Capital Metals: Unlocking Value in High-Grade Sri Lankan Mineral Sands

• Capital Metals has a high-grade mineral sands project in Sri Lanka with a 17.2Mt resource at 17.6% heavy minerals
• The company is pursuing a reduced capex plan to get to cash flow quickly, targeting production in H1 2026
• Recent political changes in Sri Lanka are positive for the project, with a new pro-business, anti-corruption government
• Off-take and financing discussions are progressing well, with a final investment decision targeted for Q2 2025
• Significant upside potential exists with the ability to expand production and resources

Capital Metals is developing the Eastern Minerals heavy mineral sands project in Sri Lanka, one of the highest grade undeveloped mineral sands projects globally. Capital Metals have recently released a revised development strategy focused on accelerating the path to production and cash flow generation, significantly reducing the initial capex requirements.

High-Grade, Substantial Resource 

The Eastern Minerals project boasts a large, high-grade mineral resource of 17.2 million tons at 17.6% Total Heavy Minerals (THM). This THM grade is well above the global average for mineral sands projects. The current resource covers just a small portion of the company's 60km of prospective coastline, with significant potential to expand.

As Executive Chairman Gregory Martyr explains:

"Our cut-off grade is 5%. That's above the average grade -- the weighted average grade for the global mineral sands industry. If we know we can reduce our cut-off to 2%, this will double our resource."

Importantly, the near-surface nature of the mineralization allows for simple mining via truck and shovel methods, with minimal strip ratios. The ore is free of deleterious materials like clay and slimes that can negatively impact processing. These characteristics contribute to low operating costs.

Fast-Track, Low Capex Development Approach 

Capital Metals is focused on accelerating the project to first production and cash flow. Following the inability to consummate a large-scale joint venture development in July, the company has pivoted to a smaller-scale initial development that is internally fundable.

The beauty of this approach is its simplicity - the processing required to produce a heavy mineral concentrate product is relatively basic, involving spirals, gravity separation and water. No chemicals, grinding or complex plant is needed.

Importantly, this has allowed Capital to significantly reduce the initial capital expenditure required. The Stage 1 capex is estimated at just US$20.9 million, revised down from US$30 million previously. With a short construction timeline of 9-12 months, this puts the company on track for first production in H1 2026, should it reach a final investment decision (FID) by Q2 2025.

Once in production at the initial rate, the project is expected to payback the development capital in less than one year, making it self-funding for future expansions. The company then plans to incrementally expand production and produce higher value ilmenite and rutile products that will further enhance margins.

Interview with Executive Chairman, Gregory Martyr

Financing & Offtake 

To fund the Stage 1 development, Capital Metals is pursuing offtake-linked financing arrangements. The company is in advanced discussions with several counterparties interested in providing pre-payments for future offtake in exchange for product supply.

Given the modest capital requirement and very high-grade product the project will produce, these offtakers are willing to commit pre-payments equivalent to multiple months of supply. This substantially de-risks the financing. Capital is targeting US$10 million in pre-payments, equivalent to less than 50% of the total capex.

The company is also evaluating equipment financing with its major vendor as well as working capital facilities with other groups. Importantly, based on the current strategy and discussions to date, Capital does not anticipate the need to issue equity to fund the Stage 1 development.

Permitting & Local Stakeholder Engagement 

Capital Metals has already secured the key permits required to commence development and mining. The project is fully permitted, with an approved EIA and two mining licenses in place. The company could start mining immediately if desired.

However, to further optimize the development, Capital is looking to shift the initial mining area slightly north to a parcel of land currently owned by the state-owned Coconut Board. This 47 hectare area is particularly attractive due to its high THM grades and the fact that it is controlled by a single owner. Capital is in advanced discussions with the Coconut Board to lease this land.

More broadly, Capital is proactively engaging with a range of local stakeholders including the newly elected government. Sri Lanka is just coming out of a period of significant political and economic turmoil, but the election of the new government on a pro-business, anti-corruption platform is a strong positive for Capital.

Valuation Upside 

Based purely on the current 17.2Mt resource at 17.6% THM, Capital Metals estimates the project has a NPV per share of 36 pence. This is highly material relative to the current share price around 2 pence, highlighting the extent of the potential valuation upside.

However, exploration work to date indicates this resource can be readily expanded. The company is about to commence a drilling campaign with the objective of at least doubling the current resource size. Deeper drilling on limited holes has demonstrated the mineralization extends well below the water table, with one hole ending in 28% THM mineralization at a depth of 14m. The ultimate resource potential is likely a multiple of the current stated resource.

Additionally, the current resource grade of 17.6% THM is based on a cut-off grade of 5%. Capital believes it can reduce the cut-off grade to 2% while still maintaining a very attractive margin. Doing so would substantially increase the resource size.

The Investment Thesis for Capital Metals

• One of the highest grade undeveloped mineral sands projects globally with a clear path to production and strong economic returns
• Near-term development opportunity with low capex requirements and rapid payback period
• Actively progressing offtake-linked financing to fully fund to production, removing equity dilution risk
• All key permits in place with further enhancements being pursued
• Exceptionally strong resource expansion and grade improvement potential
• Attractive valuation relative to project NPV, with clear upcoming re-rating catalysts
• Experienced and invested management team with strong in-country relationships

Macro Thematic Analysis

The mineral sands sector has historically been a GDP-linked industry tied to factors like global construction, renovation spending, and overall economic growth. While the sector is currently experiencing a cyclical low in prices, the medium-to-long term demand outlook remains robust driven by ongoing global development and the mineral sands' industry's high exposure to Asia.

Despite this cyclical weakness, the unique high-grade nature of Capital Metals' Eastern Minerals project positions it in the lowest cost quartile of global producers. This ensures the project will generate strong margins and cash flow even in the current price environment. As Executive Chairman Gregory Martyr explains:

"Even in that market, we'll have less than a one year payback on that first capex. We become self-funding. We become a completely different company because you've de-risked."

Furthermore, the company's strategy to initially produce a heavy mineral concentrate product insulates it from weakness in any single end-use mineral market. The concentrate product will be sold to end-users to separate into individual ilmenite, rutile and zircon products. This allows Capital to maximize margins while maintaining flexibility.

Looking ahead, the mineral sands market is likely to face growing supply challenges as grades decline and existing operations deplete. With limited new projects in development, Capital Metals is well-positioned to help fill this supply gap as it brings the Eastern Minerals project into production in the coming years. The project's high grade, substantial scale, and low cost attributes make it one of the standout development opportunities in the global mineral sands sector.