Premier African Minerals (LON: PREM) has a delay in the shipping of concentrate from the new Zulu project in Zimbabwe. Ah well, delays happen, this is all built into the usual contracts, right? Well, yes, - but what matters is the detail of how the contracts are written. We have said this before, elsewhere, about Premier African - details matter. There it was about the date of the launch of their rights issue- the one that did not have any pre-emption rights. Because they launched it the day before the ability to launch a share issuance without pre-emption rights ran out. That is some detail and yes, it mattered.
Here there is a wrinkle in how the spodumene business works. That is what Zulu is, a spodumene mine for lithium. That detail is here in this announcement: “Premier's requirements to supply spodumene to Canmax Technologies Co., Ltd. ("Canmax") are to ship first product by 30 May 2023 (which will not now be met), failing which CanMax may elect to cancel the Marketing and Pre-Payment Agreement and require that the prepayment plus interest is settled within 90 days following notice.” Now that's dangerous.
So, the way spodumene works. No one mine is large enough to provide material to keep a processing plant working economically. Therefore those v large and centralized processing plants make contracts with a number of lithium mines. The processors (Ganfeng and the like, although it's Canmax here) make offtake contracts with the miners. They agree to take the product of the mine. In return they often provide the capital to get the mine open. This is, in fact, the most common form of spodumene mine finance - upfront payments from processors in return for those offtake contracts. This is how PREM is working with Canmax.
Premier African Minerals share price from London Stock Exchange
What PREM is saying there is that as a result of not being able to meet the terms of the offtake contract therefore Canmax can demand that capital payment back. This may or may not make PREM go bust but it would almost certainly mean Zulu no longer belonged to Premier. Which would be bad, obviously.
So, the question becomes will Canmax support PREM? Or will they demand their cash back? That might well depend upon one more detail - what are the terms of the offtake contract? These usually come with a cap and a collar on prices. The spodumene concentrate price, three years back, was around, say, $700. The cap might have been at $1,000, the collar (ie, price will always be above) $500. Not accurate figures but the general idea is right. 6 months back lithium 6% concentrate was at $5,000 and $6,000. So, the cap and collar on a contract signed then might have been $4,000 and $7,000. Just, again, as examples.
So, what's the cap and collar on the Canmax offtake contract? It might have a collar rather higher than the current lithium price (Li is down 50% over the past 8 months). At which point Canmax benefits from asking for the money back and then being able to negotiate a new contract. Or, there might be a cap at $1,500 - again, just an example. Which means that Canmax would be mad to try to negotiate, better to support PREM and lock in that great deal.
No, we do not know either. But we would very strongly argue that it's those sorts of details which are going to determine whether Premier African can either gain Canmax support, or possibly finance from elsewhere to be able to continue even in the face of this breach of contract. What are the prices on the offtake contract?
