Leo Lithium (ASX: LLL) is up another 17% today on the back of their announced deal with Ganfeng. Yes, this is an important change in Leo's prospects because the way the lithium space works this is a validation of their prospects. To grasp this we need to understand how the market works and what the role of the Chinese processors is in it. Effectively, they're the people who both finance hard rock and spodumene projects and also approve them as being real. So, when they open their chequebooks we should indeed pay attention. Leo Lithium still may or may not come to full fruition as a producing entity - Premier African has just shown that it's still possible near, maybe, fail right at the last moment.
When mining lithium from spodumene (also, mica, lepidolite, but those are more minor sources) of what is known as “hard rock” sources the mine itself only ever produces up to a mineral concentrate. This is because the likely size of output from any one mine is far too small to support a concentrate processing plant of economic size. That's just the way the technology works out here. Each mine is too small to support its own plant to do that next stage.
What this also, obviously, means is that each processing plant needs to gain supply of concentrate from many mines. If you've a vast plant - economies of scale, recall - then you want to be very sure that you've got the feedstock to run through your vast concentrate processing plant.
Leo Lithium share price from ASX
This leads to a specific financial relationship in the industry. When a mine - a potential mine- gets to the stage of having proven its variability it will, like every miner, look around for finance to actually develop the site. In lithium the usual source is those concentrate processors like Ganfeng. They may or may not finance the entire money gap but it's so common that they will buy into a project that if they don't then a general assumption is that the project doesn't work. They buy in, provide the capital to build the concentrate production plant and in return they gain an “offtake contract” which means they get preferential access to what the mine produces. The mine gains capital and a guaranteed customer. At which point any other money that is required is pretty easy to raise.
For, as we say, such a contract with one of the lithium processors is regarded as the confirmation that this is a real lithium opportunity. This is what Leo Lithium has just achieved - that investment from and contract with Ganfeng, one of the lithium concentrate processors. This is a validation of the mine, the geology and the whole project. It doesn't prove, as in absolutely guarantee, that Leo's mine is going to be profitable. But it is one of those things without which we would all assume the mine would never happen.