The curious case of AVZ, the Democratic Republic of Congo, and the largest lithium deposit on the planet

Tue, March 19, 2024 03:24

The legal battle (if it can be called that) concerning AVZ Minerals’ mega lithium deposit in the Democratic Republic of Congo (DRC) evokes images of the delirious Cantina bar scene in Star Wars.

You know, the one where all the characters have two heads, or three arms, or a long neck, or scales on their backs, or some other crazy deformity – and they all have an arsenal of weapons to wield.

And it is far from an exaggeration to suggest that the various players in the saga that besieged AVZ in its struggle to retain its incredible majority-owned Manono project would be right at home in this famous Star Wars Cantina.

The strange and wonderful array of characters assembled in the DRC with a wild eye fixed on AVZ’s brilliant Manono project is almost comical – or at least it could be if the grand prize wasn’t the largest accumulation of lithium on the planet.

This week, AVZ has accumulated a new series of favorable court rulings, she hopes, aimed at dispelling the bewildering unease she finds herself in at the center of her relationship with Manono. We’ll talk about that later, but first, a little background.

Manono now has a nearly biblical resource of 842 million tonnes containing 1.61 percent lithium oxide, 709 parts per million tin, and 37 ppm tantalum, and contains 13.52 million tonnes of lithium oxide. The project has two geographically distinct deposits that could be broadly described as the southern and northern zones.

The southern area houses the key part of the project known as the Roche Dure deposit, which contains an incredible 669 million tonne resource containing 1.61 percent lithium oxide, 690 ppm tin and 33 ppm tantalum for an overall total of 10.79 million tonnes of lithium oxide.

The northern zone contains the Carrière de l’Este, Malata and Kahungwe deposits, as well as the Colline Manono construction camp. The administrative center, central courtyard and central farm are also located in the northern part of the project.

Specifically, AVZ has already drilled a 173 million tonne resource at the Carrière de l’Este mine, grading 1.58 percent lithium oxide, 785 ppm tin, and 52 ppm tantalum. Were it not for the overshadowing of the large Roche Dure deposit in the south, the Carrière de l’Este resource would be revered in its own right as world-class.

AVZ has watched the second lithium boom come and go from the margins of the ASX, where it has been suspended since May 2022 as it sought to bring its lightsaber to the Cantina-like forces that had begun to encircle its gigantic lithium project.

To fully understand the current state of the legal dispute surrounding Manono, we must first take a closer look at Dathcom – the joint venture (JV) that owns the Manono project – and its curious group of shareholders.

Manono was originally 100 percent owned by Cominiere, a DRC government-owned entity created to give the government exposure to the mining sector. A few years ago, Cominiere struck a deal with the fast-talking Chinese businessman Cong Mao Huai, known in Congo as Simon Cong. Cong, who has lived in the DRC for years, has a colorful and controversial past and is involved in numerous ventures.

As part of the agreement with Cominiere, Cong’s Dathomir company secured an option to acquire 70 percent of Manono by doing certain things – including paying an “entry fee” of US$6 million (AU$9.15 million), working on the project, producing a definitive feasibility study (DFS) and more.

Not wanting to put its hand in its own pocket, Cong – through Dathomir – sold its paper contract with Cominiere to AVZ, listed on the ASX, in January 2017. Or at least the majority of it.

Dathomir de Cong would retain the rights to 10 percent of Manono, and AVZ would have the right to acquire 60 percent by assuming the majority of its obligations under the agreement with Cominiere. AVZ would also reimburse Cong approximately $1.4 million (A$2.14 million) for prior expenses and issue him 240 million shares of the company.

AVZ then fulfilled its obligations and a three-way joint venture was created, with AVZ holding 60 percent of Dathcom (the owner of Manono), Dathomir de Cong getting recognition for its 10 percent free transport and Cominiere retaining the remaining 30 percent.

A shareholders’ agreement was concluded between the parties, giving AVZ the first right of refusal on any subsequent sale of Dathcom shares by minority shareholders, Dathomir or Cominiere – a right that AVZ decided not to exercise once when Cominiere subsequently sold 5 percent of its 30 percent stake to Dathomir, bringing the stake in Dathcom at that point to 60 percent for AVZ, 15 percent for Dathomir and 25 percent for Cominiere.

As is normal in shareholders’ agreements, the parties to the JV determined that in the event of a dispute, an agreed arbitrator would be appointed and in this case, the International Court of Arbitration of the International Chamber of Commerce in Paris (ICC) was chosen.

With an eye on the potentially massive investments each joint venture partner would need to make to build the Manono mine, Cong then sought to sell its 15% stake in Dathcom to AVZ. Two sale agreements were reached and signed – one for 5 percent signed in 2019 by Dathomir and one for the remaining 10 percent signed in 2020.

Both agreements required a separate, non-refundable deposit of US$500,000 (AU$762,640), which AVZ paid. They could then be adopted at AVZ’s discretion after payment of an additional US$20 million (AU$30.5 million – US$5 million (AU$7.62 million) for the 2019 agreement for the 5 percent and an additional US$15 million (AU$22.88 million) for the 2020 agreement and the additional 10 percent.

In total, AVZ would pay $21 million (AU$32 million) to acquire an additional 15 percent stake in the project from Dathomir, and Dathcom’s shareholding would then stand at 75 percent for AVZ and 25 percent for Cominiere. The share transfer documents were signed by the parties and held in escrow by a law firm in the DRC pending the final payment of $20 million by AVZ, which was subsequently made.

In April 2020, AVZ filed a Disclosure Statement (DSF) on the Manono project, which showed a Herculean net present value (NPV) of $1 billion (A$1.54 billion) after tax. By 2021, the project was beginning to gain international attention from several parties looking to get involved. AVZ claims that Cong subsequently had serious second thoughts as the seller, given that he had previously signed binding agreements to sell 15 percent of the project to AVZ for $21 million, for a total project value of $140 million (A$213.5 million).

In May 2021, Cong wrote to AVZ claiming to be canceling the sale of Dathomir’s 15% stake in Dathcom, citing the need for a valuation. AVZ stated that a valuation was not a precondition for the 2019 and 2020 share purchase agreements and made the final payment of US$20 million to Dathomir in August 2021, before the deadline.

Dathcom, headed by AVZ’s technical director, Graeme Johnston, then filed the signed transfer documents with the registrar of the RCCM, the official public register of shares in the DRC. A new share certificate showing AVZ’s 75 percent stake was produced… and that’s when things started to get a little crazy.

In an almost comical move, Cong returned the $20 million to AVZ’s bank account. AVZ then sent it back, but this time the money was deposited into a lawyer’s escrow account (in accordance with a court order obtained by AVZ) and Cong was asked to pick it up – which he did not do.

Cong then attempted to claim that the new share certificate issued by the RCCM was a forgery and, perhaps inexplicably, he managed to convince a DRC criminal court of his allegations. Perhaps even more inexplicably, the court sided with Cong and Dathomir and sentenced Johnston and the employee responsible for creating the new share certificates to three years and one year in prison, respectively—although, fortunately, the employee’s sentence was suspended.

And the sting in the tail… believe it or not… was a $50 million US (76.26 million AU) fine payable by Dathcom, presumably to Cong. The fine was later reduced to $25 million US (38.13 million AU) on appeal, then suspended pending a further appeal by AVZ to the Supreme Court.

The court also ordered the destruction of the new share certificate attesting to AVZ’s 75 percent stake. Fortunately, Johnston had already returned to Perth due to COVID and likely has no intention of ever returning to the DRC.

AVZ says the process was a farce. Neither Dathcom, nor Johnston, nor AVZ were notified of the lawsuit, and none of them appeared in court to present a case. Further highlighting the farcical nature of the proceedings, AVZ claims that neither Dathcom nor Johnston were ever formally informed of the decision.

AVZ asserts that the new share certificate was indeed valid because it resulted from transfer agreements signed by Dathomir that were duly filed after the final $20 million payment was made to the escrow account accessible by Cong.

Cong then pressed the nuclear button and launched legal action to liquidate Dathcom, citing violations of the joint venture agreement – ​​violations that AVZ claims are nonexistent. Cong’s decision to liquidate Dathcom is curious, given that his Dathomir claims to own 15 percent of it.

In any case, AVZ claims that Cong violated the shareholders’ agreement and Dathcom’s articles of association by not bringing the dispute before the ICC – the agreed determination body in the event of a dispute between shareholders.

AVZ then initiated proceedings before the ICC to prevent Cong from liquidating Dathcom and to ratify its purchase of Dathomir’s 15 percent stake in Dathcom. These proceedings are still ongoing, and AVZ states that it will use any favorable outcome from the ICC to try to overturn the DRC criminal court’s ruling against Dathcom and Johnston.

As in all great epics, there is usually more than one dark force at play, and this is certainly the case in this epic saga. Just as AVZ metaphorically barricaded the front gate against Cong and Dathomir, his other minority joint venture partner, Cominiere, was also gathering its forces at the back gate.

While the conflict with Cong continued, Cominiere was quietly trying to cede 15 percent of its 25 percent stake in Dathcom to Chinese forces without giving AVZ its first right of refusal to purchase those shares, in accordance with the Dathcom shareholders’ agreement.

Enter the Chinese giant Zijin Mining and its subsidiary Jin Cheng Mining Company. The wealthy Jin Cheng (read Zijin here) paid 33.4 million US dollars (50.94 million Australian dollars) to Cominiere and then claimed 15% of Dathcom – and by extension, 15% of the Manono lithium project.

AVZ then appealed to the ICC to obtain a ruling that Cominiere had breached Dathcom’s shareholders’ agreement by denying AVZ its right of first refusal on the purchase of these shares and that they were invalid.

After receiving the money from Jin Cheng, Cominiere then very generously allocated US$6.8 million (AU$10.37 million) out of the US$33.4 million for  “operating needs (including commissions, fees and exceptional remuneration of all those who would otherwise have contributed to the transaction).”

It would appear that it was payday for everyone present at the Cantina bar.

This little gem only came to light when the DRC government’s Inspectorate General of Finance (yes, it has one) launched an investigation into Cominière. The IGF, as it’s known, was tasked with determining whether Cominière’s actions in connection with the alleged sale of Dathcom shares to Zijin’s subsidiary, Jin Cheng, were appropriate and whether Cominière’s recent conduct had been legal, among other things.

It is best to read this IGF report with a glass of wine and a good meal.

Among its various findings is the determination that Cominiere acted in violation of its statutes, in violation of the DRC mining code, and that the sale of shares to Jin Cheng contained certain “irregularities.” Oh yes, and the IGF also found that the $6.8 million payment to the crowd at the Cantina bar for expenses and other items related to the share sale had been “improperly allocated.”

The IGF report is noteworthy because it sheds light on Cominiere and its relationship with the DRC government. Even though, technically, Cominiere is an instrument of the DRC government, the IGF report suggests they may not be entirely aligned, which bodes well for AVZ’s eventual objective of obtaining a mining permit from the DRC government for Manono.

In particular, the alleged sale of Cominiere shares to Jin Cheng for $33.4 million, or 15 percent of Manono, valued 100 percent of the project at just over $220 million (A$335.56 million) – which would be fine if AVZ and Dathcom had not yet presented a DFS showing the project’s after-tax NPV at just over US$1 billion.

Clearly, the Force is with Jin Cheng, who seems to have used an old Jedi trick to convince Cominiere of the paltry $220 million valuation for the project. Incidentally, it’s hard to imagine any of the Cantina bar patrons returning the $6.8 million in fees and other expenses if the ICC decides that Cominiere’s sale of those shares to Jin Cheng was invalid—which it sort of did this week. But more on that later.

Cominere then personally pressed the nuclear button to destroy the Dathcom mothership. Somehow, Cominere managed to convince a DRC court that the Dathcom joint venture had been dissolved and that, as the original owner of the Manono buildings, they should be returned to Cominere.

AVZ asserts that it is impossible for the Dathcom joint venture to have ever been dissolved and that Cominiere has no right to terminate it. In what appears to be a worrying trend, AVZ and Dathcom were once again not involved in Cominiere’s lawsuit – nor even informed of it.

Nevertheless, the court complacently claimed to award all of Manono’s leases to Cominiere and the forces of the Cantina bar were once again at their peak – or so they thought.

Amid the haze of celebrations, Cominiere’s well-armed ally and Jin Cheng’s parent company, Zijin (through one of its subsidiaries), was awarded the northern concessions containing the fabulous 173 million-ton lithium resource. It would later be revealed that a Zijin subsidiary held only 61 percent of the northern leases, with Cominiere retaining the remainder.

But the most curious thing is that in October of last year, Zijin revealed that the $33.4 million payment made to Cominiere for 15 percent of Dathcom would be “transferred” to the JV vehicle that claims to own the northern part of Manono as payment for Zijin’s 61 percent stake in that joint venture.

But what about Zijin’s claim that he paid $33.4 million for 15 percent of Dathcom? Did Zijin see what was written on the wall and change his mind?

Perhaps the force is also with Zijin and he somehow managed to foresee the stunning ICC decision announced by AVZ to the market this week which put a damper on Cominiere’s alleged sale of 15 percent of Dathcom to Jin Cheng – well, almost.

On March 15, the ICC International Court of Arbitration decided that it would not hear a case brought by Jin Cheng.

This case alleged that AVZ (through its subsidiary AVZ International) was abusing its majority stake in Dathcom by refusing to acknowledge Jin Cheng’s purported shareholding in Dathcom. The ICC refused to hear the complaint on the grounds that Jin Cheng did not appear in Dathcom’s share register and therefore had no recourse before the ICC, a dispute resolution body reserved for Dathcom’s “shareholders.”

Perhaps more specifically, the ICC made Jin Cheng bear AVZ’s considerable legal costs, ordering him to reimburse AVZ’s subsidiary US$75,000 (AU$114,400) for its arbitration costs, AU$813,474 for defense costs, and over €3 million (AU$5 million) for other “legal costs.”

AVZ indicates that the ICC will soon deal with its own substantive allegation that Cominiere violated its right of first refusal to buy the shares that it claims were sold to Jin Cheng, in addition to other unsavory matters it alleges concerning the purported sale of those shares.

Stay tuned for the second episode of this battle.

Meanwhile, AVZ has opened a second legal front in its epic fight to retain Manono. Enter the ICSID, or International Center for Settlement of Investment Disputes.

The ICSID (not to be confused with the ICC) is a court-like institution in Washington, DC, affiliated with the World Bank. It was established in 1966 to settle investment disputes between states and foreign nationals of other states and is enshrined in most international investment treaties as well as numerous laws and investment contracts. It is important to note that the DRC has been a member state of the ICSID since 1970.

In June of last year, AVZ launched an action with the ICSID to demand that the DRC government issue Dathcom a mining permit for Manono – thus refuting Cominiere’s claim that it and Zijin have already shared the northern and southern benefits of the project.

And now, it seems that the wheels of justice could finally turn for AVZ on its second front. In January of this year, the ICSID tribunal issued a provisional government ruling ordering the DRC to reinstate the southern part of Manono, which contains the enormous 669 million-ton lithium resource, in the name of Dathcom, of which AVZ still claims to own 75 percent.

The decision is fully enforceable and constitutes a provisional decision allowing the entire arbitration process to proceed, with the final decision to be rendered when the ICSID has been able to hear the arguments of all parties.

The decision does not include the northern part of Manono, which contains 173 million tons of lithium resources, nor a large portion of the project’s existing infrastructure. This part of the project was reportedly awarded to the Zijin-Cominiere partnership, and the ICSID was reluctant to take on this part provisionally, given the involvement of a third party (Zijin). However, it will ultimately remain involved.

AVZ’s interim victory follows another favorable ruling in December of last year, this time by the ICC, which ordered the Dathomir Cong to put its stick back in its backpack – at least for the time being. The ICC issued an emergency injunction requiring the Cong to drop its legal action to liquidate Dathcom until the substantive issues between the parties can be heard and resolved.

In May of last year, the ICC also dealt Cominiere a blow by preventing him from taking any further action or legal proceedings related to his alleged termination of the Dathcom joint venture until the substantive issues between the parties could be heard by the ICC. A penalty of €50,000 (AU$83,000) per day was imposed for good measure.

Fast forward to November of last year and AVZ was back before the ICC, arguing that Cominiere had ignored its orders and that an additional (and further) daily fine of €50,000 had been imposed, making things decidedly uncomfortable for Cominiere. That fine now amounts to more than €45 million (AU$74.74 million).

It is interesting to note that at the November hearing, the ICC determined that Cominere had “concealed” the fact that she had sought and obtained a court ruling in the DRC concerning the alleged dissolution of Dathcom.

The great tragedy of this epic series is that AVZ and Dathcom have found an intergalactic ally with sufficient resources to finance the entire equity portion of the investments needed to build the Manono mine. The Chinese company Suzhou CATH Energy Technologies (CATH) is partly owned by the world’s most prolific lithium battery manufacturer, Contemporary Amperex Technology (CATL), and has a genuine interest in building a mine and producing lithium.

As early as September 2021, CATH agreed to invest some US$240 million (AU$366.7 million) to build the plant in exchange for 24 percent of the project, ultimately reducing AVZ’s 75 percent share to 51 percent, while still maintaining control.

This would likely have covered AVZ’s share of equity needed to build the project, which would have crowned the DRC as the country with the world’s largest lithium mine and significantly elevated its status as a global mining jurisdiction.

AVZ asserts that CATH remains highly engaged and that both are now counting on favourable final outcomes from both the ICC and the ICISD – or alternatively, from the DRC government, which could simply bring Cong and Cominiere to their knees and issue a mining permit directly to AVZ.

Whatever the outcome, the view from the cheap seats on the sidelines of this big blockbuster will be good.

Will force prevail? Will the characters from the Cantina bar melt away?

Or will the Republic come to the rescue of this biblically significant lithium resource and allow it to safely move into production?

AVZ is gathering its forces and now has a bag of favorable court decisions to its credit as it prepares for what will undoubtedly be an epic final episode that could well see the world’s largest lithium deposit catapulted into production – and who knows, perhaps this will coincide perfectly with the inevitable third lithium boom.