Premier African Minerals (LON> PREM) is a company that we think of as being one of those dead men walking. We might be wrong about this and we’d be perfectly happy to be proven wrong too. We just cannot see how they’re going to get out of the mess they’re in, that’s all.
The problem is as we’ve said before about Premier African: “We can really only see one of three ways for this to go. Now that the pre-emption rights no longer matter it’s possible to bring in a strategic buyer. Who pays off Canmax and takes the vast majority of the value for themselves. Or, Canmax waits and picks up Zulu out of bankruptcy. Or, the third, Canmax agrees to renegotiate the Zulu contract but near all of the value then flows to Canmax. Given that everyone involved here is a ruthless capitalist we can’t see any other outcomes - which does mean that we fear that current shareholders of Premier African are going to end up with much of that value of Zulu.”
To repeat the basic problem at PREM: “So here's where PREM is. They owe that prepayment back to Canmax. They don't have it. Initial spudumene concentrate production won't be enough to raise that cash. They can't issue stock to a trade buyer to raise the cash because of the preemption rights. The only possibilities are that Camnax decides to play nice - and why should they? - or a rights issue to the current shareholder base. Which would have to be deeply discounted and thus horribly dilutive. There just doesn't seem to be much of a way out of this. So the real surprise is that Premier African is still valued at over £100 million. Seems a bit steep for a company with such problems.
They owe Canmax the advance back because they’re late in production. They have spent the advance. Therefore Canmax can take the mine and there doesn’t really seem to be any other likely source of that money.
Premier African Minerals share price from Google Finance
The latest announcement doesn’t solve that problem: “Premier African Minerals Limited ("Premier" or the "Company"), is pleased to provide a further update on the Zulu Lithium and Tantalum Project ("Zulu") with particular reference to installation of the interim milling solution and concentrate grades. The Board of Premier continues to expect that the Zulu plant will produce spodumene to the specification required by the Company's offtake partner.”
Sure and that’s great. But we’re well past the necessary delivery date. Which means that advance payment needs to be returned. Or, of course, Canmax can agree to vary the contract. But as we keep insisting Canmax will likely - well, we would in that position - vary the price terms of the contract to ensure that all the value flows to them. Or, as we say, they can bankrupt the Zulu holding company and then buy it out themselves. The third option is that PREM raises the cash to pay off Canmax - which would be horrendously dilutive.
We don’t see a way that Premier African comes out of this well. That might be a fault in our vision but we’ll see.