Leo Lithium (ASX:LLL) once had a lucrative project, only to be forced out by the Mali government

Nick Sundich Nick Sundich, May 13, 2024

Investors were excited about Leo Lithium (ASX:LLL) until sovereign risk issues became a reality. Some investors, and even ourselves for some time, thought this was the best ASX lithium stock – at least as far as the risk versus reward balance was concerned. We liked the project’s compelling returns, that production was set to get underway in the June quarter of 2024 (in other words, right now) and how it was fully funded. One of the major concerns was sovereign risk and it came to pass, forcing the company to sell its project.


Who is Leo Lithium?

Leo Lithium is a resources company that aspired to bring the Goulamina project in Mali into production. It has since sold the stake it owned in the project to Chinese lithium giant Gangfeng, a deal that was unveiled last week. First, let’s reflect on the project itself.

Goulmania has a Mineral Resource of 108Mt at 1.45% lithium and an Ore Reserve at 52Mt at 1.51% lithium. The DFS found an NPV of US$2.94bn and a post-tax IRR of 83%! Leo held a 45% stake in the project (a further 45% belonging to JV partner Ganfeng and the balance belonging to the government), which meant its stake was notionally worth A$1.7bn.

This project was first picked up by Firefinch (ASX:FFX) in 2016, during which time the resource was substantially grown, not to mention the NPV (Net Present Value) and IRR (Internal Rate of Return). Firefinch also sealed a Joint Venture with Chinese lithium giant Ganfeng that unlocked a debt and equity package of at least US$170m, in addition to operational support and offtake.


Once a solid project for ASX investors

Goulamina, an open-pit hard rock lithium mine, is located near Bougouni in Sikasso Region of southern Mali, approximately 150 km by road from Mali’s capital, Bamako. Ore will be trucked to the coast for export, likely from the Cote d’Ivoire port of Abidjan, with the company requiring a fleet of about 250 trucks over a 6-7-day cycle at full production.

LLL has a solid leadership team. Managing Director Simon Hay was formerly CEO of Galaxy Lithium, a pioneering lithium producer that operated the Mt Cattlin hard rock mine in Western Australia. When Hay started at Galaxy Resources, the lithium industry was struggling. By 2021 Galaxy had become part of the $7.5bn megamerger, which created Allkem (ASX: AKE). Before Galaxy, Hay gained valuable African experience in his ten years at Iluka Resources, which included three years as Head of Resource Development where his team oversaw developments in Sierra Leone.


In a good space, so we thought

In case you’ve been living under a rock in recent times, lithium demand has been skyrocketing and was projected to continue for the rest of the decade because of its use in electric vehicles. Analysts believed existing supply could keep up and so there will need to be more mines coming into production. Sure, plenty of other ASX lithium stocks will be in production by the end of the decade, but few were anticipated to be as soon as Leo Lithium.

And Leo Lithium’s mine (Goulamina) was not just any lithium mine. It is a long-life, low-cost operation with an Average Life-of-Mine Cash Cost of just US$312 per tonne of SC6 produced, while All-In Sustaining Cost is US$365 a tonne. The Mine life is a minimum of 21 years.


Ganfeng liked Goulamina a lot

Few other projects have a resource of over 100Mt and a grade of greater than 1%. But there’s potential for it to grow further with exploration work continuing. And the end product will be high quality with its 6% Li2O spodumene concentrate (SC6) having less than 0.6% Fe2O3 content and low mica. This should help ensure that pricing stays good for Leo and its partners.

If you don’t want to take our word for it, take Ganfeng’s word. It is China’s largest lithium chemicals producer by capacity, supplying downstream to the likes of BMW, LG Chem and Tesla. Ganfeng has not only provided credibility to LLL, but also provided substantial funding as well as offtake and technical support.


Africa strikes again

When we first wrote about Leo Lithium, we noted three risks: sovereign risks, the lithium price and funding. The last of these was resolved barely days after we first published this article. Unfortunately, the former of these risks came to pass and put investor appetite for Leo Lithium on life support. Most investors would have acknowledged some sovereign risk. There was no shying away from political instability in Mali (with two coups in the last decade) as well as problems with terrorism. But we noted that this has not stopped Mali from being a major gold producer as well as an exporter of cotton, sesame seeds, lumber and vegetable oils.

Gold miners active in Mali include Barrick (NYSE: GOLD), B2Gold (TSX: BTO), Resolute Mining (ASX: RSG), AngloGold Ashanti (JSE: ANG) and Hummingbird Resources (LSE: HUM). The majority of these companies (and Leo Lithium too) have operations in the more fertile southern half of the country where risks are lower.


The lion stopped roaring

But when the risks came to light, they sent investors rushing for the exits…when they were still able to, of course, with the company in and out of suspension during that time. The most recent stint in suspension lasted 8 months.

The military regime currently in charge of Mali had its eyes on the project, forming a commission to examine matters on the project. This committee halted Leo Lithium’s plans to ship its first unprocessed ore this year. Leo Lithium spent 6 weeks in suspension and crashed 50% after re-entering trading. Although this move would not delay spodumene concentrate production on schedule for 2024, the company scrapped its guidance.

It sold a 5% stake in the JV to Gangfeng for $137m, giving it a 55% stake in the asset. With the government and locals owning potentially another 35% (more on this shortly), this could leave Leo with as little as 10%.

Fast forward to mid-September 2023 and LLL entered suspension again over ‘correspondence from the government of Mali’, and the company has not traded since. The government announced a review of the code in January and this new code enables the government to take a stake of 10% in the project, an option to buy an additional 20% within the first two years of commercial production and a further 5% could be ceded to locals. It also abolished certain tax exemptions.


Leo Lithium was forced out and the saga is over

Last week, the company told investors it was selling its remaining stake in Goulamina to Gangfeng. It would receive US$342.7m all up, equivalent to A$0.43 per share. With the Mali government, Leo negotiated a US$60m settlement, paid for by selling a 5% stake in the project to the government. The government now has a 35% stake between the stake it paid for and the one it arranged to be given for free.

Leo Lithium isn’t done quite yet. It will act as a contractor for some months to ensure a smooth transition and will receive a 1.5% gross revenue fee for over 20 years in return for giving up all rights coming with the Co-operation agreement with the two.

Leo Lithium shares are still in suspension and will likely remain suspended until it finds a new project and closes that potential new deal, or it ends up delisted from the ASX for not trading in over 2 years…whichever comes first. Management will try to find another project, we aren’t for one minute suggesting that won’t be the case. Although it will likely need to find one for the ASX to entertain the idea of letting shares trade again.

If you never invested in Leo Lithium, but own shares in other ASX resources stocks, we hope this serves as a lesson to seriously consider the jurisdiction the company has a project in!


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