Executive Summary
To date, our Analyst’s Notes company assessments have been relatively even between positive and negative write-ups. Negative assessments - whilst often accurate - are almost always poorly received by both the companies in question and their investors, generating strong resistance.
This note begins by reviewing the track record of Crux Investor's recommendations since the inception of the Analyst’s Notes. We’re pleased to report that the track record is strong. Investors without exposure typically remain indifferent, but those holding positions often react defensively, sometimes accusing Crux Investor of having hidden agendas. In reality, nothing could be further from the truth. Our analysts are empowered to present their views candidly, without bias. That said, when given the option, they much prefer highlighting opportunities and sharing positive insights -it’s simply more rewarding. Fortunately, the company featured in this note is a clear standout and easy to endorse.
Sovereign Metals Limited (“Sovereign”) (ASX:SVM)(AIM:SVML)(OTCQX:SVMLF) is a company that has been involved in Malawi since 2012 when it started exploring for graphite deposits in hard rock. Over the years, as it generated more and more targets, it found very good-grade deposits in saprolite, which is rock that has decomposed through weathering to a soft medium. As metallurgical testwork was carried out, substantial amounts of rutile (TiO2) were also present, an even more attractive commodity. Eventually, the company settled on a project area called Kasiya, where a thick layer of saprolite was present, with good grades of both natural rutile and flake graphite. Testwork proved that the rutile can be upgraded to a premium product of coarse grain size and an average grade of 95.7% TiO2, making it suitable for marketing as industrial grade, attracting a premium to standard grade. The graphite product is also very attractive, with approximately 57% of the flakes in the large to super jumbo fractions, which attract premium prices.
Whereas the grade of the deposit is low compared to some other rutile and graphite deposits, the economics are very attractive because they occur in free-dig material. No waste stripping is required, and processing is very cheap, not having to crush and grind, and using spirals for the initial separation. There is however some concern about whether or not the cost structure sufficiently accounts for the cost of returning the tailings to the pits by mechanical means.
As Sovereign is an Australian company, it is not obligated to publish a comprehensive report on its business case. Therefore, this review had to draw information from many company announcements to generate the business case. Most of the information was drawn from a press release reporting on the findings of an “optimised” pre-feasibility study (“OPFS”). Crux Investor has adopted the input parameters of this study but included the government’s free carried interest and a provision for corporate expenses.
The pre-feasibility study is classified as “optimised” because the company has been able to substantially de-risk issues such as mining, processing, and rehabilitation through pilot projects. These programs are carried out with the assistance of Rio Tinto, which has endorsed the project significantly by becoming a strategic shareholder, earning it a 19.9% interest by funding studies since July 2023.
Given the scale of operation, risks are associated with the size of additional supply to the natural rutile and graphite markets. The OPFS relies on a forecast sharp decline in the natural rutile market because of the imminent closure of major operations, and has applied a 30% discount to the estimated value of the basket of graphite products. A phased approach to production growth will further assist in market absorption of the production. Full production is forecast in year 7, which Crux Investor has modelled as calendar year 2035.
Using the OPFS inputs, Crux Investor valuation arrives at an NPV8 value of US$1,148 million, substantially lower than the US$1,284 million according to Sovereign. The explanation for the differential is a longer lead time modelled by Crux Investor and a more onerous treatment of negative cash flow. When the government’s free-carried interest is accounted for, as well as corporate expenses and investments in net current assets, Crux Investor arrives at an NPV8 of US$924 million. Doubling the material handling cost rate drops this further to US$804 million. Crux Investor has also gauged the risk of the market not being able to absorb the total rutile and graphite supply by dropping the Phase 2 expansion altogether. This reduces the NPV8 to US$539million.
At the current share price, the diluted Enterprise value is US$273 million, assuming all cash is committed to completing the DFS and arriving at a go-ahead decision. Given Rio Tinto’s 18.45% stake, the US$754 million attributable to Sovereign is at a 176% premium to the Enterprise Value. When doubling the materials handling cost rate, the premium of the NPV8 to the Enterprise Value is still an impressive 140%.
When assuming no expansion, the premium of NPV8 to Enterprise Value drops to 61% and 40% when doubling material handling costs.
Sovereign is clearly undervalued.
Introduction
Crux Investor wished to start this introduction by summarising previous Analyst Notes before tackling the subject at hand.
Since 2020, Crux Investor has issued valuation notes by the same authors, which were published from March 2020 onwards under the Analyst’s Notes banner. The analysts pride themselves in having no preconceived ideas and ulterior agendas. They call it as it is. This can lead to negative conclusions, usually not received well by those long in the stock. Below is a table showing the performance of companies that were downrated.
As the table illustrates, our recommendations have been spot-on except for Discovery Silver, whose price has risen over the last three months from C$0.66 to its current level (+152%) on the back of the acquisition of the Porcupine Complex from Newmont in January 2025. It is safe to say that people who did heed our recommendation in 2020 did well.
The Analyst’s Notes are not, in principle, negative, but undervalued shares are hard to find, particularly in the precious metal sector. Table 1_2 shows the share price performance for the companies that received a positive buy recommendation.
The analysts got it spectacularly wrong with Cobre, relying too much on assay values indicated by handheld XRF’s. An apology was issued to the readers. The re-rating of McEwen Mining based on the prospects of the Los Azules project in Argentina has not (yet) occurred.
The notes on GoGold Resources and Mako Mining were neutral and did not have a recommendation.
The introduction above indicates that although some analysts have been negative, there were reasonable grounds for this. Our preference is for positive notes, as these are more gratifying. That brings us to the subject of this note, which is a company that, in the opinion of the analysts, is undervalued. At last, we found another good opportunity.
Sovereign Metals Limited (“Sovereign”) (ASX:SVM)(AIM:SVML)(OTCQX:SVMLF) is an Australian company with a rutile and graphite project in Malawi, Africa. The company started its involvement in Malawi in 2012 when it acquired McCourt Mining Pty Limited (“McCourt”), which held the Central Malawi Graphite project composed of three tenement areas totalling 7,261 km2 near the capital city Lilongwe. The close proximity of transport infrastructure, including a railway line to the Nacala port on the Indian Ocean, would facilitate the development of a bulk project such as an operation producing graphite. Initially, deposits along the Duwi Trend received the most attention. Within this trend, high-grade flake graphite is present in hard rock. Initial metallurgical testwork showed that two-thirds of the ultra-pure (grading 99.97%) concentrate was in the form of Extra Large (“Jumbo”) and Large flake, which carries a significant premium over small or medium flake sizes.
The company carried out in parallel geophysical surveys, which resulted by the end of 2014 in the identification of 43 high-priority targets in the Lifidzi and Malingunde areas, where a deep, preserved weathering profile favours the formation of graphite deposits in saprolite (rock decomposed due to chemical weathering to a soft medium). This allows for cheap exploration by shallow auger and air-core drilling, is free-dig material amenable to simple processing with no crushing and milling, and is devoid of sulphides. This caused Sovereign to concentrate on such targets, in parallel with advancing the Duwi target to a scoping study (= equivalent to a preliminary economic assessment) completed in September 2015. Figure 1_1 shows the location of various graphite targets with the darker grade background for hard rock and the light-grey indicating saprolite-hosted deposits.
While carrying out metallurgical testwork on saprolite material from Malingunde, it was observed to contain a high amount of rutile (TiO2) that could be upgraded to a clean concentrate. Suddenly, the company had a valuable co-product. The historical hand-auger drill samples were re-assayed for TiO2, demonstrating that such mineralisation occurred extensively in the Malingunde and Lifidzi areas - the Lifidzi deposit sites within EPL0372 on the map above (Figure 1_1).
Therefore, the company started to concentrate on rutile exploration, and by February 2020, it could publish the map reproduced in Figure 1_2.
Whereas the Railroad, Railroad West, and Kasiya deposits are saprolite hosted, the trend that stretches over 50 km in a north-northeast direction is the Bua Channel deposit, with rutile washed from the saprolite areas into a fluvial system resulting in a placer deposit.
By September 2020, the Kasiya target, measuring at the time 7.5 km long by 3 km wide, became the focus of attention, with the treatment of a bulk sample of 1 tonne yielding high-grade rutile with an attractive coarse product size. By December 2021, the quality of the Kasiya deposit was even more apparent, with metallurgical testwork showing that a simple flow sheet could produce a very high-quality rutile concentrate with low impurities at very high recovery rates and a high-grade, coarse flake graphite by-product (note how graphite was downgraded from “co-product”).
By April 2022, Sovereign could declare an updated mineral resource estimate (“MRE”) for Kasiya, proclaiming it to be the largest global rutile deposit and the world’s second-largest graphite resource after Balama in Mozambique, which Syrah Resources own.
The updated MRE must have been the reason for Sovereign to decide in December 2022 to demerge its hard-rock tenements by ceding these to a wholly owned subsidiary, NGX Limited (“NGX”), and spinning it off to its shareholders before NGX listed separately on the ASX. After the spin-off, management could fully concentrate on advancing the Kasiya project, which was the subject of a pre-feasibility study (“PFS”).
By April 2023, another updated MRE was announced. While only slightly increasing the total resource estimate, it substantially upgraded resources from the Inferred to Indicated category, which rose by 80%. This would enable the completion of a PFS.
On 17 July 2023, Kasiya received a major endorsement when Rio Tinto invested A$40.4 million to become a 15% shareholder in Sovereign, with the proceeds used to advance the project. Under the investment agreement, Rio Tinto would provide assistance and advice on technical and marketing aspects with respect to the graphite co-product (promoted again from being a by-product) with a primary focus on spherical purified graphite (“SPG”) for the lithium-ion battery anode market. Rio Tinto also obtained the option to increase its shareholding to 19.9% by investing an additional A$18.5 million before 14 July 2023.
As part of its investment Rio Tinto obtained an even more important option. Following the conclusion of a Definitive Feasibility Study (“DFS”), Rio Tinto can opt to become the Operator of the project “on commercial arm’s length terms”. Rio Tinto needs to decide on the exercise of this option within 180 days after the announcement of the DFS results. Should Rio Tinto cease to hold voting power in Sovereign of at least 10%, the option expires.
Operatorship gives Rio Tinto the exclusive marketing rights to market 40% of the annual production of all products (therefore including rutile products) as identified in the DFS “on arm' s-length terms.” As long as Rio Tinto holds a minimum of 10% of the issued shares and until the deadline to exercise the option for Operatorship, Rio Tinto has the pre-emptive right over any offer from a third party to acquire shares or assets.
Rio Tinto actively contributed to the project's advancement by appointing members to the technical committee and a General Manager. The agreement further stipulates that Sovereign and Rio Tinto will collaborate to qualify the project’s graphite co-product, with a particular focus on supplying the SPG segment of the lithium-ion battery market.
The PFS results, with an after-tax NPV8 of US$1.6 billion, were announced on 28 September. The project was limited to 25 years.
The year 2024 was used to start de-risking the project by carrying out trial mining, both dry and hydraulic, and firming up the quality of the graphite product to supply specific markets. Rio Tinto liked what it saw, increasing its shareholding to 19.9%.
On 22 January 2025, the OPFS findings were announced, this time advertising a pre-tax NPV of US$2.3 billion, with the company uncertain about the tax regulations. Hidden on page 60, the company provides a range of NPV8s from US$1.28 billion to US$1.56 billion depending on the rate of the rent resource tax (“RRT”) assumed.
Derisking continued with the rehabilitation of the test pit dug to select the mining method, which was completed on 5 March 2025, and the graphite by-product strategy, which was announced on 25 March 2025.
The company plans to complete the DFS in September 2025.
Figure 1_3 shows the share price history of Sovereign on the Australian Stock Exchange over the last five years.
The share price rose sharply in 2020 and early 2021 with the discovery of rutile in the saprolite deposits. After that, the price stabilised during the study phases and the completion of the MREs, which is typical for this project phase.
With the endorsement of Rio Tinto, the price restarted its upward trend, which continued as the project was being de-risked and the completion of the DFS came closer. Following the release of the findings of the DFS, Rio Tinto will have to decide within 180 days to exercise its option to become the Operator. The very sharp drop in the last few days is due to a substantial share placement with institutions at A$0.85, which was at a discount of almost 13% from the price just before the announcement. The market did not take this discount kindly, probably exacerbated by the recent market turmoil. The A$40 million raised is to fund all studies and permitting up to completion of the DFS. Rio Tinto has yet to indicate if it will exercise its non-dilutive rights and purchase the relevant number of shares. Currently its holding has been diluted to 18.45%. This is a big negative, but there could be a number of explanations. Rio Tinto can acquire the shares substantially cheaper in the open market than at A$0.85. Even when retaining only its current shareholding, it maintains its Operator option and may well pay less for a full takeover by suppressing the price rise through this action. Rio Tinto may also have come to the conclusion that the project is of insufficient size, which will be investigated later in this report. In summary, the Rio Tinto dilution is concerning, but not necessarily a fatal flaw.
At the share price of A$0.68 on 8 April, including the 47 million shares from the placement that will be issued by 2 April, the market capitalisation is A$440 million, equivalent to US$264 million. Whereas the equity ownership of the Malawian government still needs to be negotiated as part of the future Mine Development Agreement (“MDA”), two recently concluded MDA’s with Mkango Resources (“Mkango”) and Lotus Resources Ltd (“Lotus”) provided for 10%. Considering Sovereign's current 80% shareholding, this places a value of US$ million / 0.8 / 0.9 = US$367 million on the project. As the government’s share is free-carried, and the companies need to fully fund development, the actual valuation is a bit higher. Even so, with an indicated value between US$1.3 billion and US$1.6 billion, Sovereign seems to be trading at an enormous discount.
This is sufficient reason for Crux Investor to investigate whether or not this is the case.
Valuation of the Kasiya Project
Background
Being an Australian-listed company, Sovereign is not required to file comprehensive technical documents that address all issues in a systematic and consistent manner. Therefore, to provide the reader with a proper understanding of the project, Crux Investor had to review all press releases over the exploration and study period and refer to the awful JORC tables included in press releases to generate the following sections. The JORC tables allow the company to “discuss” the relevant matters in a lazy way without having to logically motivate the business plan.
The technical information has been mainly drawn from news releases with the findings of the PFS dated 28 September 2023 and the optimised PFS dated 22 January 2025. Unless expressly stated otherwise, all illustrations, technical information, and wording in Section 2.1 until Section 2.6.5 have been drawn from these reports.
The project is located 30 km northwest of Lilongwe, the capital, and approximately 45 km by road (see Figure 2.1_1).
The project area benefits from a very close proximity to the railway network. The Nacala Logistics Corridor (“NLC”), which runs through the Kasiya project area, offers the preferred logistics route to the deep-water Indian Ocean port of Nacala to export mineral products to global markets. To access the NLC, Sovereign plans to construct its exclusive 6 km rail spur to connect directly with the plant. A purpose-built rail dry port is planned at the mine site to rail to Nacala. The southern port of Beira, connecting Kasiya via the recently refurbished Sena Rail Line, offers a secondary export route.
Whereas the national electric power transmission and distribution company has assured that sufficient power will be available, and Sovereign plans to connect to the national grid via a 97 km power line, it also plans to build a 30 MW generator farm to ensure an alternative power source.
Malawi, being a subtropical country, provides ample opportunity to capture sufficient water in a purpose-built raw water dam northwest of the plant site.
Geology and Mineralisation
Kasiya is located on the Lilongwe Plain, which is underlain by rocks enriched in rutile and graphite. These rock types strike north-south in the south of the project area and northeast-southwest further north. The original protolith (= original, unmetamorphosed rock) was subjected to deep burial, resulting in very high-grade metamorphism, at which temperatures and pressures rutile is the most stable crystal form for titanium. In situ growth of new minerals led to a rock containing coarse-grained rutile and graphite.
Much later, exhumation and tropical weathering physically and chemically depleted mobile minerals from the near-surface horizon, causing volume loss and concurrent concentration of resistant minerals such as rutile and graphite. These minerals are therefore in near-surface, flat blanket-style bodies of saprolite. Saprolite is chemically weathered rock that retains the original texture and structure of the parent rock but is soft and easily broken down. Given the flat, somewhat undulating landscape, erosion was limited, and the bodies are preserved over wide areas. At Kasiya high-grade mineralisation commonly grades 1.2% to 2.0 % rutile in the top 3-5 m from the surface, with moderate grades of between 0.5% and 1.2% rutile commonly from 5 m to the base of the soft saprolite, which is generally at 20 m to 30 m depth, where it terminates on hard basement rock. Graphite in contrast, is depleted in the top 3-5 m and shows an inverse grade relationship with rutile. At depths of more than 5 m, graphite is not depleted.
Figure 2.2_1 shows the grade relationships with depth and weathering product, drawn from a press release dated 9 June 2021.
Mineral Resources and Mineral Reserves
Mineral Resources
The MRE could rely on a drilling database collared at a nominal spacing of 200 m by 200 m. Drilling was done using a spiral hand-auger (“HA”) and push-tube (“PT”) core. As these methods are unable to retrieve reliable samples once the bit is 3 m to 5 m below the water table, which is approximately at 9.5 m depth, aircore (“AC”) drilling in some high-grade areas was used to confirm the continuation of rutile and graphite grade and depth, and to define the fresh rock elevation.
The geological model is based on constructing domains for the upper soil (at 0–1 m deep), ferruginous pedolith (1–4 m), less mineralised mottled (4-7 m), pallid saprolite (7-9 m) and saprolite (9-25 m). The topsoil horizon was defined at 0.3 m thickness. Based on lithology, 1 m intervals were composited with a maximum sample interval of 2 m. Interpolation of grade was constrained by applying hard boundaries for the domains.
The average parent size is based on the average drill hole spacing 200 m x 200 m x 3 m with 5 sub-cells in the x and y axes and 10 down depth to smooth topographical and lithological transitions. A review of the grade assay statistics showed no extremes, and grade cutting is not required. Variography was used to determine the search directions for grade interpolation. Inverse Distance to the power 4 (ID4) was used to estimate block grades.
For reporting purposes, a nominal 0.7% rutile grade was used. As graphite is a by-product, no cut-off grade is applied.
Figure 2.3.1_1 shows an oblique plan looking NE of the rutile grade block model, and Figure 2.3.1_2 shows the cross sections A-A and B-B, the traces of which can be found on the oblique plan.
Table 2.3.1_1 shows the declared mineral resources, effective April 2023.
The table shows that 68% of the rutile and 74% of the graphite resources are in the Indicated Resource category. With this ratio, there was sufficient material to make the business case.
Mineral Reserves
Only resources in the Measured and Indicated category may qualify to estimate mineral reserves. Figure 2.3.2_1 shows the location of such mineral resources, illustrating a southern block of ground close to the railway line and a northern block.
During 2024 trail mining was carried out to test the removal of the saprolite by hydraulic means (= using water guns), which was the assumed method in the PFS, and dry mining by using excavators and haul trucks. The dry mining test pit measures 120 m by 110 m and is mined to a depth of 20 m. This provided significant insight and real mining data. The criteria for mining method selection were based not only on capital and operating cost but also on environmental, social and governance (“ESG”) considerations, infrastructure requirements, and operability. Following this pilot programme, several dry mining methods were evaluated to determine the optimal method for a large-scale operation. A dragline mining method was determined to be one of the safest, lowest risk, and most flexible. The conclusions drawn were:
- Due to the single-bench operation and the dragline’s extended reach, there will be fewer relocation operations than for any other mining method;
- Due to the single-bench operations, the dragline-mined materials will be a more consistent blend than those of other mining methods; and
- Draglines can excavate key cuts on the pit or mining block edges that can assist with pit dewatering, ensuring that the bulk of the mined material will be dry enough for truck transport.
Using a dragline makes for an extreme bulk mining operation. Therefore, all material within the pit shell will be extracted and fed to the plant as ore, and any interstitial waste and/or sub-economic grade material will be likewise treated as diluent material. However, due to the relatively homogenous and continuous nature of the orebody, the quantities of this material will be relatively small, and a simple 5% dilution was applied within the pit optimisation tool to approximate this assumption.
An overall slope angle of 20 degrees has been applied within the optimisation.
The optimisation shells were further refined based on the cut-off grades applied to develop a mineable geometry. The process applied the following constraints:
- A minimum depth of 5 m; and
- Pit extents limited to mineable areas and to remain outside of identified exclusion areas wherever reasonably possible. Sovereign identified all local village areas and areas of cultural or environmental significance within the potential mining envelope that should not be disturbed during the mining phase of the project.
The OPFS does not specify a cut-off grade for mineral reserves but is presumably the same as for mineral resources: 0.7% rutile. Table 2.3.2_1 gives the mineral reserves statement, effective January 2025.
Almost half of the rutile and graphite contained in Indicated resources are converted to Probable reserves at a grade that is 3% higher for rutile and 11% higher for graphite, despite the 5% dilution that was applied. The explanation is that mining will focus on higher-grade areas.
Mining Operations
Whereas the PFS assumed contractor mining, the OPFS assumes an owner-operated mine with leased equipment as the preferred operating model. Operations are to commence in the southern block (refer to Figure 2.3.1_1), feeding a central plant with a throughput capacity of 12 million tonnes per annum (“Mtpa”). This has the advantage of lowering haulage costs early in the life of mine (“LOM”), targeting pits close to this plant. The rail line and siding will be positioned at the South Plant location. A second plant with 12 Mtpa capacity is to be constructed in the northern block, starting production in year 5.
Based on fuel and electricity usage and costs, maintenance and repairs, labour costs, water usage, and other life cycle costs, the optimal run-of-mine (“ROM”) material transport solution has been determined to be trucking to the respective southern and northern plant areas using 120 – 140 tonne trucks.
The pits are backfilled as part of the mining operation and rehabilitation. In March 2025, the company announced that it had completed the backfilling of the 175,000 m3 test pit void and rehabilitation of the area. Backfilling employed the same equipment used to excavate the pit. The backfill design was optimised for maximum capacity. For this, a 65%:35% sands-to-fines co-disposal ratio was used in the pit voids.
Sovereign will return a good mix of soils as part of the backfilling and introduce carbon and soil nutrients through organic and inorganic inputs. Rehabilitation involves the following steps:
- Locally sourced dolomitic lime is added to the soil to a depth of 1 m below surface;
- Nutrients such as organics carbon and nutrients such as fertiliser in the form of potash, phosphate and nitrogen are added as well;
- These additions are incorporated in the soil through grading, ripping and discing using graders, ensuring that the land is level;
- Rehabilitation crops such as giant bamboo are planted, and maise and other cover crops are intercropped between the giant bamboo; and
- New seed varieties are being tested as part of an ongoing process, and a fruit and farming nursery has been established.
Metallurgy and Processing Operations
Metallurgical Test Work
After establishing the process flow, a pilot spiral plant was constructed at the project site to process material mined from the test pit, with further processing at the laboratory in Lilongwe. This programme's rutile and graphite concentrates were shared with potential off-takers and end users to provide material for further test work for graphite commercialisation.
Rutile recovery is defined as saleable rutile recovered divided by rutile contained in the feed. The feed assay is determined by a method that only measures non-magnetic rutile. However, slightly magnetic rutile, not determined by the assay method, is also in the feed. As bulk sample test work has indicated that it produces a product grading 97%-98% TiO2, it allows for the inclusion of some slightly magnetic rutile to stay within the required product specification. For this reason, the OPFS suggests a 100% recovery rate of the rutile feed grade.
Crux Investor commentary: This kind of guessing does not fit well with a study that professes to be an “optimised” PFS. With pilot plant processing, there is undoubtedly enough concentrate to do a proper mass balance. Working back from the total amount of rutile production over the LOM in the cash flow model, Sovereign suggests that 100% of the TiO2 content is recovered, but the average 95.7% TiO2 content in the concentrate is overlooked. It means that the cash flow model underestimates the amount of concentrate by 100/0.957 – 1 = 4.5%. This introduces some conservative bias.
The rutile product is reported at ~96% TiO2 with low impurities and relatively coarse with 50% larger than 106 μm. According to Sovereign, major end-users have confirmed its premium chemical and physical specifications and that it should be suitable for all major natural end-use markets, including TiO2 pigment feedstock, titanium metal, and welding sectors.
Since the process primarily focuses on maximising rutile recovery, the feed goes through a de-slime and gravity stage prior to processing graphite by flotation. This results in a graphite recovery that is lower than that of traditional graphite projects. The OPFS suggests a recovery of 67.5%. Here, the Sovereign cash flow model does take into account the average 96.5% total carbon (“Ct”) content of the concentrate.
The specifications for the graphite product produced during the test work are also considered premium. The product naturally grades over 96% Ct, with approximately 57% in the large to super-jumbo fractions (+180 μm). The grade and size distribution are shown in Figure 2.5.1_1, which is extracted from the OPFS news release.
According to Sovereign, further downstream testwork has demonstrated that Coated Spherical Purified Graphite (“CSPG”) produced from Kasiya natural flake graphite has performance characteristics comparable to the leading Chinese natural graphite anode materials manufacturers, such as BTR New Material Group (“BTR”). Electrochemical testing of the CSPG samples at a leading German institute achieved first cycle efficiencies (“FCE”) of 94.2% to 95.8%, with results above 95%, a key specification for highest-quality natural graphite anode materials under the Chinese standard.
Processing
Based on the testwork results the selected flow sheet for the new plant is as per Figure 2.5.2_1.
One of the main advantages of processing the Kasiya saprolite is that no crushing and grinding is required, only scrubbing (to remove clay minerals, not shown in the flow sheet) followed by removal of material with a grain size larger than 2 mm (“Oversize Removal”). In the cyclones, particles finer than 45 μm are removed, after which the spiral section separates a heavy mineral concentrate (“HMC”). The spirals produce a coarse and fine tailings stream enriched in graphite and low in rutile. A graphite flotation circuit upgrades the graphite to a saleable product.
The HMC is treated electrostatically to separate conductive rutile, ilmenite, and a non-conductive concentrate. Magnetic separation is used to separate the non-magnetic rutile and magnetic ilmenite.
Because of the bulking effect from removing in-situ saprolite to tailings, the disposal into the pits is insufficient, and a proportion will have to be disposed in a tailings storage facility (“TSF”). Mud farming will be employed to reduce the required footprint of the TSF and accelerate dewatering. Within the basin of the TSF, a drainage network will promote drainage of the deposited tailings. The schedule of tailings disposal is as follows:
- During the first five years, no backfilling of pits is carried ou,t and all tailings (sand and fines) are pumped to the TSF;
- Backfilling of pits will take place in the same order as the mine plan and will commence once mining a specific pit has been completed; and
- From year 6 onwards, no sand will be sent to the TSF; all will be sent to the pits. The fines from only one of the plants are part of the backfill, with the fines from the other plant sent to the TSF.
Economic Valuation
Metal Prices and Marketing Terms Assumed
This study has adopted the prices suggested in the OPFS as Crux Investor does not have the expertise to source current prices for the product qualities from Kasiya.
The OPFS prices are based on a forecast by TZ Minerals International Pty Ltd (“TZMI”) for Standard Grade Rutile (“SGR”) and Industrial Grade Rutile (“IGR”) and adopted the price forecast for Kasiya’s graphite basket from Fastmarkets but discounted by 30% to US$1,290/t. Figure 2.6.1_1 shows the price forecast over the LOM.
The OPFS assumes that during Phase 1, half the product sold will be SGR and the other half IGR. From Phase 2 production, 70% will be sold as SGR. The press release is quiet about the split during production year 2, when Phase 2 ramps up. Crux Investor has assumed that the split is proportional to the amount produced in years four and six.
The OPFS estimates off-mine charges for railing, storage, and port handling costs at US$108/t. Crux Investor assumes this is the rate converted to a dry metric tonne basis without information on the moisture content.
Production Schedule
After a 30-month pre-production period, the first year of production is forecast to be at 77.5% of plant capacity, and in year 5, the second plant's production is supposed to achieve 66.6% of this plant’s capacity. Crux Investor has assumed that the go-ahead decision will be made in 2026 and that the first production year will start on 1 January 2029.
The OPFS does not provide tables for the production forecast; it just provides graphs. Crux Investor has estimated annual numbers by eye-balling these graphs and could, fortunately, reproduce the LOM total production and grades. However, the graph in the news release showing annual graphite production does not make sense. It shows at steady state a very constant annual figure of approximately 260,000 tonnes per annum (‘tpa”), whereas the feed grade fluctuates considerably from year to year. It makes no sense, but over the LOM total production of Crux Investor and Sovereign are the same.
Comparing the amount of product generated annually to TiO2 feedstock demand forecasts made by the expert agencies, the rutile production of Phase 1 at full production in 2030 is forecast to account for 1.2% and in 2034 for 2.4%. However, natural rutile supply in 2024 was only 0.48 Mtpa, dropping from more than 0.7 Mtpa in 2017. Year 2 would be 0.13 Mtpa, or 28% of 2024 production. This will clearly impact the market for natural rutile, but TZMI forecasts a rapidly dropping supply with other major operations shutting down. By 2029, supply is forecast by TZMI to have fallen to 0.3 Mtpa, with the drop from current levels creating space for Kasiya supply.
The amount of graphite supplied is 5.5% of global demand in 2029 and 4.8% in 2034. This is considerable and could affect the graphite price, but the 30% discount applied to the forecast price should address this.
Even so, the large impact on the rutile and graphite markets is a concern. However, the Kasiya’s modular approach to expansion gives it great flexibility by cancelling or postponing Phase 2 until the market can absorb it. This valuation will also include a case without expansion.
Capital Expenditure
The capital expenditure forecast takes account of the excellent existing infrastructure for transport and power and the proximity to the capital city.
Table 2.6.3_1 shows the capital cost estimates for Phase 1, Phase 2, and sustaining capital expenditure. No breakdown is given for sustaining capex, and no schedule of outlays over the LOM is given. Crux Investor has assumed equal expenditure over 24 years, with nil in the final production year.
No capital outlay schedule is provided for Phase 1, but the press release mentions that of the Phase 2 provisions, US$92 million is spent in the first two years of production and US$370 million in years 5 and 6. Strangely, a substantial amount is payable well after plant construction has been finalised.
The provisions seem low for the very large operation, but the absence of a comminution circuit and simple process flow should make for a very cheap plant per tonne capacity. The low expenditure on mining is explained by the assumption that equipment will be leased.
The amount for contingencies is 15.9% for Phase 1 and 15.2% for Phase 2, which is low for a PFS confidence level.
Crux Investor has adopted the forecast for its economic assessment.
Operating Expenditure
The OPFS does not provide cost information based on tonnes mined and treated, but as cost “per tonne product”, no details are given. Crux Investor has assumed this to mean per tonne rutile and graphite combined.
Table 2.6.4_1 shows how the provided numbers convert to unit cost for each tonne treated.
A mining cost rate of US$1.80/t is very low, but the strip ratio is nil, no drilling and blasting is required, and a very high-productive piece of equipment carries out loading. Moreover, material handling is supposedly also covering the cost of transporting to the plant/stockpiles, and feeding of the plant, apart from tailings transport and product transport to the railway siding. Haulage is usually included in the cost of mining. Considering the above, the provision seems adequate if it accounts for haulage to the plant. However, considering that the tailings will be returned by mechanical means, this would be almost as costly as haulage to the plant. This places a question mark behind the adequacy of the material handling cost rate. Crux Investor has adopted the rate and will revisit the issue under sensitivities.
The processing cost is also very low, but the material does not need to be crushed and ground, and the treatment in the spiral plants is very low-cost. Again, the provision seems reasonable.
The General and Administrative (“G&A”) expense rate converts to an annual expenditure of US$7.2 million during Phase 1 and US$14.4 million during Phase 2. Even considering the low-cost nature of Malawi, this provision is too optimistic for the size of the operation. In the scheme of things, it is a minor issue and Crux Investor has adopted that rate.
The corporate overheads that the project needs to carry are missing from the cost structure. Crux Investor has added an annual amount of US$10 million, which is a guesstimate.
Royalties and Taxes
Sovereign gives the following details for royalties and taxes:
- A Community Development Royalty of 0.45% of total revenue;
- Malawi Mineral Royalty of 5% ad valorum;
- Vendor Gross Profit Royalty of 2%;
- The OPFS has not calculated an after-tax return because of uncertainty about the applicable income tax and the RRT. As a before-tax value is meaningless, Crux Investor has referred to the PFS and used a rate of 30% for income taxes and 15% for RRT.
Another essential piece of information not provided by Sovereign is the Malawian government's typical approach to allowing deductions for amortisation of initial capital expenditure and depreciation of capital expenditure during the LOM. Moreover, the financial statements for the period ending 31 December 2024 show that accumulated losses amount to almost US$100 million. No information is provided whether and how this is allowed against profits.
Crux Investor has referred to the Malawi Tax Incentives Handbook for the year 2022, from which it is clear that:
- An income tax rate of 30% is the highest for locally registered companies. When a company is deemed active in a “Priority Industry”, it may be granted a tax holiday for up to 10 years. Crux Investor records that the MDA entered into by Mkango provides for a 30% income tax rate;
- There is a provision for an “Initial Allowance” of 100% on new and unused buildings and 100% on new plant and machinery. In general, there is an annual allowance of 25% on heavy equipment;
- Any losses may be carried forward for up to six years (for Mkango, this is 10 years); and
- There is a withholding tax of 10% on dividends.
Based on the above, Crux Investor has amortised the initial capital expenditure in the first year of production, and any resulting assessed loss was off-set in subsequent years. The accumulated loss of US$100 million was applied to reduce income taxes. The income tax rate of 30% and a 15% rate for RRT were adopted.
Working Capital
It is crucial to account for working capital requirements for any project with a long product pipeline.
Table 2.6.6_1 shows Crux Investor's assumptions regarding various current assets and liabilities to arrive at the total investment in working capital.
Peak investment is forecast to be reached in production year 15. Crux Investor has assumed that all investments will be recovered at the end of the LOM, ignoring any losses, pilferage, and obsolesce.
Results
Table 2.6.7_1 summarises the LOM results for the OPFS scenario (including taxes) and Crux Investor valuation for the base case commodity prices and the input parameters set out above.
Using the OPFS parameters, the project has a very good operating margin of more than 64.6%, corresponding with the 64% number according to Sovereign Metals. However, despite using the same inputs for capital expenditure, etc., the net present value at a discount rate of 8% (“NPV8”) is US$1,148 million. This is substantially lower than the US$1,284 million, according to Sovereign, stated on page 60 of the OPFS news release. The difference may be attributable to the assumed pre-production period, with Crux Investor having production start on 1 January 2029, which is four years in the future, combined with a different treatment of negative cash flow. If applying the NPV formula of Excel, the negative cash flows are discounted at the same rate as the positive cash flow, implicitly assuming that the company earns this rate of return on capital raised. Crux Investor disagrees with this approach and assumes that all required funding is raised upfront and invested very securely, earning approximately a rate equal to inflation after tax. This dramatically adds to the negative cash flow burden.
When accounting for the 10% free-carried interest of the government (which reduces the NPV8 by US$128 million) and corporate expenses, net free cash flow attributable to the shareholders drops by US$768 million, reducing the NPV8 to US$924 million.
Given the risk that the Kasiya supplies could depress market prices for rutile and graphite, the case without Phase 2 expansion was evaluated. It assumes that 70% of the rutile is sold as industrial grade over the entire LOM. It also retains the 30% discount for the graphite basket price. This increases the gross margin from 64.6% to 65.2%. Sustaining capex has been dropped by 40%.
The NPV8 for Phase 1 only (without accounting for the many additional years' LOM available) is US$539 million. Every additional year would add approximately US$20 million to the value.
The average attributable annual revenue including Phase 2 is US$570 million, and excluding expansion US$329 million. A Google search shows that the definition of a Tier 1 mining project is one with substantial reserves and a projected LOM of 20 years or more (check), located in the lower quartile of the cost curve (check) and generating substantial revenue exceeding US$300-US$600 million annually.
Table 2.6.7_2 expresses the sensitivity of the value of Sovereign (assuming the Expansion case) as the change in NPV per percentage point change in the main parameters: metal prices, operating expenditure, and capital expenditure.
The sensitivity analysis demonstrates the very robust nature of the Kasiya project, with the NPV8 increasing by 2.3% (US$21.4 million) for every percentage point increase in the commodity prices and dropping by only 0.7% (US$6.4 million) for every percentage point increase in operating cost (i.e. US$0.07/t processed). Returning to the issue of the low material handling cost rate, doubling this would drop the NPV8 by US$120 million to US$804 million, indicating that it is not a fatal flaw.
Due to the front loading of capital expenditure, the change in the company’s value is more sensitive to this than for operating cost with each percentage point increase (US$15 million), dropping the NPV8 by 1.0% (US$9.1 million).
If the LOM is extended, which is almost certain, an additional year would increase the NPV8 by around US$35 million.
The Enterprise Value of Sovereign Metals On 8 April 2025
At the share price of A$0.68 on 8 April 2025, the market capitalisation for the 647 million shares outstanding after the recent placement is A$440 million, or US$264 million.
On 31 December 2024, the company had no warrants outstanding, but 22.2 performance share units. Whereas on that day net current assets amounted to almost A$29 million, these can be considered committed to bringing the project to a DFS stage, as applies to the A$40 million newly raised. It has been ignored to compare the company's Enterprise Value (see Table 3_1) to what the economic assessment indicates.
This Enterprise Value compares to the NPV8 of US$924.3 million for the Kasiya project after the 10% free-carries interest of the government. Assuming Rio Tinto maintains its 18.45% beneficial stake, the US$754 million attributable to Sovereign is at a 176% premium to the Sovereign Enterprise Value. The premium is still an impressive 140% when doubling the material handling cost rate.
When assuming no expansion, the premium of NPV8 to Enterprise Value drops to 61%, and 40% when doubling material handling costs.
The company is currently clearly undervalued.
DISCLOSURE: One of the analysts involved in compiling this report has taken an active position in Sovereign Metals.
Executive Summary
To date, our Analyst’s Notes company assessments have been relatively even between positive and negative write-ups. Negative assessments - whilst often accurate - are almost always poorly received by both the companies in question and their investors, generating strong resistance.
This note begins by reviewing the track record of Crux Investor's recommendations since the inception of the Analyst’s Notes. We’re pleased to report that the track record is strong. Investors without exposure typically remain indifferent, but those holding positions often react defensively, sometimes accusing Crux Investor of having hidden agendas. In reality, nothing could be further from the truth. Our analysts are empowered to present their views candidly, without bias. That said, when given the option, they much prefer highlighting opportunities and sharing positive insights -it’s simply more rewarding. Fortunately, the company featured in this note is a clear standout and easy to endorse.
Sovereign Metals Limited (“Sovereign”) (ASX:SVM)(AIM:SVML)(OTCQX:SVMLF) is a company that has been involved in Malawi since 2012 when it started exploring for graphite deposits in hard rock. Over the years, as it generated more and more targets, it found very good-grade deposits in saprolite, which is rock that has decomposed through weathering to a soft medium. As metallurgical testwork was carried out, substantial amounts of rutile (TiO2) were also present, an even more attractive commodity. Eventually, the company settled on a project area called Kasiya, where a thick layer of saprolite was present, with good grades of both natural rutile and flake graphite. Testwork proved that the rutile can be upgraded to a premium product of coarse grain size and an average grade of 95.7% TiO2, making it suitable for marketing as industrial grade, attracting a premium to standard grade. The graphite product is also very attractive, with approximately 57% of the flakes in the large to super jumbo fractions, which attract premium prices.
Whereas the grade of the deposit is low compared to some other rutile and graphite deposits, the economics are very attractive because they occur in free-dig material. No waste stripping is required, and processing is very cheap, not having to crush and grind, and using spirals for the initial separation. There is however some concern about whether or not the cost structure sufficiently accounts for the cost of returning the tailings to the pits by mechanical means.
As Sovereign is an Australian company, it is not obligated to publish a comprehensive report on its business case. Therefore, this review had to draw information from many company announcements to generate the business case. Most of the information was drawn from a press release reporting on the findings of an “optimised” pre-feasibility study (“OPFS”). Crux Investor has adopted the input parameters of this study but included the government’s free carried interest and a provision for corporate expenses.
The pre-feasibility study is classified as “optimised” because the company has been able to substantially de-risk issues such as mining, processing, and rehabilitation through pilot projects. These programs are carried out with the assistance of Rio Tinto, which has endorsed the project significantly by becoming a strategic shareholder, earning it a 19.9% interest by funding studies since July 2023.
Given the scale of operation, risks are associated with the size of additional supply to the natural rutile and graphite markets. The OPFS relies on a forecast sharp decline in the natural rutile market because of the imminent closure of major operations, and has applied a 30% discount to the estimated value of the basket of graphite products. A phased approach to production growth will further assist in market absorption of the production. Full production is forecast in year 7, which Crux Investor has modelled as calendar year 2035.
Using the OPFS inputs, Crux Investor valuation arrives at an NPV8 value of US$1,148 million, substantially lower than the US$1,284 million according to Sovereign. The explanation for the differential is a longer lead time modelled by Crux Investor and a more onerous treatment of negative cash flow. When the government’s free-carried interest is accounted for, as well as corporate expenses and investments in net current assets, Crux Investor arrives at an NPV8 of US$924 million. Doubling the material handling cost rate drops this further to US$804 million. Crux Investor has also gauged the risk of the market not being able to absorb the total rutile and graphite supply by dropping the Phase 2 expansion altogether. This reduces the NPV8 to US$539million.
At the current share price, the diluted Enterprise value is US$273 million, assuming all cash is committed to completing the DFS and arriving at a go-ahead decision. Given Rio Tinto’s 18.45% stake, the US$754 million attributable to Sovereign is at a 176% premium to the Enterprise Value. When doubling the materials handling cost rate, the premium of the NPV8 to the Enterprise Value is still an impressive 140%.
When assuming no expansion, the premium of NPV8 to Enterprise Value drops to 61% and 40% when doubling material handling costs.
Sovereign is clearly undervalued.
Introduction
Crux Investor wished to start this introduction by summarising previous Analyst Notes before tackling the subject at hand.
Since 2020, Crux Investor has issued valuation notes by the same authors, which were published from March 2020 onwards under the Analyst’s Notes banner. The analysts pride themselves in having no preconceived ideas and ulterior agendas. They call it as it is. This can lead to negative conclusions, usually not received well by those long in the stock. Below is a table showing the performance of companies that were downrated.
As the table illustrates, our recommendations have been spot-on except for Discovery Silver, whose price has risen over the last three months from C$0.66 to its current level (+152%) on the back of the acquisition of the Porcupine Complex from Newmont in January 2025. It is safe to say that people who did heed our recommendation in 2020 did well.
The Analyst’s Notes are not, in principle, negative, but undervalued shares are hard to find, particularly in the precious metal sector. Table 1_2 shows the share price performance for the companies that received a positive buy recommendation.
The analysts got it spectacularly wrong with Cobre, relying too much on assay values indicated by handheld XRF’s. An apology was issued to the readers. The re-rating of McEwen Mining based on the prospects of the Los Azules project in Argentina has not (yet) occurred.
The notes on GoGold Resources and Mako Mining were neutral and did not have a recommendation.
The introduction above indicates that although some analysts have been negative, there were reasonable grounds for this. Our preference is for positive notes, as these are more gratifying. That brings us to the subject of this note, which is a company that, in the opinion of the analysts, is undervalued. At last, we found another good opportunity.
Sovereign Metals Limited (“Sovereign”) (ASX:SVM)(AIM:SVML)(OTCQX:SVMLF) is an Australian company with a rutile and graphite project in Malawi, Africa. The company started its involvement in Malawi in 2012 when it acquired McCourt Mining Pty Limited (“McCourt”), which held the Central Malawi Graphite project composed of three tenement areas totalling 7,261 km2 near the capital city Lilongwe. The close proximity of transport infrastructure, including a railway line to the Nacala port on the Indian Ocean, would facilitate the development of a bulk project such as an operation producing graphite. Initially, deposits along the Duwi Trend received the most attention. Within this trend, high-grade flake graphite is present in hard rock. Initial metallurgical testwork showed that two-thirds of the ultra-pure (grading 99.97%) concentrate was in the form of Extra Large (“Jumbo”) and Large flake, which carries a significant premium over small or medium flake sizes.
The company carried out in parallel geophysical surveys, which resulted by the end of 2014 in the identification of 43 high-priority targets in the Lifidzi and Malingunde areas, where a deep, preserved weathering profile favours the formation of graphite deposits in saprolite (rock decomposed due to chemical weathering to a soft medium). This allows for cheap exploration by shallow auger and air-core drilling, is free-dig material amenable to simple processing with no crushing and milling, and is devoid of sulphides. This caused Sovereign to concentrate on such targets, in parallel with advancing the Duwi target to a scoping study (= equivalent to a preliminary economic assessment) completed in September 2015. Figure 1_1 shows the location of various graphite targets with the darker grade background for hard rock and the light-grey indicating saprolite-hosted deposits.
While carrying out metallurgical testwork on saprolite material from Malingunde, it was observed to contain a high amount of rutile (TiO2) that could be upgraded to a clean concentrate. Suddenly, the company had a valuable co-product. The historical hand-auger drill samples were re-assayed for TiO2, demonstrating that such mineralisation occurred extensively in the Malingunde and Lifidzi areas - the Lifidzi deposit sites within EPL0372 on the map above (Figure 1_1).
Therefore, the company started to concentrate on rutile exploration, and by February 2020, it could publish the map reproduced in Figure 1_2.
Whereas the Railroad, Railroad West, and Kasiya deposits are saprolite hosted, the trend that stretches over 50 km in a north-northeast direction is the Bua Channel deposit, with rutile washed from the saprolite areas into a fluvial system resulting in a placer deposit.
By September 2020, the Kasiya target, measuring at the time 7.5 km long by 3 km wide, became the focus of attention, with the treatment of a bulk sample of 1 tonne yielding high-grade rutile with an attractive coarse product size. By December 2021, the quality of the Kasiya deposit was even more apparent, with metallurgical testwork showing that a simple flow sheet could produce a very high-quality rutile concentrate with low impurities at very high recovery rates and a high-grade, coarse flake graphite by-product (note how graphite was downgraded from “co-product”).
By April 2022, Sovereign could declare an updated mineral resource estimate (“MRE”) for Kasiya, proclaiming it to be the largest global rutile deposit and the world’s second-largest graphite resource after Balama in Mozambique, which Syrah Resources own.
The updated MRE must have been the reason for Sovereign to decide in December 2022 to demerge its hard-rock tenements by ceding these to a wholly owned subsidiary, NGX Limited (“NGX”), and spinning it off to its shareholders before NGX listed separately on the ASX. After the spin-off, management could fully concentrate on advancing the Kasiya project, which was the subject of a pre-feasibility study (“PFS”).
By April 2023, another updated MRE was announced. While only slightly increasing the total resource estimate, it substantially upgraded resources from the Inferred to Indicated category, which rose by 80%. This would enable the completion of a PFS.
On 17 July 2023, Kasiya received a major endorsement when Rio Tinto invested A$40.4 million to become a 15% shareholder in Sovereign, with the proceeds used to advance the project. Under the investment agreement, Rio Tinto would provide assistance and advice on technical and marketing aspects with respect to the graphite co-product (promoted again from being a by-product) with a primary focus on spherical purified graphite (“SPG”) for the lithium-ion battery anode market. Rio Tinto also obtained the option to increase its shareholding to 19.9% by investing an additional A$18.5 million before 14 July 2023.
As part of its investment Rio Tinto obtained an even more important option. Following the conclusion of a Definitive Feasibility Study (“DFS”), Rio Tinto can opt to become the Operator of the project “on commercial arm’s length terms”. Rio Tinto needs to decide on the exercise of this option within 180 days after the announcement of the DFS results. Should Rio Tinto cease to hold voting power in Sovereign of at least 10%, the option expires.
Operatorship gives Rio Tinto the exclusive marketing rights to market 40% of the annual production of all products (therefore including rutile products) as identified in the DFS “on arm' s-length terms.” As long as Rio Tinto holds a minimum of 10% of the issued shares and until the deadline to exercise the option for Operatorship, Rio Tinto has the pre-emptive right over any offer from a third party to acquire shares or assets.
Rio Tinto actively contributed to the project's advancement by appointing members to the technical committee and a General Manager. The agreement further stipulates that Sovereign and Rio Tinto will collaborate to qualify the project’s graphite co-product, with a particular focus on supplying the SPG segment of the lithium-ion battery market.
The PFS results, with an after-tax NPV8 of US$1.6 billion, were announced on 28 September. The project was limited to 25 years.
The year 2024 was used to start de-risking the project by carrying out trial mining, both dry and hydraulic, and firming up the quality of the graphite product to supply specific markets. Rio Tinto liked what it saw, increasing its shareholding to 19.9%.
On 22 January 2025, the OPFS findings were announced, this time advertising a pre-tax NPV of US$2.3 billion, with the company uncertain about the tax regulations. Hidden on page 60, the company provides a range of NPV8s from US$1.28 billion to US$1.56 billion depending on the rate of the rent resource tax (“RRT”) assumed.
Derisking continued with the rehabilitation of the test pit dug to select the mining method, which was completed on 5 March 2025, and the graphite by-product strategy, which was announced on 25 March 2025.
The company plans to complete the DFS in September 2025.
Figure 1_3 shows the share price history of Sovereign on the Australian Stock Exchange over the last five years.
The share price rose sharply in 2020 and early 2021 with the discovery of rutile in the saprolite deposits. After that, the price stabilised during the study phases and the completion of the MREs, which is typical for this project phase.
With the endorsement of Rio Tinto, the price restarted its upward trend, which continued as the project was being de-risked and the completion of the DFS came closer. Following the release of the findings of the DFS, Rio Tinto will have to decide within 180 days to exercise its option to become the Operator. The very sharp drop in the last few days is due to a substantial share placement with institutions at A$0.85, which was at a discount of almost 13% from the price just before the announcement. The market did not take this discount kindly, probably exacerbated by the recent market turmoil. The A$40 million raised is to fund all studies and permitting up to completion of the DFS. Rio Tinto has yet to indicate if it will exercise its non-dilutive rights and purchase the relevant number of shares. Currently its holding has been diluted to 18.45%. This is a big negative, but there could be a number of explanations. Rio Tinto can acquire the shares substantially cheaper in the open market than at A$0.85. Even when retaining only its current shareholding, it maintains its Operator option and may well pay less for a full takeover by suppressing the price rise through this action. Rio Tinto may also have come to the conclusion that the project is of insufficient size, which will be investigated later in this report. In summary, the Rio Tinto dilution is concerning, but not necessarily a fatal flaw.
At the share price of A$0.68 on 8 April, including the 47 million shares from the placement that will be issued by 2 April, the market capitalisation is A$440 million, equivalent to US$264 million. Whereas the equity ownership of the Malawian government still needs to be negotiated as part of the future Mine Development Agreement (“MDA”), two recently concluded MDA’s with Mkango Resources (“Mkango”) and Lotus Resources Ltd (“Lotus”) provided for 10%. Considering Sovereign's current 80% shareholding, this places a value of US$ million / 0.8 / 0.9 = US$367 million on the project. As the government’s share is free-carried, and the companies need to fully fund development, the actual valuation is a bit higher. Even so, with an indicated value between US$1.3 billion and US$1.6 billion, Sovereign seems to be trading at an enormous discount.
This is sufficient reason for Crux Investor to investigate whether or not this is the case.
Valuation of the Kasiya Project
Background
Being an Australian-listed company, Sovereign is not required to file comprehensive technical documents that address all issues in a systematic and consistent manner. Therefore, to provide the reader with a proper understanding of the project, Crux Investor had to review all press releases over the exploration and study period and refer to the awful JORC tables included in press releases to generate the following sections. The JORC tables allow the company to “discuss” the relevant matters in a lazy way without having to logically motivate the business plan.
The technical information has been mainly drawn from news releases with the findings of the PFS dated 28 September 2023 and the optimised PFS dated 22 January 2025. Unless expressly stated otherwise, all illustrations, technical information, and wording in Section 2.1 until Section 2.6.5 have been drawn from these reports.
The project is located 30 km northwest of Lilongwe, the capital, and approximately 45 km by road (see Figure 2.1_1).
The project area benefits from a very close proximity to the railway network. The Nacala Logistics Corridor (“NLC”), which runs through the Kasiya project area, offers the preferred logistics route to the deep-water Indian Ocean port of Nacala to export mineral products to global markets. To access the NLC, Sovereign plans to construct its exclusive 6 km rail spur to connect directly with the plant. A purpose-built rail dry port is planned at the mine site to rail to Nacala. The southern port of Beira, connecting Kasiya via the recently refurbished Sena Rail Line, offers a secondary export route.
Whereas the national electric power transmission and distribution company has assured that sufficient power will be available, and Sovereign plans to connect to the national grid via a 97 km power line, it also plans to build a 30 MW generator farm to ensure an alternative power source.
Malawi, being a subtropical country, provides ample opportunity to capture sufficient water in a purpose-built raw water dam northwest of the plant site.
Geology and Mineralisation
Kasiya is located on the Lilongwe Plain, which is underlain by rocks enriched in rutile and graphite. These rock types strike north-south in the south of the project area and northeast-southwest further north. The original protolith (= original, unmetamorphosed rock) was subjected to deep burial, resulting in very high-grade metamorphism, at which temperatures and pressures rutile is the most stable crystal form for titanium. In situ growth of new minerals led to a rock containing coarse-grained rutile and graphite.
Much later, exhumation and tropical weathering physically and chemically depleted mobile minerals from the near-surface horizon, causing volume loss and concurrent concentration of resistant minerals such as rutile and graphite. These minerals are therefore in near-surface, flat blanket-style bodies of saprolite. Saprolite is chemically weathered rock that retains the original texture and structure of the parent rock but is soft and easily broken down. Given the flat, somewhat undulating landscape, erosion was limited, and the bodies are preserved over wide areas. At Kasiya high-grade mineralisation commonly grades 1.2% to 2.0 % rutile in the top 3-5 m from the surface, with moderate grades of between 0.5% and 1.2% rutile commonly from 5 m to the base of the soft saprolite, which is generally at 20 m to 30 m depth, where it terminates on hard basement rock. Graphite in contrast, is depleted in the top 3-5 m and shows an inverse grade relationship with rutile. At depths of more than 5 m, graphite is not depleted.
Figure 2.2_1 shows the grade relationships with depth and weathering product, drawn from a press release dated 9 June 2021.
Mineral Resources and Mineral Reserves
Mineral Resources
The MRE could rely on a drilling database collared at a nominal spacing of 200 m by 200 m. Drilling was done using a spiral hand-auger (“HA”) and push-tube (“PT”) core. As these methods are unable to retrieve reliable samples once the bit is 3 m to 5 m below the water table, which is approximately at 9.5 m depth, aircore (“AC”) drilling in some high-grade areas was used to confirm the continuation of rutile and graphite grade and depth, and to define the fresh rock elevation.
The geological model is based on constructing domains for the upper soil (at 0–1 m deep), ferruginous pedolith (1–4 m), less mineralised mottled (4-7 m), pallid saprolite (7-9 m) and saprolite (9-25 m). The topsoil horizon was defined at 0.3 m thickness. Based on lithology, 1 m intervals were composited with a maximum sample interval of 2 m. Interpolation of grade was constrained by applying hard boundaries for the domains.
The average parent size is based on the average drill hole spacing 200 m x 200 m x 3 m with 5 sub-cells in the x and y axes and 10 down depth to smooth topographical and lithological transitions. A review of the grade assay statistics showed no extremes, and grade cutting is not required. Variography was used to determine the search directions for grade interpolation. Inverse Distance to the power 4 (ID4) was used to estimate block grades.
For reporting purposes, a nominal 0.7% rutile grade was used. As graphite is a by-product, no cut-off grade is applied.
Figure 2.3.1_1 shows an oblique plan looking NE of the rutile grade block model, and Figure 2.3.1_2 shows the cross sections A-A and B-B, the traces of which can be found on the oblique plan.
Table 2.3.1_1 shows the declared mineral resources, effective April 2023.
The table shows that 68% of the rutile and 74% of the graphite resources are in the Indicated Resource category. With this ratio, there was sufficient material to make the business case.
Mineral Reserves
Only resources in the Measured and Indicated category may qualify to estimate mineral reserves. Figure 2.3.2_1 shows the location of such mineral resources, illustrating a southern block of ground close to the railway line and a northern block.
During 2024 trail mining was carried out to test the removal of the saprolite by hydraulic means (= using water guns), which was the assumed method in the PFS, and dry mining by using excavators and haul trucks. The dry mining test pit measures 120 m by 110 m and is mined to a depth of 20 m. This provided significant insight and real mining data. The criteria for mining method selection were based not only on capital and operating cost but also on environmental, social and governance (“ESG”) considerations, infrastructure requirements, and operability. Following this pilot programme, several dry mining methods were evaluated to determine the optimal method for a large-scale operation. A dragline mining method was determined to be one of the safest, lowest risk, and most flexible. The conclusions drawn were:
- Due to the single-bench operation and the dragline’s extended reach, there will be fewer relocation operations than for any other mining method;
- Due to the single-bench operations, the dragline-mined materials will be a more consistent blend than those of other mining methods; and
- Draglines can excavate key cuts on the pit or mining block edges that can assist with pit dewatering, ensuring that the bulk of the mined material will be dry enough for truck transport.
Using a dragline makes for an extreme bulk mining operation. Therefore, all material within the pit shell will be extracted and fed to the plant as ore, and any interstitial waste and/or sub-economic grade material will be likewise treated as diluent material. However, due to the relatively homogenous and continuous nature of the orebody, the quantities of this material will be relatively small, and a simple 5% dilution was applied within the pit optimisation tool to approximate this assumption.
An overall slope angle of 20 degrees has been applied within the optimisation.
The optimisation shells were further refined based on the cut-off grades applied to develop a mineable geometry. The process applied the following constraints:
- A minimum depth of 5 m; and
- Pit extents limited to mineable areas and to remain outside of identified exclusion areas wherever reasonably possible. Sovereign identified all local village areas and areas of cultural or environmental significance within the potential mining envelope that should not be disturbed during the mining phase of the project.
The OPFS does not specify a cut-off grade for mineral reserves but is presumably the same as for mineral resources: 0.7% rutile. Table 2.3.2_1 gives the mineral reserves statement, effective January 2025.
Almost half of the rutile and graphite contained in Indicated resources are converted to Probable reserves at a grade that is 3% higher for rutile and 11% higher for graphite, despite the 5% dilution that was applied. The explanation is that mining will focus on higher-grade areas.
Mining Operations
Whereas the PFS assumed contractor mining, the OPFS assumes an owner-operated mine with leased equipment as the preferred operating model. Operations are to commence in the southern block (refer to Figure 2.3.1_1), feeding a central plant with a throughput capacity of 12 million tonnes per annum (“Mtpa”). This has the advantage of lowering haulage costs early in the life of mine (“LOM”), targeting pits close to this plant. The rail line and siding will be positioned at the South Plant location. A second plant with 12 Mtpa capacity is to be constructed in the northern block, starting production in year 5.
Based on fuel and electricity usage and costs, maintenance and repairs, labour costs, water usage, and other life cycle costs, the optimal run-of-mine (“ROM”) material transport solution has been determined to be trucking to the respective southern and northern plant areas using 120 – 140 tonne trucks.
The pits are backfilled as part of the mining operation and rehabilitation. In March 2025, the company announced that it had completed the backfilling of the 175,000 m3 test pit void and rehabilitation of the area. Backfilling employed the same equipment used to excavate the pit. The backfill design was optimised for maximum capacity. For this, a 65%:35% sands-to-fines co-disposal ratio was used in the pit voids.
Sovereign will return a good mix of soils as part of the backfilling and introduce carbon and soil nutrients through organic and inorganic inputs. Rehabilitation involves the following steps:
- Locally sourced dolomitic lime is added to the soil to a depth of 1 m below surface;
- Nutrients such as organics carbon and nutrients such as fertiliser in the form of potash, phosphate and nitrogen are added as well;
- These additions are incorporated in the soil through grading, ripping and discing using graders, ensuring that the land is level;
- Rehabilitation crops such as giant bamboo are planted, and maise and other cover crops are intercropped between the giant bamboo; and
- New seed varieties are being tested as part of an ongoing process, and a fruit and farming nursery has been established.
Metallurgy and Processing Operations
Metallurgical Test Work
After establishing the process flow, a pilot spiral plant was constructed at the project site to process material mined from the test pit, with further processing at the laboratory in Lilongwe. This programme's rutile and graphite concentrates were shared with potential off-takers and end users to provide material for further test work for graphite commercialisation.
Rutile recovery is defined as saleable rutile recovered divided by rutile contained in the feed. The feed assay is determined by a method that only measures non-magnetic rutile. However, slightly magnetic rutile, not determined by the assay method, is also in the feed. As bulk sample test work has indicated that it produces a product grading 97%-98% TiO2, it allows for the inclusion of some slightly magnetic rutile to stay within the required product specification. For this reason, the OPFS suggests a 100% recovery rate of the rutile feed grade.
Crux Investor commentary: This kind of guessing does not fit well with a study that professes to be an “optimised” PFS. With pilot plant processing, there is undoubtedly enough concentrate to do a proper mass balance. Working back from the total amount of rutile production over the LOM in the cash flow model, Sovereign suggests that 100% of the TiO2 content is recovered, but the average 95.7% TiO2 content in the concentrate is overlooked. It means that the cash flow model underestimates the amount of concentrate by 100/0.957 – 1 = 4.5%. This introduces some conservative bias.
The rutile product is reported at ~96% TiO2 with low impurities and relatively coarse with 50% larger than 106 μm. According to Sovereign, major end-users have confirmed its premium chemical and physical specifications and that it should be suitable for all major natural end-use markets, including TiO2 pigment feedstock, titanium metal, and welding sectors.
Since the process primarily focuses on maximising rutile recovery, the feed goes through a de-slime and gravity stage prior to processing graphite by flotation. This results in a graphite recovery that is lower than that of traditional graphite projects. The OPFS suggests a recovery of 67.5%. Here, the Sovereign cash flow model does take into account the average 96.5% total carbon (“Ct”) content of the concentrate.
The specifications for the graphite product produced during the test work are also considered premium. The product naturally grades over 96% Ct, with approximately 57% in the large to super-jumbo fractions (+180 μm). The grade and size distribution are shown in Figure 2.5.1_1, which is extracted from the OPFS news release.
According to Sovereign, further downstream testwork has demonstrated that Coated Spherical Purified Graphite (“CSPG”) produced from Kasiya natural flake graphite has performance characteristics comparable to the leading Chinese natural graphite anode materials manufacturers, such as BTR New Material Group (“BTR”). Electrochemical testing of the CSPG samples at a leading German institute achieved first cycle efficiencies (“FCE”) of 94.2% to 95.8%, with results above 95%, a key specification for highest-quality natural graphite anode materials under the Chinese standard.
Processing
Based on the testwork results the selected flow sheet for the new plant is as per Figure 2.5.2_1.
One of the main advantages of processing the Kasiya saprolite is that no crushing and grinding is required, only scrubbing (to remove clay minerals, not shown in the flow sheet) followed by removal of material with a grain size larger than 2 mm (“Oversize Removal”). In the cyclones, particles finer than 45 μm are removed, after which the spiral section separates a heavy mineral concentrate (“HMC”). The spirals produce a coarse and fine tailings stream enriched in graphite and low in rutile. A graphite flotation circuit upgrades the graphite to a saleable product.
The HMC is treated electrostatically to separate conductive rutile, ilmenite, and a non-conductive concentrate. Magnetic separation is used to separate the non-magnetic rutile and magnetic ilmenite.
Because of the bulking effect from removing in-situ saprolite to tailings, the disposal into the pits is insufficient, and a proportion will have to be disposed in a tailings storage facility (“TSF”). Mud farming will be employed to reduce the required footprint of the TSF and accelerate dewatering. Within the basin of the TSF, a drainage network will promote drainage of the deposited tailings. The schedule of tailings disposal is as follows:
- During the first five years, no backfilling of pits is carried ou,t and all tailings (sand and fines) are pumped to the TSF;
- Backfilling of pits will take place in the same order as the mine plan and will commence once mining a specific pit has been completed; and
- From year 6 onwards, no sand will be sent to the TSF; all will be sent to the pits. The fines from only one of the plants are part of the backfill, with the fines from the other plant sent to the TSF.
Economic Valuation
Metal Prices and Marketing Terms Assumed
This study has adopted the prices suggested in the OPFS as Crux Investor does not have the expertise to source current prices for the product qualities from Kasiya.
The OPFS prices are based on a forecast by TZ Minerals International Pty Ltd (“TZMI”) for Standard Grade Rutile (“SGR”) and Industrial Grade Rutile (“IGR”) and adopted the price forecast for Kasiya’s graphite basket from Fastmarkets but discounted by 30% to US$1,290/t. Figure 2.6.1_1 shows the price forecast over the LOM.
The OPFS assumes that during Phase 1, half the product sold will be SGR and the other half IGR. From Phase 2 production, 70% will be sold as SGR. The press release is quiet about the split during production year 2, when Phase 2 ramps up. Crux Investor has assumed that the split is proportional to the amount produced in years four and six.
The OPFS estimates off-mine charges for railing, storage, and port handling costs at US$108/t. Crux Investor assumes this is the rate converted to a dry metric tonne basis without information on the moisture content.
Production Schedule
After a 30-month pre-production period, the first year of production is forecast to be at 77.5% of plant capacity, and in year 5, the second plant's production is supposed to achieve 66.6% of this plant’s capacity. Crux Investor has assumed that the go-ahead decision will be made in 2026 and that the first production year will start on 1 January 2029.
The OPFS does not provide tables for the production forecast; it just provides graphs. Crux Investor has estimated annual numbers by eye-balling these graphs and could, fortunately, reproduce the LOM total production and grades. However, the graph in the news release showing annual graphite production does not make sense. It shows at steady state a very constant annual figure of approximately 260,000 tonnes per annum (‘tpa”), whereas the feed grade fluctuates considerably from year to year. It makes no sense, but over the LOM total production of Crux Investor and Sovereign are the same.
Comparing the amount of product generated annually to TiO2 feedstock demand forecasts made by the expert agencies, the rutile production of Phase 1 at full production in 2030 is forecast to account for 1.2% and in 2034 for 2.4%. However, natural rutile supply in 2024 was only 0.48 Mtpa, dropping from more than 0.7 Mtpa in 2017. Year 2 would be 0.13 Mtpa, or 28% of 2024 production. This will clearly impact the market for natural rutile, but TZMI forecasts a rapidly dropping supply with other major operations shutting down. By 2029, supply is forecast by TZMI to have fallen to 0.3 Mtpa, with the drop from current levels creating space for Kasiya supply.
The amount of graphite supplied is 5.5% of global demand in 2029 and 4.8% in 2034. This is considerable and could affect the graphite price, but the 30% discount applied to the forecast price should address this.
Even so, the large impact on the rutile and graphite markets is a concern. However, the Kasiya’s modular approach to expansion gives it great flexibility by cancelling or postponing Phase 2 until the market can absorb it. This valuation will also include a case without expansion.
Capital Expenditure
The capital expenditure forecast takes account of the excellent existing infrastructure for transport and power and the proximity to the capital city.
Table 2.6.3_1 shows the capital cost estimates for Phase 1, Phase 2, and sustaining capital expenditure. No breakdown is given for sustaining capex, and no schedule of outlays over the LOM is given. Crux Investor has assumed equal expenditure over 24 years, with nil in the final production year.
No capital outlay schedule is provided for Phase 1, but the press release mentions that of the Phase 2 provisions, US$92 million is spent in the first two years of production and US$370 million in years 5 and 6. Strangely, a substantial amount is payable well after plant construction has been finalised.
The provisions seem low for the very large operation, but the absence of a comminution circuit and simple process flow should make for a very cheap plant per tonne capacity. The low expenditure on mining is explained by the assumption that equipment will be leased.
The amount for contingencies is 15.9% for Phase 1 and 15.2% for Phase 2, which is low for a PFS confidence level.
Crux Investor has adopted the forecast for its economic assessment.
Operating Expenditure
The OPFS does not provide cost information based on tonnes mined and treated, but as cost “per tonne product”, no details are given. Crux Investor has assumed this to mean per tonne rutile and graphite combined.
Table 2.6.4_1 shows how the provided numbers convert to unit cost for each tonne treated.
A mining cost rate of US$1.80/t is very low, but the strip ratio is nil, no drilling and blasting is required, and a very high-productive piece of equipment carries out loading. Moreover, material handling is supposedly also covering the cost of transporting to the plant/stockpiles, and feeding of the plant, apart from tailings transport and product transport to the railway siding. Haulage is usually included in the cost of mining. Considering the above, the provision seems adequate if it accounts for haulage to the plant. However, considering that the tailings will be returned by mechanical means, this would be almost as costly as haulage to the plant. This places a question mark behind the adequacy of the material handling cost rate. Crux Investor has adopted the rate and will revisit the issue under sensitivities.
The processing cost is also very low, but the material does not need to be crushed and ground, and the treatment in the spiral plants is very low-cost. Again, the provision seems reasonable.
The General and Administrative (“G&A”) expense rate converts to an annual expenditure of US$7.2 million during Phase 1 and US$14.4 million during Phase 2. Even considering the low-cost nature of Malawi, this provision is too optimistic for the size of the operation. In the scheme of things, it is a minor issue and Crux Investor has adopted that rate.
The corporate overheads that the project needs to carry are missing from the cost structure. Crux Investor has added an annual amount of US$10 million, which is a guesstimate.
Royalties and Taxes
Sovereign gives the following details for royalties and taxes:
- A Community Development Royalty of 0.45% of total revenue;
- Malawi Mineral Royalty of 5% ad valorum;
- Vendor Gross Profit Royalty of 2%;
- The OPFS has not calculated an after-tax return because of uncertainty about the applicable income tax and the RRT. As a before-tax value is meaningless, Crux Investor has referred to the PFS and used a rate of 30% for income taxes and 15% for RRT.
Another essential piece of information not provided by Sovereign is the Malawian government's typical approach to allowing deductions for amortisation of initial capital expenditure and depreciation of capital expenditure during the LOM. Moreover, the financial statements for the period ending 31 December 2024 show that accumulated losses amount to almost US$100 million. No information is provided whether and how this is allowed against profits.
Crux Investor has referred to the Malawi Tax Incentives Handbook for the year 2022, from which it is clear that:
- An income tax rate of 30% is the highest for locally registered companies. When a company is deemed active in a “Priority Industry”, it may be granted a tax holiday for up to 10 years. Crux Investor records that the MDA entered into by Mkango provides for a 30% income tax rate;
- There is a provision for an “Initial Allowance” of 100% on new and unused buildings and 100% on new plant and machinery. In general, there is an annual allowance of 25% on heavy equipment;
- Any losses may be carried forward for up to six years (for Mkango, this is 10 years); and
- There is a withholding tax of 10% on dividends.
Based on the above, Crux Investor has amortised the initial capital expenditure in the first year of production, and any resulting assessed loss was off-set in subsequent years. The accumulated loss of US$100 million was applied to reduce income taxes. The income tax rate of 30% and a 15% rate for RRT were adopted.
Working Capital
It is crucial to account for working capital requirements for any project with a long product pipeline.
Table 2.6.6_1 shows Crux Investor's assumptions regarding various current assets and liabilities to arrive at the total investment in working capital.
Peak investment is forecast to be reached in production year 15. Crux Investor has assumed that all investments will be recovered at the end of the LOM, ignoring any losses, pilferage, and obsolesce.
Results
Table 2.6.7_1 summarises the LOM results for the OPFS scenario (including taxes) and Crux Investor valuation for the base case commodity prices and the input parameters set out above.
Using the OPFS parameters, the project has a very good operating margin of more than 64.6%, corresponding with the 64% number according to Sovereign Metals. However, despite using the same inputs for capital expenditure, etc., the net present value at a discount rate of 8% (“NPV8”) is US$1,148 million. This is substantially lower than the US$1,284 million, according to Sovereign, stated on page 60 of the OPFS news release. The difference may be attributable to the assumed pre-production period, with Crux Investor having production start on 1 January 2029, which is four years in the future, combined with a different treatment of negative cash flow. If applying the NPV formula of Excel, the negative cash flows are discounted at the same rate as the positive cash flow, implicitly assuming that the company earns this rate of return on capital raised. Crux Investor disagrees with this approach and assumes that all required funding is raised upfront and invested very securely, earning approximately a rate equal to inflation after tax. This dramatically adds to the negative cash flow burden.
When accounting for the 10% free-carried interest of the government (which reduces the NPV8 by US$128 million) and corporate expenses, net free cash flow attributable to the shareholders drops by US$768 million, reducing the NPV8 to US$924 million.
Given the risk that the Kasiya supplies could depress market prices for rutile and graphite, the case without Phase 2 expansion was evaluated. It assumes that 70% of the rutile is sold as industrial grade over the entire LOM. It also retains the 30% discount for the graphite basket price. This increases the gross margin from 64.6% to 65.2%. Sustaining capex has been dropped by 40%.
The NPV8 for Phase 1 only (without accounting for the many additional years' LOM available) is US$539 million. Every additional year would add approximately US$20 million to the value.
The average attributable annual revenue including Phase 2 is US$570 million, and excluding expansion US$329 million. A Google search shows that the definition of a Tier 1 mining project is one with substantial reserves and a projected LOM of 20 years or more (check), located in the lower quartile of the cost curve (check) and generating substantial revenue exceeding US$300-US$600 million annually.
Table 2.6.7_2 expresses the sensitivity of the value of Sovereign (assuming the Expansion case) as the change in NPV per percentage point change in the main parameters: metal prices, operating expenditure, and capital expenditure.
The sensitivity analysis demonstrates the very robust nature of the Kasiya project, with the NPV8 increasing by 2.3% (US$21.4 million) for every percentage point increase in the commodity prices and dropping by only 0.7% (US$6.4 million) for every percentage point increase in operating cost (i.e. US$0.07/t processed). Returning to the issue of the low material handling cost rate, doubling this would drop the NPV8 by US$120 million to US$804 million, indicating that it is not a fatal flaw.
Due to the front loading of capital expenditure, the change in the company’s value is more sensitive to this than for operating cost with each percentage point increase (US$15 million), dropping the NPV8 by 1.0% (US$9.1 million).
If the LOM is extended, which is almost certain, an additional year would increase the NPV8 by around US$35 million.
The Enterprise Value of Sovereign Metals On 8 April 2025
At the share price of A$0.68 on 8 April 2025, the market capitalisation for the 647 million shares outstanding after the recent placement is A$440 million, or US$264 million.
On 31 December 2024, the company had no warrants outstanding, but 22.2 performance share units. Whereas on that day net current assets amounted to almost A$29 million, these can be considered committed to bringing the project to a DFS stage, as applies to the A$40 million newly raised. It has been ignored to compare the company's Enterprise Value (see Table 3_1) to what the economic assessment indicates.
This Enterprise Value compares to the NPV8 of US$924.3 million for the Kasiya project after the 10% free-carries interest of the government. Assuming Rio Tinto maintains its 18.45% beneficial stake, the US$754 million attributable to Sovereign is at a 176% premium to the Sovereign Enterprise Value. The premium is still an impressive 140% when doubling the material handling cost rate.
When assuming no expansion, the premium of NPV8 to Enterprise Value drops to 61%, and 40% when doubling material handling costs.
The company is currently clearly undervalued.
DISCLOSURE: One of the analysts involved in compiling this report has taken an active position in Sovereign Metals.
Executive Summary
To date, our Analyst’s Notes company assessments have been relatively even between positive and negative write-ups. Negative assessments - whilst often accurate - are almost always poorly received by both the companies in question and their investors, generating strong resistance.
This note begins by reviewing the track record of Crux Investor's recommendations since the inception of the Analyst’s Notes. We’re pleased to report that the track record is strong. Investors without exposure typically remain indifferent, but those holding positions often react defensively, sometimes accusing Crux Investor of having hidden agendas. In reality, nothing could be further from the truth. Our analysts are empowered to present their views candidly, without bias. That said, when given the option, they much prefer highlighting opportunities and sharing positive insights -it’s simply more rewarding. Fortunately, the company featured in this note is a clear standout and easy to endorse.
Sovereign Metals Limited (“Sovereign”) (ASX:SVM)(AIM:SVML)(OTCQX:SVMLF) is a company that has been involved in Malawi since 2012 when it started exploring for graphite deposits in hard rock. Over the years, as it generated more and more targets, it found very good-grade deposits in saprolite, which is rock that has decomposed through weathering to a soft medium. As metallurgical testwork was carried out, substantial amounts of rutile (TiO2) were also present, an even more attractive commodity. Eventually, the company settled on a project area called Kasiya, where a thick layer of saprolite was present, with good grades of both natural rutile and flake graphite. Testwork proved that the rutile can be upgraded to a premium product of coarse grain size and an average grade of 95.7% TiO2, making it suitable for marketing as industrial grade, attracting a premium to standard grade. The graphite product is also very attractive, with approximately 57% of the flakes in the large to super jumbo fractions, which attract premium prices.
Whereas the grade of the deposit is low compared to some other rutile and graphite deposits, the economics are very attractive because they occur in free-dig material. No waste stripping is required, and processing is very cheap, not having to crush and grind, and using spirals for the initial separation. There is however some concern about whether or not the cost structure sufficiently accounts for the cost of returning the tailings to the pits by mechanical means.
As Sovereign is an Australian company, it is not obligated to publish a comprehensive report on its business case. Therefore, this review had to draw information from many company announcements to generate the business case. Most of the information was drawn from a press release reporting on the findings of an “optimised” pre-feasibility study (“OPFS”). Crux Investor has adopted the input parameters of this study but included the government’s free carried interest and a provision for corporate expenses.
The pre-feasibility study is classified as “optimised” because the company has been able to substantially de-risk issues such as mining, processing, and rehabilitation through pilot projects. These programs are carried out with the assistance of Rio Tinto, which has endorsed the project significantly by becoming a strategic shareholder, earning it a 19.9% interest by funding studies since July 2023.
Given the scale of operation, risks are associated with the size of additional supply to the natural rutile and graphite markets. The OPFS relies on a forecast sharp decline in the natural rutile market because of the imminent closure of major operations, and has applied a 30% discount to the estimated value of the basket of graphite products. A phased approach to production growth will further assist in market absorption of the production. Full production is forecast in year 7, which Crux Investor has modelled as calendar year 2035.
Using the OPFS inputs, Crux Investor valuation arrives at an NPV8 value of US$1,148 million, substantially lower than the US$1,284 million according to Sovereign. The explanation for the differential is a longer lead time modelled by Crux Investor and a more onerous treatment of negative cash flow. When the government’s free-carried interest is accounted for, as well as corporate expenses and investments in net current assets, Crux Investor arrives at an NPV8 of US$924 million. Doubling the material handling cost rate drops this further to US$804 million. Crux Investor has also gauged the risk of the market not being able to absorb the total rutile and graphite supply by dropping the Phase 2 expansion altogether. This reduces the NPV8 to US$539million.
At the current share price, the diluted Enterprise value is US$273 million, assuming all cash is committed to completing the DFS and arriving at a go-ahead decision. Given Rio Tinto’s 18.45% stake, the US$754 million attributable to Sovereign is at a 176% premium to the Enterprise Value. When doubling the materials handling cost rate, the premium of the NPV8 to the Enterprise Value is still an impressive 140%.
When assuming no expansion, the premium of NPV8 to Enterprise Value drops to 61% and 40% when doubling material handling costs.
Sovereign is clearly undervalued.
Introduction
Crux Investor wished to start this introduction by summarising previous Analyst Notes before tackling the subject at hand.
Since 2020, Crux Investor has issued valuation notes by the same authors, which were published from March 2020 onwards under the Analyst’s Notes banner. The analysts pride themselves in having no preconceived ideas and ulterior agendas. They call it as it is. This can lead to negative conclusions, usually not received well by those long in the stock. Below is a table showing the performance of companies that were downrated.
As the table illustrates, our recommendations have been spot-on except for Discovery Silver, whose price has risen over the last three months from C$0.66 to its current level (+152%) on the back of the acquisition of the Porcupine Complex from Newmont in January 2025. It is safe to say that people who did heed our recommendation in 2020 did well.
The Analyst’s Notes are not, in principle, negative, but undervalued shares are hard to find, particularly in the precious metal sector. Table 1_2 shows the share price performance for the companies that received a positive buy recommendation.
The analysts got it spectacularly wrong with Cobre, relying too much on assay values indicated by handheld XRF’s. An apology was issued to the readers. The re-rating of McEwen Mining based on the prospects of the Los Azules project in Argentina has not (yet) occurred.
The notes on GoGold Resources and Mako Mining were neutral and did not have a recommendation.
The introduction above indicates that although some analysts have been negative, there were reasonable grounds for this. Our preference is for positive notes, as these are more gratifying. That brings us to the subject of this note, which is a company that, in the opinion of the analysts, is undervalued. At last, we found another good opportunity.
Sovereign Metals Limited (“Sovereign”) (ASX:SVM)(AIM:SVML)(OTCQX:SVMLF) is an Australian company with a rutile and graphite project in Malawi, Africa. The company started its involvement in Malawi in 2012 when it acquired McCourt Mining Pty Limited (“McCourt”), which held the Central Malawi Graphite project composed of three tenement areas totalling 7,261 km2 near the capital city Lilongwe. The close proximity of transport infrastructure, including a railway line to the Nacala port on the Indian Ocean, would facilitate the development of a bulk project such as an operation producing graphite. Initially, deposits along the Duwi Trend received the most attention. Within this trend, high-grade flake graphite is present in hard rock. Initial metallurgical testwork showed that two-thirds of the ultra-pure (grading 99.97%) concentrate was in the form of Extra Large (“Jumbo”) and Large flake, which carries a significant premium over small or medium flake sizes.
The company carried out in parallel geophysical surveys, which resulted by the end of 2014 in the identification of 43 high-priority targets in the Lifidzi and Malingunde areas, where a deep, preserved weathering profile favours the formation of graphite deposits in saprolite (rock decomposed due to chemical weathering to a soft medium). This allows for cheap exploration by shallow auger and air-core drilling, is free-dig material amenable to simple processing with no crushing and milling, and is devoid of sulphides. This caused Sovereign to concentrate on such targets, in parallel with advancing the Duwi target to a scoping study (= equivalent to a preliminary economic assessment) completed in September 2015. Figure 1_1 shows the location of various graphite targets with the darker grade background for hard rock and the light-grey indicating saprolite-hosted deposits.
While carrying out metallurgical testwork on saprolite material from Malingunde, it was observed to contain a high amount of rutile (TiO2) that could be upgraded to a clean concentrate. Suddenly, the company had a valuable co-product. The historical hand-auger drill samples were re-assayed for TiO2, demonstrating that such mineralisation occurred extensively in the Malingunde and Lifidzi areas - the Lifidzi deposit sites within EPL0372 on the map above (Figure 1_1).
Therefore, the company started to concentrate on rutile exploration, and by February 2020, it could publish the map reproduced in Figure 1_2.
Whereas the Railroad, Railroad West, and Kasiya deposits are saprolite hosted, the trend that stretches over 50 km in a north-northeast direction is the Bua Channel deposit, with rutile washed from the saprolite areas into a fluvial system resulting in a placer deposit.
By September 2020, the Kasiya target, measuring at the time 7.5 km long by 3 km wide, became the focus of attention, with the treatment of a bulk sample of 1 tonne yielding high-grade rutile with an attractive coarse product size. By December 2021, the quality of the Kasiya deposit was even more apparent, with metallurgical testwork showing that a simple flow sheet could produce a very high-quality rutile concentrate with low impurities at very high recovery rates and a high-grade, coarse flake graphite by-product (note how graphite was downgraded from “co-product”).
By April 2022, Sovereign could declare an updated mineral resource estimate (“MRE”) for Kasiya, proclaiming it to be the largest global rutile deposit and the world’s second-largest graphite resource after Balama in Mozambique, which Syrah Resources own.
The updated MRE must have been the reason for Sovereign to decide in December 2022 to demerge its hard-rock tenements by ceding these to a wholly owned subsidiary, NGX Limited (“NGX”), and spinning it off to its shareholders before NGX listed separately on the ASX. After the spin-off, management could fully concentrate on advancing the Kasiya project, which was the subject of a pre-feasibility study (“PFS”).
By April 2023, another updated MRE was announced. While only slightly increasing the total resource estimate, it substantially upgraded resources from the Inferred to Indicated category, which rose by 80%. This would enable the completion of a PFS.
On 17 July 2023, Kasiya received a major endorsement when Rio Tinto invested A$40.4 million to become a 15% shareholder in Sovereign, with the proceeds used to advance the project. Under the investment agreement, Rio Tinto would provide assistance and advice on technical and marketing aspects with respect to the graphite co-product (promoted again from being a by-product) with a primary focus on spherical purified graphite (“SPG”) for the lithium-ion battery anode market. Rio Tinto also obtained the option to increase its shareholding to 19.9% by investing an additional A$18.5 million before 14 July 2023.
As part of its investment Rio Tinto obtained an even more important option. Following the conclusion of a Definitive Feasibility Study (“DFS”), Rio Tinto can opt to become the Operator of the project “on commercial arm’s length terms”. Rio Tinto needs to decide on the exercise of this option within 180 days after the announcement of the DFS results. Should Rio Tinto cease to hold voting power in Sovereign of at least 10%, the option expires.
Operatorship gives Rio Tinto the exclusive marketing rights to market 40% of the annual production of all products (therefore including rutile products) as identified in the DFS “on arm' s-length terms.” As long as Rio Tinto holds a minimum of 10% of the issued shares and until the deadline to exercise the option for Operatorship, Rio Tinto has the pre-emptive right over any offer from a third party to acquire shares or assets.
Rio Tinto actively contributed to the project's advancement by appointing members to the technical committee and a General Manager. The agreement further stipulates that Sovereign and Rio Tinto will collaborate to qualify the project’s graphite co-product, with a particular focus on supplying the SPG segment of the lithium-ion battery market.
The PFS results, with an after-tax NPV8 of US$1.6 billion, were announced on 28 September. The project was limited to 25 years.
The year 2024 was used to start de-risking the project by carrying out trial mining, both dry and hydraulic, and firming up the quality of the graphite product to supply specific markets. Rio Tinto liked what it saw, increasing its shareholding to 19.9%.
On 22 January 2025, the OPFS findings were announced, this time advertising a pre-tax NPV of US$2.3 billion, with the company uncertain about the tax regulations. Hidden on page 60, the company provides a range of NPV8s from US$1.28 billion to US$1.56 billion depending on the rate of the rent resource tax (“RRT”) assumed.
Derisking continued with the rehabilitation of the test pit dug to select the mining method, which was completed on 5 March 2025, and the graphite by-product strategy, which was announced on 25 March 2025.
The company plans to complete the DFS in September 2025.
Figure 1_3 shows the share price history of Sovereign on the Australian Stock Exchange over the last five years.
The share price rose sharply in 2020 and early 2021 with the discovery of rutile in the saprolite deposits. After that, the price stabilised during the study phases and the completion of the MREs, which is typical for this project phase.
With the endorsement of Rio Tinto, the price restarted its upward trend, which continued as the project was being de-risked and the completion of the DFS came closer. Following the release of the findings of the DFS, Rio Tinto will have to decide within 180 days to exercise its option to become the Operator. The very sharp drop in the last few days is due to a substantial share placement with institutions at A$0.85, which was at a discount of almost 13% from the price just before the announcement. The market did not take this discount kindly, probably exacerbated by the recent market turmoil. The A$40 million raised is to fund all studies and permitting up to completion of the DFS. Rio Tinto has yet to indicate if it will exercise its non-dilutive rights and purchase the relevant number of shares. Currently its holding has been diluted to 18.45%. This is a big negative, but there could be a number of explanations. Rio Tinto can acquire the shares substantially cheaper in the open market than at A$0.85. Even when retaining only its current shareholding, it maintains its Operator option and may well pay less for a full takeover by suppressing the price rise through this action. Rio Tinto may also have come to the conclusion that the project is of insufficient size, which will be investigated later in this report. In summary, the Rio Tinto dilution is concerning, but not necessarily a fatal flaw.
At the share price of A$0.68 on 8 April, including the 47 million shares from the placement that will be issued by 2 April, the market capitalisation is A$440 million, equivalent to US$264 million. Whereas the equity ownership of the Malawian government still needs to be negotiated as part of the future Mine Development Agreement (“MDA”), two recently concluded MDA’s with Mkango Resources (“Mkango”) and Lotus Resources Ltd (“Lotus”) provided for 10%. Considering Sovereign's current 80% shareholding, this places a value of US$ million / 0.8 / 0.9 = US$367 million on the project. As the government’s share is free-carried, and the companies need to fully fund development, the actual valuation is a bit higher. Even so, with an indicated value between US$1.3 billion and US$1.6 billion, Sovereign seems to be trading at an enormous discount.
This is sufficient reason for Crux Investor to investigate whether or not this is the case.
Valuation of the Kasiya Project
Background
Being an Australian-listed company, Sovereign is not required to file comprehensive technical documents that address all issues in a systematic and consistent manner. Therefore, to provide the reader with a proper understanding of the project, Crux Investor had to review all press releases over the exploration and study period and refer to the awful JORC tables included in press releases to generate the following sections. The JORC tables allow the company to “discuss” the relevant matters in a lazy way without having to logically motivate the business plan.
The technical information has been mainly drawn from news releases with the findings of the PFS dated 28 September 2023 and the optimised PFS dated 22 January 2025. Unless expressly stated otherwise, all illustrations, technical information, and wording in Section 2.1 until Section 2.6.5 have been drawn from these reports.
The project is located 30 km northwest of Lilongwe, the capital, and approximately 45 km by road (see Figure 2.1_1).
The project area benefits from a very close proximity to the railway network. The Nacala Logistics Corridor (“NLC”), which runs through the Kasiya project area, offers the preferred logistics route to the deep-water Indian Ocean port of Nacala to export mineral products to global markets. To access the NLC, Sovereign plans to construct its exclusive 6 km rail spur to connect directly with the plant. A purpose-built rail dry port is planned at the mine site to rail to Nacala. The southern port of Beira, connecting Kasiya via the recently refurbished Sena Rail Line, offers a secondary export route.
Whereas the national electric power transmission and distribution company has assured that sufficient power will be available, and Sovereign plans to connect to the national grid via a 97 km power line, it also plans to build a 30 MW generator farm to ensure an alternative power source.
Malawi, being a subtropical country, provides ample opportunity to capture sufficient water in a purpose-built raw water dam northwest of the plant site.
Geology and Mineralisation
Kasiya is located on the Lilongwe Plain, which is underlain by rocks enriched in rutile and graphite. These rock types strike north-south in the south of the project area and northeast-southwest further north. The original protolith (= original, unmetamorphosed rock) was subjected to deep burial, resulting in very high-grade metamorphism, at which temperatures and pressures rutile is the most stable crystal form for titanium. In situ growth of new minerals led to a rock containing coarse-grained rutile and graphite.
Much later, exhumation and tropical weathering physically and chemically depleted mobile minerals from the near-surface horizon, causing volume loss and concurrent concentration of resistant minerals such as rutile and graphite. These minerals are therefore in near-surface, flat blanket-style bodies of saprolite. Saprolite is chemically weathered rock that retains the original texture and structure of the parent rock but is soft and easily broken down. Given the flat, somewhat undulating landscape, erosion was limited, and the bodies are preserved over wide areas. At Kasiya high-grade mineralisation commonly grades 1.2% to 2.0 % rutile in the top 3-5 m from the surface, with moderate grades of between 0.5% and 1.2% rutile commonly from 5 m to the base of the soft saprolite, which is generally at 20 m to 30 m depth, where it terminates on hard basement rock. Graphite in contrast, is depleted in the top 3-5 m and shows an inverse grade relationship with rutile. At depths of more than 5 m, graphite is not depleted.
Figure 2.2_1 shows the grade relationships with depth and weathering product, drawn from a press release dated 9 June 2021.
Mineral Resources and Mineral Reserves
Mineral Resources
The MRE could rely on a drilling database collared at a nominal spacing of 200 m by 200 m. Drilling was done using a spiral hand-auger (“HA”) and push-tube (“PT”) core. As these methods are unable to retrieve reliable samples once the bit is 3 m to 5 m below the water table, which is approximately at 9.5 m depth, aircore (“AC”) drilling in some high-grade areas was used to confirm the continuation of rutile and graphite grade and depth, and to define the fresh rock elevation.
The geological model is based on constructing domains for the upper soil (at 0–1 m deep), ferruginous pedolith (1–4 m), less mineralised mottled (4-7 m), pallid saprolite (7-9 m) and saprolite (9-25 m). The topsoil horizon was defined at 0.3 m thickness. Based on lithology, 1 m intervals were composited with a maximum sample interval of 2 m. Interpolation of grade was constrained by applying hard boundaries for the domains.
The average parent size is based on the average drill hole spacing 200 m x 200 m x 3 m with 5 sub-cells in the x and y axes and 10 down depth to smooth topographical and lithological transitions. A review of the grade assay statistics showed no extremes, and grade cutting is not required. Variography was used to determine the search directions for grade interpolation. Inverse Distance to the power 4 (ID4) was used to estimate block grades.
For reporting purposes, a nominal 0.7% rutile grade was used. As graphite is a by-product, no cut-off grade is applied.
Figure 2.3.1_1 shows an oblique plan looking NE of the rutile grade block model, and Figure 2.3.1_2 shows the cross sections A-A and B-B, the traces of which can be found on the oblique plan.
Table 2.3.1_1 shows the declared mineral resources, effective April 2023.
The table shows that 68% of the rutile and 74% of the graphite resources are in the Indicated Resource category. With this ratio, there was sufficient material to make the business case.
Mineral Reserves
Only resources in the Measured and Indicated category may qualify to estimate mineral reserves. Figure 2.3.2_1 shows the location of such mineral resources, illustrating a southern block of ground close to the railway line and a northern block.
During 2024 trail mining was carried out to test the removal of the saprolite by hydraulic means (= using water guns), which was the assumed method in the PFS, and dry mining by using excavators and haul trucks. The dry mining test pit measures 120 m by 110 m and is mined to a depth of 20 m. This provided significant insight and real mining data. The criteria for mining method selection were based not only on capital and operating cost but also on environmental, social and governance (“ESG”) considerations, infrastructure requirements, and operability. Following this pilot programme, several dry mining methods were evaluated to determine the optimal method for a large-scale operation. A dragline mining method was determined to be one of the safest, lowest risk, and most flexible. The conclusions drawn were:
- Due to the single-bench operation and the dragline’s extended reach, there will be fewer relocation operations than for any other mining method;
- Due to the single-bench operations, the dragline-mined materials will be a more consistent blend than those of other mining methods; and
- Draglines can excavate key cuts on the pit or mining block edges that can assist with pit dewatering, ensuring that the bulk of the mined material will be dry enough for truck transport.
Using a dragline makes for an extreme bulk mining operation. Therefore, all material within the pit shell will be extracted and fed to the plant as ore, and any interstitial waste and/or sub-economic grade material will be likewise treated as diluent material. However, due to the relatively homogenous and continuous nature of the orebody, the quantities of this material will be relatively small, and a simple 5% dilution was applied within the pit optimisation tool to approximate this assumption.
An overall slope angle of 20 degrees has been applied within the optimisation.
The optimisation shells were further refined based on the cut-off grades applied to develop a mineable geometry. The process applied the following constraints:
- A minimum depth of 5 m; and
- Pit extents limited to mineable areas and to remain outside of identified exclusion areas wherever reasonably possible. Sovereign identified all local village areas and areas of cultural or environmental significance within the potential mining envelope that should not be disturbed during the mining phase of the project.
The OPFS does not specify a cut-off grade for mineral reserves but is presumably the same as for mineral resources: 0.7% rutile. Table 2.3.2_1 gives the mineral reserves statement, effective January 2025.
Almost half of the rutile and graphite contained in Indicated resources are converted to Probable reserves at a grade that is 3% higher for rutile and 11% higher for graphite, despite the 5% dilution that was applied. The explanation is that mining will focus on higher-grade areas.
Mining Operations
Whereas the PFS assumed contractor mining, the OPFS assumes an owner-operated mine with leased equipment as the preferred operating model. Operations are to commence in the southern block (refer to Figure 2.3.1_1), feeding a central plant with a throughput capacity of 12 million tonnes per annum (“Mtpa”). This has the advantage of lowering haulage costs early in the life of mine (“LOM”), targeting pits close to this plant. The rail line and siding will be positioned at the South Plant location. A second plant with 12 Mtpa capacity is to be constructed in the northern block, starting production in year 5.
Based on fuel and electricity usage and costs, maintenance and repairs, labour costs, water usage, and other life cycle costs, the optimal run-of-mine (“ROM”) material transport solution has been determined to be trucking to the respective southern and northern plant areas using 120 – 140 tonne trucks.
The pits are backfilled as part of the mining operation and rehabilitation. In March 2025, the company announced that it had completed the backfilling of the 175,000 m3 test pit void and rehabilitation of the area. Backfilling employed the same equipment used to excavate the pit. The backfill design was optimised for maximum capacity. For this, a 65%:35% sands-to-fines co-disposal ratio was used in the pit voids.
Sovereign will return a good mix of soils as part of the backfilling and introduce carbon and soil nutrients through organic and inorganic inputs. Rehabilitation involves the following steps:
- Locally sourced dolomitic lime is added to the soil to a depth of 1 m below surface;
- Nutrients such as organics carbon and nutrients such as fertiliser in the form of potash, phosphate and nitrogen are added as well;
- These additions are incorporated in the soil through grading, ripping and discing using graders, ensuring that the land is level;
- Rehabilitation crops such as giant bamboo are planted, and maise and other cover crops are intercropped between the giant bamboo; and
- New seed varieties are being tested as part of an ongoing process, and a fruit and farming nursery has been established.
Metallurgy and Processing Operations
Metallurgical Test Work
After establishing the process flow, a pilot spiral plant was constructed at the project site to process material mined from the test pit, with further processing at the laboratory in Lilongwe. This programme's rutile and graphite concentrates were shared with potential off-takers and end users to provide material for further test work for graphite commercialisation.
Rutile recovery is defined as saleable rutile recovered divided by rutile contained in the feed. The feed assay is determined by a method that only measures non-magnetic rutile. However, slightly magnetic rutile, not determined by the assay method, is also in the feed. As bulk sample test work has indicated that it produces a product grading 97%-98% TiO2, it allows for the inclusion of some slightly magnetic rutile to stay within the required product specification. For this reason, the OPFS suggests a 100% recovery rate of the rutile feed grade.
Crux Investor commentary: This kind of guessing does not fit well with a study that professes to be an “optimised” PFS. With pilot plant processing, there is undoubtedly enough concentrate to do a proper mass balance. Working back from the total amount of rutile production over the LOM in the cash flow model, Sovereign suggests that 100% of the TiO2 content is recovered, but the average 95.7% TiO2 content in the concentrate is overlooked. It means that the cash flow model underestimates the amount of concentrate by 100/0.957 – 1 = 4.5%. This introduces some conservative bias.
The rutile product is reported at ~96% TiO2 with low impurities and relatively coarse with 50% larger than 106 μm. According to Sovereign, major end-users have confirmed its premium chemical and physical specifications and that it should be suitable for all major natural end-use markets, including TiO2 pigment feedstock, titanium metal, and welding sectors.
Since the process primarily focuses on maximising rutile recovery, the feed goes through a de-slime and gravity stage prior to processing graphite by flotation. This results in a graphite recovery that is lower than that of traditional graphite projects. The OPFS suggests a recovery of 67.5%. Here, the Sovereign cash flow model does take into account the average 96.5% total carbon (“Ct”) content of the concentrate.
The specifications for the graphite product produced during the test work are also considered premium. The product naturally grades over 96% Ct, with approximately 57% in the large to super-jumbo fractions (+180 μm). The grade and size distribution are shown in Figure 2.5.1_1, which is extracted from the OPFS news release.
According to Sovereign, further downstream testwork has demonstrated that Coated Spherical Purified Graphite (“CSPG”) produced from Kasiya natural flake graphite has performance characteristics comparable to the leading Chinese natural graphite anode materials manufacturers, such as BTR New Material Group (“BTR”). Electrochemical testing of the CSPG samples at a leading German institute achieved first cycle efficiencies (“FCE”) of 94.2% to 95.8%, with results above 95%, a key specification for highest-quality natural graphite anode materials under the Chinese standard.
Processing
Based on the testwork results the selected flow sheet for the new plant is as per Figure 2.5.2_1.
One of the main advantages of processing the Kasiya saprolite is that no crushing and grinding is required, only scrubbing (to remove clay minerals, not shown in the flow sheet) followed by removal of material with a grain size larger than 2 mm (“Oversize Removal”). In the cyclones, particles finer than 45 μm are removed, after which the spiral section separates a heavy mineral concentrate (“HMC”). The spirals produce a coarse and fine tailings stream enriched in graphite and low in rutile. A graphite flotation circuit upgrades the graphite to a saleable product.
The HMC is treated electrostatically to separate conductive rutile, ilmenite, and a non-conductive concentrate. Magnetic separation is used to separate the non-magnetic rutile and magnetic ilmenite.
Because of the bulking effect from removing in-situ saprolite to tailings, the disposal into the pits is insufficient, and a proportion will have to be disposed in a tailings storage facility (“TSF”). Mud farming will be employed to reduce the required footprint of the TSF and accelerate dewatering. Within the basin of the TSF, a drainage network will promote drainage of the deposited tailings. The schedule of tailings disposal is as follows:
- During the first five years, no backfilling of pits is carried ou,t and all tailings (sand and fines) are pumped to the TSF;
- Backfilling of pits will take place in the same order as the mine plan and will commence once mining a specific pit has been completed; and
- From year 6 onwards, no sand will be sent to the TSF; all will be sent to the pits. The fines from only one of the plants are part of the backfill, with the fines from the other plant sent to the TSF.
Economic Valuation
Metal Prices and Marketing Terms Assumed
This study has adopted the prices suggested in the OPFS as Crux Investor does not have the expertise to source current prices for the product qualities from Kasiya.
The OPFS prices are based on a forecast by TZ Minerals International Pty Ltd (“TZMI”) for Standard Grade Rutile (“SGR”) and Industrial Grade Rutile (“IGR”) and adopted the price forecast for Kasiya’s graphite basket from Fastmarkets but discounted by 30% to US$1,290/t. Figure 2.6.1_1 shows the price forecast over the LOM.
The OPFS assumes that during Phase 1, half the product sold will be SGR and the other half IGR. From Phase 2 production, 70% will be sold as SGR. The press release is quiet about the split during production year 2, when Phase 2 ramps up. Crux Investor has assumed that the split is proportional to the amount produced in years four and six.
The OPFS estimates off-mine charges for railing, storage, and port handling costs at US$108/t. Crux Investor assumes this is the rate converted to a dry metric tonne basis without information on the moisture content.
Production Schedule
After a 30-month pre-production period, the first year of production is forecast to be at 77.5% of plant capacity, and in year 5, the second plant's production is supposed to achieve 66.6% of this plant’s capacity. Crux Investor has assumed that the go-ahead decision will be made in 2026 and that the first production year will start on 1 January 2029.
The OPFS does not provide tables for the production forecast; it just provides graphs. Crux Investor has estimated annual numbers by eye-balling these graphs and could, fortunately, reproduce the LOM total production and grades. However, the graph in the news release showing annual graphite production does not make sense. It shows at steady state a very constant annual figure of approximately 260,000 tonnes per annum (‘tpa”), whereas the feed grade fluctuates considerably from year to year. It makes no sense, but over the LOM total production of Crux Investor and Sovereign are the same.
Comparing the amount of product generated annually to TiO2 feedstock demand forecasts made by the expert agencies, the rutile production of Phase 1 at full production in 2030 is forecast to account for 1.2% and in 2034 for 2.4%. However, natural rutile supply in 2024 was only 0.48 Mtpa, dropping from more than 0.7 Mtpa in 2017. Year 2 would be 0.13 Mtpa, or 28% of 2024 production. This will clearly impact the market for natural rutile, but TZMI forecasts a rapidly dropping supply with other major operations shutting down. By 2029, supply is forecast by TZMI to have fallen to 0.3 Mtpa, with the drop from current levels creating space for Kasiya supply.
The amount of graphite supplied is 5.5% of global demand in 2029 and 4.8% in 2034. This is considerable and could affect the graphite price, but the 30% discount applied to the forecast price should address this.
Even so, the large impact on the rutile and graphite markets is a concern. However, the Kasiya’s modular approach to expansion gives it great flexibility by cancelling or postponing Phase 2 until the market can absorb it. This valuation will also include a case without expansion.
Capital Expenditure
The capital expenditure forecast takes account of the excellent existing infrastructure for transport and power and the proximity to the capital city.
Table 2.6.3_1 shows the capital cost estimates for Phase 1, Phase 2, and sustaining capital expenditure. No breakdown is given for sustaining capex, and no schedule of outlays over the LOM is given. Crux Investor has assumed equal expenditure over 24 years, with nil in the final production year.
No capital outlay schedule is provided for Phase 1, but the press release mentions that of the Phase 2 provisions, US$92 million is spent in the first two years of production and US$370 million in years 5 and 6. Strangely, a substantial amount is payable well after plant construction has been finalised.
The provisions seem low for the very large operation, but the absence of a comminution circuit and simple process flow should make for a very cheap plant per tonne capacity. The low expenditure on mining is explained by the assumption that equipment will be leased.
The amount for contingencies is 15.9% for Phase 1 and 15.2% for Phase 2, which is low for a PFS confidence level.
Crux Investor has adopted the forecast for its economic assessment.
Operating Expenditure
The OPFS does not provide cost information based on tonnes mined and treated, but as cost “per tonne product”, no details are given. Crux Investor has assumed this to mean per tonne rutile and graphite combined.
Table 2.6.4_1 shows how the provided numbers convert to unit cost for each tonne treated.
A mining cost rate of US$1.80/t is very low, but the strip ratio is nil, no drilling and blasting is required, and a very high-productive piece of equipment carries out loading. Moreover, material handling is supposedly also covering the cost of transporting to the plant/stockpiles, and feeding of the plant, apart from tailings transport and product transport to the railway siding. Haulage is usually included in the cost of mining. Considering the above, the provision seems adequate if it accounts for haulage to the plant. However, considering that the tailings will be returned by mechanical means, this would be almost as costly as haulage to the plant. This places a question mark behind the adequacy of the material handling cost rate. Crux Investor has adopted the rate and will revisit the issue under sensitivities.
The processing cost is also very low, but the material does not need to be crushed and ground, and the treatment in the spiral plants is very low-cost. Again, the provision seems reasonable.
The General and Administrative (“G&A”) expense rate converts to an annual expenditure of US$7.2 million during Phase 1 and US$14.4 million during Phase 2. Even considering the low-cost nature of Malawi, this provision is too optimistic for the size of the operation. In the scheme of things, it is a minor issue and Crux Investor has adopted that rate.
The corporate overheads that the project needs to carry are missing from the cost structure. Crux Investor has added an annual amount of US$10 million, which is a guesstimate.
Royalties and Taxes
Sovereign gives the following details for royalties and taxes:
- A Community Development Royalty of 0.45% of total revenue;
- Malawi Mineral Royalty of 5% ad valorum;
- Vendor Gross Profit Royalty of 2%;
- The OPFS has not calculated an after-tax return because of uncertainty about the applicable income tax and the RRT. As a before-tax value is meaningless, Crux Investor has referred to the PFS and used a rate of 30% for income taxes and 15% for RRT.
Another essential piece of information not provided by Sovereign is the Malawian government's typical approach to allowing deductions for amortisation of initial capital expenditure and depreciation of capital expenditure during the LOM. Moreover, the financial statements for the period ending 31 December 2024 show that accumulated losses amount to almost US$100 million. No information is provided whether and how this is allowed against profits.
Crux Investor has referred to the Malawi Tax Incentives Handbook for the year 2022, from which it is clear that:
- An income tax rate of 30% is the highest for locally registered companies. When a company is deemed active in a “Priority Industry”, it may be granted a tax holiday for up to 10 years. Crux Investor records that the MDA entered into by Mkango provides for a 30% income tax rate;
- There is a provision for an “Initial Allowance” of 100% on new and unused buildings and 100% on new plant and machinery. In general, there is an annual allowance of 25% on heavy equipment;
- Any losses may be carried forward for up to six years (for Mkango, this is 10 years); and
- There is a withholding tax of 10% on dividends.
Based on the above, Crux Investor has amortised the initial capital expenditure in the first year of production, and any resulting assessed loss was off-set in subsequent years. The accumulated loss of US$100 million was applied to reduce income taxes. The income tax rate of 30% and a 15% rate for RRT were adopted.
Working Capital
It is crucial to account for working capital requirements for any project with a long product pipeline.
Table 2.6.6_1 shows Crux Investor's assumptions regarding various current assets and liabilities to arrive at the total investment in working capital.
Peak investment is forecast to be reached in production year 15. Crux Investor has assumed that all investments will be recovered at the end of the LOM, ignoring any losses, pilferage, and obsolesce.
Results
Table 2.6.7_1 summarises the LOM results for the OPFS scenario (including taxes) and Crux Investor valuation for the base case commodity prices and the input parameters set out above.
Using the OPFS parameters, the project has a very good operating margin of more than 64.6%, corresponding with the 64% number according to Sovereign Metals. However, despite using the same inputs for capital expenditure, etc., the net present value at a discount rate of 8% (“NPV8”) is US$1,148 million. This is substantially lower than the US$1,284 million, according to Sovereign, stated on page 60 of the OPFS news release. The difference may be attributable to the assumed pre-production period, with Crux Investor having production start on 1 January 2029, which is four years in the future, combined with a different treatment of negative cash flow. If applying the NPV formula of Excel, the negative cash flows are discounted at the same rate as the positive cash flow, implicitly assuming that the company earns this rate of return on capital raised. Crux Investor disagrees with this approach and assumes that all required funding is raised upfront and invested very securely, earning approximately a rate equal to inflation after tax. This dramatically adds to the negative cash flow burden.
When accounting for the 10% free-carried interest of the government (which reduces the NPV8 by US$128 million) and corporate expenses, net free cash flow attributable to the shareholders drops by US$768 million, reducing the NPV8 to US$924 million.
Given the risk that the Kasiya supplies could depress market prices for rutile and graphite, the case without Phase 2 expansion was evaluated. It assumes that 70% of the rutile is sold as industrial grade over the entire LOM. It also retains the 30% discount for the graphite basket price. This increases the gross margin from 64.6% to 65.2%. Sustaining capex has been dropped by 40%.
The NPV8 for Phase 1 only (without accounting for the many additional years' LOM available) is US$539 million. Every additional year would add approximately US$20 million to the value.
The average attributable annual revenue including Phase 2 is US$570 million, and excluding expansion US$329 million. A Google search shows that the definition of a Tier 1 mining project is one with substantial reserves and a projected LOM of 20 years or more (check), located in the lower quartile of the cost curve (check) and generating substantial revenue exceeding US$300-US$600 million annually.
Table 2.6.7_2 expresses the sensitivity of the value of Sovereign (assuming the Expansion case) as the change in NPV per percentage point change in the main parameters: metal prices, operating expenditure, and capital expenditure.
The sensitivity analysis demonstrates the very robust nature of the Kasiya project, with the NPV8 increasing by 2.3% (US$21.4 million) for every percentage point increase in the commodity prices and dropping by only 0.7% (US$6.4 million) for every percentage point increase in operating cost (i.e. US$0.07/t processed). Returning to the issue of the low material handling cost rate, doubling this would drop the NPV8 by US$120 million to US$804 million, indicating that it is not a fatal flaw.
Due to the front loading of capital expenditure, the change in the company’s value is more sensitive to this than for operating cost with each percentage point increase (US$15 million), dropping the NPV8 by 1.0% (US$9.1 million).
If the LOM is extended, which is almost certain, an additional year would increase the NPV8 by around US$35 million.
The Enterprise Value of Sovereign Metals On 8 April 2025
At the share price of A$0.68 on 8 April 2025, the market capitalisation for the 647 million shares outstanding after the recent placement is A$440 million, or US$264 million.
On 31 December 2024, the company had no warrants outstanding, but 22.2 performance share units. Whereas on that day net current assets amounted to almost A$29 million, these can be considered committed to bringing the project to a DFS stage, as applies to the A$40 million newly raised. It has been ignored to compare the company's Enterprise Value (see Table 3_1) to what the economic assessment indicates.
This Enterprise Value compares to the NPV8 of US$924.3 million for the Kasiya project after the 10% free-carries interest of the government. Assuming Rio Tinto maintains its 18.45% beneficial stake, the US$754 million attributable to Sovereign is at a 176% premium to the Sovereign Enterprise Value. The premium is still an impressive 140% when doubling the material handling cost rate.
When assuming no expansion, the premium of NPV8 to Enterprise Value drops to 61%, and 40% when doubling material handling costs.
The company is currently clearly undervalued.
DISCLOSURE: One of the analysts involved in compiling this report has taken an active position in Sovereign Metals.
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