Kodal Minerals: what happens now?

Kodal Minerals is on the verge of its fairytale ending — but in reality, this is only the first chapter of the book.

Once upon a time in a market far away (January), there lived a junior resource mining stock (Kodal Minerals) which agreed a $117.75 million Joint Venture deal with a Chinese Prince named Hainan Mining, which is almost 50% owned by the behemoth Fosun.

Sadly, despite their betrothal, the government of the day — in Mali — felt the need to spend ten months dragging their feet (presumably to ensure both parties were completely committed and that this was no shotgun wedding).

However, as a sign of good faith of their commitment, Hainan gave Kodal $3.5 million as a goodwill gesture — subject to several stringent legally binding conditions — to get initial work on the planned mine started. And then on 27 October, Kodal announced that the two had agreed the ‘Completion of Bougouni Lithium Project Funding Package.’

The share price shot up — and they lived happily ever after.

Kodal Minerals: funding isn’t the end

What a lovely story.

However, where it gets interesting is what comes after you get the fairytale ending. Funding is only one part of a larger battle — and is not the end of the risk story. The AIM market is littered with junior resource sector companies who agreed a deal with a major only to run into difficulties in the run up to production.

In very recent memory:

• Caracal Gold: OCIM funding pulled
• Premier African Minerals: production delays, some dilution
• Horizonte Minerals: unplanned 35%+ capex increase
• Atlantic Lithium: funding secured, share price fell over time anyway
• Greatland Gold: JV with Newcrest, share price fell over time anyway

This isn’t a negative slant on any of these shares — indeed I own 4/5 of them. But while some of the share price slides can be attributed to wider market sentiment, I have made the point before that delays are part and parcel of investing in small cap mining shares — and I would be surprised (pleasantly) if there are no bumps in the road for Kodal on the road from today to production.

And this could be problematic for long-term investors because the temptation to take profits will be strong. First through, let’s consider that transformative RNS.

RNS Day

While it may feel like Santa came late, I am convinced that the timing of the RNS at 9.57am was designed to do as much damage to shorters as possible. I do think that the ability to short stocks is good for the market in general — but sometimes the damage to individual smaller companies can be painful and feel personal.

To those who lost out betting against CEO Bernard Aylward — hopefully the lesson has been learnt.

Now to the RNS itself — I’m not going to re-cover the original agreement particulars; I have covered these in detail before. Instead, it’s only really worth looking at the new information.

Here’s the clef notes:

• The cash balance of $114.25 million is expected to transfer in the first half of November, with the long stop date moved (once again) to 15 November.

• The parties are ‘targeting production as quickly as possible.’

• There is a risk to consider. The parties have waived the condition that several licences must first all be in the right place before the cash is handed over.

• In essence, KOD is liasing with DNGM (a regulator) in Mali to complete the licence transfers as quickly as possible but has agreed warranties and indemnities up to $100 million in relation to the waiving of these conditions — to the point of transfer of the licence and the concession, with a two year period for claims to be made.

• Kodal is also guaranteeing the good standing of the licence and concession at the time of transfer.

Or in other words, Mali is still being a bit useless, and the marriage is going ahead anyway. This regulatory risk is one to observe — beyond just the instability in the country, there’s also the risk that this could all come tumbling down, and two years is a long time to guarantee anything.

For balance, there is similar risk in many African countries.

The cynic in me — and I would rather avoid being sued so will phrase this delicately — does wonder whether there is a connection between the slowness of the mining licence transfers and money. But the bottom line is that Kodal is financially on the hook in case anything goes wrong.

If you look at the share price reaction, I suspect that the stock will trade in a range of 0.6p-0.8p until the deal is signed — at which point KOD could briefly reach that initial target of 1p per share. At this point, there will almost certainly be significant profit-taking.

What to do next?

Aylward enthuses that ‘Kodal and Hainan are both very keen for the next important stage of mine development to commence as soon as possible…the completion of the funding package transaction is a major milestone for the development of the Bougouni Lithium project, and we are looking forward to working closely with our partners to achieve production as soon as possible from the Bougouni Lithium mine.’

He also notes that ‘the development activity is progressing on site with the road upgrades to provide access for the start of construction of site infrastructure. Off-site Kodal, Hainan and our consultants are continuing to finalise the engineering design of the processing plant as well as progressing mine design and site optimisation.’

When Aylward says processing plant, it’s important to note that he’s talking about a Dense Media Separation plant. The design is close to completion, and KOD already has the procurement specializations ready to go. This plant has several advantages — it’s relatively cheap to build, only takes a year to build (in theory!) and should pay for itself within two to three months.

I wrote about this last year though — a flotation plant is objectively far better, and the long-term plan is to use the cash generated by the DMS plant to fund a flotation plant, which will massively increase output.

Then there’s masses of further lithium exploration to enjoy, as well as millions allocated to explore Kodal’s gold assets. This is Mali after all — the country isn’t short of the yellow stuff.

But rather than talk about all the potential future profit, I’m instead going to make the same prediction I have made for many other shares at this point in the journey. There will be significant bumps on the road to production. The good news is that Kodal and Hainan are true partners in the JV — this isn’t an offtake agreement or similar, and this means there should be a much higher level of mutual co-operation than elsewhere when it comes to facing problems together.

This advantage has to be set against the fact that KOD has had to give up ownership of a giant chunk of its asset, but it does make the inevitable future obstacles less worrisome — even if Mali is perhaps not an ideal jurisdiction.

But the key point is this: I am reasonably confident that the share price will rise to between 0.8p and 1p when the deal is signed — but to retain this share price, Aylward will need to put on a masterclass in investor comms AND share the DMS plant timeline AND rigorously stick to it.

Otherwise, the share price will slide. Of course, if there’s a CEO who’s up to the challenge…

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.