Zulu Lithium JV Agreement

All things considered I’m in little doubt we’re about to witness a step change in PREMs fortune and hopefully it's share price shortly.

I believe the step change will come as a result of entering into a JV agreement with a suitable partner on Zulu's lithium. There are a number of unmistakable indicators telling us it’s likely once DD has been completed.

To be clear I believe the agreement will be on just the old license area which is currently the subject of the DFS and not on other areas. Well not yet anyway, I’m sure GR will want to “keep his powder dry” on those pending further exploration and analysis. Viz;-

George Roach PREMs CEO is quoted as reporting to the markets on 14th December 2021.

“I have made reference to a number of ongoing negotiations intended to secure funding for the balance of the DFS underway at Zulu, against a small disposal of a direct interest in the project and assurance of mine build and off-take finance. Due diligence is being undertaken by more than one capable potential off-take partner.

As much as Premier is under due diligence, so too are those seeking to conclude an off-take agreement with us. Although progress is good in my CV, there is no certainty of outcome until final agreements are concluded and that is not the case at this time."

Looking at similar agreements recently entered into in the space I'm taking from GR’s statement that we're going to be hearing about a JV not only to finance the rest of the DFS but also to build the follow-on mine all in exchange for a % of it.



I see the finance for the rest of the DFS as slightly irrelevant as it’s likely to be just a cash down payment of the overall deal. I can see an overall JV being done on a 50/50 basis.
 
Given the small placing @ 0.16p and the likelihood that some payments may now be called for on Pro-forma is just one indication that PREM is on the cusp of entering into such an agreement.

If I’m right the agreement will be transformational for PREM, and not just in financial terms but more importantly in terms of leadership, experience and skills. 

The market is sure to see there’s a very significant likelihood that a mine will be built and the JV having the skills and the wherewithal to build it! It will also be seen that it puts PREM in a position that it shouldn't need to keep coming to the market to raise cash anywhere near as often as it has if ever at all.

As I say, the DFS currently being carried out is confined to what was the original licensed area before the Exclusive Prospecting Order (EPO) was granted. That area is 350 hectares.

By granting the EPO earlier this year PREM was awarded a much larger area under a new license. The new area encompasses the original. But it is over 57 times larger. It measures a staggering 20,200 hectares which is over 85 square miles, or as previously pointed out the equivalent of 20,000 rugby pitches!


To my mind the original area compared to the new one is akin to just one square on a chess board or a postage stamp on an A4 envelope.

Look back to 2017 and consider the Scoping Study was out on just a small part of the original area back in 2017 and you get some sense of proportions. It was based on a short length of just one of many Pegmatite strikes there.

Nevertheless, the short length of strike was assessed to contain 20.1 million tonnes of Pegmatite containing Li2O at a grade 1.06% under the SAMREC code. Approximately two-thirds of which was Spodumene and one third was Petalite. It was PREMs first and still is it’s only bankable position on Zulu albeit updated now.

After the necessary work for the Scoping Study was completed, the drilling campaign continued across the remaining area. But this time to  do no more than delineate the extent of the Pegmatite.It was not SAMREC compliant.

It was in this campaign that much higher grades were discovered in the so-called step out zones. Those zones together with farm fields that couldn't be accessed are now being incorporated in the DFS. One core was found to contain a high grade of over 4% Li2O which is truly exceptional if you recall.

By the time the exploration drilling had finished in 2017, a reasonable estimate of the Pegmatite resource was said to be between 80 million tonnes and 160 million tonnes. So  4x to 8x more than the Scoping Study but incredibly less than 2% of the whole of the  new license area awarded! All very encouraging to say the least. .





Zulu is often benchmarked against Pilbara’s lithium mine in Australia given it’s similar grades. Its Pilbara's ore body is said to be one of the largest hard rock lithium deposits in the world. But I think there’s every chance that Zulu could  surpass it.

Pilbara’s mine is about three years ahead of Zulu and  in production now. It's current resource is 230mt's @ 1.20% Li2O or something like that. Its original mining plan was to produce over 320kt’s of SC6 (Spodumene Concentrate >6%) from a Run Of Mine (ROM) of 2mt's/annum of Spodumene bearing Pegmatite  giving the mine a Life Of Mine (LOM) of over 20 years. Pilbara's well on with it now I believe.

All very interesting. As is the fact that Zulu’s Lithium is higher quality than Pilbara. Zulu’s has a very low iron content which sets it above Pilbara's and indeed most of its piers.

Pilbara’s mine is massive and highly profitable producing SC6 in those quantities at today's prices by any measure. It and other similar lithium mines are generating ROI’s (Return On Investments) never thought possible.  

Pilbara's Market Cap is now a staggering A$9bn or $6bn generated from its production of 320kt’s/ annum of SC6 and its potential the markets are seeing. It’s p/e ratio by the way is over 40!

So typically if we consider the first mine on Zulu having a ROM of say 2mt’s/annum of Spodumene bearing Pegmatite this is what the calculator looks like using an earrings metric method. 1.25% is the grade I’ve used and 85% is the Metallurgical Recovery.

2.0mt's X 1.25% gr X 85%mr = 0.20mts or 200kt's  Li2O.

200kt's Li2O ÷ 6% = 333kt's/annum SC6

333kt's SC6 @ $2,500/t  = $830m annual revenue and I would suggest $650m net profit after tax and royalties.  



If we assume then that Zulu’s p/e ratio is going to be a miserly 8 that would give the mine a Market Cap of $5.2bn which would be $2.6bn net to PREM in a 50/50 JV.  Let's not forget Pilbara's p/e ratio is over 40.

$2.6bn at today's exchange rate is £1.9bn or thereabouts and with no more than 25bn shares in issue the math tells us we’re looking at a share price of 7.5p when the mine is operating in an optimised as steady state sometime in 2025.

With fundamentals that good I think it would be reasonable to anticipate a share price of 1.0 - 1.5p assuming we have a good DFS and with finance to build the mine in place even in a 50/50 JV agreement in Zimbabwe. All on a DCF (Discounted Cash Flow) basis with a high ROI.

If all that’s right and we come full circle it follows that we are on the brink of a step change JV agreement which could easily see the share price run up to 0.50p if not more very quickly on its announcement.

Zulu will have many options going forward. I doubt very much a single mine having the metrics will be the end of it. Nowhere near in fact. I believe we could be looking at a lithium resource that could support the equivalent of six like mines if not more. With a little vision I can see we may need to use road trains on a dedicated road at some point or even a rail link.

I’m not ruling out a Carbonate production unit either and although I’ve not focused on it there’s Petalite and other minerals such as Tantalum to consider too.

Perhaps last but not least we would be naive to think that gold mining will not feature at some point. We’re in the Greenstone Belt which is known to have some of the highest near surface grades of Au on earth after all.

IMHO as always and best wishes to you all in 2022.

Zulu Lithium Asset - Enormous Upside Potential

 

On 12 March this year PREM was granted an Exclusive Prospecting Order (EPO) which gives it's Zulu project in Zimbabwe a new License Area (LA) of 20,200 hectares. That’s an increase over and above it’s old LA from 350 hectares to 20,200 hectares which is an enormous 5700% increase. An area that could potentially make Zulu one the largest Lithium mines of it’s kind on earth. It’s the equivalent of :-

* 20,000 rugby pitches
* 25% bigger than Liechtenstein
* 25% bigger than Washington DC

Read EPO grant RNS here 

Most genuine shareholders know that Zulu’s LA is huge and the notional Return On Investment could be good. But just how good isn't easy to visualize at this early stage. So let's consider a few things to see if they help.

Zulu’s Lithium

Zulu's Scoping Study (SS) or PEA, if you prefer to call it that, prepared by BARA Consulting some years ago helps and it gives some pointers that are extremely useful. But although the PEA laid a marker in the sand it gives very little guidance on scale and potential which is what investors are understandably very interested in.

BARA prepared a statement of fact on a fully SAMREC compliant but relatively very short length of just one of the known lithium strikes on old LA. That's all they were remitted to do back then. Consultants like BARA aren’t given to speculation or vision. They have to be “mechanical” and deal with what they're asked to do. So BARA put together their SS and designed a business model for a small mine and no more. Read Scoping Study RNS here 

So BARA’s appraisal and model were based upon just 15% of one known strike which was just a small fraction of what has been identified through subsequent drilling just on the old LA. It follows therefore that BARA’s business model must be minimalist and it should be read in that light. 

So PREM used the SS as a basis to estimate an overall resource on the old LA of 350 hectares. PREM made their estimate known to shareholders at the time saying it was an estimate and should be used for guidance only. But what PREMs estimate did for the first time was to give an indication of scale much better than the SS. It incorporated drill results subsequent to the SS and shouldn't therefore be considered as simply as a guess. It was much more accurate and scientific than that.

If anything, PREMs estimate was more likely to be conservative than not at that point. Later still in the drilling campaign PREM undertook further drilling maily to delineate newly discovered strikes that appeared to run on to the old LA boundaries and beyond across the EPO area. I believe those findings are just drillers notes and assays so far and were neither disclosed or included in PREMs estimate. To get a better idea of the effect of scale here's some benchmarking and calculations of my own. If I am anywhere near right the results are simply breathtaking!

Based on its old LA PREMs highest target resource was 60mt's of Pegmatite containing Li2O at an average grade of 1.06%. It’s been found there mostly in Petalite and Spodumene form at a ratio of one third to two thirds. Spodumene being the most attractive of two given its use in battery production in increasingly strong market conditions. 

PREM derived its estimate from the known and measured strike contained in the SS and extrapolated it on a straightforward linear basis to incorporate all the results from the drilling campaign. After this exercise there were further lithium strikes found in step out zones when the drilling continued purposely to delineate the overall potential there. Those up to the boundaries are sure to have helped to justify PREMs perseverance in the EPO application.

One of the strikes discovered during this last phase was simply an extension to the main strike. But there were three further strikes discovered and these were categorized as Step Out Zones which were entirely separate to the main strike. These were appropriately called SOZ's 01 to 03.

The Pegmatites in SOZ's 01 to 03 were shown to contain predominantly very high grade Li2O in Spodumene with very little Petalite and Lepidolite encountered. Highly encouraging as it affacted the sites proportionality and potential as well as improving the average grade of 1.06%.

Assay results from ZDD-45 were particularly noteworthy if not world beating where a length of the core was found to contain a bonanza grade in excess of 4% Li2O. George Roach is quoted as saying in an RNS at the time "Not often is a grade of 4.24% Li2O seen in drill core". An understatement if ever there was one.

So let's assume the 160mt's estimated resource is about right. LCE prices are currently about $12k/t and rising under improving market conditions is much much stronger than the last rally that saw the LCE price top $20k/t. Nothing is for certain but in my view I doubt we’ll see those all time highs lasting very much longer.

The conversion factor from Li2O to LCE is x 2.473. So for ease of maths let's say the current Li2O price is $30k/t. That would give Zulu an “in-ground” value of 160m x 1.06% x $30k which is $51bn. It’s worth reiterating as I've used it later, so $51bn! But that is based on the old area of 350 hectares. So now multiply that by 57 and you get to a mind-blowing $3 trillion in ground value just for the Lithium assuming the density of Li2O is consistent across the EPO all at today’s prices! If you think that’s far fetched you should note that an as yet unmeasured surface Lithium strike has been found that runs virtually the full length of the EPO. so roughly 20km. To me it’s inconceivable that that’s the extent of it. There’s sure to be many more strikes and step out zones than a simple walk over has detected.

The largest hard rock lithium resource in the world is owned by AVZ Minerals in the Democratic Republic of the Congo and it’s resource there was increased to over 400mt's @ 1.66% Li2O giving it an ”in ground” value of $200bn on the same basis. So compare that to the Zulu potential of $3 trillion in ground value. Amazing!

Zulu is also often benchmarked against Pilbara's mine in Australia given it's of a similar size with similar grades. But Pilbara’s development is ahead of Zulu and it’s in production now. It's resource is 216mt's @ 1.13% Li2O or something like that, giving an “in ground” value around $70bn. It’s considered to be amongst the largest hard rock lithium mines in the world and whatever anyone might say it’s certainly no whip in the wood!

If you take Zulu as having an “in ground” value of over $3 trillion it’s potentially fifteen times higher than one of the largest mines of it's kind currently in the world and forty times higher in value than Pilbara. All of a sudden Pilbara starts to take the size of a minnow such is the potential of Zulu!

Some like to value mines based on the value “in-ground“. It’s a quick and easy way and it’s a method adopted quite often. We’ve seen George Roach do it a few times too, but being honest I'm not a fan of this valuation method.

There are better ways to value Zulu of which benchmarking, NPV and using an earning metric are most common. However, now I've mentioned the “in ground “ values it's just worth saying that using a factor of 1.5% to calculate Zulu's Market Cap. Based on the new area under licence and LCE at its current price of $12k/t would be around $3.6bn. However if LCE were to be more like $20k/t which I think is more realistic Zulu's Market Cap would be nearer $6bn.

All very interesting. As is the fact that Zulu’s Lithium is very high quality much higher than that of AVZ and Pilbaras. It has a very low iron content too which sets it at a cost advantage above most of its peers in the space and highly sought after by battery manufacturers for all industries not just EV’s come the day.

These mines are massive and highly profitable by any measure even at today's LCE and Spodumene prices. Pilbara's mining plan is to develop it’s mine in two phases. Phase 1 sees it producing over 300kt’s/ annum of battery grade Spodumene from a mining rate of 8mt’s and Run Of Mine rate of 2mt's a year. In phase 2 Pilbara intends to have two production areas and double it’s metrics. It’s Market Cap from producing 300kt’s of Concentrate per year currently is around $1.2bn with it’s All in Costs likely to be higher than Zulu's. Adjusted for price increases and the ramp up in Phase 2 Pilbara is set to achieve a market Cap of around $5bn in two years time.

As I see it, Pilbara's plans have been well laid out by experts in the space and as I see it there's no reason why PREMS plans for Zulu shouldn't follow suit. On the other hand, given its potential it’s possible we'll see Zulu have its own dedicated chemical plant in time producing Lithium in Carbonate form. For the purposes here I'm going to ignore the Carbonate option for now. So please bear that in mind. I’ve tried to be conservative in other areas but in my view they’re factors that shouldn't be ignored and left unconsidered

Battery grade Spodumene was selling for around $900/t & $1000/t during the last bull run when the market price for Lithium Carbonate Equivalent was around $10,500/t.That’s reflected in the BARA report too. So projected prices then say $1500/t for Zulu's Spodumene and $20k/t for LCE seems reasonable.

If I count the Petalite and Tantalum I'll ramble on forever and it's going to make the maths quite difficult to follow. So I've assumed they cancel each other out and ignored them. I think it's a reasonable assumption and conservative too. I say that because of the strong Petalite market and the Tantalum we know is present in grades of up to 200ppm. 

I've also used Zulu’s SS and Prospects Arcadia Mine in Zimbabwe where I can for references to make my statements and calculations more factual and less “dreamy”. There are some key non-disclosures on their offtake agreements in Prospects presentations which is a shame but understandable for confidentiality. So the information is limited.

Prospect hasn't long entered into a seven year offtake agreement with Sinomine, a Chinese offtaker on a build and transfer basis. Sinomine has agreed to design and build the mine but then transfer ownership of it to Prospect in a share swap arrangement of $10m for 10% stake and an offtake agreement for 70% of the lithium Concentrate produced for the next six years.

Prospect has a say in the mine's design and takes ownership of it when it's built. They pay for it’s cost over a three year payback period I believe. It sounds like a good arrangement but Sinomines payment rates under the agreement are undisclosed so I can’t be entirely sure.

Now here's an interesting part. Prospect has the right under the agreement to divert up to 50% of their Concentrate at any time to an owned Carbonate plant. That is a step change for them given they've got the room on site. Their licensed area is 4 x the size of Zulu’s old LA.

Arcadia managed to start production within a year from a “spade in the ground” which is very quick especially considering the climatic conditions. Their plan was to produce 200 kt's/annum of Lithium Petalite Concentrate and over 150kt’s of Spodumene Concentrate initially and whilst those targets may have been met they’ve just opened a chemical plant too and are now producing Carbonate too.

The Arcadia mine in Zimbabwe is said to be one of a group of mines that are the largest hard rock Lithium mines in the world. At 0.2% cut off I think they have a resource of about 75mt's at similar grades to PREM. To put that into perspective Zulu has an assessed but well estimated target of twice that on just on it’s old LA. Like all appraisals, logistics should be considered. It will be the pinch point for Zulu in my view. I doubt we will be able to ship much more than 300kt's - 350kt’s/annum by road from each mine gate.

So with my positive hat on I like to imagine Zulu in 3 phases:-

PHASE 1 DFS - I think Zulu could command a $200m to $300m Market Cap just on it’s Lithium alone at this stage or more subject to reasonable fundamentals which I'm confident we'll see given the market outlook. If there are offers from suitors at this point Zulu’s value could be substantially more and I see that as a real possibility.

I've derived the basic value from Prospects' deal with Sinomine where it was given a similar value in the same time & space. So if we say PREM has 20bn shares in issue then we get to a share price contribution of around 1.25p to PREM. Fairly straightforward. But I say again just on the Lithium asset.

PHASE 2 PRODUCTION - Zulu should be producing Lithium Concentrate. $120m Capex or thereabouts will be needed to build a Concentrate facility. So we should expect something like a 25% dilution to raise Capex finance in a 50/50 debt to equity fundraise.

Zulu should achieve a rate of 2m/t ROM/annum @1.06% Li2O grade quite easily and similar to it’s industry peers. That would produce 300kts - 350kt’s >6% Spodumene at a quality better than battery grade. With a $1.5k/t offtake agreement that would give Zulu a $450m/annum revenue. C3 costs or All In Costs if you prefer from the BARA report should be no more than $550/t or $165m annualised. So assuming conservatively = Tantalum credit at 60 ppm grade should cover most of those. "Earnings' ' therefore would be in the region of $375m giving Zulu's notional Market Cap of $3.75bn using a P/E ratio of 10 in an earnings metric calculation. In turn a contribution then to PREMs Market Cap of around $3bn say. PREM having retained 75% ownership. All this is very much in line with Pilbara’s appraisal.

PREM currently has 20bn shares issued or so but by then say 30bn. Based on that Zulu’s Lithium mine should contribute roughly 8p to PREMs SP at current exchange rates.

PHASE 2a INCREASED PRODUCTION - The same as Phase 2 but double the metrics. Production being from two locations within the EPO and the mine having two gates to ship it’s Concentrate from in lieu of one.

PHASE 3 BEYOND 2028 - Zulu could be one of the largest producing Lithium mines from a hard rock source in the world producing Lithium Carbonate. At least $500m Capex is going to be needed to build a chemical plant capable of producing 80kt's to 100kt's of Carbonate. I see most of that being funded out off WIP though with very little or no dilution or debt.

Projected revenue from the sale of 80kt's Carbonate should be near $1.6bn/annum and projected All In Costs should be around $5k/t so perhaps $400m/annum. The cost figures have come from benchmarking against Zulu's peers.

With earnings then of $1.1bn the math tells us we're looking at a Market Cap of $10bn and therefore a contribution to PREMs SP of 33p or thereabouts. I said at the beginning of this the figures would be breathtaking and I think that one certainly is! Whilst PREMs notional Market Cap wouldn’t be the highest in the Lithium space most but not all of the others are miners processing the metal from solution rather than hard rock.

It's worth reiterating that the figures I’ve arrived at for the Concentrate alternative are projected three years out for Phase 2 and those for the Carbonate alternative are projected six years out. We could well be looking at a huge mining operation in Zulu, with it being quite possibly the largest of its kind in the world.

Zulu’s Gold

In 1994 The British Geological Survey organisation undertook a very detailed Technical Review of Zimbabwe's gold mines. It considered eighteen mines in total and nine of those in far more detail than the others.

The nine were in the Greenstone belt that crosses Zulu's EPO. Although in part only it looks to be very extensive covering what looks like roughly two thirds of it. It's difficult to be more precise at this stage.

To paint a picture the Greenstone belt in Zimbabwe is massive by any measure and should only be categorised in square miles. It really is that big and it’s largely unexplored. What is known for certain however is that it's the richest belt in gold resources on earth. 

The old mines that are littered in the belt are mostly disused now. They were abandoned in an undepleted state in the 1930's as we're most mines at the time I believe. 

The average Au grades identified by the BB'S were consistent and nothing short of jaw dropping!

One large mine had just a small quantity of it’s resource less than 5g's/t Au the rest was over. One had a large quantity of Au over 20 g's/t and the rest of the mines had between 7 & 8g's/t. All of these were either at the surface or at shallow levels lending them to open pit mining.

Zulu’s gold potential is much bigger than this but simply run an appraisal using a modest 80k oz’s production rate to give you an idea. So annual revenue would be around $150m at today's prices, All In Costs at the grades I’ve said should be no more than $500/oz and the annual net profit would be around $120m. Apply then an earnings metric calculation using a p/e of say 15 and you get a Market Cap of $2bn. As I say though this could be conservative especially given Au has a very positive outlook just now. 

Finding another Au resource on earth that has near surface grades like these and has this potential is a real challenge .

CONCLUSION

My conclusion is that Zulu's gold potential may be even bigger than its Lithium. Regardless, neither cannot and should not be ignored. 

If I'm anywhere near right, PREM has a truly valuable asset in Zulu within its portfolio.

One which could easily have a Market Cap of $10bn in five years time if not more! I’ve appraised Zulu’s Lithium and gold values using four recognised methods. An in ground valuation. One using benchmarking.  An NPV25, although I haven't given the details, and one using an earnings metric. They're all slightly different, but all are mind blowing!

I'm not going to give any investment advice here. I think with PREMs current Market Cap of $60m we could be looking at a 200 bagger on that metric within five years.

What I would say though is you don’t want to miss an opportunity with this potential so you definitely should DYOR before dismissing it. It is also worth bearing in mind this is only one of PREM's assets, with the others being RHA Tungsten, Circums Mineral Potash, MNH Manganese, Ligonha Gold, Katete REE, Tinde + more!

AIMHO

Circum Minerals - a potential special dividend to PREM shareholders

#PREM has many partially or wholly owned assets in its portfolio. But it also has an investment of just over 5m shares in Circum Minerals. Here’s some information on Circum and it’s  Danakil potash opportunity in Ethiopia. Some LTH’s are sure to be well aware of it given it’s been an investment in #PREM portfolio for several years now.

It’s long been known that Circum intends to either launch it’s Danakil potash project in Ethiopia or sell it outright. From its latest presentation and recent letter to its shareholders we now know a little more about it’s intentions. We also know from #PREM RNS’s that Circum is on schedule to achieve its objectives.

Moreover we know that #PREM has pledged to give its shareholders a choice of how #PREM shares are dealt with come the day, which is quite a generous offer and truly extraordinary. Here’s an overview:-

Circum is a private company of substance. It has a “Board” of six Directors each of whom have a high net worth but more significantly  appear to compliment each other as experts in their own field. Circum was founded by Canadian billionaire Stephen Dattels who is still the company Chairman:

Who is Stephen Dattels? (click here to view)

The BOD’s are supported by an extensive and competent management team and together with outsourced specialists, I’ve no doubt they form a team with a high level of skills.  A team more than competent  to develop the Danakil project into a successful potash mine if that’s the way it goes.

The Ethiopian government remains extremely supportive of the project and continues to progress the final major infrastructure work required for the development. This includes a newly upgraded 600km road corridor to port in Djibouti as well as power lines linking the mine to Ethiopia’s new sustainable hydroelectric supplies.

Ethiopia has featured prominently in the news recently with encouraging reports on many fronts including: Prime Minister Abiy Ahmed receiving the UNESCO Prize for Peace for his reconciliation with Eritrea; announcements of Ethiopia’s ongoing economic growth at around 10% p.a.; successful attraction of foreign direct investment in the past year; political restructuring including empowering and unifying opposition parties to enable democratic elections this year and Ethiopia’s successful completion of new infrastructure around the county including business parks, the Addis Ababa rail links and international railway lines.

Circum through its wholly-owned subsidiary, Circum Minerals potash Ltd.  has held a majority ownership of Danakil since 2013. It was originally owned by AgriMinco but they sold 70% of it to Circum and 30% to #PREM. Circum subsequently bought out #PREM in 2014. But #PREM has been buying back the shares since then and currently owns just over 5%.

As things stand #PREM holds 5,010,333 shares in Circum Minerals Limited ("Circum")

The project has the potential to be a world class asset and one of the largest potash mines on Earth producing both Muriate of potash (MOP) & Sulphate of potash (SOP) at the same time from the same boreholes.

It is situated in the Danakil evaporite basin which is recognised as one of the hottest places on Earth. Temperatures there are over 40* C for most of the year and that’s an ideal climate for the mines evaporation process. Just about as good as it gets.. The area is also well mapped for potash having been extensively explored for over 100 years.

The potential resource there is nothing short of mind blowing. The licensed area covers 36,500ha which is over 140 square miles. It’s a similar size to the Isle of Wight for scale. So it’s big...... Very big!

We should take note that the Danakil Project of Circum is a substantially larger resource than the adjacent deposit in Eritrea owned by Danakali Limited as to 50%, and the market valuation of Danakali Limited is currently approximately US$105 million.

There's an NI 43-101 compliant reserve and resource of 5 billion tonnes of potash salts there at grades of over 18% KCI at varying depths from a shallow 80m to 500m. Again as things stand.

There's also an additional 7 to 9 billion tonne potential identified reasonably accurately by a detailed seismic survey.

Again for scale a large  mine there producing 5m tonnes of MOP & SOP a year combined would give the project a mining extraction rate or ROM  of 27.5m/t’s p.a. and give the project a LOM of over 5 centuries!

Just for further perspective that would give the project an in ground value of nearly $650 billion at today's potash prices. Using the adage of valuing the project from its in ground resource we get to roughly a $6.5 to $10bn Market Cap at its height running in a steady and optimised state at the 5m tonnes annual production figure I’ve used.

I believe Circum now has a new DFS for Danakil.  But as far as I'm aware it's a private document that’s currently undisclosed. The new one is now based on further studies to optimise the project. The development of the processing plant has been modularised enabling Circum to  build the mine in phases which will produce much better economics and at the same time require lower initial Capex.  

For now as shareholders we’re only able to consider Circums latest information in the public domain along with any further information we're given by #PREM or are able to wheedle out of them. Significantly amongst other things the new DFS will enable a bankable valuation to be made and the importance of that to both Circum as a sales document in an outright sale or to raise finance in an IPO cannot be overstated.

We're told that Circum is at a crossroads with the project and there's been debates going on behind closed doors amongst Directors as to which way to take it for some time. Circums recent update confirms:-

“The Boards approved strategy is to achieve a liquidity event for shareholders either through an outright sale or development of the project. Strategic Sale/Partnering Process As advised previously, various parties are in the process of undertaking due diligence and given the size of the project this is a time consuming process, however, it is expected that it will be concluded by year end. These parties could either acquire the company outright or contribute a significant portion of the equity leading towards the development of the project.”

The update went on to say:-

“The company is, however, doing some preparatory work including debt and offtake workstreams for an IPO in the background and should market conditions change, this option could be activated.”

So Circums BOD are running two scenarios.  One preferred and the other secondary.

Furthermore the last official update tells us:-

“In the event that the project is taken forward to development it is intended to finance Capex through a combination of debt and equity to enhance project returns. A leading London based financial advisor was appointed last year to structure a suitable debt package. Excellent progress has been made in this regard, with Expressions of Interest being received from various commercial and development banks for the entire debt package. In addition, there have been strong indications of support by various Export Credit Agencies to provide the required commercial and political risk insurance. The Board of Circum is optimistic that the positive developments noted above will result in a successful achievement of a liquidity event for shareholders in due course.”. A copy of the Circum policy is below:

 

Should a mine be developed by Circum the plan is to achieve a steady state production of 3.5mt's/ annum in less than four years. Based on the estimated total resource that production rate would give the project a Life Of Mine of roughly 750 years which is  the best part of a kiloyear or 1 Millennium. So it’s a  huge mine from that perspective too.

Circum was granted its mining license over two years ago which is valid for an initial 20 years, renewable thereafter in 10 year increments. Circum has also obtained government approval of its Environmental and Social Impact Assessment and Environmental Management Plan. Since then they appear to have been working on getting the $1bn Capex finance arranged. No doubt all aspects necessary for making a start on constructing the mine will be under consideration too not least of all selecting a suitable contractor to build the mine.

The processing plants have now been modularised and Circums plan is to ramp up production to 3.5mt's/annum in four phases in order to minimise the Capex needed and to mitigate the risk. Potash mines are renowned for needing disproportionately high Capex which is why very few get beyond feasibility stage. So the planned construction period for the mine of two years may at first appear long is probably commensurate.

Phase 1 production target of 750kt's /annum is set for 2021 leading up to a phase 4 optimised and steady state production of 3.5mt's /annum by sometime in 2024. The modules have been designed to be either SOP or MOP focused to allow Circum to adapt its production to respond to changes in demand and market forces.

The development this way adds exceptional optionality to the project as Circum can bolt on more production modules over time after the initial construction period and it makes any additional phases beyond phase one largely self-funding out of WIP.

The Capex needed to get to phase one is said to be $1bn. Although the figure mentioned in #PREM recent Webinar was $1.1bn. I'm not sure but I imagine the additional $100m is for contingencies which is an allowance that  always features.

Solution potash mining uses exceptionally high volumes of water but Circum's process is designed to predominantly use saline brines from the existing water table. Hydrogeological studies that show Circum has access to sufficient brines for its initial operations from the nearest three alluvial fan complexes within its license area. All very conducive to mining and reflected in Circums cost appraisal.

In field test work, over 600 million litres of brine (roughly the equivalent of two hundred and fifty full size olympic size swimming pools) equivalent to only 1 weeks supply of water the mine needs was extracted without any impact being observed to the water table. Based upon these results and extensive groundwater modelling expert engineers have concluded that the alluvial fans will be excellent aquifers of sufficient storage and yield to supply the required volume of water to satisfy the mines demand beyond the requirements called for in  Circums mining plan.

Nevertheless the groundwater supply is finite and whatever the limitations are of that source they will almost certainly be the factor that will determine the LOM and more importantly it’s optimised production rate. The annual  water usage is estimated to be 30 gigalitres which per annum is 30 billion litres and Danakil will be allowed to use that amount of water under Ethiopian Law given it will be collected from within it’s licensed mine area.

The SOP & MOP is able to be extracted in solution from the same boreholes. They are able to be kept entirely separate as they are situated in well defined salt layers at different levels.

It's quite an  important point to make as it gives greater control and brings flexibility to the mining plan.  As does the plant modularisation all of which will allow the mine to vary the output for each type potash at any time to its advantage. It’s only when the brine is pumped into the drying beds that the two types of brine are separated entirely to dry. Initially I imagine the mine will produce more SOP to enable it to finance the  ramp up from phase one out of profit rather than dilute the equity any further or take on more debt.

SOP & MOP have both cost and value differentials. Cash Costs (CC’s) or mining production costs if you prefer are said to be less than  $40/t for MOP and $112/t or thereabouts for SOP. Both of those rank amongst the lowest costs in the world.

Revenues after Offtake commissions are more difficult to assess but I have them at about $150/t for MOP and nearer $350/t for SOP respectively.

In a recent Webinar we were also told that Circum had secured the $750m debt finance it was looking for and two brokers were negotiating the $350m balance needed to be raised in equity with eight funds or interested parties. All of that seems a while ago now and it seems the negotiations  may have changed tack slightly and are nearing a conclusion.

The intention is to ship the potash from the mine to the port using huge “road trains” via a newly built dedicated road financed by the Ethiopian Government to the port in Djibouti. But even so to ship 3.5mt's/annum is going to be a big ask. The mine will be capable of producing considerably more than 3.5mt's/annum but to do so the mine is going to need a rail link in my view. A combination of both may be the optimum.

What are road trains? (click here to view)

In fact rail transport has also been evaluated by Circum with the intention of incorporating it into the project economics once production in the Danakil Basin exceeds 3.5 m/t's per annum.

World  fertilizer prices ebb and flow on the basic law of economics supply and demand as we all would expect. In recent history we've seen potash prices fall  and they only bottomed out last year. They now continue to follow an upward trend and slow rally  in line with the forecast by many experts. All of this bodes well for the  Danakil project. SOP prices also continue to demand a considerable premium over those for  MOP and I can't see that changing. This is what Circums update tells us:-

"Potash prices have continued their recoveries from the 2017 lows, owing to tight global supply/demand fundamentals, aided by increasing market demand for both SOP and MOP. The SOP price premium over MOP has been increasing but is expected to taper as China has relaxed its regulations on SOP exports. Positioning on the cost curve will be the key to success, this is where Circum, as one of the lowest cost producers, will have an advantage over other producers."

There was a noteworthy event that happened last year too but it isn't quite so well broadcast. In or around August India being one of the largest end users entered into a huge long term offtake agreement with the Belarusian potash Company (BPC) one of the worlds largest producers. The prices agreed were at a premium to the then market prices of about 25%.

The effect of that has been not only to lift the market prices generally but more importantly to lay a floor on future prices to prevent them  falling close to or below cost. All good news  for Danakil. This is what Londons ICIS said at the time:-

“The global muriate of potash (MOP) market is bracing for a flurry of trading and price fluctuations after Indian buyers finalised negotiations for a crucial long-term import contract at a $50/tonne increase”.

So what does all of what I’ve written come down to for #PREM and it’s shareholders. Well for starters it tells us that we have a 5% holding in what is looking very likely to be a world class potash mine regardless of who the developers are. It’s reasonable to assume that a bankable valuation will have been made on the project using the new DFS which will give support to values arrived at by the other methods.

Those of you familiar with the NI 43-101 Certification that it’s mandatory for valuations to be made on the project once it’s in production. Unfortunately for us however that document remains undisclosed for the time being at least.

It’s not difficult to see that Circums BOD’s are now favouring an outright sale of the project. The signs are clear and  you don't have to look too hard to see Curcums update supports that view.

However as a measure of prudence Circums BOD's are also taking certain steps in the background in readiness to develop the project into a mine in the event the outright sale option becomes unattractive.

For obvious reasons it’s a strategy that any shrewd BOD’s would adopt. That is not wanting interested suitors to believe an outright sale is the only option being pursued.

At the end of the day going this route the outcome will depend upon what a suitor is prepared to pay for the opportunity and what circum are prepared to sell it for. Nothing more and nothing less.

Given some major shareholders paid $2 or slightly more for their shares I imagine an offer would need to be somewhere between $3.00 and $4.00 for negotiations on an outright buyout front to start. That would mean between $15m to $20m or thereabouts to #PREM. The following example is based on if you held 1,000,000 #PREM shares:





To find out how much you could be entitled to please use this live link: https://docs.google.com/spreadsheets/d/1TCFwl6-BZOJ8VD9MnSVR48WAdMg3OcEG0z_fCPN9Avs/edit#gid=0

 

If there is more than one buyer in the frame each one will know that and will want in the end to give their offers their best chance by submitting the best offer they can. They will most likely have been told what number their offer needs to start with and why shouldn’t they!

The IPO route did look likely to me up until the recent update. But now I think quite the opposite. I feel some of the interested parties are now seeing the potential in Danakil may be improving. Their consideration appears to have moved on from wanting to be a substantial investor to one wanting full control. Lasting peace with neighbouring Eritrea will surely be an influencing factor as it gives access to its neighbours extensive rail network and shorten the mine to port route. This is the reference in the update that’s persuaded me to change my mind:

“The company is, however, doing some preparatory work including debt and offtake work streams for an IPO in the background and should market conditions change, this option could be activated.”

Going the IPO route as I say the government has invested in and largely completed the necessary infrastructure works. Capex debt finance has been all but arranged. Capex equity finance is either being resolved too it seems  or provisionally agreed. Permitting has been  granted and the team is in place and so on.

Market testing of Circum’s product has found it to be of an excellent quality which is in high demand globally. Various parties have been engaged on offtake/marketing arrangements, with contracts currently under discussion. potash Markets potash prices have continued their recoveries from the 2017 lows, owing to tight global supply/demand fundamentals, aided by increasing market demand for both SOP and MOP. The SOP price premium over MOP has been increasing but is expected to taper as China has relaxed its regulations on SOP exports. Positioning on the cost curve will be the key to success, this is where Circum, as one of the lowest cost producers, will have an advantage over other producers.

Arguably at present #PREM shares can be substantially valued at over US$10 million. The substance being the latest price at which Circum has accepted subscriptions

As a comparison there is a benchmarking exercise to do against the neighbouring Danakali potash mine in Eritrea. Whilst that’s interesting  Danakali is a few  years ahead of Danakil. It's much smaller too and is a j.v. project. All of those factors make quite a difference. A valuation on this basis would put #PREM investment much higher than $10m. So I think a valuation on Circums last subscriptions whilst the safest way to value Danakil it’s probably too conservative and misleading.

Alternatively again when Danakil is producing 3.5m/t’s of potash in a steady state in three to four years time the mines “Earnings” should be about $300m at today's MOP & SOP prices which suggests its Market Cap should be near $3bn to $4bn in an earnings metric equation using a P/E ratio of at least 10 to reflect its attractive LOM. Justifiably it should attract a ratio of nearer 15.

Working that back on a reasonable ROI I get to a value at IPO of approximately £750m. #PREM holding could be diluted in percentage terms to 2.5% going that route. For simple math that would put the value of #PREM holding at around $17.5m which would be 0.15p per share to #PREM shareholders.

It seems there may be a lock - in period for the shares needed to maintain an orderly market. For how long and if it’s necessary will be at the behest of the funders we’re told. That being the case it’s unlikely to apply to all shareholders and perhaps not #PREM as its holding is likely to fall below the 3% trigger categorizing them as a “significant shareholder”. 

This is a genuine and rare opportunity for #PREM shareholders to benefit to the extent of as much as 0.15p and possibly more in addition to the value of their shares in short order IMHO.

-----------------------------------------------------------------------------------------------------------------------------