Behind the Arcadia mine agreement
HUAYOU, one of the world’s largest battery metals companies, announced an agreement last week to buy Prospect Resources, which is developing a lithium mine in Zimbabwe.
The deal will see the Chinese giant pay US $ 422 million for Prospect’s shares. Huayou is the world’s largest producer of cobalt, a metal used in batteries for electric vehicles.
It has assets of nearly US $ 8 billion and achieved sales of US $ 2.1 billion between January and June of this year. Prospect is listed on the Australian Stock Exchange and has developed the Arcadia mine at Goromonzi. It is not surprising to see a Chinese company winning the tender for the project.
Chinese companies are buying lithium projects around the world to secure their supplies. As of October, Chinese companies had purchased 6.4 million tonnes of lithium resources in 2021. This almost matches the 6.8 metric tonnes purchased by all other companies in 2020. Chinese battery makers have won bids for worth $ 1.58 billion in 2021, according to S&P Global Market Intelligence.
Here, we summarize how Prospect got here, what the deal entails, and what’s happening in the future.
Prospect: a timeline
2018: Prospect is innovating at its Goromonzi mine site, announcing the ambition to build what could be Africa’s largest lithium project. The site is on a farm where, decades earlier, explorers from a British company, Atomic Energy Authority, had searched for beryl, a mineral in high demand at the time for the alloys to make everything. from springs to planes and missiles.
Shortly thereafter, Prospect ships its first 100 kg samples of its 99.5% battery-grade lithium carbonate, for distribution to potential collection partners for evaluation. The company is also announcing plans to process lithium hydroxide, used in the manufacture of battery cathodes.
2019: Prospect obtains the status of special economic zone, which gives it generous tax exemptions and reduces the cost of developing the project. The company signs an off-take agreement with Sinomine, which guarantees it will have a market for some of its lithium once production begins.
2019: Prospect plans to sell the mine to a larger investor capable of moving the project forward. Company appoints renaissance capital, leading investment bank, as advisor on possible divestment of its lithium stake in Arcadia
2020: Prospect signs a seven-year agreement to supply petalite to Sibelco, the largest metal distributor in Europe and one of the largest glass-ceramic manufacturers in the world. With the deal with Sibelco, all of the petalite that Prospect will produce from the Arcadia lithium mine in the first seven years now has guaranteed buyers. In 2021, Prospect builds its first pilot plant and ships its first petalite samples to Sibelco.
2021: Prospect decides to take a different route to find a new investor. They are opening a competitive bidding process, capitalizing on demand for such assets from major lithium developers. Out of seven bidders, the company decides to go with Huayou. Huayou Chairman Chen Xuehua said the acquisition was part of his company’s strategy to build its battery materials business.
“The acquisition of Arcadia complements our existing battery metal mining operations in southern Africa and represents a logical transaction for Huayou as we continue to build a new energy materials business division. “
Who gets what?
Huayou will pay Prospect US $ 377.8 million for its 87%. Minority shareholders Tamari Trust, owned by veteran mining investor Paul Chimbodza, and Kingston Kajese, who owns 6%, will walk away with $ 44.2 million for their combined 13% stake.
Is this a good deal?
While the country’s rich resources are an attraction, Zimbabwe’s risk profile makes it more difficult for companies like Prospect to raise capital in global markets. It is not uncommon for “miners,” with a greater risk appetite, to explore markets such as Zimbabwe and then sell to larger players after all the legwork has been done.
The Arcadia project needs US $ 192 million in pre-production capital expenditure on its own. As of June, Prospect spent US $ 25.7 million exploring and evaluating Arcadia, according to its financial data. Now they are getting $ 378 million for their 87% stake in the project, a steal for them.
The price per share Huayou paid was a 78% premium over the 10-day average Prospect share price. For the buyer, Huayou is also a good deal. Earlier this month, Prospect said a direct optimized feasibility study showed improved economic returns. The site has the resources of a factory with a capacity of 2.4 million tonnes per year. The study showed an after-tax net present value (NPV) and internal rate of return (IRR) of $ 929 million and 60% respectively. Generally speaking, NPV and IRR are measures used in such capital budgeting to assess the profitability of an investment. Arcadia has a lifespan of 18 years. Profits over the period are estimated at US $ 175 million per year, based on forecast lithium prices.
Could the mine have brought in more? To answer this question, you have to compare the purchase price with other lithium mines of similar size.
It will also take into account the “risk premium” of an asset in Zimbabwe, as well as the amount Huayou will now have to spend to bring the plant into production.
In recent times, there has been a surge in purchases of smaller lithium mines by larger ones, a sign of growing demand from China, the world’s largest producer of batteries. CATL of China, the world’s largest manufacturer of electric vehicle batteries that supplies Tesla, has just purchased Millenial Lithium in Canada for US $ 298 million.
Millenial Lithium, a Canadian company, owns two lithium mines in Argentina, larger than Arcadia’s potential. The Millenial mine is located in the “Lithium Triangle”, which includes Chile and Bolivia. The Lithium Triangle holds 75% of the world’s lithium supply. Argentine mines also bought by large companies include Rincon and Neo Lithium.
Rio Tinto bought Rincon this year for $ 825 million. Rincon has a total resource of 11.77 million tonnes of lithium carbonate equivalent (LCE), compared to 1.24 mt at Prospect. In South America lithium is mined from brine – large salt marshes – while in Zimbabwe lithium is mined from hard rock, making it more expensive to mine.
Will Arcadia sell ore?
Prospect has so far produced two types of concentrates. It produces a petalite concentrate with a very low iron content, used in ceramics and glass. It also produced battery grade lithium concentrate samples.
It also plans to produce lithium hydroxide, which is used in the manufacture of battery cathodes. Lithium hydroxide sells for more than lithium carbonate.
Petalite is used in the glass and ceramic industry.
Why not just set up a battery factory in Zimbabwe?
South American companies in Argentina, Bolivia, Brazil and Chile produce the most lithium, but battery makers have not set up factories there. All of these countries have discovered that it is not easy to convince producers, mostly Chinese, to leave Asia. These countries are now focusing more on the export of concentrates.
First of all, while they are called lithium batteries, batteries also include other components. These include cobalt, nickel and copper. A manufacturer is also expected to import cells and other components from China. Second, battery makers have told South American lithium countries that they want to produce batteries close to markets.
Producing batteries in South America, or now Zimbabwe, and having to ship them to Asia would make them more expensive. Manufacturers also want more lithium than a single market can provide.
In Chile, the manufacturer POSCO needed 14,231 tonnes of lithium hydroxide, increasingly preferred for making cathodes for batteries in electric vehicles. Chile, which has some of the greatest resources in the world, could not meet this demand enough for POSCO to establish itself there.
Equally unlikely is an electric vehicle battery factory in Zimbabwe. At a mining conference in 2018, Wilfried Pabst, chairman of Southern African Metals & Minerals, majority owner of lithium developer Bikita Minerals, burst the bubble of executives and government officials waiting for battery factories in Zimbabwe.
Lithium only makes up 7% of some electric vehicle batteries, he told them. ” Let’s be realistic. It won’t happen, ”he said. – newZWire