Sovereign Metals Scale Offering a Highly Compelling Investor Return Profile

• Sovereign Metals is developing the world's largest rutile and second-largest graphite deposit at its Kasiya project in Malawi
• Rutile is the highest-purity titanium mineral used in titanium dioxide pigments, titanium metal and welding; graphite is a key component in EV batteries
• Sovereign aims to be the most significant and lowest-cost producer of both rutile and graphite outside China with an average annual EBITDA of $415M
• Sovereign has partnered with Rio Tinto which invested $40M for a 15% stake with options to increase to 19.9% and provide development support
• The PFS shows a post-tax NPV of $1.6B and IRR of 28% with a 25-year mine life only utilizing 30% of the resource; the current market cap is only $140M

The Growing Importance of Critical Minerals

In transitioning to a low-carbon future, certain critical minerals will play an increasingly vital role. Through their high-purity rutile form, graphite and titanium are two minerals that investors should pay close attention to. Graphite is an essential component in the anodes of lithium-ion batteries powering electric vehicles (EVs), while rutile is used to produce titanium dioxide pigments, titanium metal, and welding rod coatings.

As demand surges for these applications, finding new, large-scale, low-cost sources of graphite and rutile outside of China, which currently dominates supply, is becoming a strategic imperative. In this context, Sovereign Metals (ASX:SVM; AIM:SVML) and its world-class Kasiya rutile-graphite project in Malawi stand out as a compelling investment opportunity.

The Prize Asset: Kasiya, the Largest Rutile and Second Largest Graphite Deposit Globally

Sovereign's key asset is its 100%-owned Kasiya deposit in Malawi, which stands out globally for its rutile and graphite. As Sovereign's Chief Commercial Officer Sapan Ghai explains:

"Kasiya is a tier one deposit hosting two critical minerals for which China is currently the dominant supplier in the world markets. Kasiya is the largest known rutile deposit - rutile is the highest grade, purest form of titanium that is found naturally. It is also the second largest flake graphite resource globally, with graphite being one of the largest lithium-ion battery components, which feeds into the electrification and decarbonization sphere."

With 18 million tonnes of contained rutile grading 1.2%, Kasiya is nearly double the size of the world's next largest rutile deposit, Sierra Rutile in Sierra Leone. On the graphite front, Kasiya's 22 million tonnes at 8% TGC (total graphitic carbon) places it second only to Syrah Resources' Balama mine in Mozambique. The combination of rutile and graphite in a single "soft rock" saprolite-hosted deposit makes Kasiya unique.

Aiming to Be the Largest & Lowest Cost Producer Outside China

Sovereign's stated ambition is to become the largest producer of both natural rutile and graphite outside China. The 2023 pre-feasibility study (PFS) outlines a multi-generational, low-cost operation producing 230,000 tonnes of rutile and 65,000 tonnes of coarse flake graphite per year over an initial 25-year mine life.

At a rutile price of $1,308/t and graphite price of $1,194/t, the PFS shows the operation would generate an average annual EBITDA of $415 million, a post-tax NPV8 of $1.6 billion, an IRR of 28%, and payback in just over 4 years from a capital investment of $597 million. Importantly, this only mines 30% of the total resource, providing the potential to extend beyond 25 years.

On costs, Sovereign is targeting the bottom of the cost curve. For natural graphite, Ghai states: "We find that the cumulative graphite production is about 1.7 million tons of graphite going into the market. We would produce about 240,000 tons of that, and we would be producing at the lowest end, which is $440 per ton based on PFS. The weighted average cost of our peer group is around $550 a ton."

Benefiting from "Easy" Mining and Processing

Sovereign stresses the simplicity of Kasiya's geology and the processing required to liberate the rutile and graphite. As Ghai describes it, the minerals are hosted in soft, friable saprolite that is "almost like soil":

"Within that soil are grains of rutile and grains or flakes of graphite, and all we are doing is scooping that stuff up and taking out those grains of rutile and graphite in a very conventional, very well-known physical process. There are no nasties involved, no impurities, no acids and smelting or any of that involved here. It's a pretty simple process to simply free those minerals."

This allows for a low strip ratio, minimal blasting and crushing, and no requirement for chemical processing or high-temperature roasting, enhancing Kasiya's cost profile and ESG credentials.

The Graphite Opportunity: Crucial for Lithium-Ion Batteries

While rutile is the main prize at Kasiya, the graphite co-product should not be overlooked. With the battery and EV revolution accelerating, graphite is crucial as the largest single raw material input for lithium-ion battery anodes. Placing Sovereign's 65,000 tonne per year graphite output in context, Ghai estimates the current global natural graphite market at 1 to 1.2 million tonnes. He elaborates:

"Not only would we be the largest producer of graphite in the world, we'd be the lowest cost producer of graphite in the world. We'd also be the lowest carbon footprint producer of graphite in the world, which is all good, but where does it come into play in the wider ecosystem of the world? Let's start with the lithium-ion battery. It's called a lithium-ion battery, but most of it is graphite. As our friend Elon Musk said back in 2016, our cells should be called nickel graphite because primarily the cathode is nickel and the anode is graphite."

Ghai highlights that not all graphite is battery-suitable, with key considerations being flake size, purity and crystallinity (which influences electrical conductivity). He believes Sovereign's graphite has the right properties to be "a crucial part" of the battery supply chain:

"Our graphite is classified as coarse flake with about 60% greater than 150 microns, and some of our flake graphite is up to 800 microns, or 0.8 millimeters in size. We also have some of the highest purity graphite in the world grading up to 96-97% TGC, and very high crystallinity. All of that positions our graphite well for the lithium-ion battery market."

The Rutile Market: Opaque but with Favorable Dynamics

The global titanium dioxide pigment industry is currently valued at over $15 billion and growing. While rutile is the highest-grade titanium feedstock, over 90% of titanium dioxide is produced from lower-grade ilmenite or by upgrading titania slag.

The rutile market is opaque and has limited pricing visibility, but at a current spot price of around $1,308 per tonne, rutile trades at a substantial premium to ilmenite (around $270/t). Rutile supply is in structural decline, with current production of roughly 500,000 tonnes (down from a peak of over 700,000 tonnes in 2007) expected to fall sharply, with major mines like Rio Tinto's Richards Bay in South Africa approaching the end of life.

When Sovereign brings its 230,000 tonnes of new supply online, Ghai expects it to offset this decline simply: "Those numbers, 700,000 in 2017 and us producing 220,000 tons of rutile, what do they mean in the grander scheme of the titanium market? Well, the titanium market's in terms of feedstock, the demand for feedstock is something like 8 million tons, and it has to just go to the ilmenite right now because they have no choice. If we had only rutile deposits, that would be great, but we don't. We have to make use of the more abundant ilmenite. But the fact that we have found this rutile deposit, and given the scale of it, make no mistake that anyone who would operate Kasiya would be the market leader within the high-grade titanium feedstock space."

ESG Benefits: Lower Carbon Footprint & Sustainable Development

Sovereign believes Kasiya's rutile will have a lower CO2 footprint than alternatives like titanium slag or synthetic rutile produced from ilmenite. As Ghai explains: "If we believe that the world is going towards decarbonization and carbon taxes, and there's a higher value-in-use to use less carbon-intensive inputs into your products, then of course you tend towards rutile."

In addition to the carbon benefits of natural rutile, Sovereign is designing Kasiya to be at the forefront of sustainable mining practices by minimizing waste, recycling water, using renewable power, and progressively rehabilitating mined areas. As a major project in one of the world's poorest countries, Kasiya also provides an opportunity for Malawi to develop its mining sector and economy. Ghai believes Sovereign has strong support from the Malawi government:

"Malawi put together an economic development strategy. Part of that strategy was to attract outside investors into Malawi to essentially take Malawi away from foreign aid and basically take aid as most of its GDP and move into a more self-sufficient economic development. Part of its life and to do that, the economic development strategy focused on attracting investors to three sectors: agriculture, tourism and mining."

The Rio Tinto Partnership: A Big Brother with Deep Pockets and Expertise

A key endorsement of Sovereign and Kasiya came in July 2022 when global mining major Rio Tinto invested US$40 million to acquire a 15% strategic stake in Sovereign. Rio has the option to increase it to 19.9% and will work with Sovereign on the feasibility study, development, and operation of Kasiya.

Rio is an ideal partner for Sovereign, given its deep experience in the titanium industry (Rio is the world's largest titanium slag producer), development and operating expertise, and strong balance sheet. Rio's investment funds Sovereign, through the definitive feasibility study (DFS), provide a potential funding partner for development and give strong external validation of Kasiya's world-class nature. As Ghai summarized:

"The highlights of our investment and relationship with Rio Tinto are that they will help us qualify our graphite, specifically for the lithium-ion battery space. They would assist us with mine construction funding post-DFS. Rio Tinto has the option to become Kasiya's operator on an arm's length basis. They also have, at that point, off-take rights over 40% of the annual production of all products coming out of Kasiya."

Next Steps: Optimization, Definitive Feasibility and Financing

Following the PFS, Sovereign is now undertaking an optimization phase with Rio Tinto to assess opportunities to enhance the project. A DFS is planned for 2024 which will firm up the economics and engineering and provide the basis for a construction decision and financing. Rio's expertise is expected to be invaluable in this process, as Ghai outlines:

"What we're going through now is an optimization phase, which is looking back at the PFS and saying which areas can the expertise and experience of 150 years of Rio Tinto mining projects around the world, and developing projects around the world specifically within the titanium sphere, how can that assist in us building a better, bigger Kasiya?"

On the permitting and approvals front, Sovereign believes it has strong support from the Malawi government to advance Kasiya efficiently:

"When we completed the PFS, we were asked by the Malawian government, what are the hurdles you are seeing, why can you not advance this project any quicker than you have been? We also said it would make sense if we had a one-stop shop to go to and deal with all governmental issues. And within a day, they had constituted what they call the Inter-Ministerial Project Development Committee for Kasiya. And what that provides us is, rather than our guys on the ground having to go to the Ministry of Mines and asking for one thing, then going to the Ministry of Land and asking for another, and then going to the Ministry of Finance and making sure that all of those guys are talking as well, we enter one room where they're all sat together and their key focus is to provide us with what we require to advance Kasiya through the DFS, through the permitting phase, through the ESIA, and everything else that it required to get to production."

A Severely Undervalued Investment Opportunity

Based on the project's current economics, Sovereign appears severely undervalued. With a current market capitalization of around US$140 million, Sovereign trades at just 0.3x its PFS average annual EBITDA of $415 million and 0.1x its after-tax NPV8 of $1.6 billion.

While the market awaits a binding off-take agreement, financing solution and development decision, Ghai believes the current valuation provides an attractive entry point for long-term investors:

"Our market cap is reflective less so of the project and the current macro environment and more so two things. When Sovereign Metals began, the concept of a rutile deposit was an entirely new thing for most investors. There hasn't been a rutile deposit found for over 70 years. It's a bit like if we were only mining gold as a byproduct of silver mines and then someone turns up one day and says, hey, I found a gold mine. Not only is it a gold mine, it's the biggest gold mine ever found. That's essentially what we're looking at with this rutile deposit."

"On top of that, then it's not just a rutile deposit. It has this graphite in there, which is completely unique and unheard of, and the market hasn't captured the fact that graphite is the biggest component within a lithium-ion battery space yet. Overlay that with, as you well mentioned, being in Malawi, which is a location unknown for its mining, is probably unknown to most people. All that education was not done for some time because we were busy doing a PFS, building out the Kasiya and bringing on Rio Tinto. Now that those pieces of the jigsaw are in place, we are very much building out an IR team and a corporate wrap-around, which really resembles the market cap that we should be and will be, educating investors on all fronts and keeping them up to speed on all fronts within the investment space."

Kasiya Poised to Fill Critical Gaps in Rutile & Graphite Supply

With demand for critical minerals like rutile and graphite set to surge in the global transition to a low-carbon future, Sovereign Metals offers investors a rare opportunity to gain exposure to two of the most strategically important - and scarce - raw materials underpinning the EV and renewable energy revolution. Kasiya's unique combination of world-class scale, high grades, low costs, growth optionality and top-tier partner in Rio Tinto make it a standout in the critical minerals space.

While development and funding risks remain, Kasiya's sheer size and economic potential provide a large margin of safety at Sovereign's current modest market valuation of ~$ $140 million. Rio Tinto's involvement substantially de-risks the funding and development pathway and provides strong validation of Kasiya's Tier 1 potential. As Sovereign Metals transitions from exploration to pre-development in partnership with Rio Tinto, it is well worth investors positioning at this early stage to capture the value uplift as Kasiya advances towards production and its strategic significance comes into clearer focus.

The Investment Thesis for Sovereign Metals

• Exposure to two of the most strategic and supply-constrained critical minerals: natural rutile (titanium) and natural graphite
• Massive, Tier 1 resource base containing the world's largest rutile deposit and second-largest graphite deposit globally, providing multi-decade production potential
• Clear potential to become the largest global producer of both natural rutile and graphite outside of China, with a bottom-quartile cost position
• Unique geology allows simple mining and processing, enhancing economics and sustainability
• Strategic partnership with global mining major Rio Tinto, which invested $40M for 15% with the potential to increase to 19.9%
• Rio to assist with the qualification of Sovereign's graphite for lithium-ion batteries, an area of rapidly growing demand
• Compelling economics with a PFS post-tax NPV8 of $1.6B, average annual EBITDA of $415M and IRR of 28% over an initial 25-year mine life
• Severely undervalued at a current market cap of $140M representing just 0.3x average annual EBITDA and 0.1x NPV
• Strong ESG credentials with a low carbon footprint and potential to catalyze sustainable economic development in Malawi
• Multiple upcoming catalysts including DFS, binding off-take, financing and a construction decision

Key Takeaways

Sovereign Metals offers a highly compelling risk-reward proposition for investors seeking exposure to the supply-constrained critical minerals of natural rutile and graphite. With the world's largest rutile and second largest graphite resource, a bottom-quartile cost structure, and a strategic partnership with global mining leader Rio Tinto, Sovereign is positioned to become a globally significant supplier of these two essential materials.

While Kasiya is still relatively early, its sheer scale and economic potential provide a significant margin of safety at Sovereign's current modest market capitalization. As the project advances through the definitive feasibility, permitting and financing processes with Rio Tinto's backing, Sovereign's value proposition should come into clearer focus for the market. For investors with a long-term view and an appetite for development-stage risk, Sovereign Metals offers an attractive asymmetric return profile with multi-bagger potential as it progresses towards production.

The global transition towards a low-carbon, electrified future is driving a structural shift in commodity demand in favor of a range of critical minerals. Foremost among these are battery metals like lithium, nickel, cobalt and graphite, as well as minerals crucial to the renewable energy and EV industries such as rare earths, vanadium and titanium.

Within this context, natural graphite and natural rutile stand out as two of the most attractive critical mineral exposures. The electrification of transport is forecast to drive a 10-30x increase in graphite demand by 2030, with graphite comprising around 50% of the raw material in a lithium-ion battery. Almost all battery anodes currently use spherical graphite derived from flake graphite concentrate.

On the rutile front, while the market is opaque, supply is in structural decline and there is no ready substitute for rutile as the highest-grade titanium feedstock. The downstream pigment, titanium metal and welding markets are all growing strongly, supporting a robust demand outlook. At the same time, with China accounting for 60-80% of global battery graphite and titanium feedstock supply, there is a strategic imperative for developing alternative supply sources.

In this light, large, high-quality ex-China natural rutile and graphite sources are likely to be highly sought after. As Sovereign CCO Sapan Ghai summed it up:

"Make no mistake that anyone who would operate Kasiya would be the market leader within the high-grade titanium feedstock space and a major player within the lithium-ion battery space just by de facto being the largest, lowest cost producer of graphite as well."