What you need to know about Chinese battery giant Huayou purchase of Arcadia Lithium in Zimbabwe

Who gets what?

Huayou will pay US$377.8 million to Prospect for its 87%. Minority shareholders Tamari Trust, owned by veteran mining investor Paul Chimbodza, and Kingston Kajese, who holds 6%, will walk away with US$44.2 million for their combined 13% interest.

Is it a good deal?

While the country’s rich resources are an attraction, Zimbabwe’s risk profile makes it harder for companies such as Prospect to raise capital on the world markets. It is not unusual for “junior miners”, with a bigger appetite for risk, to explore markets such as Zimbabwe, and then sell to bigger players after doing all the legwork.

The Arcadia project needs US$192 million in pre-production capital expenditure alone.

By June, Prospect had spent US$25.7 million on exploration and evaluation on Arcadia, according to its financials. Now they are getting US$378 million for their 87% stake in the project, a good deal for them. The price per share Huayou paid was a 78% premium on Prospect’s 10-day average share price.

For the buyer, Huayou, this is also a good deal. Earlier this month, Prospect said a direct optimised feasibility study showed improved economic returns. The site has resources for a 2.4 million tonne per annum capacity plant. Will it be profitable? The study showed post-tax net present value (NPV) and internal rate of return (IRR) of US$929 million and 60% respectively. Broadly, NPV and IRR are measures used in such capital budgeting to evaluate the profitability of an investment.

Arcadia has an 18-year life of mine. Earnings over the period are estimated at US$175 million per year, based on forecast lithium prices.

Cheap sale?

Could the mine have fetched more?

To answer this question, one has to compare the purchase price with other similar-sized lithium mines. There will also be consideration of the “risk premium” of an asset in Zimbabwe, as well as how much Huayou will now have to spend to bring the plant to production.

There has been a rush of buy-ups of smaller lithium mines by bigger ones lately, a sign of the growing demand by China, the world’s biggest producer of batteries.

CATL of China, the world’s largest EV battery maker which supplies Tesla, has just bought Canada’s Millenial Lithium for US$298 million. Millenial Lithium, a Canadian company, has two lithium mines in Argentina, larger than Arcadia’s potential. The Millenial mine sits in the “Lithium Triangle”, which includes Chile and Bolivia. The Lithium Triangle holds 75% of the world’s lithium supply.

Argentina mines also bought by large corporations include Rincon and Neo Lithium. Rio Tinto this year bought Rincon for US$825 million. Rincon has total resource of 11.77 million tonnes lithium carbonate equivalent (LCE), compared to 1.24mt at Prospect. In South America, lithium is extracted from brine – large salt pans – whereas in Zimbabwe, the 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 ultra-low iron petalite concentrate, used in ceramics and glass. It has also produced samples of battery-grade lithium concentrate. It also has plans to produce lithium hydroxide, used in the making of battery cathodes. Lithium hydroxide fetches a higher price than lithium carbonate.

Petalite is used in the glass and ceramics industry.

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