On 12 March 2021 Premier African Minerals (PREM) Exclusive Prospecting Order (EPO) application to expand it's Zulu lithium project from 350 hectares to 20,200 hectares, an increase of circa 5700% was granted, which could potentially make it one the biggest lithium projects in the world: Read EPO grant RNS here
Investors flock back to lithium as battery bust turns to boom:
Most genuine shareholders believe that Zulu is huge and could be good. But just how good isn't easy to visualize. Zulu's Scoping Study or PEA, if you prefer to call it that, prepared by BARA Consulting helps: Read Scoping Study RNS here
In that we’re given some reference pointers that are extremely useful. But although the PEA lays a marker in sand it gives very little guidance on scale and therefore potential which is what investors are keen to see and are understandably very interested in.
What BARA have done is prepared a statement of fact on a fully SAMREC compliant but relatively very short length of just one of the known lithium strikes on the existing license area. That's all they're allowed and were remitted to do. Consultants like BARA aren’t given to speculation. They have to be “mechanical” and deal with what they're asked to do. So BARA put together their Scoping Study and designed a business model for a small mine around what the Scoping Study covers and no more. That's the extent of it!
But as I say BARA’s appraisal and models were based upon just 15% of one known strike which is just a small fraction of what's been identified so far through subsequent drilling just on the current licensed area. It follows therefore that BARA’s business models must be minimalist and it should be read in that light. In just about every case mining reserves and resources increase over the Life Of Mine and mining plans change accordingly. That will apply nevermore so than in Zulu’s case.
So PREM used the Scoping Study as a basis and from it estimated an overall resource. PREM made their estimate known to shareholders saying it was an estimate and should be used for guidance only. But what PREMs estimate did is give an indication of scale much better than the Scoping Study. It was based upon drill results and shouldn't be considered as simply as PREMs guess. It’s much more accurate and scientific than that.
If anything, PREMs estimate was more likely to be conservative than not. Later in the drilling campaign PREM undertook further drilling to delineate newly discovered strikes that appeared to run on to the site boundaries and beyond. I believe those findings are just drillers notes and assays so far and are 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 near anywhere near right the results are simply breathtaking!
If the licensed area stays unaltered and we take PREMs highest target resource we have a resource of 160mt's @ 1.06% Li2O. PREM derived that from the known and measured strike used in the SS and extrapolated it on a straightforward pro-rata basis. There were further strikes subsequently discovered after the SS but they weren’t counted in the estimate.
The drilling was carried out purposely to delineate those strikes up to the boundaries and perhaps helped to justify PREMs now approved EPO application.
So if we assume the 160mt's 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.
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. $51bn!
The largest hard rock lithium resource in the world is owned by AVZ Minerals in the DRC 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 some 4x higher in value than Zulu’s estimate. But Zulu’s has only been based on the current licensed area.
Zulu is also often benchmarked against Pilbara's mine in Australia too 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. So it's “in ground” value is $70 bn just less than 50% higher in value than Zulu.
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 which sets it’s above most of its piers in the space. For that reason it’s sure to be much more highly sought after by battery manufacturers come the day.
These mines are massive and highly profitable at today's LCE price by any measure. Pilbara's original mining plan was to produce over 300kt’s of battery grade Spodumene from a Run Of Mine of 2mt's/annum giving the mine a LOM of over 20 years. That’s short compared to Zulus potential.
But that changed. Pilbara has doubled its ROM capacity to 5mt's/annum . It’s Market Cap from producing 300kt’s of Concentrate per year is $1.2bn with it’s All in Costs likely to be higher than Zulus which bodes well for PREM.
Now here's the sting in the tail. Well for other miners at least, as the recent approval of PREMs EPO application has increased Zulu's mining area from 350 hectares to a staggering 20,200 hectares, which equates to a monumental 5700% x bigger - and the equivalent of:
* 20,000 rugby pitches
* 25% bigger than Liechtenstein
* 25% bigger than Washington DC
So if you imagine the resource continues at the same density across the EPO area that would give Zulu an “in ground” value of over $2.4 trillion. That’s fifteen times higher in value than the largest mine of it's kind 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 saw GR do it in one of his webinars.
I'm not a fan of this valuation method to be honest. There are better ways to value Zulu such as benchmarking, discounted cash flows and using an earning metric which I think is most common.Far better. 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 current licensed area and LCE at $12k/t would be around $750m. However if LCE were to be more like $20k/t which I think is more realistic Zulu's Market Cap would be around $1.25bn
However in its larger area Zulus value would be multiples of that. But whether it would be 57 times more is questionable in my mind.
As you're probably aware, increasing the resource and/or extending the LOM has little impact on the Market Cap of a mine and its Share Price in most cases. That's understandable given profitability usually remains largely unchanged. If the production level is unaltered it simply means the mine stays operational longer. So no big deal really especially when the LOM is reasonably long anyway. However I believe Zulu's situation couldn't be more different.
As I see it if the licence area remains unchanged we're unlikely to see Zulu plan to produce Lithium Carbonate from a chemical plant on site. Due to current site area constraints if Zulu wants to produce Lithium Carbonate we may have to opt for using the shared facility in Bulawayo.
On the other hand if the licence area increases by a reasonable margin in the current EPO it may be possible for Zulu to have its own dedicated chemical plant adjacent to produce Lithium in Carbonate form.
For the purposes here I'm going to ignore the Carbonate option but wear my positive hat and assume PREMs EPO application is successful. I'm going to predict Lithium prices at the point of production three years out in 2025/6.
So please bear those two things in mind. As I say 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 off takers 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've also used Zulu’s PEA 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.
Prospect haven't long entered into a seven year offtake agreement with Sinomine a Chinese offtaker on a build and transfer basis. Sinomine have 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 then over a three year payback period I believe. It sounds 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 step change for them given they've got the room on site. Their licensed area is 4 x the size of Zulu’s current license area.
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 and are now producing Carbonate too.
The Arcadia mine in Zimbabwe is said to 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 its current licensed area. Like all appraisals logistics must 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/annum by road.
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 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 more. 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.
PHASE 2 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 300 kts >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 the 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 earrings metric calculation. In turn a contribution then to PREMs Market Cap of $2.8bn. PREM having retained 75% ownership. This is very much in line with Pilbara’s appraisal.
PREM currently have 17m shares issue, so Zulu would contribute roughly 10p to it's SP at current exchange rates.
PHASE 3 beyond 2028 - Zulu could be one of the largest producing Lithium Carbonate mines from a hard rock source in the world. 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 piers.
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 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.
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