Kodal Minerals (AIM:KOD) de-risked, undervalued, and ready to rocket

Hainan’s $117.75 million investment is a strong vote of confidence in Kodal’s flagship Bougouni Project.


Up until a few days ago, Kodal Minerals (LON: KOD) was a high-risk lithium explorer with rights to 100% of the potentially lucrative Bougouni Lithium Project in Southern Mali. Objectively, KOD was a high-risk, high-reward FTSE AIM company, and indeed this is how I presented the lithium explorer for ShareTalk last year.

However, the investment case has changed.

Kodal Minerals: DMS plant

On 23 December, Kodal released a trading update covering the six months ending 30 September 2022.

Kodal highlighted that it was continuing to ‘look for and review opportunities to accelerate the development of the Bougouni Project so that it can take advantage of the near-term high price environment in the lithium market.’

Accordingly, the FTSE AIM company focussed the RNS on its plans to rapidly build a ‘low cost’ dense media separation (DMS) plant, for circa $65 million, a small sum compared to the capital cost of the previously proposed — and objectively better — $154 million flotation plant.

The DMS plant would initially be fed by Bougouni’s Ngoualana deposits. For perspective, the Ngoualana, Sogola-Baoulé and Boumou pegmatite veins comprise the current mineral resources but are only three of the ten lithium spodumene prospects identified to date across Kodal’s 350 square kilometre project area. And there is plenty of exploring left to do.

The plan is to exploit near-term sales to generate cash flow sufficient to build a flotation plant in the future. The company estimates NPV7% of $557 million ($420 million post-tax), and based on full equity funding, a payback of just two months from commencement of operations. Further, the DMS operation revenue forecast was to exceed $1.05 billion in less than four years.

For context, these figures were arrived at assuming a price of $2,080/tonne for spodumene concentrate, but the current price on global markets remains above $5,000/tonne. And with titan Albemarle expecting lithium prices to increase by another 40% in 2023, Kodal could be underselling its own value.


However, as of late December, it was still left with a funding gap to build the DMS. The group lost £490,856 in the interim period, and a further £903,000 for the year to 31 March 2022. This left it with a cash balance on 21 December 2022 of £1,821,000 — and investors were left to worry whether there would soon either be a share placement, or a strategic partner agreement on unfavourable terms.

19 January: Funding secured

However, minds were put at ease a little under a month later, when KOD announced it had agreed a conditional funding package worth $117.75 million, agreed with Hainan Mining and its subsidiary Xinmao Investment Co. Hainan itself is a subsidiary of Fosun International, which holds a 45.9% stake in Hainan, alongside the Chinese province of Hainan which owns circa 20%.

Briefly, Hainan is pouring $100 million into new joint venture subsidiary Kodal Minerals UK, which will be majority (51%) owned by Hainan, with mining work managed by Kodal. This more than covers the $65 million required to bring the proposed DMS to production, leaving $35 million for working capital, further drilling, increased exploration and any additional or underbudgeted costs (not uncommon in the mining industry).

In addition, Hainan agreed to subscribe for $17.75 million of Kodal Minerals shares at 0.5p, a 108% premium to the prior day’s closing price, giving the company a circa 14.8% stake in Kodal Minerals. Interestingly, Kodal is using this portion of the cash to explore their gold portfolio that has thus far been overlooked in favour of Bougouni. This includes gold exploration assets in Mali and Cote d’Ivoire, as well as the assessment of new exploration and development opportunities in West Africa.

For context, Hainan has already announced a $164 million investment into a battery-grade lithium hydroxide processing plant in the Chinese Yangpu Economic Development Zone, with a 20,000-tonne annual production capacity. Presumably, Bougouni’s lithium is destined for this site.

Where next?

The financing will only go through once Kodal reorganises itself to put Bougouni into the new JV, and once Hainan receives approval from the Chinese government. Given the relatively small size of the deal, previous sample testing done by Hainan, and the majority Chinese stake, these regulatory hurdles should be cleared fairly rapidly, with the entire funding expected to be paid by 30 April at the latest.

The DMS should come online in around 12 months, and will be able to ramp up to 130,000tpa of spodumene concentrate in short order. Again, this would see the JV deliver over $1 billion of revenue in less than four years.

CEO Bernard Aylward enthuses that ‘this investment provides us with a great opportunity to fast track to production of spodumene concentrate in a very strong market. The level of funding will allow us to fully fund the dense media separation plant.’

One side note: the Mali government retains the right to a 10% shareholding in the JV for nil cost, and also has the right to buy an additional 10% at fair market value.

Is this a good deal for shareholders?

Overall, this seems an exceptionally good outcome for Kodal Minerals investors, though of course there are some who think being reduced to the junior partner at Bougouni is a bridge too far.

However, Kodal needed this level of funding to get its lithium out of the ground. Its financial situation makes this obvious, and $117.75 million is not only enough to get production going a year from now but is also enough to explore Kodal’s other overlooked projects.

While it may seem that Hainan had the upper hand in negotiations, Chinese lithium processors are frantically attempting to get their hands on sufficient lithium supply to power the country’s green tech and EV revolution. Politically, China also wants to reduce its overdependence on Australian lithium, which may be restricted in the event of a military operation in Taiwan.

Kodal Minerals now has a market cap of £74 million, and a share price of 0.44p. At the very least, KOD shares should be trading for over 0.5p. And for context, a year from now the FTSE AIM company will be benefiting from circa 50% of the sales of 130,000 tonnes of spodumene concentrate per year, every year from Q1 2024.

How much this will be worth is subject to lithium price fluctuations, but consider this:

65,000 tonnes x $5,000/tonne (current price) = $325 million. Every year.

Even taking Kodal’s conservative price estimate:

65,000 tonnes x $2,080/tonne = $135 million. Every single year. And the lithium majors think prices will only increase.

Of course, delays do happen, and things do go wrong. This is not a risk-free investment, and as many FTSE AIM investors can attest, a lot can happen in a 12-month period.

But there’s another carrot for investors to contemplate.

Ganfeng purchased a 50% stake in the adjacent Goulamina Project for $130 million in mid-2021, and production is slated to start from this project in Q1 2024. Like Bougouni, Mali retains the right to acquire 10% of the project for no cost, and an additional 10% at market value.

Kodal is currently planning to sell Bougouni West (separate claim from Bougouni) for £2 million in cash, with updates available in due course. It’s possible that given Ganfeng could be the buyer, given its involvement in adjacent Goulamina.

There’s then an intriguing question over whether Chinese companies will take 100% control when production at Bougouni starts for another sizeable premium. And that premium could be a lot more than Hainan’s 108%.


This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.

Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

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