another LPD mess... background... Concentrate pricing and the Desert Lion-Jinhui precedent
On 6 March 2018, Desert Lion announced that it had entered into a binding offtake agreement with Chinese lepidolite converter Jiangxi Jinhui Lithium, whereby it would sell lithium concentrate from Phase 1 production of stockpiled material located at Karibib to Jinhui.
Under the terms of the agreement, Jinhui agreed to purchase all lithium concentrate produced from the stockpiled material that contains not less than 2.0% lithium oxide (Li2O) and up to a maximum of 120,000t of lithium concentrate containing not less than 1.7% Li2O. At the time, Desert Lion management estimated that there were approximately 700–750kt of stockpiled material located at Karibib, capable of producing c 150–160kt of lithium concentrate for sale to Jinhui over the following 12–18 months.
Payment by Jinhui for each shipment of lithium concentrate, each in an approximate amount of 30kt, was to be collateralised by the delivery by Jinhui to Desert Lion of irrevocable and unconditional letters of credit drawable on a major international bank. On execution of the agreement, Jinhui made a deposit of US$4.5m against future delivery of lepidolite concentrate, which would then deplete by an adjustment to the purchase price using a depletion factor of US$40.00 per tonne.
The purchase price for lithium concentrate was to be determined as of the first day of each month, for that month, calculated as a percentage of the previous 30-day moving average price of 99.5% lithium carbonate as published by Asian Metals. The percentage of the benchmark was determined by the average lithium oxide and tantalum content of the concentrate.
While Desert Lion’s announcement of 6 March was relatively guarded in terms of expressing the detailed commercial terms of the relationship between itself and Jinhui, in the event it made only one shipment of concentrate to Jinhui, which was completed on 24 April 2018. At the time of its first shipment, it had expected to deliver an additional 60,000t of lithium concentrate from its sorting operations by the end of Q318, ahead of an anticipated start of production from a flotation plant in Q418.
However, Desert Lion then ceased all operations in Namibia on 31 August, while it conducted a strategic review of its activities. In its subsequent Q218 and Q318 results, however, it made the following comments in the notes to its financial statements, ‘On April 24, 2018, the Company completed its first shipment within the timeframe of the contract. As a result, the Deposit is no longer refundable and the remaining balance shall continue to amortise against future shipments.
On April 24, 2018, 30,321 tonnes of lithium was shipped to Jinhui and the deposit owing was reduced by $1,550,139 (US$1,212,845). After assaying the product in China, the Company and Jinhui agreed on a $1,630,849 (US$1,275,995) grade adjustment credit note. The net realised shipment value was $2,151,790 (US$1,655,223).’
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