I wish to take into account readers view and be as fair as possible when researching companies. The single largest critique of my article on PREM was that I was not appreciating the nature of AIM is highly speculative – high risk and high reward, nor did I give the Zulu Lithium Project its due. With that in mind I re-visit my research note, taking into account the comments received.
I have been asked by a reader to prepare a research note on Premier African Minerals Limited, and as he asked nicely I thought I would oblige.
This is a company with 1,886.21m shares in issue at a current share price of 0.4p, valuing the company at £7.54m. It suffers from the same issue that I raised on Solo Oil (https://riskybearinvesting.com/2016/10/17/research-note-solo-oil-aim-solo/) last week week in that it needs to be forced out of the sub penny share territory before investors can take it seriously and treat it more than just a ‘speculative investment’.
That is assuming of course that there is underlying value to be had moving forward. The company is currently haemorrhaging money, having made a loss of £3.24m in the six months to 30th September 2016 (£740k did relate to amortization and depreciation). For a company worth so little, that’s a significant amount to lose in six months, The company is currently supported by equity placements with Darwin Strategic Limited, explaining the significant number of shares now in issue.
The above is common on the AIM market – companies raise funds required to survive through equity placements. The question a new investor should ask themselves is ‘Do I think my investment will be diluted too much before the company is able to realise value from its projects?’ For a existing investor the question is ‘Should I top up when dilutions take place to preserve my position for when value is realised?’ A new investor is in a stronger position, but runs the risk of ‘missing the boat’. An existing investor runs the risk of investing beyond his means and letting other opportunities pass him by. It is for this reason I far prefer AIM firms that have a revenue stream, or will have one imminently so as to alleviate the risk to my investment. This is of course merely a personal preference.
So, I won’t be investing in this company on the basis of cash flow alone for the time being. What is it then that would make the company worth investing in?
Company in Transformation?
The company has stated that it is in the process of transforming from an exploration and development company into one of production, revenue and value generation. This is arguably a wise strategy as we have seen many small exploration companies on AIM disintegrate under the pressure of equity placements RRR, ORCP, ASPM, THOR to list but a few.
The companies principle assets are currently:-
- Zulu Lithium – exploration phase lithium development.
- RHA Tungsten Mine – producing Tungsten mine which is expected to yield 10,000mtu per month, providing revenues of $300k per month.
- TCT – a 52% interest in TCT Industrias Florestais Limitada holding limestone deposits and forestry operations.
- Passive 2% share in Circum Minerals.
The company also has other assets, including Tinde Fluorspar, Globe multi-element and graphite and Rare Earth Elements at Katete, Zimbabwe, and mining activities in Togo, West Africa
The company has one producing asset, which may finance its general operating costs as we move into 2017. The RHA mine has to support the company moving forward, else further equity placements will take place for working capital. PREM have stated that revenue of $300k per month will be generated by February 2017 (http://www.investegate.co.uk/premier-african-min–prem-/rns/half-year-report/201609271638129931K/) “At anticipated ore grade, concentrate production at this mining tonnage is expected to be of the order of 10,000 mtu per month, which would at current APT prices, result in a net monthly RHA revenue of approximately US$300,000, before interest, plant lease and debt repayment.” Unfortunately the Company does not provide an indication of profitability after debt repayment, cost of sales etc are taken into account. Without a figure it is difficult to speculate where the company will be financially this time next year.
I wouldn’t say the company is in transformation – that phrase implies that the company is moving away from exploration and early development assets into mature, revenue generating assets. In direct contradiction to this transformation strategy announced on 27th September in the half year results, the Company announced on the 18th October that it has made an investment in Casa Mining.
In making this investment the company does not seem to appreciate that with its current assets it needs to keep spending on a tight leash, PREM announced on the 18th October that it had spent $300,000 through further equity placement (of about 5%) to make an investment in Casa Mining Limited. What causes me greater concern than this strategic U-turn is that:-
- Casa made a loss of $2.7m in the year to December 2015
- Casa has assets of only $683,000.00 as at December 2015
- Mr Michael Foster, a director of Premier, holds a 5.6% interest in Casa.
- The fact that it is claimed Casa has spent over $30m to date, yet is willing to part with a 4.5% stake for a meagre $300k is testament to a state of financial distress.
This to me screams that Casa is using PREM as a listed investment vehicle, with no regard for PREM’s shareholders. There is no near term commercial value to be had for investors of PREM through the Company making this investment, and even should Casa define a mineral resource that is JORC complaint, the next stage of development will be various feasibility studies which will likely require further financial input from PREM, again to likely be funded through further dilution.
PREM has updated the market several times recently with regard to its current drilling programme at its Zulu project, showing high mineral intersections, including
- Significantly elevated tantalum (Ta2O5) grades encountered in all holes sampled to date, with grades reported as high as 706 ppm Ta2O5in borehole ZDD 14.
- Massive lithium enriched mineralised intersections in excess of 40 meters in hole ZDD-05.
PREM is currently trying to establish a JORC compliant resource to expand upon the assessment of Mr R Taylor in 2009 which suggested the presence of 1.4Mt at 1.4% Li2O to a depth of 75m. So far the drilling has been encouraging, with investors expecting significant resource upgrade when the programme is complete.
Investors have been comparing PREM to Pilbara Minerals, which is boasting a recent Definitive Feasibility Study confirming a, high margin project with a post-tax Net Present Value of A$709 million. The Internal Rate if Return is forecast at 38.1%. This is based on a 2 million tonne per annum stand-alone mining and processing operation, which also forcasts a mine life of 36 years , with total revenue at todays prices being A$4.22 billion over an estimated 36-year mine life, or A$117m per year. One can see why investors would be excited if the expected high grades turn into a JORC complaint resource.
No-one can argue that Lithium is shaping up to be the metal of the future with such significant focus being placed on the development of battery technology, dominated by lithium ion. Tesla’s pioneering work is often cited as the real driving force behind lithium price increase and surging demand. Should the Zulu project be commercialised, PREM may stand to gain significantly from this. PREM sated in their half year results ‘We have received interest in Zulu from a number of different parties with which we have ongoing discussions regarding their possible involvement in the project, however we believe that Zulu’s size and scale make it potentially analogous to other world-class spodumene/pegmatite deposits and hence we are reviewing the best development strategy for the project.’
The big question is, where is the price going to go. Macquarie Bank argued in June this year that the price is currently very strong sue to mines operating below capacity. “We believe existing producers will be forced to lift volumes to protect market share and keep new entrants out,” the bank said, stating that their expectation is for prices to rise into late 2017 before starting to head lower. Certainly with Pilbara Minerals coming online in late 2017, and potentially PREM too (though this would more likely be 2018/19) there is argument for price depression to occur.
Of course, heading lower from a high base in late 2017 will not be the end of the world. If the project is economically viable now, it will be even more so in 2017.
The Company holds a 2% investment in Circum minerals, which owns the ‘Danakil project’, claiming it to be a unique and world-class potash project with one of the largest potash resources in the world. Circum further states
- The project features lowest quartile industry operating costs for both SOP and MOP.
- The project will be able to deliver substantial production to the Asian market at the lowest cost per tonne of any producer.
- The optimized after-tax NPV (at a 10% discount rate) amounted to US$2.1 billion and nominal IRR amounts to 26%.
- The mining licence agreement negotiation is well advanced and Circum expects this to be completed before year end.
- Morgan Stanley is running a process to help find a strategic partner for Circum and/or provide a liquidity alternative to shareholders.
Initial CAPEX is a stated to be $2.6bn for the project, with $2bn cash required for development (http://circumminerals.com/sites/default/files/Circum%20Fact%20Sheet%20%28Dec.2015%29.pdf). Circum has not divulged its financial state to the wider world but it is safe to say that it does not have anything like that sort of money available, and a floatation will not realise anything like this sum. So it will be down to a strategic partner to take on the financial burden. I would say its likely that the entire project will be sold with a production royalty payable back to Circum of 2.5-5%. To put this into perspective, PREM’s share of the CAPEX is $40m, 5X its market cap.
There has been media references to the smaller ‘Dallol Project’ which was funded on a valuation of $200m, with $50m being raised to take the project forward. A similar methodology could be applied to Circum if the project is conducted in phases, which would see PREM’s share reduced, but still potentially worth a fair bit. The question is, how much…
The number of AIM companies that have claimed to have a world class resource but go bust before they can do anything with it is beyond counting. I question whether this project is actually worth anything to current investors as the share suffers from further dilution.
Would I invest?
First, the pros and cons:-
- RHA mine is a producing, profitable mine, providing stability for the company which other AIM companies do not have.
- Zulu project could prove to be a Company changer.
- The company has not indicated the level of profitability that RHA will provide, and so a prospective investor doesn’t know if further dilution is just around the corner.
- The company is, at the Director’s behest, investing in an unlisted company which is years away from returning value – with potential conflict of interest between a director and PREM’s shareholders.
- The company has a 2% share in a project with a $2.6bn capex ($2bn cash, $0.6bn from production), which will be diluted as it is funded or put further financial pressure on the company to participate in the funding
Personally, I would not be happy investing in PREM until we have more information about the profitability of RHA. The levels of profitability will determine the fundraising required to take Zulu forward, which in term will determine how much of the Zulu project will be retained by the company at the point first production is achieved. This is the key point for me to decide to invest – its great having a world class resource, but only if you still hold a decent portion at the end of development.
That being said, the high risk, high reward nature of AIM means that investors take up positions before a company is cash flow positive in a meaningful way. If I were to wait until the company declares how profitable RHA is, I may have already missed the most significant share price rise.
An investor who wants to see a good return with low risk should have a look at Virgin Money http://bit.ly/2dAe8gH or Easyjet http://bit.ly/2dvYUts. I may hold positions in both, but there’s a good reason for it.
Would you like me to research another company
I’m happy to take requests to research other companies, whether it be FTSE or AIM – just leave me a message on the contact page and I’ll either get back to you with a rough time frame , or do crack on with it straight away.