SMALL CAP SHARE IDEAS: Sovereign Metals

Sovereign Metals has rutile and lots of it.

In fact, it could have the largest rutile deposit anywhere in the world, if the results of ongoing exploration work go its way.

For anyone not familiar, rutile is a significant source of titanium, a metal widely used in aerospace, clean-tech and medical applications, but which is mainly an essential component in paint pigments.

You can get titanium from ilmenite too, and in some cases rutile and ilmenite are found together.

But the kicker is that it’s much more carbon and energy intensive to extract titanium from ilmenite than it is to extract it from rutile.

In other words, rutile is a big tick in the green energy box.

Rutile is a significant source of titanium, a metal widely used in aerospace, clean-tech and medical applications, but which is mainly an essential component in paint pigments 

Sovereign’s Kasiya deposit in Malawi already boasts a resource of 605million tonnes of ore grading 0.98 per cent rutile, with significant graphite credits.

There are also areas of higher grade, which may well end up being mined first, and a sizeable and ongoing exploration programme which is likely to push the resource base on from its current status as the world’s second largest rutile deposit to the world’s largest.

What’s more, just over half of that total resource has been booked in the indicated category, which adds a welcome robustness to the modelling undertaken in the scoping study Sovereign completed at the end of last year.

This study envisaged an operation that would process 12million tonnes of ore per year to produce 122,000 tonnes of rutile as well as 80,000 tonnes of graphite over a 25-year mine life.

That in turn would generate life of mine revenues of US$6.26billion, or US$251million per year.

What’s more, the study was to a degree moderated by what can realistically be achieved by Sovereign itself as a junior to mid-tier miner. Accordingly, the capex for the operation as planned rings in at less than US$350million.

What’s the likelihood that if a major company swooped in and bought Sovereign out it would create a still larger operation with bigger up-front costs and greater returns? Pretty good.

But at this stage, although there’s plenty of interest across the industry – how could there not be, with the world’s second largest rutile deposit? – there are no plans to sell.

For one thing, in its management team, Sovereign has a group of people who are more than capable of getting a mine built for themselves and, which is no small point, who have the in-country experience to do it.

For another, there’s still plenty more value to be added yet.

‘We know we’ve got an eminently saleable and desirable product,’ says Sovereign’s chairman Ben Stoikovich.

Indeed, that’s one of the first things he made sure got checked even before the resource base got built up. On his line of thinking, there was no point building a big resource if some serious testing of the material hadn’t been done first.

To that end he had a couple of tonnes of ore shipped out from Kasiya to Perth early in the process, and the results from the tests that were conducted ticked all the right boxes.

‘Potential end-users and off-takers came to us as we published the specs,’ he said. And from that point the company really knew it was onto something.

At the moment, there’s 129 square kilometres of known mineralization around Kasiya, although it could go bigger in due course.

But there’s already so much of it that where mineralization occurs beneath or near known settlements, the current mine plan just carves out those areas and goes round them.

Not too many mines can afford that kind of luxury, but in the case of Kasiya, social licence and economics aren’t really in conflict.

In fact, in Malawi, there’s a general hunger for major projects of the kind that Kasiya looks like developing into.

Not too many junior miners operate there at the moment, but the ones that do – and investors will be particularly aware of Mkango – have found the jurisdiction to be welcoming and easy to work in.

The green credentials of the process of mining rutile help too, of course.

Although the ground will be disturbed as the rutile is dug up, it will be returned in essentially the same form minus the rutile after the mining is complete. Rehabilitation in this way of doing things is a constant and ongoing process.

What’s more, because natural rutile is the purest natural form of titanium and requires very little processing after extraction, its carbon footprint is much smaller. From an ESG point, that’s a major tick. But it also works from the point of view of the economics too.

Typically at the moment, rutile sells for around US$1,350 per tonne, whereas ilmenite sells for just US$200 per tonne. The reason? – buyers know they’ll incur significant processing costs when they buy ilmenite that they won’t incur when buying rutile.

So why doesn’t everyone just mine rutile?

The answer is that there aren’t that many pure rutile deposits around. Sierra Rutile has one, but are there any others? Not really.

‘It’s hugely rare,’ says Stoikovich.

And that’s all to the good.

‘We only know of one other deposit like this,’ he adds.

‘And for each tonne of rutile you’re saving up to 2.8 tonnes of carbon. So if a paint producer bought our product they could literally claim that what they are selling is low carbon paint.

‘Rio Tinto is one of the biggest participants in this market. They produce predominantly ilmenite, which they smelt in South Africa using coal-fired power.’

So, with all this potential the plan is now to complete a pre-feasibility study by the end of this year, a process which will also run in parallel with environmental and social impact assessment programmes.

And while all that’s going on, guess what? – analysts expect the global supply of rutile to decline by 70 per cent between 2017 and 2030 – or 8 per cent per year.

The timing couldn’t be better for a project like this and with the shares at 25p currently it will be interesting to watch it run.

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