Sovereign Metals: six-month review

...and welcome to this special overview of Sovereign Metals (LON: SVML), one of our top picks for H2 2024* — and arguably one of the best growth stocks in the junior resource space.

Sovereign controls the Kasiya deposit in Malawi — which is the largest rutile and second-largest natural flake graphite deposit in the world. I went into significant detail on the technical details late last year, including the already-known PFS. Key details to consider include:

• Current MRE: 17.9Mt rutile @ 1.01% and 24.4 MT graphite @ 1.32%
• $1,605 million after tax Net Present Value

These remain current. But if you are new to the story, I urge you to scroll down to the original piece as it is an excellent primer, easily accessible to SVML novitiates.

There has been a plethora of news since we published this initial piece six months ago; the stock has risen from 22p when we first covered the potential in mid-December 2023 to circa 35p today. It’s nice to see a winner — and now it’s time to appraise why the share price is reacting so positively, and where it could go next.

Let’s dive in.

* For Australians, H2 in this article means a UK H2, which for you will be H1 (and where we say H1, it’s your H2).

After the January and February appointments, late February saw Sovereign begin a conservation farming program in Malawi as part of its sustainability initiatives — with local farmers to be trained in sustainable farming techniques to increase their maize crop yield, protect the soil from erosion and degradation, and improve their long term food security.

For context, the World Food Program considers that up to 5.4 million people in Malawi are subject to food insecurity, with many Malawians wholly dependent on subsistence agriculture. Maize makes up two-thirds of the national calorie intake, with 90% of farming households producing maize, and devoting over 70% of their land to growing it. 

On 15 April, Sovereign announced that 90 farmer participants were onboarded, with a scale-up to 300 planned for the 2024 planting season. Via a cob count and sizing estimate, yields to date are conservatively estimated at 3.2 tonnes per hectare, triple the average conventional crop yields. 

And this success was despite the El Niño weather phenomenon, which is expected to sink Malawi's crop yields by 22.5% lower than the average this year.

The program ultimately aims to provide a model where successful smallholder farmers can produce enough crops not only to feed themselves, but also to generate sustainable household income. SVML 

MD Frank Eagar notes that ‘The incredible improvements in expected maize yields is beyond expectations and is another example of the positive impacts the Kasiya Project will have on our local communities. The 90 farmers in the Program comprise 50% women and 10% vulnerable people.’

This will also be sustainable for the longer term — the system aims to protect soil from erosion and degradation as well as increasing crop yields, through (a) minimum soil disturbance, such as no-till farming, (b) maintenance of a permanent soil cover, such as cover crops or crop residues and (c) diversification of plant species, such as crop rotation.

There have been various updates on the graphite, but the key one to consider came in on 15 May 2024, where Sovereign announced that its downstream test work conducted by consultancy ProGraphite GmbH in Germany had demonstrated Kasiya held high quality graphite for lithium-ion batteries. 

It successfully produced spherical purified graphite (SPG) with ‘world-leading specifications,’ with exceptionally low levels of residual impurities achieving an exceptional 99.99% loss-on-ignition (LOI). For perspective, loss on ignition is a key metric used to assess the purity of graphite for lithium-ion batteries, referring to the mass percentage of material that burns off when heated in a controlled atmosphere. 

For the best battery performance, graphite used in an anode should have minimal impurities. This is because impurities can hinder the movement of lithium ions and also reduce battery capacity. 

LOI values are correlated to the presence of impurities like moisture, hydrocarbons, or residual binders from the processing steps — and while graphite itself is relatively stable, too many impurities can become a problem at elevated temperatures. A low LOI helps ensure a battery anode's stability because fewer impurities reduce the risk of exothermic reactions during thermal runaway scenarios (EV battery fires).

SPG from Kasiya demonstrated all the standard industry standards with spheronisation yields of up to 68%, and with further scope to optimise in future testwork. 

For context, spherical graphite is required for lithium-ion batteries as they pack together more densely, meaning a higher density electrode and greater capacity battery — performance is also better because current flow with SPG is more uniform — and spheres are also easier to coat and process during battery manufacturing.

This SPG material derived from Kasiya graphite is now undergoing coating and electrochemical testing to characterise CSPG active anode material for lithium-ion batteries — and provide the data needed for offtake discussions.

The SPG was purified with commercially proven acids purification and with a LOI purity of 99.99%, assays on key trace elements showed very low levels. Further, the low Si and Ca results highlighted that Kasiya graphite is well-suited to single stage acids purification. 

For perspective, aggressive dosing in acids purification can result in elevated Ca levels due to precipitation of CaF2, which forces multiple stages of purification to reduce both Si and Ca impurities — which costs more money. 

Eagar noted that ‘These results clearly demonstrate that Kasiya has the potential to disrupt the China dominated graphite supply chain as a long term, secure source of high quality graphite ex-China. We believe Kasiya graphite will have industry low operating costs and is also one of the largest graphite resources globally holding a 

significant advantage over its graphite peers.’

For perspective, four weeks ago the US announced a 25% tariff on natural and synthetic graphite anodes from China, despite Chinese production accounting for 97% of global anode output after decades of under-investment by the west.

It’s a familiar story — see also copper, lithium, and tungsten. If it’s a critical mineral, China is ten steps ahead and the west barely starting to play catch-up.

Of course, the big news came in during late May — when Sovereign announced plans to immediately start a pilot mining program at Kasiya as part of its wider ongoing optimisation study. Sovereign is excavating some 150,000 bench cubic metres of ore from a test pit over a three-month period using a combination of dry and hydraulic mining techniques over a 9.9-hectare site. 

Excavated material will be processed on-site and at Sovereign's own lab — but will also provide additional bulk samples for graphite product qualification. The test pit will then be backfilled, and multiple rehabilitation strategies will be implemented to demonstrate successful restoration of agricultural land (which is key to keeping the local population onside).

It’s worth noting how this is also further evidence of strong government ties and the benefits of the jurisdiction —all required approvals and community permissions for the pilot plant were obtained within just three months, including from the Malawi Environment Protection Authority, the National Water Resources Authority, the Ministry of Mines, and the local community.

If this were in Canada, we’d probably be waiting at least a year before someone even opened the application letter.

Eagar noted that ‘Advancing to a Pilot Phase is an important milestone for Kasiya…The successful permitting is a testament to the strong owner's team we have assembled. We are progressing Kasiya into a totally new phase of development. The scale and results from this phase will significantly enhance our knowledge base from the previous laboratory-based studies.’

The data gleaned will also help to prevent any unforeseeable potential issues when the real thing gets going — in addition to providing critical information for the upcoming Definitive Feasibility Study and shortening the time to its completion.

Objectives include:

• Optimising mining methods by constructing of a pilot-scale open pit close to the maximum depth of the current reserves at 20m.
• Scaling-up existing in-country processing capability by installing of commercial scale spirals to produce additional bulk samples for graphite product qualification.
• Optimising the tailings management and storage designs.
• Optimising land rehabilitation.

SVML plans the following activities:

• A test pit of 120m by 110m will be excavated to a depth of 20m, allowing optimisation of hydraulic and dry mining excavation methods.
• The excavated material will be temporarily stored in four stockpiles — all dry mining material, wet slimes (in a pond) and two sizes of sand fractions.
• The material will be placed back into the pit, and all areas will be graded.
• Sovereign will construct eight small rehabilitation demonstration pits covering a combined area of 100m by 130m. These will be used for water storage, excavated material storage, and the demonstration of multiple rehabilitation approaches.
• Four areas will be used as temporary laydown areas, offices, and associated infrastructure.
• Sovereign will undertake a series of stakeholder visits and consultations during the Pilot Phase.

In an update on 12 June, SVML noted that everything remains on schedule:

• A mobile fleet is currently constructing the test pit, water storage pond and ore stockpile.
• Site equipment is currently moving 5,000 cubic metres of earth daily. The fleet consists of four excavators, 20 trucks and a support fleet, including two bulldozers and a motor grader.
• A perimeter fence around the site has been erected to maintain the necessary health and safety standards. 
• The free-dig nature of soft saprolite ore has confirmed the ease of mining with no drilling or blasting required.
• Eight boreholes have been commissioned and are ready to supply the water storage pond.
• The temporary water storage pond is currently being excavated and will be sealed using natural clay from excavated material, minimising the use of conventional plastic lining.

Key contractors and consultants have also now been appointed across all major disciplines essential for the Pilot Plant:

• Mota Engil Group — to perform all excavation required for site establishment, the water storage pond, the test pit, seven rehabilitation pits, site closure and general rehabilitation of the site. Mota operates in 21 countries with 54,000 employees and is ranked among the world's largest construction companies.
• South Africa-based consultancy Fraser Alexander — to complete the hydraulic mining phase.
• Management solutions consultancy Epoch Resources — Backfill, storage and tailings management. It boasts a 25-year track record, including working for Randgold, Xstrata and Anglo American Platinum.
• International engineering company DRA Global Limited — to oversee and provide engineering and design services required during the Pilot Phase.

These contractors are also expected to work with SVML or RIO to build the real thing in the future.

Eagar commented ‘This Pilot Phase is a step-change for Kasiya and demonstrates our ability to execute in Malawi. The early works are progressing as planned: on schedule and within budget. We are very pleased with the progress and specifically how the mobile fleet is performing in the soft saprolite ore, confirming our understanding of how simple mining, with no drilling or blasting required, will contribute to low operating costs.’

And this pilot — as large as it seems — is perhaps 5-10% of the size of the anticipated mine. We’re on a different level here.

11.12.23

Sovereign Metals (LON: SVML, ASX: SVM) is perhaps not a household name on the FTSE AIM market. The rutile-graphite explorer is, however, well-known to ASX investors — having been listed down under for many years prior to its December 2021 UK listing.

The company launched on the London market on 14 December, issued its positive flagship scoping study a couple of days later — and then announced it had raised £1 million from UK investors for further exploration on the 22 December.

Of course, December 2021 was also when the Bank of England started increasing the base rate from a piddling 0.1% to the current 5.25%. This rapid tightening of monetary policy has hit most growth shares, and the stock fell from well above 30p to 23p by late February 2022. March then saw Sovereign soar to 45.5p by the end of the month, after some ‘spectacular’ exploratory results and signing an offtake Memorandum of Understanding with Hascor.

You could argue that getting this IPO away — even if just a dual listing — was a win for the company. The IPO market was pretty awful in 2022, and even worse in 2023. December 2021 was perhaps the last chance saloon prior to the hoped-for 2024 recovery, and the dual listing has perhaps been key to SVML’s share price stability in a market where others have fallen far more sharply.

But while Sovereign has made significant further progress since the IPO, its shares are nevertheless changing hands for just 22p today. There are various reasons for this slide — including the broader risk-averse market and wider investor awareness of the Lassonde Curve — but there is now excellent value to be found.

However, before we get to the meat of the investment case, it’s important to cover the usual caveats:

• This is not financial advice. Do your own research and make your own decisions.
• All investing carries risk.
• There are some important first steps to consider before investing in AIM shares, or in mining shares. Generically, these centre around developing financial resilience and diversification.

For balance, Sovereign — with a circa AU$250 million market capitalisation — is not a minnow and its flagship will in all likelihood be developed. But it’s also not BHP, an ASX 200 index tracking ETF, Microsoft, or gold. The investment thesis rests on hopes of significant growth and therefore there is, to an extent, a corresponding level of risk.

And I’m targeting much more than 11% with Sovereign Metals.

With that being said:

Let’s dive in.

The two critical minerals that Sovereign plans to extract are graphite and titanium. That’s good news. Both will be in significantly higher demand over the next decade.

Let’s start with graphite.

Graphite is often overlooked when compared to lithium, copper, and nickel. However, it’s just as essential to the green energy and EV revolution as its more popular cousins. And as it’s less covered, it’s probably worth giving a quick chemistry lesson.

Graphite is a form of carbon found either as crystal flakes or as a mass, and constitutes the third naturally occurring form of carbon, the others being coal and diamond. Graphite’s structure is unique as it works as an excellent electrical conductor, maintains strength at high temperatures, and is resistant to corrosion.

The non-metal is a core material in both the renewable energy and battery metal markets. For context, every EV requires circa 40-60kg of graphite, roughly 40 times more than the required lithium. Tesla CEO Elon Musk is on record arguing that lithium-ion batteries ‘should be called nickel-graphite’ for their relative weights.

Standard graphite must be made into spherical graphite if it is to be used in the anodes within lithium-ion batteries which act as the power source of EVS. This is done by refining flake graphite into ultra-high purity microscopic spheres.

Further, removing impurities within pre-processed graphite typically requires the use of hydrofluoric acid. The acid is effective, but very toxic and must be neutralised after use and disposed of safely. It’s worth noting that grinding the flakes into balls is electricity-intensive and therefore expensive.

This poses an ESG difficulty, though also an investing opportunity in the handful of companies are looking to streamline the process.

Like lithium, graphite is not traded on commodity exchanges, but is instead valued by averaging offtake agreements. This is because like lithium, graphite is typically non-fungible, and purity, size, crystallinity, and total processing costs all affect the final sale price. Spherical graphite commands a high price premium, costing more than three times as much as standard graphite. 

And graphite from rutile sources is the ultra-premium product, as I will discuss below.

Currently, the lithium-ion battery market accounts for circa 35% of global graphite supplies, but to meet the needs of current car manufacturer plans, the global supply needs to double in just five years. This is unlikely to be possible, especially as investors shy away from opening up new operations through the recession.

Benchmark Minerals data shows that the proportional cost of graphite within a li-ion battery stands at circa 15%; this means graphite company investors could stand to benefit from 15% of the growing EV market even if graphite prices remain static.

An important side note is the future potential of graphene. Graphene is a material developed from breaking graphite down into one-atom thick sheets of carbon and many predict it could become a world-changing material.

It’s the globe’s first 2D material, ten times lighter and 100x stronger than steel, is elastic, transparent, and can carry heat and conduct electricity better than copper. Its ductile properties are so exceptional that it comes close to superconductor levels, without needing to be either heated or cooled. As technological advances come, graphite/graphene supply could become ever more critical.

Like lithium, China controls much of the global graphite supply, by some accounts as much as 70%. Western countries are now attempting to develop their own mines and processing facilities but remain even further behind than with lithium.

And of course, as part of a tit-for-tat exchange whereby the US is banning the export of advanced semiconductors to China, while China bans critical minerals exports to the US to stop the country from making semiconductors (all part of the wider AI race), China has banned the export of most forms of graphite to the US.

This will light a fire under ex-China near-term graphite producers, including Sovereign but also other smaller picks such as Blencowe and GreenRoc, the former of which has already benefitted from US government funding. For context, the US gets roughly 33% of its graphite from China and has no domestic production.

But right now, graphite prices have artificially slumped. This is primarily due to Chinese EV subsidies — the country has played an excellent game — removing EV subsidies resulting in large corporate stockpiles of critical minerals, driving prices down and allowing the country’s businesses to gain even more of a stranglehold as western investors baulk at investing in the dip of the commodity supercycle.

Graphite prices have also slumped due to excess processing capacity; high graphitization costs and limited capacity saw Chinese processors add massively more capacity — from 1 million tonnes in March 2022 to 2.3 million tonnes in December 2022. This caused a fall in processing costs and therefore a rise in the production of synthetic graphite — which even if it is more expensive to create — also became cheaper as needle coke prices had also fallen dramatically.

This has created a situation where the price differential between synthetic active anode material (AAM) and natural-based AAM has narrowed to only a few percentage points. But the key point is that the surplus graphite is artificial — current stockpiles will dwindle, and prices will rise again.

Of course, this will take time. The synthetic sector is now large enough and the price differential low enough that whenever demand increases, Chinese synthetic producers will now always come into pick up the slack faster than mining operations can get ramp up production. And regardless, China has significant natural graphite deposits of its own.

The investment case, therefore, rests on the graphite export ban. China has banned export of the material to the US — and in any event, any electric battery made in the US that includes components or critical minerals extracted or processed from China will not be eligible for a US$7,500 credit from the Inflation Reduction Act, starting in 2024.

The US — and allies — were previously reliant on Chinese graphite. And they will now need to secure supplies from ex-China sources; in other words, there is now an artificial supply problem that will result in higher prices for western acquirers.

Then there’s titanium. Ten points to guess which country controls global supply?

China — the largest producer in the world as it has circa 30% of global reserves in the form of ilmenite ore. Here the US is in even more of a bind; I am certain China will impose an export ban to the country because the US does not keep the metal in its ever-dwindling national defence stockpile and is reliant for 92% of its titanium from Japan. You can probably spot the problem.

Incidentally, you might want to consider similar implications for uranium supply — and also that tungsten will likely face a similar export ban soon. Good news for Golden Metal Resources perhaps, less so for US supply chains.

China has been winning the critical minerals trade war for years, and titanium is one mineral the US needs. It’s used in everything from spacecraft to missiles, ships, car parts and robotics and is absolutely essential in both military and civilian applications. It’s twice as strong as aluminium, almost 50% lighter than steel but as strong.

Of course, the US has been lazy. Domestic titanium sponge production had been falling for years when the country ceased production altogether in 2020. Russia and China together now control more than 70% of the global titanium market, and China’s titanium sponge capacity has risen by over 1,000% over the past few years.

Now even if the US can continue to rely on Japan for titanium supply, there are two problems with this strategy. First, the geopolitical risk (Tokyo and Beijing are not exactly on great terms, and Taiwan continues to simmer in the background). Second, Japan is operating at capacity, so the US cannot get more titanium from the country as its needs scale.

In other words, the US has handed control of yet another critical mineral to two of its greatest opponents. The US Commerce Department covers 16 ‘critical infrastructure’ sectors which are economic priorities — and titanium is needed in 15 on them.

Manufacturing is a different story — the US retains relatively strong titanium sponge processing capabilities, as interestingly, does Ukraine.

I am certain that China will soon impose an export ban on titanium, tungsten, and uranium to the US (as it has with graphite and certain rare earth elements) and the continued US reliance on Japan for this critical mineral is a supply chain weakness that must be urgently addressed.

Which brings us nicely to:

Before getting into ownership details, Malawi governance, financing et al, it’s important to start with the deposit. This is true both when designing a flow sheet or considering an investment; and fortunately in this case the deposit is exceptional.

Kasiya Rutile-Graphite Project

The plan is clear — to develop a long life, large scale and profitable operation (to be fair, this is the usual plan). But the company released its Pre-Feasibility Study in September 2023, and the share price has barely moved since.

Counterintuitively, this may be good news. Once you get to a certain level of certainty, study releases should not come as a surprise to anybody — and while the asset is now further de-risked, the main issue seems to be getting the wider market to understand the importance of this particular asset.

Initial rutile was found in 2018 during ongoing graphite test work (the company was not looking for titanium at the time), drilling in 2019 confirmed high-grade and widespread rutile, and its footprint was tripled in 2020. The maiden JORC resource in 2021 confirmed that Kasiya was one of the largest rutile discoveries ever — and by 2022, upgraded the asset to the largest rutile deposit AND the second-largest graphite deposit in the world.

Once again, if you haven’t read this article and your mining knowledge is sketchy, do so now.

Regardless, with all financial figures in US dollars, key PFS results include:

• Current MRE: 17.9Mt rutile @ 1.01% and 24.4 MT graphite @ 1.32%
• $1,605 million after tax Net Present Value
• 28% after tax Internal Rate of Return
• $415 million average annual EBITDA, 64% EBITDA margin
• 222ktpa rutile, 244ktpa graphite average annual production
• $597 million capex to first production
• $404/tonne opex
• 25 years life of mine, though this would only mine 30% of the current known mineralisation

This looks world class. And it is.

The only factor I would double check in the later DFS, is production expectations for the first year. These are often lower before a ramp up and can impact on initial profitability. PFS figures in this regard are often based on too many assumptions.

But on a larger scale, the plan is to produce both rutile and graphite through two stages of development: stage 1 at 12Mtpa throughput for the first five years and Stage 2 at 24Mtpa thereafter — by the development of 4 pits being mined simultaneously.

The basic investment case is simple: the potential returns are enormous, the titanium and graphite in the ground could see the asset become the world’s largest (perhaps second-largest dependent on measurement) producer of both critical minerals, and producing costs are also extremely cheap compared to competitors and generic industry standards.

For context, rutile sources of titanium command a price premium nearly ten times that of ilmenite — for the lithium investors, it’s somewhat akin to comparing a spodumene deposit with a lepidolite deposit, or perhaps a brine or clay-based asset.

Kasiya’s 18Mt resource is more than double that of Sierra Rutile’s Sierra Leone deposit which is the only rutile resource that can hold a candle to Kasiya. The rutile zones occur across a 200 square kilometre area — which is all the more extraordinary when you consider that no large rutile dominant deposits have been discovered in over 50 years.

Kasiya is by a long, long way the largest rutile deposit in the world. New deposits are not being found, and existing assets are depleting alongside declining ore grades. Best of all, natural rutile supply is forecast to fall sharply from 2024 — by 52% by 2033.

All yours for circa £120 million in market cap, apparently.

Then there’s the graphite — even without the graphite, the rutile would be enough. Here, Kasiya is the second-largest flake graphite deposit worldwide — however second by a significant margin, to Syrah Resources’ Balama deposit in Mozambique.

But unlike Balama, one of the key factors to understand is that the graphite processing costs will be very low because the graphite is a co-product of the rutile production and therefore a significant portion of the opex can be ‘shared’ with the rutile. In fact, Kasiya should be the lowest cost producer of graphite anywhere in the world when the mine comes online (with the standard caveats around theory and practice).

In chemical terms, the company can produce 96% TGC, very coarse flakes, with over 60% in the large to super-jumbo fractions (above 180 microns), and with overall recovery of 62%. It’s also high purity and highly crystalline which are key for uses in lithium battery anodes — because this means the graphite is both conductive and easy to upgrade to the minimum requirement of 99.95% TGC.

Regarding of contaminants (which are usually brushed over), they’re fairly low. The rutile product grade stands at 96% TiO2 at a +98% recovery, while uranium, thorium, chromium, and zirconium levels are all at a minimum.

Accordingly, Sovereign has engaged in three non-binding Memorandums of Understandings with Mitsui, Chemours and Hascor. These are the big boys in the space, but the non-binding aspect is actually a positive as it makes any potential buyout that bit easier.

As a general rule, cheap processing equals green processing, and Kasiya is no exception.

Natural rutile requires no upgrading for use in titanium pigment feedstock (unlike the labour/energy/carbon intensive process required to upgrade ilmenite). Indeed, the plan is to use hydro mining followed by wet concentration plant processes — which is far less carbon intensive than the drilling, blasting, crushing, and grinding required at hard rock deposits.

This will leave Kasiya with the lowest carbon footprint of major producers — Syrah generates 0.4CO2eq/tonne, China 1.2CO2eq/tonne, and Kasiya will generate just 0.2eq/tonne.

In addition to its natural characteristics, renewable energy solutions are at hand: the 60MW Salima solar power plant recently commissioned by JCM, in addition to the nearby Nkhoma substation which is already equipped to hook up Kasiya to hydro-sourced grid power. For context, the entire project is anticipated to require a maximum of 56MW at full production so will not only be environmentally friendly (by mining standards), but also have access to reliable power, a top concern in African nations.

Kasiya is also extremely well connected for ports and shipments.

It has access to the Nacala Logistics Corridor, a refurbished railway running nearly 1,000km to transport coal from mines in Mozambique to the port of Nacala — which by necessity had to run through Malawi. Happily, this provides Sovereign with direct access to the sea, and in further good news, the railway is controlled by Vale and Mitsui.

It’ll be staying open for decades to transport billions of dollars of coal, and luckily for Sovereign (yes, this particular chance was definitely luck), a branch line passes close to Kasiya. Good for capex, good for opex.

Nacala itself is the deepest port in Southern Africa — and is designed to export 18 million tons of coal alongside passengers and generic cargo.

Malawi may be adjacent to Zambia, but the comparatively smaller African nation is not a mining powerhouse by any means. The mining sector in its entirety is worth circa 1% of its annual GDP.

But while I’ve covered other African countries in depth before, Malawi’s relative lack of mining projects means I need to mention a few key concerns. For context, one of my pet peeves is when investors treat the entire continent of Africa as one location from a risk perspective — when in reality, each country is different with diverse advantages and drawbacks.

The good news is that the state has enjoyed sustained peace since gaining independence in 1964 and has held relatively fair elections every five years since one-party rule ended in 1993.

And while the mining industry may be nascent, the potential is very much there. Consider Zambia’s recent moves to encourage copper investment as a blueprint; Malawi has the resources, and the government is keen to exploit them.

Despite the peace, the country is not wealthy. World Bank data puts it at the fourth poorest in the world, with 80% of the population living on less than $2.15 per day using 2019 figures. Mining could change this.

His Excellency President Lazarus Chakwera is on record — in 2022 — enthusing that ‘Malawi is poised to benefit from a package committed by the US towards development projects and programs on the African continent.’ And in front of the US General Assembly, he specifically made the case that ‘the recent discovery in Malawi of the largest deposit of rutile in the world means that Malawi’s economic rise is imminent.’

The country’s economic development focuses are on agriculture (not surprising given Zimbabwe’s blueberry boom), tourism, and mining. The Inter-ministerial Project Development Committee is firmly committed to working with Sovereign — with the Ministry of Mining recently formally noting that ‘we applaud the timely investment by Rio Tinto (Sovereign shareholder) as it will mark a milestone towards realizing the country’s aspirations of a prosperous Malawi. Government’s commitment is to ensuring growth of the mining sector…establishing a conducive investment environment.’

In other words, there should be no unpleasant regulatory surprises. Sovereign has been operating in the country for nearly a decade as a reliable employer and has developed strong relationships with all the relevant officials.

And the PFS does demonstrate Kasiya’s potential to provide substantial socio-economic benefits for Malawi including monetary returns, job creation, skills transfer and sustainable community development initiatives. My one caveat despite the company’s protestations is that training up staff to operate the mine will not be easy — the skilled workforce available in Zambia or Zimbabwe, for example, does not exist on the same level yet.

Of course, Sovereign will change that.

Rio is heavily involved in Sovereign in a number of ways. And this is good news on a number of levels, not least because $119 billion titan is already the world’s largest titanium feedstock producer (among heavy involvement in many, many other assets).

It produced 1,200ktpa of titanium dioxide in 2022, is engaged multiple titanium projects in Africa, and has invested heavily in battery metals analysis including most recently its Battery Lab last month.

I’ve touched on the company many times before in analysis for blue chip clients — it’s often a chart topper for best dividend stocks — but recent pieces on Investing Strategy include its partnership with AIM great Greatland Gold to explore tenure in Australia, and also its first entry into Rwanda to explore for lithium with minnow Aterian.

Let’s look at the strategic investment:

• AU$40.4 million for 15% of Sovereign Metal’s total shares (July 2023)
• Option to acquire an additional 4.99% by the end of July 2024
• Proceeds to be used to advance Kasiya (critically, to complete the DFS)
• Collaboration to qualify Kasiya’s graphite, focus on supplying the li-ion battery anode market
• Understanding to negotiate a mine construction funding package
• Option for Rio to become operator up to 180 days post DFS
• If operator option taken, exclusive rights to market 40% of annual production
• Right to appoint a director
• Rights to first refusal (boilerplate terms)

It’s worth noting that Sprott retains 8% of the shares in Sovereign, with a further 8% held by other institutional investors. Directors and Management hold 11% (skin in the game always a good sign), and Australian High Net Worth investors, 20%. This means much of the share base is in strong hands — which is good for certainty but can generate increased volatility.

In early November, Rio and Sovereign announced a bulk sampling program to extract >100 tonnes of ore for qualification — the key component to graphite sales agreements. Graphite produced from this test will be shared with prospective buyers.

Rio’s reasons for involvement are obvious — the world’s largest titanium feedstock producer, facing falling grades and few discoveries, is obviously going to be jump at a pairing with owner of the largest rutile deposit on Earth.

Rio and Sovereign together now maintain a joint technical committee composed of three 

members from each company. And the obvious endgame is that Rio will buy the remaining shares of Sovereign, or acquire the Kasiya asset, shortly after the DFS is released.

Indeed page 69 of Argonaut’s November 2023 ‘Metals and Mining Research — Best Undeveloped Projects’ report makes the case that:

‘The greatest hurdle to development will be funding of initial capital requirements. In our view Rio Tinto’s endgame is to become 100% owner of Kasiya. Rio will be in no rush to make a bid for SVM, so we may not see any corporate activity until after the completion of the Kasiya DFS. Alternatively, if SVM’s PFS numbers meet threshold expectations, RIO may wish to take executive control of the project, catalysing a takeover offer of SVM in the short to medium term.’

A Rio Tinto offer is essentially inevitable. Maybe not today, maybe not tomorrow, but the world’s largest titanium feedstock producer is simply not going to allow another major to wrest control of this project. In supply terms, Kasiya is simply too valuable — and as Sovereign mitigates risk over the next six to 12 months, an offer could come at any stage.

In essence, Sovereign is using Rio’s intel and know-how on world-class, multi-generational projects in project configuration prior to the DFS kicking off at some point during mid-2024. 

Thereafter, my anticipation is that construction will begin in 2026 and first production may occur from perhaps 2027, though ramping up will likely take to 2028. As a caveat, these dates are my best guess, and initial construction could well come sooner or later than this.

But the market capitalization is circa £120 million. Regardless of when the offer is made, the offer price will be significantly higher than this, and likely several multiples.

Rio will not want to invest the $597 million capex cost without taking control of the deposit — and for context, the total expected revenue for the modelled 25 years LOM is a whopping $16 billion. And being realistic, 25 years is conservative for the deposit; the DFS will likely see sizeable production/mine life increases.

The stock has been trundling along within a strict range since July 2022, so unlike many explorers there’s unlikely to be a substantial dip anytime soon — though the technical analysts are free to consult their horoscopes.

The risk is low (relatively), the rewards are obvious. The market has ignored the importance of the deposit and the significance of Rio’s involvement.

Shrewd investors will soon start paying attention.