products with a certain discount as well as production
costs financing in advance.
Now we have talked about the SOP market, the project as well as the products. I think
and hope that the explanations are understandable and the potential of the project
was pointed out clearly enough.
In the following we will discuss the company, the coming milestones as well as the
risks of the project.
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Company Valuation
DANAKALI has 200.64 million shares outstanding, which amounts a market capitalization
of $74.2 million according to the current share price of 37 cents. The company has 28.5
million Options outstanding. The lowest exercise price is 0.278 AUD; the majority has an
exercise price of 0.35 AUD. Should all of them be exercised, this would bring 9.8 million
AUD extra cash. The cash position was at 6.1 million AUD at the end of March 2016.
Source: http://www.asx.com.au/asxpdf/20160516/pdf/4378qw1w3r1q7m.pdf
The project has been developed already and the definitive feasibility study has already
been issued. The study has been issued over the first and the second modules. During
the first phase DANAKALI will be able to produce 425.000 tonnes of SOP. The company
has calculated with a conservative price of 572 USD per tonne. At the moment a tonne
of SOP is traded at 700 USD. The production costs per tonne amount 255 USD (margin
>100%).
The study was based on 2 modules for a period of 60 years. This is quite fine, but not
realistic to my mind. The company has reserves which are enough for 100 years of
production. As soon as the first and second modules are in production I expect an
expansion to 2-3 million tons p.a..
The expansion is easily possible because of the open-pit production, as no volume
limit exists as for example for an underground mine.
The capital costs for the first module are 298 million USD. The second module could
probably be built with 175 million USD. The IRR for the first module is 25.40% after
taxes. The net present value is 439 million USD for 100% of the project and 206 million
USD for the stake belonging to DANAKALI (50%).
Options/Warrants amount price expiration cash if exercised
6.000.000 $0,340 29.11.2016 $2.040.000,00
5.000.000 $0,278 17.11.2017 $1.390.000,00
11.635.232 $0,350 30.03.2018 $4.072.331,20
800.000 $0,350 13.05.2018 $280.000,00
2.700.000 $0,350 13.05.2018 $945.000,00
750.000 $0,527 29.05.2018 $395.250,00
600.000 $0,550 30.05.2018 $330.000,00
1.000.000 $0,408 04.11.2018 $408.000,00
Gesamt 28.485.232 $9.860.581,20
shares amount current share price Market-Cap Spalte1
200.642.631 $0,370 $74.237.773
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Source: http://www.danakali.com.au/the-colluli-project/definitive-feasibility-study-economic-outcomes
The study is conservative and robust to my mind. The IRR for the first module is over
25%, for both modules over 29%. The calculated sales prices are significantly below the
current prices. It means we have calculation security.
The first module was chosen with 425,000 tons per year consciously, as the second
module will be financed to a large extent with the cash flow from the first module.
As discussed above, 50% of the area belongs to DANAKALI. Additional 50% of the area
belong to ENAMCO, the state owned Eritrean mining company.
The complete project financing has to be carried out by DANAKALI initially.
The financial plan is structured as follows – one third by equity, two thirds by debt
and/or off-take agreements. We assume that 300 million USD, in order to calculate with
straight numbers, so DANAKALI has to bring 100 million USD in equity.
Subsequently DANAKALI will get 50% of the amount from the gained profit back
without sharing a piece of the cake with ENAMCO. After that a simple 50/50 Joint-
Venture will follow.
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Comparison with other companies
I come now to a point which is quite difficult – comparing DANAKALI with other
companies from the sector. The reason for the difficulty is that almost all comparable
companies plan with underground mining and want to produce a more low-priced
product KCl at the same time.
Capital requirements of such companies amount significantly above a billion USD
whereas DANAKALI requires a third of it.
Other companies start with larger output quantities.
Let me explain you the reason for these strategies.
If you want to go into production with a mine like K+S mine LEGACY, you have to sink a
shaft. The shaft has to be constructed in such a way so that at least 1 million tons p.a.
can be produced; almost always it has to be more than 1 million tons p.a. If you
calculate with a smaller shaft, setting up costs shrinks slightly. Nevertheless, a smaller
shaft means smaller output capacity, smaller output capacity means smaller revenues
and therefore almost no profit, as fixed costs stay the same.
The company has issued some comparisons and according to every parameter COLLULI
is the leading project.
Source: http://www.danakali.com.au/images/stories/media/2016/DNK_Proactive_Investors_Presentation_April2016.pdf
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I used the latest takeover deals from the sector as a comparison base. In the beginning
of 2015 the Canadian company ALLANA POTASH was taken over by a leading company
of the sector - ICL (Israel Chemicals). ICL paid for the whole company 137 million CAD.
The ALLANA project is very close to the DANAKALI area (the same basin), not in Eritrea
but in Ethiopia.
If you know African geography, then you will probably know that Ethiopia has no access
to the sea, but Eritrea has. For such commodities a port access is essential, otherwise
the transport costs will devour the profit margin.
Source: Google Maps
DANAKALI project is the port closest SOP project worldwide.
Source: http://www.danakali.com.au/images/stories/Danakali_Somers_and_Partners_Research_Note_20160523.pdf
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The development costs of ALLANA´s project has been recently estimated at 642
million USD, which is twice as much as DANAKALI has to raise. Nevertheless, ICL was
willing to pay 137 million CAD for ALLANA.
Another example is ELEMENTAL MINERALS (ASX: ELM). The company has a potash
project in Congo. ELEMENTAL got two takeover offers from Hong Kong. The first one
was 190 million AUD in 2013, the second one – 123 million AUD in 2016. Both offers
were rejected.
Conclusion It is quite complicated to set up a fair price for this project. We can just focus on NPV
after taxes, which amounts 206 million USD or on the takeover price of ALLANA, which
was taken over for 137 million CAD even though the area has worse prerequisites
compared to DANAKALI.
SOMERS & Partners, a young broker, which was established by analysts and traders
from GMP, has recently released a study on DANAKALI. A researcher was in Eritrea
which distinguishes him from all other analysts. Eritrea has a negative reputation,
however exceedingly few analysts have ever been on the spot.
The analyst has rated the share as a BUY and set a target price of 1.03 AUD.
According to some sources the target price should have been set at >2 AUD, but the
analyst took another deduction during his calculation (500 USD per ton) in order to
prevent investors from not taking the share price seriously.
The mentioned report can be found under the following link
Source: http://www.danakali.com.au/images/stories/Danakali_Somers_and_Partners_Research_Note_20160523.pdf
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From my point of view DANAKALI should be valued with a market cap of round about
100 million AUD at least, more 130 to 140 million AUD like ALLANA, which is below
current estimates of SOMERS & Partners. This is my very conservative statement.
Should I tell you my actual statement, it would be much more. The project is simply
unique. Imagine a 3 million tonne p.a. operation with a profit margin of $300 US per
tonne.
The ideal case: a takeover battle If we take a look at the project and its great development opportunities which are
possible with a successful start, then you will probably raise the question why nobody
has carried out a takeover.
I can give you an answer to this question, but it´s not a guarantee. I can only assume.
DANAKALI has submitted all the necessary documents for the mining license recently
(NEWS). This license is the final one DANAKALI needs. After getting the license the
company will be “ready to go”. The company management expects a granting of the
license in 4 to 6 months.
This means, which is only my assumption that a company that is looking to take over
DANAKALI wants to wait until the final license has been granted. All studies are
available; the only thing missing is the “ok” from the government.
I have already explained to you, what kind of potential the project has and the project
can surely drive out some producers from the market.
Especially the SOP-producers, who use the Mannheim-Process (minimum costs 500 –
550 USD per tonne) should think about buying the COLLULI project, as it allows
production a tonne of SOP for a price of 255 USD. As soon as this project gets into
right or even wrong hands, 3 million tons from the Mannheim-process will vanish.
The ideal case is a takeover battle.
We are talking about a mine life of more than 100 years, which means that the project is
strategically important for big companies of the sector (POTASH CORP., K+S, SQM,
MOSAIC, ICL). As soon as company X makes an offer, some other companies will
probably panic. I can also imagine that a strong company could buy the whole project
area in order to prevent other companies from getting the project and mixing up the
current SOP-Market.
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RISKS
Of course there are risks as well. First of all, some of you feel dizzy every time you
hear ERITREA. I haven´t visited the project myself, so I can only trust on reports.
Some days ago ERITREA celebrated 25 years of independence and for the first time BBC
with its camera teams has been there. You can find the report on the issue I like best
here: BBC in Eritrea.
What I can definitely say is that the companies which operate in Eritrea haven’t had
any problems in the previous years.
NEVSUN (TSX: NSU) has been producing in Eritrea for many years at its famous BISAH
Gold and Coppermine in Eritrea. ENAMCO is the partner (60% Nevsun, 40% ENAMCO).
The operation goes well and NEVSUN pays taxes which are usual in the industry. The
company managed to generate much money, which has been paid to its shareholders in
form of dividends. At the moment NEVSUN is interested in a takeover and it seems
there will be no problems, even if the money which comes from Eritrea will be
reinvested somewhere else.
Long-term chart NEVSUN:
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Another story used to be a part of our portfolio - CHALICE GOLD (ASX: CHN).
The company discovered ZARA Goldmine in Eritrea and developed it. After that the
company’s stake in the project was sold to a Chinese company for 80 million USD.
Without any problems. (NEWS).
The most interesting point we should have a look at was the time line of that deal.
CHALICE got the mining license from the government, 02. November 2011.
Approximately 8 weeks later, on 28. December 2011 a takeover offer for the project of
CHALICE GOLD was made!
Source: www.asx.com.au
The newest story is SUNRIDGE GOLD (TSX: SGC). The company developed ASMARA
gold project in Eritrea. ENAMCO was a 40% partner here as well. November 2015
SUNRIDGE got a takeover offer from a Chinese company and took it. The result: Profit
for the shareholders. Again: no hurdles in the takeover process and good profits for
the shareholders.
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Chart SUNDRIDGE:
With respect to SUNRIDGE, I would like to give you some further information on this.
11.09.2015 SUNRIDGE signed the Joint-Venture Deal with ENAMCO. Approximately 5
weeks later SUNRIDGE got it final mining license – only 3 weeks later a takeover offer
came in.
Source: www.stockwatch.com
I have already mentioned that DANAKALI misses only the final mining license. This
could probably be the key to success.
SUNRIDGE didn´t have to wait for a long time – the project found a new owner and
the shareholders could double their money in only 6 months …
CHALICE got a takeover offer from China in about 8 weeks after the final mining
license.
DANAKALI can be one of the excellent examples of how deals are completed in
Eritrea. It looks like this at least.
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Apart from the country risks I see the project as a strong one. The reserves are drilled
at a minimum distance, which increases the quality. The geology is simple and the
processing of the material is completed by known procedures without any
experiments. The largest risk is the financing, to my mind. DANAKALI needs 300 million
USD. For this kind of mine it´s actually not a big deal, but the sum has to be collected.
Conclusion: It took plenty of time to revise all the information on this topic. Studying the company
presentations means only seeing half the potential of the company. I had to work into
the topic as well, do research and avoid mainstream sources. But then the message
"clicked" in the mind.
The project is that good, that I have decided to write this report about it. There are
some risks which have to be taken into consideration and cannot be ignored, that´s for
sure.
But the existing chances of the DANAKALI project COLLULI are so high that I just
wanted to inform you about this project.
The share price went up then after the discovery phase like a rocket. Some of my
readers can remember the phase – we have started at 0.10 AUD and then couldn´t
believe our eyes – the share price went up to 6.00 AUD. The company market value was
at 450 million AUD.
Today, the company value is 72 million AUD and DANAKALI has a ready for production
project as well as all the necessary studies.
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Disclaimer:
Please note that this report is not an
investment research and the editor
is not registered as an investment
adviser or financial planner. The
article was published in a German
newsletter and updated and
modified for this translation. The
article is not a buy, hold or sells
recommendation. The editor holds
shares in DANAKALI LTD.
Sources: Company introduction movie: https://www.youtube.com/watch?v=vdIqmf6ZQ_0
Quarterly report: http://www.asx.com.au/asxpdf/20160429/pdf/436wsnfybrq76n.pdf
Company presentation:
http://www.asx.com.au/asxpdf/20160513/pdf/4376v4b4stszfq.pdf
Website: http://www.danakali.com.au/