Armed with a positive feasibility study, an offtake deal and national project status, lithium developer Prospect Resources has now entered one of the toughest phases for any company investing in Zimbabwe – raising money on the capital markets.
The Australian-listed firm is developing Arcadia, a lithium project near Harare, which would make Zimbabwe one of the world leaders in lithium. But first, Prospect is having to weigh up different ways to raise the funding it needs to develop the 2.4-million tonne a year operation.
The company is considering offers from several prospective investors seeking stakes, and even control, of Prospect or Arcadia. Other funding options include project financing, share placements and new offtake agreements, including with battery makers.
While mining firms typically do not use their own cash resources to fund projects – they raise money to fund capital-intensive development – companies often have to boost their own cash balances ahead of financing discussions. Arcadia, according to the last feasibility study released late in 2018, needs capital investment of US$165 million.
“Prospect has 115 million unlisted options exercisable at 1.5 cents which are due to expire on 15 June 2019. Total funds that may be raised from the exercise of the Options is up to A$1,725,000 (if all Options were to be exercised),” the company says.
Prospect also intends to engage in discussions in respect of a potential placement of shares, the notice said. The company has also opened talks with potential funders for project financing.
“Prospect is in ongoing discussions with a number of entities including African development banks and institutions, and a European family office consortium regarding the possible project financing of Arcadia. These discussions are at various stages of maturity and contemplate a variety of structures from traditional debt and equity financing through to 100% debt financing.”
Prospect says it has received a draft commitment letter from a potential debt arranger to provide project finance funding for the mine. The company is however cautious: “However, at this stage, the Company believes the proposal is incomplete and requires further development and clarification before the Company can continue to progress discussions on that draft document. The Company continues to actively negotiate with this debt arranger/ financier and others.”
The options on the table could see new investors coming on board, either at Prospect level or at the project itself.
Says the notice to shareholders: “Prospect has received non-binding expressions of interest from a number of parties interested in acquiring an interest in, or control of, Prospect and/or Arcadia. The directors believe that it is in the best interests of shareholders to entertain such discussions and, accordingly, the Company has entered into non-disclosure and restriction agreements with certain parties so that due diligence investigations can occur.”
In 2018, to secure a future market for its lithium, Prospect signed an offtake agreement with Shenzhen-listed Sinomine, who will buy 30% of Arcadia’s annual production over seven years. Sinomine bought equity in Prospect for US$10 million and a further US$10 million in advance for Arcadia’s lithium concentrates. In May, Sinomine announced it had started construction of a 15,000tpa battery grade lithium hydroxide plant.
Prospect plans to stitch up similar deals. “The Company expects that offtake discussions will be ongoing from time to time for the life of Arcadia, particularly in relation to low iron petalite where a world-wide scarcity of supply of this product offers premium pricing potential.”
Last December, Prospect shipped out Zimbabwe’s first battery-grade lithium carbonate, sending out 100kg samples of its 99.5% battery-grade lithium carbonate to potential offtake partners for evaluation. Bulk testwork at Arcadia provided more samples, including of petalite, to show to potential offtakers.
“These potential offtake partners include chemical converters and battery end users, as well as glass and ceramics producers for whom the low-iron petalite is a strategic mineral,” Prospect says in its update.
In November, Prospect released the results of a definitive feasibility study (DFS) which confirmed that the mine will be profitable, with forecast life of mine revenue of US$2.93 billion and average annual EBITDA of US$106 million over a 12-year mine life.
The Government has awarded Arcadia national project status, which exempts the project from import duties and VAT on imported capital goods.
Zimbabwe has been pushing lithium as major draw for foreign investment into its resources, which remain largely undeveloped due to years of economic decline. While the repeal of the indigenisation law helped ease investor worries – Prospect and gold producer Caledonia increased their shareholdings in Zimbabwean assets as a result – forex shortages and policy volatility continue to keep large scale investment at bay.
While the country’s rich resources are an attraction, Zimbabwe’s risk profile make it harder for companies such as Prospect to raise capital on the world markets.