A 90% dividend payout sounds too good to be true: So what’s the catch?

Small cap resource company Danakali (ASX: DNK) has inked a US$166m deal to sell its flagship Colluli Potash Project. Under the terms of the agreement, Danakali will also distribute around 90% of net proceeds to shareholders (so don’t worry, there’s no clickbait in the above title!)

The transaction is expected to net the company approximately US$122m after tax which converts to A$171m or a $154m payout to shareholders. 

Why is this a big deal? Because the company’s market cap is only $153m.

It’s not often you see a company opt to pay out what looks to be its entire market cap. This article serves as an educational piece about what an ex-dividend scenario might look like and a case study of a company that opted for a similar big payout.

Key numbers

• Market cap: $153m

• Net sale proceeds: $171m

• Payout (90%): $154m

• Cash (leftover 10%): $17.1m

• Cash at bank: $14.9m as at 31 December 2022

• Combined cash: $32m

It's worth noting that the net sale proceeds are still subject to changes such as foreign exchange movement, additional transaction-related fees and other associated costs.  

The transaction is expected to be complete in the second quarter of 2023 and subject to approvals from: Danakali shareholders, the Eritrean National Mining Corporation and Chinese regulatory approvals (for the purchaser).

Case study: Prospect Resources

A lithium explorer by the name of Prospect Resources (ASX: PSC) also opted to return most of its asset sale proceeds to investors. Back then, the stock was trading around $1.00 with a $435m market cap. 

In April 2022, Prospect sold its flagship Arcadia Lithium Project for a net US$342.9m (approximately A$492m). The company opted to return $450m or 96 cents per share to shareholders. 

Post payout, Prospect planned to retain $30-60 million in cash and management wanted to focus on a new, early stage project that was located down the road from the one they just sold.

PSC shares went ex-div on 27 July 2022 and the stock immediately fell -93.6% or 94.5 cents to 6.5 cents – which is generally what ex-div stocks do, they fall the amount of the payout.

PSC shares would start to catch a bid around noon and rally aggressively towards close, finishing the session at 8.5 cents or 25% off session lows.

What’s interesting is that the 93.6% dip would have pulled the market cap to around $28m – below the amount of cash the company was holding.

The next day, the stock rallied another 45% to 12 cents.

Prospect Resources intraday chart (27 July - 2 August)

On the third day, it rallied 25% as the market opened to 15 cents. That’s where the re-rate started to run out of steam and the stock would spend the next 4 months trading around the 10 cent level.  

Prospect Resources daily chart (Source: TradingView)

Now, there's also other factors to consider such as:

• Lithium is a hot commodity

• The ASX 200 was up 2.03% between 27-29 July

• The company had already purchased another project to develop

• Tax implications

Back to Danakali

Danakali doesn't have a new project lined up. The company's binding asset sale agreement noted that they will "continue as a listed company to identify new projects and growth opportunities."

Simply put, Danakali will become a shell company with around $32m cash (subject to change).

That's not necessarily a bad thing but it leaves a little overhang among investors. Will they buy another potash project? Will it be located in a safe jurisdiction? How early stage will the project be? What if management decides to pivot to another commodity? Only time will tell.

The other thing to consider is that Danakali trades at around 42 cents. If it does fall some 95% post payout, that means the stock will trade around the 2 cent level. At these levels, a one pip move in either direction would be some 20%. 

The transaction is expected to take place in the second quarter of 2023. It will be interesting to see what kind of price action plays out on the ex-div date.