Member Info for Modcon

From John Meyer Senior analyst at SP Angel

Sovereign Metals* (SVML LN) 38p, Mkt Cap £234m – Quarterly report highlights Rio Tinto oversight of optimised prefeasibility study

(Sovereign currently holds 100% of the Kasiya project. Malawi has 10% free carry right. Rio Tinto acquired an initial strategic interest of 15% for A$40m mid 2023 and has recently invested a further A$19.2 to move up to 19.9%)

STRONG BUY – Valuation 55p

The recently published optimised PFS shows the Kasiya project to be the worlds largest and lowest-cost producer of natural rutile and natural flake graphite.

The large-scale, yet relatively simple project appears to meet the criteria for major company involvement.

Recently completed trials highlight that rutile and graphite can be simply mined from surface using conventional machinery for dry mining or hydraulically mined using high-pressure hoses.

The main test pit has been refilled to its original ground level and on-site soil remediation and land rehabilitation is now underway.

We expect trials to show improved crop yields after rehabilitation with the rutile and graphite removed.

Rutile: Iluka recently reported firm prices for rutile at $1,662/t for Q4 for 95% gradeproduct.

Graphite: test work confirmed the Kasiya graphite is suitable for sale a refractory material. Further work will likely confirm the graphite is also suitable for Li-ion battery anodes.

Optimised PFS results:

Capex: US$665m

Total life of mine development capital: US$1,127m vs US$1,250m in September 2023

Sustaining capital: US$397m

NPV8% US$2,322m

IRR of 27%

Operating costs: US$428/t vs US$404/t , on an FOB, Nacala basis

Throughput: 12mtpa for Stage 1 rising to 24mtpa in Stage 2

Production - Rutile: 222,000tpa

- Graphite 233,000tpa

Sales US$640mpa

EBITDA US$409mpa

Mine life 25 years initially

Assumptions:

Rutile: US$1,490/t (Iluka report rutile at $1,662/t today for Q4 for 95% grade rutile)

Graphite: US$1,290/t

Quarterly financials, Expenditure:

Sovereign spent A$7.2m on drilling, assays, metallurgical test work, ESG and other Malawi operations through the past quarter.

Staff costs came to a relatively modest A$369,000 for the quarter implying total staff costs of around A$1.5m for the year.

Admin and corporate costs were A$326,000 for the quarter and A$970,000 for the six months

Interest received was A$650,000 in the quarter covering almost all the staff, admin and corporate costs

Cash and cash equivalents stand at A$33.5m.

Conclusion: It is refreshing to see a company where the interest received virtually covers all the staff, admin and corporate costs, with the vast majority of expenditure on the development of the value of the asset in the ground.

Sovereign will upgrade the optimised PFS to a DFS in Q2 at which point we expect the company to enter into discussions over the mine financing and potential partners for the mine development.

We suspect Rio Tinto may