Key points:
- PREM shares have slid just the 1% on Zulu news
- The surprise here is that all is going to plan
- Zulu is largely derisked now – except for the lithium price
Premier African Minerals (LON: PREM) shares have wobbled down 1% on the back of the company's announcement that the Zulu lithium project is proceeding as planned. Which seems a fairly odd thing for a share price to do really, “we're doing well at what we said we were going to do” isn't usually thought of as a negative for a share price. But that is what is happening at PREM and it's worth trying to figure out why.
One possible answer is simply people being less enamoured of the idea of mining in Zimbabwe. The place hasn't been notably politically nor economically stable in recent decades and there's little about the current economic strategy there that would inspire confidence. But on the other hand we're reasonably sure that mining concessions – unlike farmland those two decades back – aren't likely to be “redistributed”.
There's also the obvious possibility that the Zulu mine won't work out quite as planned. But that's exactly what this current announcement should assuage. So while the risk is always there – it just always is in any mining – we should have seen a reduction in that risk, not an increase, as a result of this announcement. That might well be what is actually holding back the share price here. The project is largely derisked and so now it's the future price of the output, the lithium concentrate, that matters for the valuation. And that could indeed be it.
Also Read: The Best Lithium And Lithium Mining Stocks To Buy
The actual deal and process that Premier African has done – and today's announcement is confirmation that it is proceeding to plan – is pretty normal in the lithium industry. The mineral, spodumene, has been mined for decades elsewhere so it's a known process. Part of that is to sign up with a spodumene concentrate processor, so as to have an outlet for the production. That concentrate processor (they're nearly always Chinese companies) advances the cash to build the concentrate plant. They then gain exclusivity over production until the loan is paid back. They also gain the first few years of concentrate at a discount to pay back that loan. This is simply the normal way to finance.
Tantalum heavy fractions (and also as here, mica) can be put aside for processing later when cashflow allows the construction of such additional equipment. As we say, all of this is quite normal in this field.
What PREM has announced today is that this is indeed all happening. The first amount of the forward purchase has been received, the pilot plant may now be financed and built.
In effect, Premier African's Zulu project has been derisked. What matters now is management performance and that all important global lithium price. Which is what might be explaining the weakness here. For it's possible to look around the world and note that there are many, many, such lithium projects in the works. Possibly enough that the lithium price will fall, despite that EV revolution. PREM is now at the stage where that could well be the major remaining risk.
