Savannah Resources (LON: SAV) (OTCPK: SAVNF) is up 24% today on the news that the Portuguese authorities have approved the environmental licence for the Barroso lithium project. This is a necessary step in the development process - you don't get to build a mine without an EIA. However, while it's a necessary part of the process it's not a sufficient one that leads to the inevitability of mining, revenue and profit. As Savannah themselves say: “The positive DIA allows the Company to progress key economic studies on the Project, including the publication of an updated Scoping Study expected in early H2 2023, and the recommencing of the Definitive Feasibility Study.”
Just to lay out a little how mining works. The definitive feasibility study is the document that matters. Before that all is simply evidence gathering leading to that one single document. For that's the one that says we've got this much ore here, it'll cost us this much to get it out, the market price is that, we'll make this much profit, we've all the licences to do this and on and on. That's also the document that really starts the fundraising process to really build the mine.
Another way to look at this is that the DFS is the first time an exploration miner actually has a bankable asset. Before that everything must be paid for from shareholder capital. After that banks might lend into the project - there's an asset there, see?
Savannah Resources share price from London Stock Exchange#
With lithium things are slightly more complex, in that this is a spodumene mine. So, the production will be a 6% concentrate, this then needs to go to a concentrate processor. Pretty much the only ones of those out there are the Chinese giants. The industry standard is that one of those processors buys into the mine at or around the point of that DFS. They agree to an “offtake” contract (that is, “we'll buy the production”) and buy that contract by providing some to all of the capital necessary to build the mine or the concentration plant.
This is such a standard part of the business that a hard rock lithium mine that doesn't have buy in from a concentrate processor is regarded as non-viable. Yes, the EIA is a good, useful and necessary step along the road. But the big issue is still in the future - which of the Chinese processors is going to buy into Savannah Resources? If any, that is? For at least so far there simply is no European plant which can do the work. And Barroso isn't large enough to justify the building of one, not on its own it's not.
