Capital Metals Poised to Bring Sri Lankan Mineral Sands Project Into Production

• Capital Metals is developing a high-grade mineral sands project in Sri Lanka with ilmenite, zircon, rutile and garnet as main products
• The project was stalled due to issues with the previous Sri Lankan government but has regained licenses and political support
• Simple, low-cost mining operation with the potential to expand the resource and consolidate other projects in Sri Lanka
• Production is expected to begin in early 2026, generating over 300 direct jobs in an impoverished region

About Capital Metals

AIM-listed company Capital Metals is advancing the development of its Eastern Minerals project, a high-grade mineral sands deposit located on the east coast of Sri Lanka. With one of the highest-grade mineral sand resources globally at over 17% heavy minerals, the project is slated to produce ilmenite, zircon, rutile and garnet using simple, low-cost mining and processing methods.

The Eastern Minerals project will be a meaningful new source of supply for in-demand mineral sands products like ilmenite, a key feedstock for the titanium dioxide pigment industry.

Interview with Executive Chairman, Gregory Martyr

Political Risk Largely Resolved

While Capital Metals' licenses were temporarily at risk in 2023 due to an issue with the previous Sri Lankan government, the company has successfully regained its mining rights and permitting. According to Executive Chairman Greg Martyr, the current government is highly supportive of the project moving forward:

"We've got really good cooperation with the Board of Investment, which sits under the Ministry for Investment Promotion, and the President is that Minister."

Sri Lanka is motivated to facilitate new mining projects to help improve its challenged economy. The International Monetary Fund (IMF) has provided a funding package to Sri Lanka conditional on enacting anti-corruption reforms. This all bodes well for Capital Metals' ability to expeditiously advance the Eastern Minerals project.

Well-Funded Through Strategic Investor

To fund the project through to a Final Investment Decision, Capital Metals is in advanced negotiations with two potential strategic investors - the LB Group, the world's largest pigment producer, and Sheffield Resources, a successful mineral sands developer. The proposed deal would see the new partner fund the project to production in exchange for a 50% stake. Capital Metals is well-positioned in these negotiations according to Martyr:

"We're prepared to give up 50% of the project and 50% of the upside - there's a lot of it. We know we can't do this on our own in our current state and we've known that for a while. We've always wanted to bring in more expertise to get it right."

The company expects to finalise the strategic partnership before the exclusivity period ends in mid-May. Based on a projected capital cost of $81 million, the initial funding requirement is estimated at $37 million to reach cash flow positive production, with the potential for the strategic partner to accelerate development.

Straightforward Path to Production

The Eastern Minerals project will utilise simple, well-established mining and processing methods, including excavator mining, gravity concentration, and magnetic separation. No new technology or complex processing is required. Capital Metals is targeting an initial production of 550,000 tonnes per annum of heavy mineral concentrate, which will be expandable over time.

From a permitting perspective, the Environmental Impact Assessment has already been approved and no major obstacles are expected in obtaining the remaining necessary permits and licenses. Martyr stated they are "very confident" in securing the required regulatory approvals over the next three months.

The mine and processing plant construction is expected to take approximately 12 months after the Final Investment Decision. If all goes to plan, this positions Capital Metals to commence production in early 2026.

Expansion & Consolidation Potential

Capital Metals' Eastern Minerals project boasts an impressive resource of just over 17 million tons, indicating significant potential for future growth and expansion. The project stands out as one of the highest-grade mineral sands projects globally, with a remarkable grade exceeding 17%. This exceptional grade positions the Eastern Minerals Project as a top-tier asset in the industry.

The primary products expected from the project include Ilmenite, which is projected to account for approximately 50% of the revenue, and Zircon, contributing to slightly over 20% of the revenue. Additionally, the project will produce Rutile and Garnet, further diversifying its product portfolio.

Capital Metals has devised a four-stage process to ramp up production over time efficiently, initially focusing on producing Heavy Mineral Concentrate (HMC). The company plans to implement magnetic separation and, if deemed feasible, non-magnetic separation over the next three years. The capital expenditure for the first 10 years is estimated to be around $80 million, which is considered relatively low for a project of this scale and potential.

The Eastern Minerals project's high-grade resource and modest capital requirements position it as a high-margin venture. Capital Metals' strategic approach to gradually increasing production capacity and optimising its processes demonstrates the company's commitment to maximising shareholder value while minimising financial risks.

Martyr also believes there are opportunities to consolidate other mineral sands projects in Sri Lanka once the Eastern Minerals project is up and running. He stated:

"There's only one [mine] in production in Sri Lanka. It's a government one called Lanka Minerals, which has been in production since the 1960s. But there are a lot of resources around the country. We would love to be that first sort of private mover and consolidate some other opportunities."

Capital Metals is well-positioned to become the dominant mineral sands producer in Sri Lanka over time. With the resource potential to support a long-life operation, the Eastern Minerals project could become a strategically significant supplier of mineral sand products to Asian markets.

Meaningful Economic Benefits

The Eastern Minerals project is expected to provide a meaningful economic boost to the local community. Martyr estimates the mine will generate over 300 direct jobs. Additional indirect economic benefits will accrue to the region.

This employment is significant for an impoverished part of an already poor country. Martyr noted "for most of them it's 'where's my my job' because it's a very poor part of the country."

Capital Metals had to pause its community development programs over the past 18 months while it resolved its licensing issues. However, the company is eager to restart these initiatives, which have included clean water treatment, beach cleanup, and contributions to local schools. The economic development and job creation from the project should provide a step-change improvement in the quality of life for the local population.

The Investment Thesis for Capital Metals

• High-grade, long-life mineral sands resource with expansion potential
• Strategic investor (LB Group or Sheffield) to fund the project to production for a 50% stake
• Near-term development and production with the first output expected in early 2026
• Low technical risk with conventional mining/processing methods
• Political risk mitigated with supportive government and IMF-backed reforms
• Strong demand/market for mineral sands products with offtake from major pigment producers
• Meaningful economic benefits for the local community in an impoverished region
• Potential to consolidate the Sri Lankan mineral sands industry as a first-mover

Capital Metals presents a compelling opportunity to gain exposure to a near-term mineral sands development project with a strategic partner. The high-grade Sri Lankan resource is well-positioned to help meet strong global demand for ilmenite and zircon. With key permits in place, a planned FID within 9 months, and production 12 months thereafter, the project offers a rapid path to cash flow. Political risks appear to be mitigated with the current government's support and oversight by the IMF. Longer-term, Capital Metals has the potential to expand its resources and consolidate other projects in the country as a first mover. Investors should monitor upcoming announcements regarding the identity of the strategic funding partner.

Macro Thematic Analysis

Mineral sands have emerged as a critical raw material in recent years driven by a resurgence in demand. The post-pandemic recovery in consumer spending and robust housing/construction markets globally have been bullish for mineral sands consumption. Ilmenite and zircon are key mineral sands used primarily in manufacturing pigments (titanium dioxide), ceramics and refractory materials.

Ilmenite is the most important economic mineral in many mineral sand deposits, usually accounting for 40-60% of revenues. It is used predominantly as a feedstock for the production of titanium dioxide (TiO2) pigment, which imparts a brilliant white colour in paints, plastics and paper. Demand for TiO2 pigment has surged to record highs since 2021, driven by the rebound in global economic growth, stimulus spending on construction/remodelling, and supply chain constraints. Major TiO2 pigment producers have been running plants at maximum capacity but have struggled to keep pace with demand.

This has incentivised pigment producers like Iluka and Chemours to secure additional sources of ilmenite feedstock. In recent years, they have turned to non-traditional supply sources like Sri Lanka and East Africa to supplement their captive mines. Capital Metals, with one of the highest-grade ilmenite resources globally, is well-positioned to become a strategic supplier of ilmenite to major consumers in Asia. In the interview, Martyr quoted the ilmenite price at around $400/tonne, highlighting the favourable economics of the Eastern Minerals project.

The lack of new supply in mineral sands markets should be supportive of prices even if demand growth moderates in a slowing economy. After years of under-investment, there are very few new projects globally the size of Capital Metals' Eastern Minerals project.