False starts have dominated plans by prospective new producers of potash and phosphate — a group known collectively as fertiliser stocks.

BHP’s slow-moving Jansen potash project in Canada has been a leading go-slow example — which could be a reason for some investors ignoring recent developments at another potash player, Danakali (ASX:DNK).

Overlooking Danakali, however, could be a mistake.

Two weeks ago the company signed a binding take-or-pay offtake (or sales) agreement with a big European fertiliser maker for up to 100 per cent of the material to be produced from the first module of the Colluli project in the north African country of Eritrea.

The 10-year deal with Swiss-based, Russian-controlled EuroChem clears the way for Danakali to secure financing for the $US300 million development which is focused on a dry salt lake close to the Red Sea.

Another, even more recent reason for taking a look at Danakali is that late last week there was a diplomatic breakthrough in a long-running dispute with Eritrea’s neighbour, Ethiopia, which could see the leaders of both countries meet for the first time in 18 years.

Complex is hardly sufficient to describe the political issues in play. Nor does a single word cover the highly-specialised world of potash, a fertiliser which boosts crop yields by adding potassium to soil with Asian farmers particularly keen to secure additional supplies.

With multiple financial, marketing, political and diplomatic issues swirling around Danakali and Eritrea it’s easy to understand why the company’s share price has gone nowhere over past 12 months, slipping from 76c to 68c, a price which values the stock at an untaxing $178 million.

Danakali's Colluli potash project is 230km by road from the Port of Massawa. Map: Danakali
Danakali’s Colluli potash project is 230km by road from the Port of Massawa. Map: Danakali

Before looking in detail at the Colluli project it is important to consider the politics of the location and what better relations between Eritrea and Ethiopia could mean for Danakali, starting with the point that an end to simmering hostility which boiled over into a nasty little war in the 1990s would make financing a potash project which lies close to the border much easier.

The problem, in a few words, is that Eritrea was once forced into a federation with Ethiopia in a deal reminiscent of the way European powers carved up Africa. Italy and Britain are the former rulers in a region which also includes Somalia, Djibouti and Sudan — with war-torn Yemen on the other side of the Red Sea.

The fact that the leaders of Eritrea and Ethiopia haven’t meet since the signing of a peace treaty in 2000 highlights the strained relations, and the potential positive turn if old disputes are finally buried.

Colluli, the plum asset in which Danakali shares 50 per cent ownership with the Eritrean Government’s mining arm, is regarded as a world-class source of potash which can be readily upgraded to one of the more valuable forms of the fertiliser call sulphate of potash (SOP), a material believed to be selling in a tightly-controlled market for around $US500 a tonne.

Potash play Danakali’s shares (ASX:DNK) over the past year.

Danakali’s plan is to mine raw material from the Danakal Depression on the Eritrean side of the border with Ethiopia, process the ore, and start exporting 472,000 tonnes of SOP a year (about 8% of global supply), mainly to EuroChem, but with a small share available for Danakali to develop its own marketing contacts, and with plans to double output as the operation beds down.

Despite its location in one of the world’s less stable (and hottest) parts of the world region the Danakal Depression does have interesting “advantages”.

The ore is close to the surface and the processing operation is close to the coast, making mining and exporting relatively easy, especially compared with European and Canadian potash projects which are far inland and working orebodies 1000 metres deep.

Another advantage is that Colluli is believed to be the most advanced of several emerging potash projects which are moving through the feasibility process, including the high-profile Whitby development of Sirius Minerals on the coast of Yorkshire in Britain with Australian iron ore billionaire, Gina Rinehart, one of that company’s early financial supporters.

What the geology and climate have created in the Depression is a vast deposit of potash rich, near-surface salts, enough the keep Danakali (and its government partner) busy for 200 years of mining given that the reserve position already stands at a whopping 1.1 billion tonnes.

Why the Depression has not been mined earlier is a function of human history and a plentiful supply of potash in parts of Europe, Russia and Canada – sources which are now deep, difficult and costly.

Danakali has been positioning itself to become a major new supplier of potash and what’s happened in the past few weeks represents the clearing of a marketing hurdle, which has opened the way to financing, just as the diplomatic climate in Eritrea cools.

Not widely-researched because of its location, Danakali got a tick of approval in mid-June from the Melbourne stockbroking firm, Baillieu Holst which put a speculative buy on the stock with a price target of 90c, somewhat less than the $1.11 from Danakali’s retained adviser, London-based Hannam & Partners.

The London research, even if from analysts close to the company is important because Danakali is working towards a listing on the London Stock Exchange where potash is more closely followed than in Australia.