Premier African Minerals and Kodal Minerals are the FTSE AIM successes of 2023. Is either investment objectively better given recent developments?
Premier African Minerals and Kodal Minerals have long been two of the most popular FTSE AIM shares — massive undeveloped lithium reserves, Chinese investment, and the regulatory support of London’s market has seen both shoot to record highs.
At the time of writing, PREM shares are changing hands for 0.97p with a market cap of £215 million while KOD shares are trading for 0.66p with a market cap of £110 million.
As a long-term investor in both — actual shares not leveraged trading — it hasn’t escaped my attention that the fortunes of one have broadly affected the other on a macro level, while short-term dips in one also correspond with spikes in the other. I’m pretty sure this is because rainbow-chasing traders hop between the two hunting the pennies.
To be fair, this isn’t a new practice — the Latin ‘desultorius,’ (from which we get ‘desultory’ and ‘desultor’) is the name the Romans gave to a circus horse rider who would jump from one animal to another; Ovid used this word to great effect to describe a lover who would jump from bed to bed, and it has also been used to describe people who made continually poor business decisions.
And to be clear, I’m a ‘buy and hold’ investor as I don’t think that short-term trading is consistently profitable.
Let’s take a step back.
Barely a year ago, PREM’s 100%-owned Zulu Lithium Project was a site of undeveloped bush and scrubland. Today, there’s a functional ‘pilot’ plant, and production is ready to go. This is a truly magnificent achievement by industry standards, and there’s a lot more to come.
In the PREM pipeline:
- confirmation that production has started
- first sale from Zulu
- first receipt of income from Zulu
- further assay results
- resource upgrade statement
- definitive feasibility study
- plant output increases
- news on the proposed second plant
- pilot plant optimization
- solar energy power plans
- approval of its mining licence application for the wider EPO (crucial)
For context, Zulu is already considered to be one of the largest undeveloped lithium reserves globally. While the past few days had investors worried, the last few minor issues have been taken care of, with a missing reagent now on-site and government approval to commence production acquired.
CEO George Roach enthuses that ‘with plant commissioning already complete, we are now going through the final stages of process control implementation with the plant designers with the first concentrate expected shortly and first shipments now targeted for the end of the month.’
I’d caveat this statement with a hard-learned lesson; when you switch a plant on, something almost always goes wrong. It’s almost always a small problem easily fixed, but when investors get a date in their heads it can become a distraction.
This is doubly so given that partner Canmax (formerly Suzhou) is charging 3.5% interest on the prepayment of $34,644,385 from the 1 April 2023 until the product is supplied after missing the 31 March deadline — with a hard deadline of 30 May 2023 — after which Canmax can terminate their previous agreement.
However, there is almost no chance that Canmax will walk away from Zulu, and I also suspect that they may waive the interest due once production begins in the interest of good faith.
Long-time investors are now turning their attention to the possibility of either a buyout or larger strategic investment from this partner, which owns circa 13% of PREM and has 50% of offtake rights.
On 29 March, investors homed in on the delays and the interest penalty, while seemingly completely ignoring Roach’s statement that ‘Premier has received a number of requests from other mining companies already well established in Zimbabwe to discuss our intentions in regard to the future of Zulu for either future offtake and/or direct equity investment into Zulu.’
I’ve covered the PREM buyout thesis in great depth elsewhere. Still, the key advantages to note are that it remains under the $1 billion Chinese Belt and Road Initiative laws, has grandfathered rights regarding selling unprocessed ore, and that the Chinese are already spending hundreds of millions of dollars on lithium mines and associated infrastructure in Zimbabwe that would drastically cut capex costs.
Sometimes when I look at my entry points for these two companies, I have to pinch myself. PREM’s EPO is massive, but then so is KOD’s. The Mali-based Bougouni Lithium Project continues to receive further resource upgrades, and like PREM, the project is clearly world-class.
Unlike PREM, Kodal has already had its buyout/investment question answered. Also unlike PREM, production is not going to start for some time — probably circa 12 months, though putting an exact start date is generally not a good idea as PREM has recently discovered.
On 19 January, KOD announced it had secured a conditional funding package worth $117.75 million, agreed with Hainan Mining and its subsidiary Xinmao Investment Co. I have covered this deal in depth for Share-Talk, and the details — other than the current lithium price — remain unchanged.
- 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 plant to production, leaving $35 million for working capital, further drilling, and increased exploration.
- Hainan also subscribed to 2,937,801,971 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 KOD. Seems like a bargain now.
- Once the DMS comes online, it will be able to ramp up to 130,000tpa of spodumene concentrate at pace.
- KOD has a conservative lithium price estimate of $2,080/tonne, which would yield $270 million in revenue every year; under the JV, KOD would be entitled to half of these profits, or $135 million every year.
This is a company with a £110 million market cap. There’s also a good chance that China will want to buy out the rest of KOD at some point in the near future — given Ganfeng’s ownership of the adjacent Goulamina project and the likelihood that it is the buyer of Bougouni West for £2 million.
Today, the last cobwebs of fear have been wiped away as Hainan has informed Kodal that ‘that it has received all necessary approvals from the Chinese Government authorities to allow it to complete its funding and investment, (including the) “Overseas Project Investment Filing Certificates” from the Hainan Province National Development and the Reform Commission and Company Overseas Investment Certificate from the Department of Commerce of Hainan Province.’
This was always a likely outcome, but China has the occasional habit of throwing regulatory curveballs for no reason whatsoever.
The final ‘i’ to be dotted is the reorganisation of Kodal’s subsidiary companies to have all its Mali lithium assets held within Kodal Mining UK (KMUK), including the Bougouni project. CEO Bernard Aylward enthuses that Chinese approval constitutes ‘a major step towards completing the transaction,’ and expects all paperwork to be in order by the end of April.
Further, the CEO notes that ‘Kodal and Hainan remain committed to moving quickly into construction once the financing transaction is complete and all funds received.’
KOD will eventually become a money-making machine, assuming the lithium price holds up and there are no major problems between now and production.
But PREM offers the chance of a buyout at a huge premium — and if not, production is starting now.
Which is better? Neither. I love all of my lithium investments equally.
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 investment 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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