The curious case of AVZ, the Congo and the biggest lithium deposit on the planet

The legal fight, (if you can call it that), over AVZ Minerals’ mega-lithium deposit in the Democratic Republic of Congo (DRC) conjures up images of the whacky Cantina bar scene in Star Wars.

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

And it is far from a stretch to suggest that the various players in the saga that has beset AVZ in its fight to hold onto its amazing majority-owned Manono project would be right at home in that famous Star Wars Cantina.

The weird and wonderful array of characters assembled in the DRC with a wild eye fixated on AVZ’s glittering Manono project is almost comical – or at least it might be if the grand prize was not the biggest accumulation of lithium on the planet.

This week, AVZ racked up another of what it hopes will be a long line of favourable court rulings seeking to unwind the confounding malaise it has found itself at the centre of in relation to Manono. More on that later, but firstly, a bit of context.

Manono now sports an almost biblical-scale resource of 842 million tonnes going an impressive 1.61 per cent lithium oxide, 709 parts per million tin and 37ppm tantalum and contains 13.52 million tonnes of lithium oxide. The project has two geographically distinct deposits that might broadly be described as the southern and northern areas.

The southern area houses the key part of the project known as the Roche Dure deposit that sports an incredible 669-million-tonne resource going 1.61 per cent lithium oxide, 690ppm tin and 33ppm tantalum for a grand total of 10.79 million tonnes of lithium oxide.

The northern area contains the Carriere de l’Este, Malata and Kahungwe deposits and the Colline Manono construction camp. The administrative centre, core yard and core farm are also within the northern portion of the project.

Notably, AVZ has already drilled out a 173-million-tonne resource at Carriere de l’Este grading 1.58 per cent lithium oxide, 785ppm tin and 52ppm tantalum. Were it not for the long shadow cast by the crazy-big Roche Dure deposit in the south, the Carriere de l’Este resource would be revered in its own right as world-class.

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

To fully understand the state of play with regard to the current legal dispute over Manono, we must first take a closer look at Dathcom – the joint venture (JV) vehicle that owns the Manono project – and its curious bunch of shareholders.

Manono was originally 100 per cent-owned by Cominiere, a DRC Government-owned instrumentality set up to give the government exposure to mining. Some years ago, Cominiere struck a deal with fast-talking Chinese man Cong Mao Huai, known in the Congo as Simon Cong. Cong, who has been in the DRC for years, has a colourful and controversial history and has his finger in a lot of pies.

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

Not willing to put his hand in his own pocket, Cong – through Dathomir – offloaded his paper deal with Cominiere to the ASX-listed AVZ in January 2017. Or at least most of it.

Cong’s Dathomir would retain the rights to 10 per cent of Manono and AVZ would have the right to earn 60 per cent of it by taking over the majority of his obligations under the deal with Cominiere. AVZ would also reimburse Cong some US$1.4 million (AU$2.14 million) for prior expenses and also issue him with 240 million of the company’s shares.

AVZ subsequently performed its obligations and a three-way JV was formed, with AVZ holding 60 per cent of Dathcom (the owner of Manono), Cong’s Dathomir getting its free-carried 10 per cent recognised and Cominiere holding onto the remaining 30 per cent.

A shareholders agreement was executed between the parties that gave AVZ the first right of refusal over any subsequent sale of shares in Dathcom by minority shareholders, Dathomir or Cominiere – a right that AVZ decided not to take up on one occasion when Cominiere subsequently sold 5 per cent of its 30 per cent to Dathomir, taking the shareholding in Dathcom at that stage to 60 per cent for AVZ, 15 per cent for Dathomir and 25 per cent for Cominiere.

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

With one eye on the potentially massive capex figure each JV partner would need to kick in to actually build the Manono mine, Cong subsequently sought to offload his 15 per cent of Dathcom to AVZ. Two sale agreements were struck and signed – one for 5 per cent signed in 2019 by Dathomir and one for the remaining 10 per cent signed in 2020.

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

In total, AVZ would pay US$21 million (AU$32 million) to pick up another 15 per cent of the project from Dathomir and the share register for Dathcom would then sit at 75 per cent for AVZ and 25 per cent for Cominiere. Share transfer documents were signed by the parties and held in escrow with a DRC law firm pending the final US$20 million payment by AVZ, which was later paid.

In April 2020, AVZ tabled a DFS on the Manono project that showed a herculean $US1 billion (AU$1.54 billion) post-tax net present value (NPV). By 2021 the project was starting to gain international notoriety with a number of parties looking to get in on the action. AVZ says Cong then got a bad case of seller’s remorse, given he had previously signed binding agreements to sell 15 per cent of the project to AVZ for US$21 million at a total project valuation of US$140 million (AU$213.5 million).

In May 2021, Cong wrote to AVZ purporting to cancel the sale of Dathomir’s 15 per cent stake in Dathcom, citing the need for a valuation. AVZ says a valuation was not a pre-condition of the 2019 and 2020 share sale agreements and proceeded to make the final US$20m payment to Dathomir in August 2021, ahead of the deadline.

Dathcom, managed by AVZ’s technical director Graeme Johnston, subsequently lodged the signed transfer documents with the registrar of the RCCM – the official public share register in the DRC. A new share certificate showing AVZ’s 75 per cent holding was produced … and that’s when things started to get a little crazy.

In an almost comical move, Cong dumped the US$20m back into AVZ’s bank account. AVZ then sent it back again, but this time the money was lodged in a lawyer’s escrow account (pursuant to a court order obtained by AVZ) and Cong was told to go get it – which he didn’t.

Cong then attempted to claim the new share certificate issued by the RCCM was a forgery and perhaps inexplicably, managed to convince a criminal court in the DRC of his claim. Perhaps even more inexplicably, the court found in favour of Cong and Dathomir and sentenced Johnston and the clerk responsible for creating new share certificates to three years’ jail and one year in jail, respectively – although happily, the clerk had his jail term suspended.

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

The court also ordered the new share certificate showing AVZ’s 75 per cent shareholding to be destroyed. Thankfully, Johnston had already hightailed it back to Perth because of COVID and presumably has no intention of ever returning to the DRC.

AVZ says the process was a farce. Neither Dathcom, Johnston or AVZ were notified of the legal action and none were in court to put a case forward. Further highlighting the farcical nature of the proceedings, AVZ says neither Dathcom or Johnston has ever been formally notified of the ruling.

AVZ says the new share certificate was indeed valid as it arose from signed transfer agreements from Dathomir that were duly lodged after the payment of the final US$20m into the escrow account that was accessible by Cong.

Cong then hit the nuclear button and launched court action to wind up Dathcom, citing breaches of the JV agreement – breaches that AVZ says are non-existent. Cong’s move to wind up Dathcom is curious, given his Dathomir purports to own 15 per cent of it.

In any case, AVZ says Cong has breached the Dathcom shareholders agreement and articles of association by not taking the dispute to the ICC – the agreed determining body in the event of a shareholders dispute.

AVZ subsequently began action before the ICC to successfully restrain Cong from winding up Dathcom and to ratify its purchase of Dathomir’s 15 percent of Dathcom. That action is still afoot and AVZ says it will use any favourable outcome from the ICC to seek to reverse the DRC criminal court ruling against Dathcom and Johnston.

As with all great epics, there is usually more than just one dark force and that is certainly the case in this epic saga. Just as AVZ was metaphorically barricading the front gate against Cong and Dathomir, its other minority JV partner, Cominiere, was also amassing its forces at the back gate.

While the dispute with Cong was going on, Cominiere was quietly attempting to offload 15 per cent of its 25 per cent holding in Dathcom to Chinese forces without giving AVZ its first right of refusal to buy those shares as per the Dathcom shareholders agreement.

Enter giant Chinese group Zijin Mining and its subsidiary, Jin Cheng Mining Company. The deep-pocketed Jin Cheng (read Zijin here) paid US$33.4 million (AU$50.94 million) to Cominiere and subsequently claimed 15 per cent of Dathcom – and by extension, 15 per cent of the Manono lithium project.

AVZ then beat a path back to the ICC seeking a ruling that Cominiere had breached the Dathcom shareholder agreement by denying AVZ its pre-emptive right to buy those shares and that they were invalid.

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

It seems it was payday for all present at the Cantina bar.

That little gem only saw the light of day when the DRC Government’s own General Inspectorate of Finance (yes, it does have one), launched an investigation into Cominiere. The IGF, as it is known, was tasked to determine whether or not Cominiere’s actions in relation to the purported sale of the Dathcom shares to the Zijin subsidiary Jin Cheng was proper and appropriate and whether Cominiere’s recent conduct had been legal, among other things.

That IGF report is best read with a glass of wine and a good meal.

Within its various findings is a determination that Cominiere acted in violation of its articles of association, in violation of the DRC mining code and that the share sale to Jin Cheng contained some “irregularities”. Oh yes, and the IGF also found the US$6.8 million payment to the crowd at the Cantina bar for fees and other things in relation to the share sale was “inappropriately allocated”.

The IGF report is notable as it shines a light on Cominiere and its relationship to the DRC Government. While technically, Cominiere is a DRC Government instrumentality, the IGF report suggests they may not quite be joined at the hip, which augers well for AVZ’s eventual goal of obtaining a mining licence from the DRC Government for Manono.

Notably, Cominiere’s purported US$33.4m share sale to Jin Cheng, effectively for 15 per cent of Manono, valued 100 per cent of the project at just a touch more than US$220 million (AU$335.56 million) – which would be fine if AVZ and Dathcom had not already tabled a DFS showing the project’s post-tax NPV at just over a billion US dollars.

Clearly, the force is with Jin Cheng, who appears to have used an old Jedi mind trick to convince Cominiere of the miserly US$220 million valuation for the project. As an aside, it is hard to envisage any of the Cantina bar crowd giving back the US$6.8 million in fees and other things if the ICC rules the sale of those shares by Cominiere to Jin Cheng was invalid – which it sort of did this week – but more on that later.

Cominiere then hit the nuclear button itself with a view to blowing up the Dathcom mothership. Somehow, Cominere managed to convince a DRC court that the Dathcom JV had been disbanded and that as the original owner of the Manono tenements, they should be returned to Cominiere.

AVZ says there is no way the Dathcom JV was ever disbanded and Cominiere is not entitled to terminate it. In what appears to be a disturbing trend, once again AVZ and Dathcom were not made party to Cominiere’s court case – or even told about it.

Nonetheless, the court compliantly purported to allocate the entirety of the Manono leases back to Cominiere and the Cantina bar forces were once again on a high – or so they thought.

In the fog of the celebrations, Cominiere’s well-armed ally and parent company to Jin Cheng, Zijin (via one of its subsidiaries), was allocated the northern leases that contain the fabulous 173-million-tonne lithium resource. It would later be revealed that a Zijin subsidiary would only hold 61 per cent of the northern leases and Cominiere would have the rest.

Most curiously however, in October last year, Zijin revealed that the US$33.4 million payment it made to Cominiere for 15 per cent of Dathcom would be “transferred” to the JV vehicle that purports to hold the northern portion of Manono as payment for Zijin’s 61 per cent of that JV.

But what of Zijin’s claim to have paid the $33.4m for 15 per cent of Dathcom? Did Zijin see the writing on the wall and change tack?

Perhaps the force is also with Zijin and it managed to somehow foresee the stunning ICC ruling announced by AVZ to the market this week that drove a sword through Cominiere’s purported sale of 15 per cent of Dathcom to Jin Cheng – well almost.

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

That case alleged AVZ (through its subsidiary AVZ International) was abusing its majority shareholding in Dathcom by refusing to recognise Jin Cheng’s purported shareholding in Dathcom. The ICC refused to hear the claim on the basis that Jin Cheng did not appear on the Dathcom share register and therefore had no recourse to the ICC, a dispute resolution body for “shareholders” of Dathcom only.

Perhaps more notably, the ICC saddled up Jin Cheng with AVZ’s not insubstantial legal costs, ordering it to reimburse AVZ’s subsidiary US$75,000 (AU$114,400) in respect of its arbitration costs, AU$813,474 for defence costs and more than €3 million (AU$5 million) for other “legal costs”.

AVZ says the ICC will shortly deal with its own substantive claim that Cominiere had breached its pre-emptive right to buy the shares it says were sold to Jin Cheng, in addition to other unsavoury matters it alleges around the purported sale of those shares.

Stay tuned for episode two in that battle.

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

The ICSID (not to be confused with the ICC) is a court of sorts in Washington DC that hangs off the side of the World Bank. It was established in 1966 to settle investment disputes between States and foreign nationals from other States and is embedded in most international investment treaties and in many investment laws and contracts. Importantly, the DRC has been an ICSID member State since 1970.

In June last year, AVZ launched an action in the ICSID to require the DRC Government to issue Dathcom with a mining license for Manono – effectively negating Cominiere’s claim that it and Zijin have already split the north and south spoils of the project between themselves.

And now, it seems the big wheels of justice might be finally turning for AVZ on its second front. In January this year, the ICSID tribunal made an interim ruling ordering the DRC Government to reinstate the southern portion of Manono that contains the huge 669-million-tonne lithium resource in the name of Dathcom, of which AVZ says it still owns 75 per cent.

The ruling is fully enforceable and is an interim one to allow the full arbitral process to be completed, with a final ruling to be made when the ICSID has been able to hear the arguments from all sides.

The ruling did not include the northern portion of Manono that contains the 173-million-tonne lithium resource and a lot of the existing project infrastructure. That part of the project was purportedly dealt out to the Zijin-Cominiere pairing and the ICSID was loathe to deal with that portion on an interim basis, given the third-party (Zijin) involvement. However, it will still do so in the final analysis.

The interim win for AVZ comes on the back of another favourable ruling in December last year, this time from the ICC, which ordered Dathomir’s Cong to put his baton back in his knapsack – at least for now. The ICC issued an emergency injunction requiring Cong to discontinue his court action to wind up Dathcom until the substantive issues between the parties can be heard and determined.

Back in May last year, the ICC also delivered a slap for Cominiere by preventing it from taking any further steps or legal action in relation to its purported termination of the Dathcom JV 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 last year and AVZ was back at the ICC again, arguing Cominiere had ignored its orders and a further (and additional) €50,000 daily penalty was slapped down, now making things decidedly uncomfortable for Cominiere. That fine is now sitting at more than €45 million ($AU74.74 million).

Interestingly, during the November hearing, the ICC determined Cominiere had “concealed” the fact that it had sought and obtained a court ruling in the DRC in respect of the purported dissolution of Dathcom.

The great tragedy of this epic series is that AVZ and Dathcom have secured an intergalactic ally with deep-enough pockets to fund the entire equity portion of the capex required to build the Manono mine. Chinese firm, Suzhou CATH Energy Technologies (CATH), is part-owned by the most prolific lithium battery maker in the world, Contemporary Amperex Technology (CATL), and has a real interest in actually building a mine and producing lithium.

As far back as September 2021, CATH agreed to invest some US$240 million (AU$366.7 million) to build the plant in return for 24 per cent of the project, eventually taking AVZ’s 75 per cent share down to a still-controlling 51 per cent.

That would likely have covered AVZ’s equity portion required to actually get the project built, which would have crowned the DRC as the country with the biggest lithium mine in the world and lifted its status immensely as a global mining jurisdiction.

AVZ says CATH is still very much engaged and both are now relying on favourable final outcomes from both the ICC and the ICISD – or alternatively, the DRC Government, which could just knee-cap Cong and Cominiere and issue a mining license direct to AVZ.

Whatever the outcome, the view from the cheap seats on the sidelines of this grand blockbuster is going to be good.

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

Or will the Republic come to the rescue of this biblical-scale lithium resource and grant it safe passage into production?

AVZ is gathering its forces well and now has a grab bag of favourable court rulings in its slingshot as it prepares for what will no doubt be an epic final episode that just might see the world’s biggest lithium deposit catapulted into production – and who knows, maybe it will coincide perfectly with the inevitable third lithium boom.

Is your ASX-listed company doing something interesting? Contact: matt.birney@wanews.com.au