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