The agreement with Hainan remains unsigned and investor sentiment is weakening. Here’s what’s going on.
Kodal Minerals (LON: KOD) shares are changing hands for 0.50p, having fallen from its 0.88p high on 21 April 2023.
However, KOD remains significantly higher than when I outlined the bull case in November 2022 — with most of the increase fuelled by a $117.75 million funding package agreed with Hainan Mining, alongside positive assay results both at its flagship Bougouni Project, as well as Leo Lithium/Ganfeng’s neighbouring Goulamina.
However, a couple of problems have started to emerge from the woodworks. And while I cannot speak to the traders, the question that long-term investors need to ask themselves is this:
Buy the dip, take profits, or stick?
Fundamentally, I believe in long-term investing in high risk shares. This involves waiting out the dips and the spikes in the hopes of achieving significant results. Apple — the $3 trillion behemoth — is now the largest company in the world, worth more than every single London-listed company put together. And yet, it nearly went bankrupt in 1997.
Pilbara Minerals, which I have covered for years, started production at AU$0.66 in March 2019. A year later it was changing hands for AU$0.15. Today, it sells for AU$5.10, and is planning huge new expansion and processing plans.
However, I would consider selling my KOD holding if there was a materially negative change in circumstances.
Let’s dive in.
Kodal Minerals: funding delay
Let’s start with the long-standing issue. The funding package was initially agreed on 19 January 2023, with a $7 million deposit announced on 1 February. The deal was meant to have been signed off by the end of April — and all seemed to be going well given a positive RNS update on 1 April.
Then on 27 April, the company extended the long stop date for the funding to 31 May but noted that ‘all parties remain fully committed to the completion of the funding transaction as soon as possible’ while Hainan had received full Chinese government approval.
Then on 31 May, the two companies once again found it necessary to extend the long stop date to 30 June. CEO Bernard Aylward once again told investors that ‘the parties remain committed to the transaction and are working together on the preliminary engineering and development processes required to ensure we move quickly into development upon completion and receipt of funds.’
And then on 30 June — can you guess? — another extension, and having learnt a lesson, this one lasts for two months to 31 August, ‘or at a later date to be agreed by the parties.’
There has been significant progress with restructuring the subsidiary companies in the UK and Mali — evidenced by publicly available documents at Companies House — but ‘certain condition precedents… remain to be completed in Mali.’ And once again, Aylward noted that ‘Kodal and Hainan remain firmly committed to completing the transaction and are working together towards the completion of all condition precedents.’
There are a few points to consider here.
- the two companies have repeatedly made it clear that they wish to proceed with the agreement.
- neighbouring Leo Lithium took several months to complete its own restructuring package, encountering similar delays.
- at the start of July, Mali’s military leader Assimi Goita appointed Amadou Keita as minister of mines in a government reshuffle.
- The Wagner Group, which helps ‘police’ Mali, is in disarray after its leader Prigozhin’s aborted coup attempt against Putin.
- former mines minister Lamine Traore resigned on 31 May after power cuts in the West African nation fuelled both corporate and personal discontent.
So, to sum up, there’s some political changes which may be contributing to the delay, but investors should have been prepared for these. I’ll happily admit that I believed that the funding would finally be agreed by the end of June — but given the endless hold up, this was never guaranteed.
The problem
Mali is one of Africa’s top gold producers (KOD also has a very prospective gold portfolio), with companies from Barrick to B2Gold operating in the country. Several articles last week — including from Reuters — noted that the Mali government may be planning to boost state and private Malian interests in gold projects from up to 20% to up to 35%.
For context, a review of the mining code has been ongoing since January, after the government made clear that it thought Mali was granting too many tax breaks and not receiving a fair share of the profits — which have soared as gold reaches near record highs.
The current law from 2019 gives the state the right to 10%, with the possibility of acquiring an additional 10%. This is what KOD is currently subject to.
The new draft law, which has not yet passed, would give the government a direct 10% stake in a miner which has been issued a permit, with the option to buy an additional 20% within the first two years of commercial production. In addition, international investors would have to cede a 5% stake to locals.
Further to this, miners will have to employ more locals in top positions and also place a cap on non-local salary costs to ensure a transfer of knowledge. The major gold producers, including Barrick, remain positive — but what is a fly in the ointment to a major can be the thorn in the side of a junior.
Does this affect Bougouni?
One of the ongoing themes in African mining is that countries want to get more out of deals made with both western and Chinese companies looking to exploit precious metals and critical minerals. You can see this everywhere, from Zimbabwe’s raw lithium export ban, through to Zambia’s lawsuit against Anglo American.
This will be subject to in-depth analysis later on, but the key point is that Mali wants a bigger piece of the pie.
Of course, clues can be found at Leo, which requested a trading halt in the early afternoon of 18 July. The company — which is now suspended from quotation — noted that the halt was required ‘pending an announcement in relation to correspondence from the government of Mali relating to plans to Produce Direct Shipped Ore.’
While KOD may not be looking to produce DSO, SP Angel (KOD’s FA and broker) did note that ‘Leo Lithium’s Thursday update will provide an important read-across to Kodal Minerals.’ It may be that Mali is considering forcing foreign companies to process ore in the country, or at least invest more into making this happen in the future.
It is worth noting that some of the funds that KOD is waiting for are going to be used to explore its Malian gold assets. But the truth is that nobody actually knows whether these new laws are going to be applied to only gold miners, or to all miners; nor whether Leo’s new problems might also eventually directly impact on KOD.
For example, would a worst case scenario see Hainan walk away? Let’s consider — KOD and Hainan combined would lose, at most, an additional 15% of the project (or 7.5% each). If the law were changed, and it did affect KOD, then this would at most see the value of the JV drop by a concomitant amount — and the government would in all likelihood have to pay for these shares.
Of course, the bigger worry is the impact of Leo Lithium’s self-imposed suspension. While it seems that KOD should not be affected, investors do not have the details, and the two companies will march in lockstep as their claims are geographically adjacent.
In conclusion — I don’t think the recent developments are necessarily negative because the current price point offers the opportunities for higher rewards. Or in other words, the risk-reward ratio has increased — where previously the January agreement essentially de-risked Bougouni, investors now have to accept that the agreement is still not signed, ownership may be diluted, and the law could be changed. But in return, the share price reflects this increased risk.
And what to do next depends on whether you find this prospect attractive.
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.