In late 2018, ASX-listed Prospect Resources (Prospect) published a definitive feasibility study (DFS) for its Arcadia Lithium Project in Zimbabwe, a vital step for the company as it works towards near term production from one of the most significant lithium projects in the world. The DFS confirmed technical and financial viability of the 2.4 million tonnes per annum (Mtpa) plant throughput development and forecasted an average annual production of 212,000 tpa of 6% spodumene concentrates, 216,000 tpa of petalite concentrates and 188,000 lbspa of tantalum over a 12-year mine life. While these production figures convincingly indicate the true potential of the project, the strong economics outlined in the DFS have been most pleasing to Prospect’s managing director Sam Hosack.
“The DFS indicated a robust business model capable of supporting quite a lot of potential turbulence in the market,” says Hosack. “When you are busy building a DFS you set out to anticipate the business environment variability to ensure the business robustness is factored in.
“In a sense you want the project to remain competitive in the most trying circumstances and in this case, it has been very rewarding to know that the Arcadia project is in the lowest capex quartile. That has been a major win for us.”
Capital costs for developing the project are estimated at US$165 million, with operating costs coming in at $285 per tonne for a conventional open pit mining scenario at a LOM strip ratio of 3:1.
Meanwhile, average annual EBITDA has been forecasted at $106 million, contributing to life of mine revenue of $2.93 billion, excluding tantalum credits.
Having been granted a mining lease by the Zimbabwean government in August 2018, and with transport infrastructure already in place at the site which is located just 38km from capital city Harare, Prospect is fantastically positioned to deliver shareholder returns as it moves from developer to operator at Arcadia.
Returning shareholder value
While the Prospect directors and management have known of the potential value held within the Arcadia project for some time, this belief was corroborated by the Hunter Capital Advisors report, which identified Arcadia as a Tier 1 asset in the global lithium space. This validation through independent research has been very comforting to Prospect.
The report went on to say: “The Arcadia project keeps standing out as a large tonnage, relatively high grade project amenable to open pit mining with a modest capital expenditure required to produce lithium concentrates.”
“I think it [the external report] serves as additional validation of the work performed, and potential identified in the DFS.” says Hosack. “Projects like this are on a journey and what we need to do is communicate successfully to all of our stakeholders that this project can stand up and stand out.
“It is one thing to have an internal belief, and there is certainly no lack of internal belief, but we are also very confident that what we have displayed in the DFS shows impartiality for any informed investor. We’ve taken a conservative position and have still delivered a very robust DFS.”
Furthermore, Hunter Capital’s risk adjusted valuation concluded that as it delivers on its strategy, Prospect should experience a significant value uplift, towards a price target of AUS$0.14, resulting in a market capitalisation of $304 million. Prospect’s market cap at the time of writing was $45 million.
“Returning shareholder value is our purpose, there is no disputing that. However, the journey to delivering shareholder value requires some sophistication. In essence, we feel that full shareholder value comes when we as a business expose ourselves to the upside of the lithium/EV cycle whilst being well underpinned by demand from the more stable glass and ceramics market.
“I think our shareholders will get successful returns as we deliver on our ambitions and the lithium/EV story realises its full potential.”
Zimbabwe is open for business
The end of 2018 also brought another key milestone for Prospect when the official groundbreaking ceremony took place for the Arcadia project in December. The ceremony was opened by the President of Zimbabwe Emmerson Mnangagwa and attended by various ministers, Australian and Chinese ambassadors and key stakeholders.
The spectacle was a clear demonstration of the high levels of cooperation between the public and the private sector in Zimbabwe, as the nation looks to attract investment and instigate an economic revival after years of neglect under President Robert Mugabe.
“We perceive Zimbabweans as being prepared and ready to make the difficult steps forward to recover from the economic stagnation of the last 15 years,” says Hosack. “That’s not going to happen just off the back of government ambition. It will require lots of fresh investment in conjunction with government economic framework.
“I think we have timed our entry well. We’ve successfully convinced the government of the value of this project and managed to gain vital social and stakeholder support that provides us the social licence to operate.
“The key message from the groundbreaking was that we have laid the foundations in the appropriate fashion and have been recognised as a committed investor in Zimbabwe by the government.”
The government also reaffirmed its commitment to comprehensive reforms to enhance Zimbabwe’s competitiveness and to attract foreign investors. One example of a recent reform Prospect has taken advantage of is the Rapid Results Initiative (RRI).
The RRI was conceived by President Mnangagwa in an effort to loosen the statutory and regulatory burden than newcomers like Prospect are faced with in Zimbabwe. The initiative is essentially an open forum where the investor presents a timeline of work from which the President’s office can provide direct support to.
This system allows for transparent dialogue between both parties and for Prospect it provides a direct line to the President’s office. “The fact that the President is prepared to apply himself and his office through the initiative shows the government’s commitment to expeditiously dealing with our applications and that of our peers.”
A mining sector with high potential
Though the investment drive under President Mnangagwa is in full swing, the challenge of turning around Zimbabwe’s economy is substantial, and the mining sector is likely to play a major role in any recovery, with around 800 mines currently in operation.
However, these mines have only performed at around 10% of their US$18 billion per annum potential since 2009, delivering just $2 million in annual revenue as the national economy faltered and the mining sector became bogged down in legislative bottlenecks.
Nonetheless, new evidence suggests that the tide may be beginning to turn. The 2018 Mining Business Confidence Index found that executives and investors were bullish about the prospects of the mining sector, as shown by the overall MBCI of +21.9, compared to -6.6 in 2017.
Prospect is a clear example of an investor with a renewed sense of confidence in Zimbabwe’s mining sector, which is evidenced by the firm’s strong commitment to developing exclusively in-country.
“We currently employ over 100 people in-country, though we do have an executive office in Perth,” Hosack reveals. “Then, during the construction phase of the project, there is likely to be in the order of 1,000 different skills demanded.
“As the project goes through its cycle, tasks become more complex butwe are comforted knowing that Zimbabwean skills can meet our needs. Our final headcount during the operational phase will be around 300-400 people from direct employment and obviously you can multiply this to establish indirect employment too.”
Hosack is also acutely aware of Prospect’s social responsibility in Zimbabwe, particularly with regards to community training programmes in key fields such as agriculture and health. “By far the biggest impact we can have is up-skilling the community that are likely to be employed by us, ensuring they are healthy and fit for the rigors of the role, while developing skills that lead to sustainable prosperity.
“We want to invest heavily into programmes targeting these outcomes and see these as preceding the project. So far we have been meticulous in our planning.”
Versatile offtake options
Zimbabwe is already the world’s fifth largest lithium producer and Minister of Mines Winston Chitando recently stated his belief that the country has the potential to account for 20% of global demand when all known lithium resources are being exploited.
With this in mind, Prospect is determined to be a frontrunner in Zimbabwe’s lithium space, particularly as the EV story gains pace. However, the company is not just targeting the lithium battery chemicals space.
“The competitive advantage that we want to leverage off is the suitability of our product across multiple markets, including ceramics which absorbs around 30% of global lithium production.”
This type of arrangement would allow Prospect to take advantage of established and robust markets such as ceramics and glazing, while also exposing itself to the more exciting and contemporary battery minerals sector, as confirmed by its offtake agreement with Chinese battery metals expert Sinomine.
With a strong DFS under its belt, Prospect will plough forward with engineering, design and construction work in 2019, ahead of a commissioning date in 2020 for its Arcadia project. If the company keeps to this timeline, Prospect will become the largest lithium producer in Africa. Watch this space.