Premier African Minerals has achieved something that few thought possible – brought a patch of bush into lithium concentrate production in under 8 months. That really is remarkable and they have indeed achieved that at the Zulu Project in Zimbabwe.
They’ve also got a horrible, horrible, financial problem here. It is about, vaguely, possible that they sail through this. They could, at worst, go bust and lose the Zulu Project entirely. They might get taken out, bought out, at a price.
The details that matter in lithium
As we’ve noted before, details matter in investing. And here’s what matters in lithium. The standard financing process is that the exploration miner processes the mineral reserve of spodumene (this is for lithium hard rock mining). The production from that would be a 6% lithium concentrate. At which point the processors of the 6% concentrate step in and finance the building of the concentrate plant.
The processing plants are vast, need the production of many mines to keep them humming along. So, they invest vertically to ensure their supply. Part of that investment contract is that they then get first dibs on the concentrate produced at the mine – security of supply.
There’s one more twist we need here. There’s normally a cap and a collar on the price to be paid. The collar is a minimum price, something around what will keep the mine producing even if the market price collapses. The cap is the maximum to be paid. That’s normally something like the market price, or a bit below, at the time the contract is signed. Hey, they’re providing the capital to get the thing working, why shouldn’t they get a fixed top price on the output from what they’ve just financed?
All of this is entirely normal. Offtake contract with price cap and collar for the capital to build the mine. This is so normal that if it doesn’t happen people think there’s something wrong with the lithium mine and won’t fund it in other ways.
But what happens if Premier African doesn’t meet the contract terms?
Well, OK. But this then comes with a catch – you’ve got to then deliver the lithium concentrate under the terms of the offtake contract. Which Premier African has just admitted it won’t do. Ah. For that leads to this: “Premier was required to supply product by the 31 March 2023. Suzhou TA&A will begin charging interest at rate 3.5% per annum on the prepayment amount of US$34,644,385 from the 1 April 2023. Premier will have until 30 May 2023 to begin providing Suzhou TA&A with product in accordance with the Agreement, a failure to do this will provide CanMax with the right to terminate the Agreement by notice in writing to Premier and Premier will need to enact repayment of the prepayment amount plus interest in full within ninety (90) days of such termination notice.” Ah, again.
One way to read this is that, in very technical terms. Premier African (or at least the Zulu ~Project, which is where the value is) is now bust. They’ve spent the $34.5 million on building the plant. Now, technically, they’ve got to repay it. One of those conundrums.
Are there alternatives for PREM?
Now, it’s possible to work through alternatives. Now that it’s producing Zulu is largely derisked and thus worth quite a lot. Maybe someone else will come in, repay CanMax, take over the offtake contract in return. But PREM is rather begging at this point, they’re not going to have a grand choice of suitors nor terms – probably. Alternatively, CanMax might think they’ve already got a great deal and not call in their loan/prepayment. Although they might toughen up the offtake contract terms as well – lower that cap and or collar perhaps.
What are the terms of the offtake contract?
The real determinant here though is what is that cap and collar on that offtake contract? Contracts signed three and four years ago might be at $500 and $1,000 a tonne. Contracts signed 6 months back might be at $5,000 and $6,000. The lithium price has varied so much that those terms really have changed that much in those few years. It’s also fallen back near 50% in the past 8 months or so.
Whether CanMax wants to renegotiate the contract will depend on the terms within that offtake contract. Whether someone will refinance depend on what terms they think they could get for a new one. It’s even feasible – not just theoretically possible – that Premier African would be better off getting the CanMax contract refinanced on better terms.
The thing we need to know to decide between those alternatives is the terms of the offtake – which is the one thing we’ve not been publicly given. The best we’ve got is “on commercial terms”.
Maybe Premier African will simply be bought out?
There’s also another wildcard here. Some decently informed opinion says that CanMax would like to buy out Zulu Lithium anyway. Now that the project is de risked it is worth more. And CanMax now has significant leverage – that $34.5 million owed – over Zulu right now. Meaning that while a sale can’t be forced if another finance source can be found if that more finance can’t be then, well, there’s forcing a sale or picking it up out of liquidation or, well, the above options again.
It’s extraordinarily difficult to pick our way through the options here. Simply because we don;t know the numbers in that offtake contract which would inform us of the best outcomes for the varied players. If we knew those then we could game play what they might do. We don’t, so we can’t – or have to game play in the absence of that information.
One speculation is that Zulu is, perhaps, worth 3 pence a share to Premier African it it’s taken out, bought, on something like commercial terms. Another is that PREM itself is worth nothing if CanMax demands the prepayment back, as it legally can do, and no alternative finance can be found. And there are a number of waystations in between those two values – renegotiations of prices and contracts between varied possible players, some to PREM’s benefit possibly, many not.
It’s not a binary option, 3p or nothing, there are multiple possible final states including survival and much higher prices as production expands. But it’s a heck of a speculation from here to there.
Anyone who can find out the details of that offtake contract would have a serious head start on working out the likely conclusion. We’ve looked and can’t find it but perhaps that’s our research skills?
