Premier African Minerals shares: dissecting an RNS

Prem shares are back on the rollercoaster, but today could be company-making. Here’s why.

Having covered Premier African Minerals (LON: PREM) in depth across a wide variety of publications — including here at Investing Strategy and elsewhere — I had noted that I would be waiting some time before covering this particular AIM share again.

However, a moth is always attracted to the darkest spot behind the brightest light, and today’s RNS is just obscure enough to titillate my interest. So, without any further ado, let’s break down what it all might mean.

PREM shares: what’s going on?

First, I’ll note the serious volatility today — PREM started the day at 0.71p, rose to 0.80p, twice dropped to 0.70p and is now trading for 0.79p.

Normally, I’m a zoom out investor, but I’ll admit watching the traders get their fingers continually burnt was fairly enjoyable as the market tried to figure out what this RNS meant. Investors who sold before this update landed were never going to ‘gold for gold’ so to speak, and PREM was never for them.

I’ve noted this before — regardless of my bullishness, this is still AIM and there are risks involved in exploratory mining in Africa. We’ve all had our fair share of losses.

So what did the RNS actually say?

I think it’s worth starting with the less important articles, which are not open to interpretation. Initially, some things remain the same:

1. Canmax has the right to terminate the prior agreement by notice in writing to Premier and Premier will need to enact repayment of the prepayment amount plus interest in full within 90 days.

• PREM has been accruing interest at circa 3.5% per annum to Canmax.

• Canmax has ‘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.’

• CEO George Roach is ‘deeply appreciative for the constructive discussion, further assistance, and confirmation of our relationship with Canmax.’

All this means is that Canmax isn’t going anywhere — which in my view was already a foregone conclusion — and that the interest on the prepayment amount is being accrued, which will be paid out by future spodumene production. A new agreement will be in place in less than three weeks, and the working relationship remains strong.

Now to the interpreting — what will this new agreement look like? The first thing to understand is that the RNS is deliberately open to interpretation. PREM needed to put out a message to the markets saying that Canmax is staying, the company remains relatively de-risked, and that negotiations are ongoing with both companies wanting to stay ‘married.’

The alternative would be waiting another three weeks for the detail, during which time the share price would likely have tanked. An 11.03am timing suggests that the CEO wanted to get out a de-risking message as soon as possible.

Now the only NEW details investors have are that the two companies are in ‘advanced discussions pertaining to an addendum to the Agreement.’

These discussions include two listed amendments:

• Adjustment in the pricing mechanism whereby both parties will equally share in the gross revenue from the sale of Lithium Hydroxide produced from spodumene supplied by Premier, after deduction of the production costs of both parties.

• Further prepurchase of spodumene by Canmax from Zulu to assist with ongoing operational costs associated with the revised timelines and expected production figures as announced on the 25 May 2023.

I’ll start with the second point. The further pre purchase of Spodumene is essentially a message that Canmax – which is both rolling in cash and desperate for lithium supply – will lend PREM the cash needed against future sales in accordance with the new realistic timeline. In other words, it’s in for the long haul and PREM investors need not worry too much about another placing.

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This is annoying given the effect of the two minor placings we just had — but in hindsight, these placings were necessary. It’s almost certain given that Canmax which owns over 13% of PREM and has a board seat, were aware of the delays. Regardless, there’s always delays when you switch on a plant, which again they would know.

My suspicion is that these renewed negotiations have been ongoing for some time. But the key point is that the bills will be paid, and short-term issues are now being put to bed. It’s also notable that Canmax has continued in good faith — this speaks volumes about the upcoming RUS.

The prior point is far more complex and dependent on your personal perspective. It almost certainly will be tied to the price of spodumene agreed in the original contract, which was negotiated in a different time.

But if I were to hazard a guess, I’d say that Canmax had previously agreed a hedged price for spodumene, and the new bull market for the silvery-alkali metal means that PREM wants to renegotiate a higher price.

Canmax has countered. The previous agreement was for PREM to be able to sell off 50% of spodumene production to Canmax, and the other 50% to the open market, once the initial pre-payment amount (which is rising given the interest rate) was paid back.

The ‘adjustment in the pricing mechanism’ can be interpreted in two ways: either the initial agreement is toast and the entire thing is being rewritten, or the former agreement remains in place and the revenue share is a new condition.

However, this is my interpretation of what’s happening. Remember, this is an opinion, and we all have the same facts.

First, Canmax will lend PREM whatever is needed to sort out any short-term funding issues, especially if there are further delays. These can’t be ruled out. Hopefully, Canmax will waiver the interest in good faith, but it may not do this as it doesn’t really care about the interest on a relatively tiny loan, but the fact this means more Spodumene supply.

Second, and bear in mind that PREM is already operating Zulu profitably, PREM will then pay back this pre-payment as a priority before anything else. Realistically, this means it will be some months before profits start to accrue to investors, and I expect share price consolidation at a level during this time.

Third, Premier will ‘give’ 100% of spodumene production to Canmax, which will then convert this to Lithium Hydroxide in Zimbabwe and China and sell it to Ford and others under their current agreements.

If I’m right — and I’ll concede that this will depend on to-be-confirmed details — the numbers are looking rosy.

Say that PREM simply sold 100% of its Spodumene to Canmax and others.

From December, that’s 4,471 tons per month x $4,000 = $17.9 million in revenue.

Under the terms of the new agreement, it’s a bit more complex and prices change dependent on exactly how good Zulu’s lithium is. But if you accept that it’s SC6, then it generally takes circa 7.5 tonnes of Spodumene to create one tonne of lithium hydroxide.

However, lithium hydroxide is selling for $45,700/tonne according to Fastmarkets, more than 11x the spodumene price.

Therefore, 4,471 tons divided by 7.5 = 596 tons of lithium hydroxide per month.

596 tons lithium hydroxide x $45,700/tonne = $27,237,000 per month.

Canmax and PREM split the revenue for circa $13.6 million revenue per month, minus processing costs for both parties — which will almost certainly be higher for PREM.

On the face of it, this seems like PREM will lose out on around $4 million in monthly revenue — but this assumes that Ford (and others) and Canmax have agreed a $45,700/tonne lithium hydroxide price.

Given the EV revolution and general lack of lithium supply, and that the agreement between Canmax and Ford lasts from January 2025 to December 2027, with Ford having the option of an extension to December 2029, I’d argue that Canmax has negotiated a far higher price in anticipation of the lithium bull run. The formula used has not been disclosed.

Meanwhile, Ford gets to benefit from certainty of supply, and PREM gets a guaranteed offtake partner and revenue generation. Ford has signed three deals with Chinese suppliers in 2023; it also needs supply.

The agreement between Ford and Canmax alone is for 72,500 tons of lithium hydroxide in total for the initial three years, worth roughly $4 billion at current market prices — and from December, PREM will be supplying 7,152 tons per annum.

As I’ve already covered, PREM may be one of Canmax’s only offtake partners by 2025, so I suspect the idea is to support the company to triple production over the next couple of years. And while PREM will not be ‘locked’ into supplying only Canmax, it will do so to keep the relationship strong, for further investment to expand production, and because it makes more money under the new agreement.

Remember, there are other assets to develop and Canmax will likely want another piece of the pie.

But the key thing is that signed agreements between PREM and Canmax, and Canmax and Ford, essentially massively de-risk the company. Even if PREM does lose some revenue, which I doubt, the share price will soon reflect this new certainty.

Then there’s the RUS, EPO, and potential buyout.

This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.

Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.