Premier African Minerals (LON: PREM) has completed a share placing to raise £800,000 for the African lithium and tantalum miner. The share price has dropped 6% as a result. This isn’t a huge surprise, that stock price fall for Premier as the current price of 167 pence is the same as the placing price. Why offer to pay more for the shares when there’s that new issue to be had at that price?
What matters for the future is of course how that money is put to use and how it increases the prospects of Premier African going forwards. It’s how the market perceives matters after that is digested that provides the future valuation and the trading opportunity.
The placing for Premier was accompanied by an update to the prospects in Zimbabwe on the Zulu Project.
The big risk before this placing was that there might not be the full financing to complete the current round of exploration. That’s something that is now resolved. So, it’s possible to think that once the placing is digested by the market the share price will rise at Premier African.
Share prices at exploration stage miners like Premier are traditionally volatile. For the current valuation is based upon a fairly complex model. What’s the future income flow from the project, times the likelihood if it completing, discounted back to a net present value. Given the number of moving parts in that model slightly different assumptions for one or more stages can produce wildly different values.
This is true of all miners at this stage of the process. With this type of lithium exploration, there’s another level too. The deposit being explored here is spodumene, which is the “hard rock” source of perhaps half the world’s lithium. Tantalum is an often produced byproduct, in fact, some spodumene mines have been primarily run as tantalum sources in the past when relative prices worked that way. The interest here at Zulu is that tantalum would be a nice addition to revenues, it is lithium which is the true target.
However, brines – salt waters – are the source of the other half of global lithium supply. Advances or changes in technology there could impact the viability of spodumene projects. Without, sadly, increasing the viability of the hard rock sources. It’ll be the other half of the global industry that benefits from technical exchanges in brine extraction that is. This adds another complexity to the valuation of spodumene projects like this Zulu one that Premier is currently working upon.
Note that this isn’t a problem, it’s just something that adds to the valuation model and thus increases the number of moving parts in it. That adds to the implied volatility of the Premier African share price going forward.
Any real action in the Premier African Minerals share price is likely to be after the news of the placing has been digested and all the stock firmly placed. Once that possible overhang is gone then the valuation will return to thinking about that net present value of future revenue flows.
Premier African Minerals shares are traded on the London stock exchange's AIM market (the alternative investment market), which is the submarket specifically for smaller companies. AIM stocks are attractive to investors as they have tax advantages and smaller companies have the potential to benefit from rapid growth. But are PREM shares the best buy? Our stock market analysts regularly review the market and share their picks for high growth companies
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Tim Worstall is a freelance writer specialising in economics and the financial markets.