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AVZ Minerals shares: a simplified precis of the current problems

AVZ Minerals is embroiled in a legal wrangle with Chinese giant Zijin over controlling interest in the globally significant Manono Project.

australia Source: Bloomberg

Between mid-May 2021 and 4 April 2022, the AVZ Minerals (ASX: AVZ) share price rose by 829% to $1.33.

And despite falling to $0.78 today, it’s still up an astonishing 2,500% over the past five years.

AVZ Minerals shares: good news first

On 4 May, the Democratic Republic of the Congo’s (DROC) Minister of Mines awarded a mining licence to AVZ’s 75% owned Dathcom Mining SA business for the flagship Manono Project.

Hailed as a ‘watershed moment’ by Managing Director Nigel Ferguson, the licence covers the entirety of the Roche Dure proven resource and Carriere de l’Este exploration target. The news briefly sent AVZ’s share price to $1.18.

Aiming to begin production in late 2023, Ferguson argues that Manono represents ‘one of the most important new mining projects in the world that will significantly contribute to the global green energy transition.’

The Roche Dure lithium deposit alone holds ‘402 MMt grading 1.65% Li2O and 715ppm tin making it the largest and highest-grade undeveloped lithium mineral deposit in the world.’ Over 22 years of mine life, AVZ expects it to generate a post-tax net present value of US$4.5 billion.

asx Source: Bloomberg

The snake in AVZ’s boot

However, AVZ requested a trading halt on 9 May to last through 20 May, to give it time to address legal claims of interest in the project.

Put simply:

DROC-registered Dathcom Mining owns a 100% interest in Manono. AVZ owns 75% of Dathcom, while Congolaise D’Exploitation Miniere SA (Cominiere) owns the remaining 25%.

With the mining licence granted, Cominiere must hand 10% interest to the DROC government, while AVZ claims it has the contractual option to acquire the other 15%.

Simultaneously, AVZ has agreed to sell 24% interest of Dathcom to battery marker Suzhou CATH Energy Technologies, in exchange for US$240 million to develop the project, and ‘a further amount to fund their pro-rata portion of development costs.’

However, no binding contract between these two parties has yet been signed.

But assuming this deal was agreed, AVZ would own 66% interest in Dathcom, Suzhou would own 24%, and the DROC government 10%.

However, Cominiere is selling its 15% interest to China’s Jin Cheng Mining Company. AVZ intends to fight the claim, while Jin Cheng has confirmed it will take legal action to secure the stake.

AVZ argues ‘any purported transfer of the 15% interest to Jin Cheng would be a material breach of the pre-emptive rights contained in the existing Dathcom Shareholders Agreement, invalid and of no force or effect.’

Separately, Dathomir Mining, which previously owned a 15% stake in Dathcom, has launched a claim against AVZ, calling into question the validity of AVZ’s share certificate which allowed AVZ to take control of this stake by reference to a prior DROC Tribunal decision.

AVZ flatly stated ‘the Tribunal Decision does not purport to (nor does it, in fact or under DRC law) have any effect on AVZ’s 75% equity interest.’

Mining politics

Jin Cheng’s parent, Zijin, is by some measures China’s largest gold and copper miner.

Zijin believes ‘following negotiations held between July and September 2021, Cominiere agreed to transfer a 15% interest in Dathcom to Jincheng Mining, an affiliate of Zijin Mining, and a transfer agreement was signed.’

Further, Zijin argues DROC’s Commercial Court of Lubumbashi rejected AVZ requests to block the transfer in November 2021, and ‘chaired a shareholders’ meeting, which approved the transfer of the 15% interest.’ Accordingly, Jin Cheng is a ‘legitimate shareholder,’ and ‘relevant changes were also made in the Trade and Personal Property Credit Register’ in DROC.

In addition, Zijin supports Dathomir’s claim, arguing the sale was previously terminated under a DROC court, due to ‘significant defects in the original transaction process.’

Accordingly, Zijin argues that Dathcom is currently 60% owned by AVZ, Cominiere 25%, and Dathomir Mining Resources 15%.

And if Zijin wins the court fight, AVZ would be left with a 36% interest, Suzhou 24%, Jin Cheng 15%, Dathomir 15%, and the DROC government 10%.

Complicating matters, Suzhou is already AVZ’s largest shareholder with a 7.29% stake, while HSBC Custody Nominees owns 6.37%, and Chinese Huayou International Mining 6.27%.

In addition, AVZ has offtake agreements signed with three Chinese lithium processors for ‘over 540kt of SC6 annually, a combined total of ~80% of early production.’

AVZ views ‘the challenges to ownership interests as a distraction and expect them to be resolved in the near-term with no negative impact.’ However, the miner could have a 36%, 51%, or 66% stake in Dathcom.

And until this is resolved, the AVZ Minerals share price will remain in no man’s land.

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