Sovereign Metals Regulatory News (SVML)

SOVEREIGN METALS LIMITED

NEWS RELEASE I 28 JULY 2023

JUNE 2023 QUARTERLY REPORT

Sovereign Metals Limited (Company or Sovereign) (ASX:SVM & AIM:SVML) is pleased to provide its quarterly report for the period ended 30 June 2023.

Rio Tinto invests $40.4m to become a 15% Strategic Investor 

· Subsequent to the end of the quarter, Rio Tinto made an investment of A$40.4 million in Sovereign resulting in an initial 15% shareholding plus options to increase their position to potentially 19.99% within 12 months

· Investment proceeds will be used to advance the Kasiya Rutile-Graphite Project (Kasiya) in Malawi

· Rio Tinto's investment represents a significant step towards unlocking a major new supply of low-CO2-footprint natural rutile and flake graphite

· Under the Investment Agreement, Rio Tinto will provide assistance and advice on technical and marketing aspects of Kasiya including with respect to Sovereign's graphite co-product, with a primary focus on spherical purified graphite for the lithium-ion battery anode market 

Government of Malawi publicly applauds Rio Tinto's Investment

· The Government applauded the timely investment by Rio Tinto and marked it as a milestone towards realising the country's aspirations of growing the mining sector as a priority industry

· The Government's public statement confirms its commitment to ensuring the growth of the mining sector through deliberate initiatives aiming at establishing a conducive investment environment in the sector

Kasiya Rutile-Graphite Project PFS targeting completion this Quarter

· Sovereign is in the advanced stages of the Pre-Feasibility Study (PFS) for Kasiya, a potential industry-leading major source of critical raw materials from Malawi

· Kasiya aims to be one of the world's largest and lowest cost producers of natural rutile and natural graphite with a carbon-footprint substantially lower than other current and planned producers

Downstream Testwork on Kasiya's Graphite shows Excellent Suitability for us in Lithium-Ion Batteries

· Downstream testwork on Kasiya's graphite co-product demonstrated it to have superior qualities showing excellent suitability for use in lithium-ion batteries. Key outcomes include:

o Near perfect crystallinity - an indicator of battery anode performance

o Above benchmark >99.95% carbon purity achieved

o No critical impurities or deleterious elements commonly found in other natural graphite sources

Bulk Sample Operations Commenced

· Bulk sample program commenced to produce larger volumes of rutile and graphite from Kasiya. Samples to be used for downstream testwork and product qualification for the lithium-ion battery sector

ENQUIRIES

Subsequent to the end of the quarter, Sovereign completed a A$40.4 million strategic investment by Rio Tinto Mining and Exploration Limited (Rio Tinto) to advance Sovereign's world-class Kasiya Rutile-Graphite Project in Malawi.

Rio Tinto subscribed for 83,095,592 new fully paid ordinary shares (Shares) in Sovereign at a price of A$0.486 per Share for aggregate proceeds of A$40.4 million. Rio Tinto's subscription price reflected a 10% premium to the 45-day volume weighted average price on the ASX as at close 14 July 2023 and resulted in Rio Tinto holding approximately 15% of the ordinary shares of the Company.

The subscription also involved Rio Tinto being granted options to acquire 34,549,598 further Shares in Sovereign within 12 months of the initial subscription which could result in Rio Tinto's shareholding in the Company potentially increasing up to 19.99% (based on the number of shares in issue in the Company as at the date of this announcement).

The Company will use the proceeds from Rio Tinto's strategic investment to fund the advancement of Kasiya, including progressing a Definitive Feasibility Study (DFS) focused on the development of a world-class, low-CO2-footprint mine capable of supplying to the titanium pigment, titanium metal and lithium-ion battery industries.

In a Press Release issued on 20 July 2023, the Government of Malawi has publicly applauded the timely investment by Rio Tinto and marked it as a milestone towards realising the country's aspirations of growing the mining industry as promoted in the Malawi Vision 2063, which isolates mining as a priority industry.

The Government's statement confirms its commitment to ensuring the growth of the mining sector through deliberate initiatives aiming at establishing a conducive investment environment in the sector.

Kasiya, located in central Malawi, is the largest natural rutile deposit and one of the largest flake graphite deposits in the world. Sovereign is aiming to develop a low-CO2 and sustainable operation to supply highly sought-after natural rutile and graphite to global markets.

The ESS confirmed Kasiya as potentially one of the world's largest and lowest cost producers of natural rutile and natural graphite with a CO2-footprint substantially lower than other existing and planned operations.

The Company is in the final stages of the PFS for Kasiya, with significant advancements made throughout the quarter. The Company expects to announce the outcomes of the PFS during the September quarter.

Figure 1: Drone photo looking south over the Kasiya Project

During the quarter, the Company completed initial downstream testwork at an independent German industrial mineral specialist. The testwork demonstrated superior qualities and excellent suitability as feedstock for use in lithium-ion batteries.

Crystallinity

Crystallinity is an indicator of electrical conductivity which affects battery performance. This result is critical to the usability in the lithium-ion battery sector as the higher the crystallinity i.e. the more "perfect" the flakes/crystals, the better the electrical conductivity and battery performance.

The testwork shows that Kasiya graphite is classed as near perfect, fully ordered graphite, confirming it should possess the best electrical conductivity attributes.

The coarse and highly crystalline graphite and rutile at Kasiya is the result of very high grade metamorphic conditions during the formation of the original host rocks (Figure 2).

Figure 2. Metamorphic stability fields for graphite, rutile and kyanite in metasedimentary rocks and the defined metamorphic stability field for Kasiya with the key indicator minerals graphite, rutile and kyanite.

Purity

Purity denotes the product's total carbon content and the amount of residual key impurities including sulphur and iron which are important in anodes. Purification is achieved via either leaching or heat treatment.

Testwork achieved >99.95% purity which is above the benchmark required for graphite in lithium-ion batteries. The results also demonstrated very low sulphur content in this material due to the graphite being hosted in soft saprolite - a key differential from graphite purified from hard-rock deposits.

The Company has commenced a graphite bulk sample program for Kasiya to facilitate qualification, downstream testwork and product development. Sovereign has been progressively upgrading its in-country laboratory facilities to enable continuous processing of larger bulk samples for further metallurgical test work and product qualification. 

Material from the planned mining pits has been sourced from the remaining samples from the 2022 Kasiya resource drill program. The samples were blended to create a bulk sample which was prepared for processing at the Company's facility in Malawi where it was sized and deslimed - processes replicating the planned operation.

Post removal of the coarse and fine fractions, the remaining clean sand fraction (45µm to 2mm) containing the graphite and rutile is processed over a wet shaking table to isolate two gravity concentrates. A graphite pre-concentrate (light mineral concentrate) with a target grade of 3-5% graphite (up from ~1.5% in the raw ore) and a heavy mineral concentrate (HMC) containing the rutile.

The graphite pre-concentrate is planned to be sent to international laboratories for processing into a final graphite product via flotation. This initial representative graphite product will provide samples for:

· Downstream testwork focussed on Spherical Purified Graphite (SPG) anode material via purification, spheronisation, coating and battery cell cycling tests.

· Assessment and qualification for traditional industrial graphite markets, including the refractory, foundry, and expandable graphite segments.

· Future production of CSPG to be provided to anode / battery manufacturers for assessment and qualification.

Figures 3 & 4: LHS: Four tonne graphite pre-concentrate sample produced at the Company's Lilongwe laboratoryRHS: Close-up of the pre-concentrate showing the coarse, clean graphite flakes

The HMC will be processed via a dry mineral separation circuit including electrostatic and magnetic separation at AML laboratories in Perth to produce a representative natural rutile product for larger scale product assessment and end-user applicability testing, especially in the welding sector.

Figures 5 & 6: LHS: Inspection and logging of oversize material & RHS: Rutile-rich HMC prior to despatch for dry separation 

Sovereign's product marketing strategy is to align with high-quality partners during the technical study and development phases to completely qualify the products, including the lithium-ion battery anode market which has now become the largest end-market for natural flake graphite. As both are industrial minerals, specifications and product qualification processes are critical to marketability and offtake arrangements.

Demand for high quality flake graphite and natural rutile is growing due to global decarbonisation requirements and current and future predicted supply deficits. Demand for high quality flake graphite continues to grow due to global decarbonisation requirements. Per Benchmark Mineral Intelligence, the demand for anodes grew by 46% in 2022 compared to only 14% growth in natural flake graphite supply.

Figure 5: Graphite demand / supply showing market deficit beginning 2025E

Source: Macquarie Research (March 2023)

To date, the Company has been able to enter into Memorandums of Understanding (MoU) (non-binding) with three major partners in the natural rutile sector; Mitsui, Chemours and Hascor. The Company already has over 50% of Stage 1 production under MoU (based on the Company's Expanded Scoping Study released June 2022). Sovereign's next objective is to secure offtake MoUs for the Kasiya flake graphite co-product.

Based on product quality assessments performed by offtakers and customers, Kasiya's natural rutile has premium chemical parameters and is suitable for all major end-use markets including welding, pigment feedstock and titanium metal.

Currently, Sovereign has no sale agreements in place for graphite production. However, the Company has built a strong understanding of the graphite market and developed a number of well-established relationships with offtakers and customers.

A major component to graphite sales agreements is customer qualification, and this is a key reason for initiating the graphite bulk sample program and scaling up in-country facilities in order to continuously produce bulk sample over the coming months. The graphite produced from this program will be shared with prospective end-users and is an important next step for Sovereign to qualify the Kasiya graphite product.

Sovereign's recent initial graphite characterisation testwork conducted by an independent German industrial minerals specialist demonstrated superior qualities and excellent suitability for its use in lithium-ion batteries. Further downstream testwork is planned that will use the graphite concentrate produced.

Industry's interaction with supply chain participants indicates the progression towards higher proportions of natural graphite used in battery anodes will be supported by its lower cost and superior environmental credentials. Environmental footprint of electric vehicles (EVs) will become increasingly important market consideration as EV penetration accelerates, noting that synthetic graphite has a carbon footprint orders of magnitude higher than flake graphite because it is made from by-products of coke and oil refining via energy intensive processes.

The Global Warming Potential (GWP) of producing one tonne of flake graphite concentrate at Kasiya estimated to be 0.2 tonnes of CO2 equivalent emissions (CO2e). Kasiya has the lowest GWP compared with currently known and planned future natural graphite projects:

· Up to 60% lower than currently reported GWP of graphite producers and developers, including suppliers to Tesla Inc.

· 3x less polluting than proposed Tanzanian natural graphite production from hard rock sources.

· 6x less polluting than current Chinese natural graphite production which accounts for up to 80% of current global graphite supply.

Figure 7: Global Warming Potential per tonne of graphite product (CO2e/t)

(Sources: see Appendix)

(Note: All figures are cradle-to-gate except for Syrah Resources which includes transportation to the port of Nacala; transportation of Kasiya's graphite to the port of Nacala would add an estimated incremental 0.04CO2e to its GWP)

Competent Person Statement

The information in this announcement that relates to the Mineral Resource Estimate is extracted from the announcement dated 5 April 2023. The announcement is available to view on www.sovereignmetals.com.au. Sovereign confirms that a) it is not aware of any new information or data that materially affects the information included in the announcement; b) all material assumptions included in the announcement continue to apply and have not materially changed; and c) the form and context in which the relevant Competent Persons' findings are presented in this report have not been materially changed from the announcement.

The information in this announcement that relates to Production Targets, Processing, Infrastructure and Capital and Operating Costs, is extracted from the announcement dated 16 June 2022 entitled 'Kasiya Expanded Scoping Study Results'. Sovereign confirms that: a) it is not aware of any new information or data that materially affects the information included in the announcement; b) all material assumptions and technical parameters underpinning the Production Target, and related forecast financial information derived from the Production Target included in the Announcement continue to apply and have not materially changed; and c) the form and context in which the relevant Competent Persons' findings are presented in this presentation have not been materially modified from the Announcement.

The information in this announcement that relates to the Metallurgy is extracted from the announcement dated 7 December 2021 and 8 June 2023. These announcements are available to view on www.sovereignmetals.com.au. Sovereign confirms that a) it is not aware of any new information or data that materially affects the information included in the announcement; b) all material assumptions included in the announcement continue to apply and have not materially changed; and c) the form and context in which the relevant Competent Persons' findings are presented in this report have not been materially changed from the announcement.

Forward Looking Statement

This release may include forward-looking statements, which may be identified by words such as "expects", "anticipates", "believes", "projects", "plans", and similar expressions. These forward-looking statements are based on Sovereign's expectations and beliefs concerning future events. Forward looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of Sovereign, which could cause actual results to differ materially from such statements. There can be no assurance that forward-looking statements will prove to be correct. Sovereign makes no undertaking to subsequently update or revise the forward-looking statements made in this release, to reflect the circumstances or events after the date of that release.

Qualified Person

Information disclosed in this announcement has been reviewed by Dr Julian Stephens (B.Sc (Hons), PhD, MAIG), Managing Director, a Qualified Person for the purposes of the AIM Rules for Companies.

The information contained within this announcement is deemed by Sovereign to constitute inside information as stipulated under the Regulation 2014/596/EU which is part of domestic law pursuant to the Market Abuse (Amendment) (EU Exit) Regulations (SI 2019/310) ("UK MAR"). By the publication of this announcement via a Regulatory Information Service, this inside information (as defined in UK MAR) is now considered to be in the public domain. The person responsible for arranging for the release of this announcement on behalf of Sovereign is Mr Dylan Browne (Company Secretary).

During the quarter ended 30 June 2023, the Company made payments of $424,000 to related parties and their associates. These payments relate to existing remuneration arrangements (executive salaries, director fees, superannuation and bonuses of $334,000), business development services ($32,000) and provision of serviced office facilities, company secretarial services and administration services ($58,000).

As at 30 June 2023, the Company had an interest in the following tenements:

Notes:

SSL: Sovereign Services Limited, MML: McCourt Mining Limited & NGX Exploration Limited

1 An exploration licence (EL) covering a preliminary period in accordance with the Malawi Mines and Minerals Act (No 8. Of 2019) (Mines Act) is granted for a period not exceeding three (3) years. Thereafter two successive periods of renewal may be granted, but each must not exceed two (2) years. This means that an EL has a potential life span of seven (7) years. ELs that have come to the end of their term can be converted by the EL holder into a retention licence (RL) for a term of up to 5 years subject to meeting certain criteria.

2 Subsequent to the end of the quarter, the Company received its granted extension for EL0492.

As noted in the Company's March 2023 Quarterly Report, the Government of Malawi has proposed a new Mines and Minerals Bill (2023) (New Bill) which has been passed by the Malawian Parliament and now awaits Malawian Presidential Assent and publication in the Malawi Gazette before coming into force. If approved, the New Bill will replace the Mines and Minerals Act (2019). The New Bill introduces amendments to improve transparency and governance of the mining industry in Malawi. Sovereign notes the following updates in the New Bill which may affect the Company in the future: (i) ELs will now be granted for an initial period of 5 years with the ability to extend by 3 years on two occasions (total 11 years); (ii) the Malawian Government maintains a right to free equity ownership for large-scale mining licences but the New Bill proposes to remove the automatic free government equity ownership with the right to be a negotiation matter; and (iii) A new Mining and Regulatory Authority will be responsible for implementing the objectives of the New Bill. There has been no change during or subsequent to the quarter.

During the quarter, the Company made the following payments in relation to mining exploration activities:

There were no mining or production activities and expenses incurred during the quarter ended 30 June 2023.

SOURCE 1 - GRAPHITE RESOURCE GLOBAL WARMING POTENTIAL (Figure 7)

Appendix 5B

Mining exploration entity or oil and gas exploration entityquarterly cash flow report

Compliance statement

1 This statement has been prepared in accordance with accounting standards and policies which comply with Listing Rule 19.11A.

2 This statement gives a true and fair view of the matters disclosed.

Date: 28 July 2023

Authorised by: Company Secretary

(Name of body or officer authorising release - see note 4)

Notes

1. This quarterly cash flow report and the accompanying activity report provide a basis for informing the market about the entity's activities for the past quarter, how they have been financed and the effect this has had on its cash position. An entity that wishes to disclose additional information over and above the minimum required under the Listing Rules is encouraged to do so.

2. If this quarterly cash flow report has been prepared in accordance with Australian Accounting Standards, the definitions in, and provisions of, AASB 6: Exploration for and Evaluation of Mineral Resources and AASB 107: Statement of Cash Flows apply to this report. If this quarterly cash flow report has been prepared in accordance with other accounting standards agreed by ASX pursuant to Listing Rule 19.11A, the corresponding equivalent standards apply to this report.

3. Dividends received may be classified either as cash flows from operating activities or cash flows from investing activities, depending on the accounting policy of the entity.

4. If this report has been authorised for release to the market by your board of directors, you can insert here: "By the board". If it has been authorised for release to the market by a committee of your board of directors, you can insert here: "By the [name of board committee - eg Audit and Risk Committee]". If it has been authorised for release to the market by a disclosure committee, you can insert here: "By the Disclosure Committee".

5. If this report has been authorised for release to the market by your board of directors and you wish to hold yourself out as complying with recommendation 4.2 of the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations, the board should have received a declaration from its CEO and CFO that, in their opinion, the financial records of the entity have been properly maintained, that this report complies with the appropriate accounting standards and gives a true and fair view of the cash flows of the entity, and that their opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively.