A £10,000 investment made in Premier African Minerals (LSE:PREM) shares in July 2018 would now be worth £26,600.
That’s an impressive return from a mining company that hasn’t booked any revenue yet. But a termination notice received on 25 June 2023 from its only customer could damage the company’s prospects in the short term.
When news broke of the dispute, its shares closed the day 40% lower. They are now worth around half what they were in April 2023.
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Precious metals
The company’s flagship asset is the Zulu Lithium and Tantalum Project in Zimbabwe.
It had hoped to be mining spodumene (a mineral with a high lithium content) in Q1 2023. But its equipment supplier produced parts to the wrong specification, delaying production to June 2023.
This meant the company missed its deadline of 31 May 2023 to supply CANMAX, a Chinese manufacturer of heavy machinery. As a result, CANMAX no longer wants to buy anything coming out of the mine.
Given that lithium is a key component in electric vehicle batteries I don’t think it’s going to be difficult finding another customer.
Falling out
However, CANMAX agreed to pay for product in advance and is now demanding repayment of $34.7m. This prepayment had been used to help fund the development of the mine.
Although PAF’s directors claim the “notice of termination has no force or effect“, they have warned that if the dispute cannot be resolved — and alternative finance isn’t forthcoming to repay the amounts advanced — then the company may not continue as a going concern.
The company does have other interests but it admits “little has been achieved” with these given that all attention has been on the Zulu project.
Verdict
This looks like a big mess.
But given that CANMAX already owns 13.14% of PAF, I don’t believe it’s in the former’s interests to cause damage to the latter company’s long-term prospects.
That’s why the Chinese company has proposed to convert the amount owed into an equity stake or debt. Based on PAF’s current market cap, the issue of additional shares would raise CANMAX’s shareholding to around one-third. If this happens, existing shareholders would be diluted.
I don’t usually invest in shares listed on the Alternative Investment Market. The index is littered with pre-revenue companies — some in the mining sector — looking to strike it big. And very few succeed.
Assuming production of spodumene concentrate did start in June (this has yet to be confirmed), and the situation with CANMAX can be resolved amicably, the company will soon start generating revenue. This will provide some of the cash necessary to develop its other interests. But more will be needed.
I prefer fully funded mining companies that are — on paper at least — less risky.
I think it’s better to invest in the stocks of miners that are already profitable. Companies like Rio Tinto, Anglo American, Antofagasta, Fresnillo, and Glencore have successfully navigated the pre-production stage that PAF has been struggling with.
And because their share prices have fallen recently over concerns of rising interest rates affecting global demand for metals, especially in China, they are presently offering high dividend yields — around 8% is typical.
For these reasons, if I had some spare cash, I’d rather invest in one of these.
