Prospect Resources (PSC:AX), an ASX listed mining exploration and development company focused on acquiring and developing assets in the southern Africa region, have announced a A$10m share placement at a price of A$10c per share.
The issue price represents a 9.1% discount to the last traded price prior to the announcement on 30 July 2024 and a 15.8% discount to the 5-day VWAP of A$0.119. Looking further back to when the share price peaked at A$0.21 on 28th May, following news of the acquisition of copper assets in Zambia, the placement represents a 52% discount. The current market cap is A$46m.
Placement details
A$8m of the placement has been offered to sophisticated and institutional shareholders, including A$1.57m specifically offered to Eagle Eye, a long-term shareholder of the company, which comes with 8m options, exercisable at a strike price of A$0.20 per share expiring in 3 years. The placement underwriting fee is 6% of the amount raised, or A$480,000.
In addition, a further A$2m will be offered to existing eligible shareholders including Directors, under a Share Purchase Plan (SPP) arrangement at the same price.
About Prospect Resources
PSC is focused on exploring and developing battery and electrification metal mines including copper, lithium and rare earths. This is particularly interesting to me given my role with a global vehicle manufacturing and financing company. Car manufacturers are facing pressures to transition much of their production to ZEV (Zero Emission Vehicles), away from combustion engines, in line with government mandated zero carbon emission targets. In the UK, 80% of new cars sold should be ZEV by 2030, increasing to 100% by 2035, with penalties of £15,000 per car exceeding the quota. According to PSC, there will be an estimated 34-million-ton deficit in copper supply by 2050, which bodes well for the copper sector.
PSC rose to prominence a couple of years ago when they sold their Zimbabwean flagship lithium mining asset Arcadia, to Chinese company Zhejiang Huayou Cobalt for A$444m, netting a A$388m windfall to shareholders, after having acquired the mine for A$6m in 2016 and raising A$84m through a series of placements and rights issues to fund the project.
Was this a once off lucky event, or can PSC “hit the jackpot” again with their existing assets? Let’s examine the company in more detail.
A snapshot of the company’s assets
In Zimbabwe, the company owns two lithium assets including the Step Aside lithium mine and a joint venture interest at Bikita Gem lithium. Step Aside is located 8km from the Arcadia mine which they sold. Drilling and field work is complete, with no further exploration expenditure planned. The company is actively looking to dispose the asset and to put the proceeds into the recently acquired Zambian copper assets. The company is engaged in a sales process with a number of interested parties.
In a counter-cyclical lithium market, with prices depressed compared to the lithium price frenzy of 2021/22, buyers will be cautious about overpaying for lithium assets and ending up with buyers remorse. The lithium carbonate price is down 69% so far during the past year, and 87% down since the highs in 2022. Meanwhile, over the same period, gold is up 26%, and copper is up 5%.
In Namibia, the company owns the Omaruru Lithium project, which is on hold at the moment, considering the depressed lithium price.
Pivoting to copper
In light of the low lithium prices, the company has pivoted to acquire and develop copper assets in Zambia. In May the company announced the acquisition of the Mumbezhi copper project in Zambia which holds the Nyungu copper deposit. The project stands within the same copper belt in which world-class companies such as First Quantum and Barrick Gold have assets. This copper belt produced 18% of global output in 2023.
The company agreed to pay USD6.5m for an 85% interest in the mine, as well as A$1m in scrip, 6.25m options at a strike price of A$0.15 per share, and a contingency payment of A$2.5m, based on Prospect achieving a mineral resource of 500,000 tons of copper at a cut-off grade of 0.5% copper.
Applying Rick Rule’s share placement principles
I wrote a piece some time back about the legendary metals and mining investor Rick Rule and his approach to mining placements.
- How much money does the company need?
The company will have A$15.7m cash on hand post the placement. After the A$2m SPP and less placement costs of A$480,000, the company will have A$17.2m cash on hand. Based on 2023 results, the company requires A$5.5m per year to cover SG&A costs, meaning there is A$12.6m for planned development and exploration activities for the company to get to the end of Q2 2025 when the Mumbezhi MRE (Mineral Resource Estimation) results should be released.
2. Why does the company need the money?
As MD Sam Hosack states, the use of placement proceeds will be principally used for: Advancing exploration and development activities on Prospect’s Mumbezhi copper project in Zambia, including resource focussed drilling initiatives, and regional exploration activities; and a review of complementary exploration and development opportunities, particularly within Zambia.
Proceeds from the A$2m SPP will be used for general working capital purposes – overheads presumably.
3. What is the unanswered question?
The unanswered question is to ascertain the mineral resource estimation of the Mumbezhi copper deposits and to continue exploration for other assets in Zambia.
4. How long till the company will know when it has answered the question, and whether it has been successful?
According to a timeline presented in the latest quarterly update, during Q3 and Q4 of 2024 the company will complete an ESIA and metallurgical study, and conduct phase 1 infill and extension drilling. During Q1 2025, a mining lease agreement is targeted with maiden MRE (Mineral Resource Estimation)/scoping study carried out. Therefore by end of Q1 2025, the company should have some updates on the MRE.
5. No warrant, no money. Is there a warrant?
Interestingly, of the A$8m raised via placement, only the portion of A$1.57m allocated to Eagle Eye comes with an option/warrant of 8m shares exercisable at a strike price of A$0.20 within a three-year period.
Rick advises the strike price to be set at a comparable price to the share options held by management. According to the 2023 annual report, there were 17.85m share options outstanding, at a weighted average exercise price of A$0.15 per share. During the 6 months to 31 December 2023, 9.3m options were issued to management at an exercise price of A$0.20 per share, with an expiry date of August 2027, which is the same expiry as the placement options. On this principle, the warrant and management share option terms are aligned. As at 31st December 2023, the company has 38m unlisted options outstanding.
It is surprising that the investors taking up the balance of the placement didn’t negotiate for options/warrants.
6. Who will implement the project? Is there a strong management team with track records?
PSC has a proven track record of acquiring, developing, operating and selling mining projects in Zimbabwe, largely attributable to the Arcadia lithium mine. The team is led by on-the-ground Zimbabwe based executives Sam Hosack and Harry Greaves, who have led the company including during the Arcadia transaction.
Based on the above information, is Prospect a buy?
Valuation of mining exploration and development companies is challenging because the company isn’t yet generating any cash flow or earnings. It requires an estimate of certain variables including mineral resources available, the grade, life of mine, cash cost per oz, and development timelines in order to provide an estimate of net present value.
Share prices of junior mining companies can be volatile, often reacting extremely to noise of new acquisitions, and resources discoveries. After the announcement of the acquisition of Zambian copper assets, the share price more than doubled from 8c up to 20c, and is now back to 10c.
As at 31 Dec 2023, PSC had net assets of A$26.2m, including A$21m cash, resulting in net tangible assets excluding cash of A$5.3m. This includes A$2.9m which has been capitalized to the Step Aside lithium project, and A$1.85m which has been invested the Namibian Richwing JV project.
During the two quarters ending 30th June, the company capitalized A$10.2m on development and exploration activities, and expended A$2.7m on operating activities, leaving A$8.3m in the bank.
The current market cap is A$46m as of 6th August, and we are told the company will have A$15.7m cash on hand after the A$8m placement but before costs, so the current cash on hand must be A$7.7m resulting in an implied valuation of the equity excluding cash at A$38.3m.
This can be allocated into net tangible assets of A$5.3m, A$10.2m capitalized to development and exploration activities over the last two quarters (presumably this relates to the acquisition of the copper assets since there are no other parts of the cash flow statement which show the transfer of funds for acquisition), and A$2m worth of shares issued in relation to the acquisition of the Zambian assets, leaving A$20.8m “goodwill”.
What is the downside? The downside is that the Zambian copper deposit results are disappointing, there is limited interest in the Step Aside project, lithium prices stay depressed, and the share price goes to NAV of 5c.
What is the upside? The upside is what is most interesting in this junior mining companies. There are several interested parties considering acquisition of the Step Aside project at the moment which could result in a windfall, and then of course we await mineral estimates from the Zambian copper project which could result in a substantial upside in the share price if considered positive. Given the company’s exposure to lithium, any upside in lithium prices would be positive.
I would estimate the stock is a spec buy at between 8-10c per share, with a 20-25c target price if upside is achieved within the next 12 months.