Kodal Minerals (LON: KOD) has finalised the financing for the Bougouni lithium project. The share price rise is for several different but connected reasons. The first, and most obvious, is that Kodal is now making that move from junior miner to producing one. That is, it's now possible to see a clear and largely derisked path to production, revenue and quite possibly profits. That does make a company worth more than someone still playing around with exploration and permit seeking.
The second and third reasons are something more specific to the structure of the lithium market. The mineral being mined, spodumene, has a particular market structure associated with it. Considerable processing is required to produce the lithium chemicals required in battery making. There are very large economies of scale in plants to do that work. No one single mine is large enough to supply the volumes required by such a plant. Also, the plants are too expensive for any one mine to build their own. So, the mines produce a 6% lithium concentrate which then goes to those - largely Chinese - processing plants.
Kodal Minerals share price from London Stock Exchange
This market structure creates a symbiotic relationship between the mines and the processors. In fact, the processors will largely finance the mines. A junior miner - like Kodal - will explore, then test and move the project to a feasibility study. Gain all the necessary licences and so on. Then it's at the stage where for other minerals it would be seeking bank or market financing to actually build out the mine. With lithium it's normally a processor which finances at this stage. For Kodal it's Hainan - others might ally with Ganfeng and so on. The processor provides the capital, gains back a contract for the production at a set (at least in a range) and specific price.
The processor gains a derisked source of material for their plant. The mine gains finance and a takeoff contact - a derisked buyer for production. Given that market structure it is actually a significant signal that a project is not serious if it cannot gain finance from one of the processors. So, the Kodal Minerals contract with Hainan actually operates in these second and third ways. Firstly, it provides the capital for development and so on - that's good, no cash call on shareholders. Secondly, it works as a validation of all of the claims and statements so far. If Hainan's willing to send that much money to Kodal then what Kodal says is probably true…..
What we're now left with at Kodal Minerals are operational risk - can and will management actually build the mine sensibly - and lithium price risk over the years. Near all of the other risks - proving the reserve, being able to finance operations and so on - have now been dealt with. No wonder the KOD stock is up in price.
