Premier African Minerals (LON: PREM) is one of those disasters in the mining markets we rarely do get to see in quite such close up. PREM has managed to get itself into the position where it’s got an entirely viable mine, which it built in near record time, in a hot and sexy market, yet it’s about – likely at least – to lose all the value from it. That really does take some screwing up.
To understand the background, a bit about the lithium market. There are two major mineral sources – given the excitement about electric vehicles more are being proposed of course – brines and hard rock mining for spodumene. The spodumene market – where PREM is – relies on a mine and a a processor. The processing plants are vastly larger – economies of scale – than the output from just the one mine. So, each processing plant has contracts with a number of mines, each mine has a contract with one of the processors. The linkages are so tight that it is normally the processors who finance the mines.
The basic lithium market structure
The exploration company goes out looking for lithium if it finds it then marks it out, gets the licences and so on. Then, at the point that the mine starts, the concentration plant has to be built, the processor finances all of that. In return it gains a “take off” contract. A guaranteed supply of lithium concentrate to feed the processing plant. And, of course, a discount on the price to be paid for it. It is normally true that this discount allows the miner to make a small profit on what is supplied under the take off contract. The real profit comes from the production over the guaranteed amount under that contract.
OK, so this all sounds rather complicated and perhaps too much of an explanation. But it’s important to know this more generally. For example, if a spodumene mine cannot get one of those contracts with a processor then forget it – it’s a dud. If one of the processors won’t sign up with it then it’s not viable. Not only that, but it also won’t be able to sell its concentrate even if it does open. On the other hand, unlike near all other exploration miners this does mean that lithium miners tend not to have dilutive rights issues when they start to build the mine. Because a lot of the costs are carried by the processor. And, of course, the processor signing up is a validation of the project and thus debt finance is often available. Much less equity dilution therefore.
Premier African’s lithium market problem
OK, so that’s the general, now to the specific. Premier African has, in that Zulu property, a nice spodumene find in Zimbabwe. OK, we can all worry about political stability there and so on but, well. They signed up with Canmax as the processing partner, Canmax provided the capital to build the processing plant etc. All absolutely standard.
Except, well, it didn’t quite work out. My particular suspicion is simply that there wasn’t enough slack in the process. Mines, building things, something often does go wrong. So there should be some – indeterminate – “here be dragons” hole in the timescale. Which there wasn’t.
We can track this through Premier African’s stock exchange announcements. Back on 29 March there’s an admission to a little oopsie “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”. Now, look back up. The processor, Canmax, funds the concentration plant and mine in return for guaranteed supplies at a certain price. But funds the plant means they paid upfront. $35 million here in fact. If you don’t deliver concentrate then they can ask for their cash back. Which, of course, PREM doesn’t have because it spent it to build the mine. Hmm, oopsie! And then on 25 May: “ As announced on 29 March 2023, Premier’s requirements to supply spodumene to Canmax Technologies Co., Ltd. (“Canmax”) are to ship first product by 30 May 2023 (which will not now be met), failing which CanMax may elect to cancel the Marketing and Pre-Payment Agreement and require that the prepayment plus interest is settled within 90 days following notice. “
And, yes, Premier African’s problems got worse
Ah, problematico. Premier doesn’t have $35 million to repay Canmax but now, legally at least, it needs to have. Or, of course, Canmax can be nice guys and let it slide. After all, they’re nearly there, right? 6 June: “Canmax and Premier are in advanced discussions pertaining to an addendum to the Agreement” ….”Canmax have confirmed that their intention is to continue to support Premier and not to terminate the Agreement providing that an addendum between the parties is entered into on or before 25 June 2023.” Well, yes, OK.
Now think of this from the Canmax point of view. They’re capitalists, they’re into profit. Premier African has failed in the contract – and now Canmax gets to rewrite that contract. So, do we think that contract is going to benefit PREM or Canmax? Depends upon how much sweetness and light there is in capitalism perhaps. 26 June: “a suitable amendment to the Agreement, no amendment has been signed to date, nor will an amendment containing certain of the terms now currently proposed by Canmax, be acceptable to Premier. In particular, Canmax’s proposal received on 23 June 2023 includes:
|The effective conversion of the Pre-Payment Amount into either (i) a convertible debt instrument in the event that Zulu is unable to meet its delivery obligations under the amended Agreement, with no floor to the conversion price or (ii) a proportionate amount of the equity of Zulu; and
|The sale to Canmax of all concentrate produced at Zulu, not only that from the Pilot Plant, at fixed prices with limited ability for Premier to accommodate cost variations.”
Ah, so not so much sweetness and light then. For, from up at the top there, we can see that this wipes out any excess profit for Premier African. That concentrate will have to be sold – all of it – to Canmax at a price determined by Canmax. A price that allows some small profit over capital invested perhaps but no more than that.
The lesson is not about PREM, it’s that market structure matters
Now, all these gory details, sure, fun to watch from a distance. Premier African needs either an angel to save it from Canmax – but why would anyone do that except at only very slightly better terms – or PREM shareholders get whatever Canmax is willing to allow them to have. No wonder the shares fell 40% on this last and latest announcement.
The point here is not, though, to say that Premier African is uniquely bad. I’m pretty sure that Core Lithium is worth less than it could be because of the time period when it signed its processor contract and the prices that were written into it.
The actual point here is that the details of a market sector matter. What are the standard contract terms? Perhaps more to the point, what happens when you violate them? Premier African Minerals might – maybe – find an outside investor but the likelihood is now that Canmax owns their arse and that’s that. But this outcome depends upon that market and contract structure as above – they’re important.