STAY FUCKING CALM! What’s the procedure?
Okay, now we have the jokes out of the way, here’s the lowdown on that RNS. I have no idea how the market will react, but am getting my opinion out there pre-open before investor sentiment swings into action.
To start with, this is a mineral resource and not a mineral reserve; a resource is all spodumene in the ground, a reserve is that which is economically viable to extract. Beyond this, a significant portion of the resource is inferred (low confidence) while the majority is indicated (reasonable confidence).
Here’s your mandatory reading before we get cracking:
Assessing a junior resource asset: your how-to guide in 5,000 words - Investingstrategy.co.uk
InvestingStrategy: The Lithium Edit - Investingstrategy.co.uk
For the intellectually challenged among you:
THIS IS NOT ADVICE. THIS IS HIGH RISK HIGH REWARD INVESTING WHERE YOU ARE EITHER GOING TO GET RICH OR LOSE EVERYTHING.
Stop.
I said read the two pieces above. It makes everything much easier to understand.
Resource Value
Okay, let’s start with how the resource calculation works. I have used the indicated resource initially:
Indicated 14.78 mt, 0.45% grade Li2O, 66,500 tonnes Li2O:
Indicated 14.78 mt: This means that there are approximately 14.78 million tonnes of material categorised as indicated.
0.45% grade Li2O: This represents the grade of lithium oxide (Li2O) within the indicated resource. A grade of 0.45% means that for every 100 parts of the material, 0.45 parts are lithium oxide.
66,500 tonnes Li2O (roughly): This figure represents the estimated total amount of lithium oxide (Li2O) present within the indicated resource. It's calculated by multiplying the total tonnage (14.78 mt) by the grade (0.45%).
The new MRE includes both inferred and indicated resources. It states:
‘Li2O contained in spodumene, specifically Li2O attributable to spodumene at 107,366 tonnes and the direct conversion of the contained Li2O to SC6 is 1,789,433 tonnes.’
This means that within the spodumene deposits at Zulu, there are 107,366 tonnes of lithium oxide (Li2O) present. And using standard formula, George notes that the 107,366 tonnes of lithium oxide (Li2O) contained in the spodumene can theoretically be converted into 1,789,433 tonnes of spodumene concentrate 6 (SC6).
This implies a 16.67x conversion factor, which in theory, again makes sense. In a setting where there are no contaminants associated with the deposit, and with a 0% cut-off grade, and 100% recovery:
Every ton of material (ore) at a 0.45% grade would yield 0.45 tons of pure Li2O, and you can think of pure Li2O as SC100 (100%). As SC6 requires 6% Li2O (and 94% of waste material), every ton of pure Li2O would theoretically produce 16.67 tons of SC6 (100/6 = 16.67). This is where the 16.67 factor comes in.
This means, and again in theory, that the 107,366 tonnes of lithium oxide can indeed be converted into 1,789,433 tonnes of SC6. Of course, GR has noted he plans to generate SC7 - but as there would then be a tradeoff (higher grades = lower volumes, hence Pilbara Minerals’ 5.2% average) it’s best to use the typical SC6 figure as this is an industry standard.
SC6 is trading for circa $1,000 per ton.
Circa 1.8 million tons x $1,000 = $1.8 BILLION (with a B).
SC6 was trading for $8,000 a ton not so long ago, and the price is on the floor.
But assume a long-term market price of $2,500 and you can see how the economics start to stack up.
This is all based on a solid 33k metres of drilling, and then there’s the tantalum to consider; very low additional opex as it’s a side product - and once production starts, it’s easy to add a module to improve the economics.
I have consistently advocated that PREM would release an updated resource, start producing and then sell the plant and resource to Canmax. Then a special dividend, and get exploring the larger EPO for a rinse and repeat - with the EPO licence to be awarded at the opening ceremony.
In other good news, Zimbabwe is much cheaper to operate in that Europe or Australia. As other operators are closing down, Zulu can continue to be marginally profitable - and regardless it’s supply Canmax wants.
And 0.45% is far higher than what’s on offer in the Chinese brine lakes.
That’s the good bit. It’s great news, but as always with PREM, there are both missing details and caveats.
Don’t preorder your Lambo just yet.
Here’s the not so good bits.
First, and it’s not to do with the resource, but the company needs money. Perhaps contractors are waiting for an imminent sale, but this is unlikely. There has been no EGM called and if one is called now it would be a PR disaster (though GR has done similar in the past).
Do not rule this out completely.
George hasn’t.
Arguably, the resource update has been released so he can get some good financial terms, either with Canmax to increase the offtake prepayment, or a bank, or similar.
Second, sorters are still being optimised. This means they are not working. Yet. And I’m sorry, but if the project is only marginally profitable now, hand sorting is simply not going to be viable. Regardless, Canmax ain’t gonna pay up unless all systems are going.
This is not a disaster currently as Canmax are being co-operative (told ya), but it does appear to be the key operational issue left to resolve. Without the sorters, you ain’t getting SC6+ at scale
Now to the MRE update. Here’s the caveats:
0% cutoff is wildly unrealistic.
0.45% grade is high for lithium deposits as a whole and a bit average for spodumene deposits. For comparison, Pilbara Minerals boasts 1.15% indicated and iron at 0.53%.
European Metals’ Cinovec has a 0.44% grade and is perfectly economically viable, and is viewed as a strategically important resource.
The 1.8m tons of potential SC6 rests on a mineral resource, not a reserve. Far less will be economically viable, and not all of it will be extractable.
The biggest issue is this: PREM has not updated investors on what quantity of iron is in the deposit in numerical terms.
GR says ‘Zulu is likely to produce spodumene concentrates with low iron and higher spodumene concentrate grades.’
But the amount of iron present in the ore is absolutely critical to the economic viability of the deposit. For the love of God, (I know you ignored them) I encourage you to read the linked articles above as it will massively help you understand what you are invested in.
I’ve taken this from the lithium edit:
There are two main grades of spodumene concentrate:
Chemical, used for batteries — <0.8% Fe2O3, SC5.0-SC6.0
Technical, used for glass/ceramics — 0.15% to 0.5% Fe2O3, >SC6.5
Fe2O3 is the symbol for iron oxide, while Li2O represents lithium oxide.
Let’s take two deposits:
The first is Li2O at 1.0%, Fe2O3 at 1.5%, and a recovery rate of 75%. If you want SC6, you will need 8 tonnes of ore because 8 x 1.0% = 8.0%, but only 6.0% given the 75% recovery. The problem is that you would also have to deal with 12% of Fe2O3.
The second is Li2O at 1.0%, Fe2O3 at 0.5%, and a recovery rate of 75%. If you want SC6, you will still need 8 tonnes of ore, but you only have 4% Fe2O3.
When you roast the product to create lithium hydroxide, the iron creates clinkers which are expensive to remove. With lithium prices on the floor, too much iron will make the deposit economically unviable.
GR says the iron content is low. How low? If he’s talking SC7, which would involve increased corresponding iron, then at the ROM pad it should be exceptionally low.
An average Li2O grade with exceptionally low iron is world class overall.
Here’s the context: for every ton of ore Pilbara Minerals has to process, PREM needs to process three (or more, the maths gets complicated). This is more expensive, but negligible iron content sees significant money saved during hydroxide production - more than if the Li2O grade were higher. And PREM has a hydroxide profit sharing agreement - I’d argue designed to account for the relative lithium/iron percentages.
But investors need to know the iron percentage as it’s the difference between owning a potentially billion dollar asset or not.
It is worth noting that in the 2017 scoping study (now thrown out by this update) SC5.9 at 0.66% Fe203 was obtained - this fell to just 0.16% when magnetic separation was implemented.
The other issue is that the NOMAD has not signed off on the update:
'Beaumont Cornish has not authorised the contents of, or any part of, this document and no liability whatsoever is accepted by Beaumont Cornish for the accuracy of any information or opinions contained in this document or for the omission of any information.’
If Cornish won’t sign a document, you have to be careful. Then there’s the SAMREC compliant nature of the update - a relatively weak standard compared to JORC for example, and involving an element of self regulation.
The Bottom Line
If the iron content is as low as the scoping study suggests, then my view is that of the original $1.8 billion figure, you can throw our about $800 million for unrecoverable resource, either because of economics or practicality.
You then need to introduce a sale discount to account for the lack of certainty that you would get with a measured JORC Resource (for example). Let’s say 20%.
That’s an $800 million valuation of the Zulu asset (not including the plant). I’d argue that a country discount also needs to be applied, but really that’s semantics.
Get producing (including the sorters, it’s been long enough, which may be the key to reducing contaminants including iron to low enough to get to SC7).
Sell the lot to Canmax.
And then it’s time for a well earned cocktail!
Finally.
I do not know what the market reaction will be; I think the rise should be spectacular but it can be very difficult to know what AIM will do. If the share rises to 0.5pish today, this is the opportunity for the timid and fearful to walk away relatively unscathed.
It might go significantly higher.
You need to remember that the fear of the summer. Of November. Of 0.16p three weeks ago. If this is not for you, there is no shame in seeking an exit. If you are emotional about large losses or wins, then you can’t handle the heat.
This sounds sarcastic and condescending, but it’s really not. High risk investing is a work of sweat and tears. And the occasional heart palpitation.
However, I booked my ticket in September 2019.
And the fuse might have been long.
But whether Apollo 1 or Apollo 11 - this rocket’s taking off.
Great write up on the risk and rewards of prem. I never worry about sp daily rises and falls. It's the bigger prize I'm hoping for