Results of Development Study and Project Economics

RNS Number : 2409L

Capital Metals PLC

12 May 2022

 

12 May 2022

Capital Metals plc

("CMET" or the "Company")

Results of Development Study and Project Economics

Study Demonstrates Exceptional Economics

Capital Metals plc (AIM:CMET), a company developing the Eastern Minerals Project in Sri Lanka (the "Project"), one of the highest-grade mineral sands projects globally, is pleased to announce the results of an independent Development Study and Preliminary Economic Assessment (the "Study").

The Study demonstrates exceptional economics resulting in a high margin operation, enabling a short payback period. Whilst the Study provides a highly compelling investment, the long-term price assumptions used are below current prices suggesting even more attractive economics are feasible. Moreover, the Study does not take into account any potential resource extensions, which would enable the expansion of mine life and throughput, providing even further upside.

The Study was undertaken by IHC Mining, a leading independent global mining services group with specialist expertise in developing mineral sands projects. The results of the Study are expected to have a positive impact in finalising the ongoing discussions with offtakers, debt providers and other strategic funding parties.

Highlights

· Base Case ungeared post tax internal rate of return ("IRR") of 56% and Net Present Value (using an 8% discount rate) ("NPV₈") of US$155m, with a Upside Price Case IRR of 73% and NPV₈ of US$235m

· Base Case shows total revenues of US$645m, operating cashflows of US$391m and net profit of US$262m over initial 10-year Project life

· Base Case comprises a conservative 3.5 year, 4-stage approach to the development of the Project, with production expansion funded through operations, and 3.7 year payback period

· The staged development approach means that the funding requirement is $37.3m until the Project is self-funding compared to the total development capex of $81m

· Significant positive benefits to Sri Lanka and local community identified with over 300 direct new jobs to be created and over US$100m in direct government royalties and taxes

· The Study assesses the Project with less than 10% of the Project area having been drilled to date and historic drilling ending at 3m from surface whilst still in mineralisation

Staged Scale Up of Mining and Processing Operations

The Study assesses three development options and modelled 18 different scenarios.  Given the Project will be the first fully integrated mineral sands mining operation in Sri Lanka, the Company has elected to take the most conservative development option as it:

· provides the lowest funding profile

· simplifies the social licence to operate

· offers the greatest flexibility for any mineral resource upgrades; and

· provides the lowest technical exposure for the Company.

The Study is based on a mining rate capacity of 1.65 million tonnes per annum ("Mtpa"), with an average mining rate of 1.43Mtpa and average annual Valuable Heavy Minerals production of 163kt (114ktpa ilmenite, 10ktpa zircon, 8ktpa rutile and 31ktpa garnet).

Stage 1 - initial 0.55Mtpa mining and processing operation to produce saleable Heavy Mineral Concentrate ("HMC") as part of the early revenue model

Stage 2 - addition of magnetic separation plant to produce ilmenite, garnet and non-magnetic concentrate (containing zircon and rutile) which will have installed capacity to process a 1.1Mtpa mining rate

Stage 3 - increase mining rate to 1.1Mtpa and increase operational hours of existing magnetic separation plant

Stage 4 - increase mining rate to 1.65Mtpa, expand the magnetic separation plant, and install a non-magnetic separation plant to separate the non-magnetic concentrate into zircon, rutile and zircon in concentrate products

The total funding requirement to cash flow positive is $37.3m, which includes working capital, a 20% contingency, existing infrastructure upgrades, and owners' costs, whilst using best-in-class equipment. Life of mine ("LOM") capex is $81m, the majority of which can be funded from cashflow due to the staged development plan.

Based on the start-up funding requirement of only $37.3m, the NPV₈ to capex funding ratio is 4.2, whilst the LOM revenue to cost ratio is 2.5 ("RC Ratio").  The ratios place the Project in the first quartile for undeveloped mineral sands projects globally, highlighting the extremely attractive capital and operating cost parameters of this Project.

At the Stage 1 production rate of 0.55Mtpa, the Study forecasts revenues per annum of US$9m and an EBITDA per annum of US$5m from the sale of a HMC. At the targeted Stage 4 production rate of 1.65Mtpa and following the installation of the mineral separation plant, the Study forecasts average revenues per annum of US$74m and an average annual EBITDA of US$45m.

Further details on the Base Case and Upside Pricing Case scenarios are included in the Additional Information section at the back of this release.

Resources and Exploration Upside

The Study is based only on an initial JORC Compliant Resource of 17.2Mt with an average grade of 17.6% Total Heavy Minerals ("THM"). Less than 10% of the Project area has been drilled to date and the current JORC Resource is from surface to a depth of 3m.

Exploration work has shown mineralisation continues beyond 3m depth and also identified potential new high-grade resource areas with numerous results in excess of 25% THM. The Company expects to be able to upgrade the size, and potentially grade, of the resource following a drill programme scheduled for H2 2022, which would be expected to further enhance project economics, expanding both mine life and potential throughput. The modular nature of the development would mean the Company should be able to expand beyond the 1.65Mtpa should the resource be significantly expanded.

On 29 March 2022, the Company announced the issue of an additional exploration licence ("EL") to further extend the Project by 12km to the north, encompassing the Oluvil Port. The EL contains areas prospective for further mineral sands resources, which have been identified for follow up drilling later this year.

Michael Frayne, Chief Executive Officer commented:

"The Study confirms the exceptional economics of the Eastern Minerals Project even on price assumptions well below the current market prices for our minerals, and before taking into account any further upside from potential resource extensions.

"This Study now paves the way for the Company to begin engineering and procurement work for a conservative, low-risk, staged development plan which targets low capex and an early revenue model.

"As a result of our staged approach, the Project benefits from a low funding requirement compared to the overall investment required - with only $37.3m of investment required to become self-funding. With the low capex requirement for Stage 1, which targets production and sale of a mineral sands concentrate, we have a range of financing options available to the Company, for example, offtake finance with upfront payments and/or project debt.

"Given the products we will produce are facing supply constraints, we believe the Base Case assumptions are conservative. With a market capitalisation today of just around 10% of the Project's Base Case discounted NPV, the CMET equity proposition has become compelling."

For further information, please visit www.capitalmetals.com or contact:  

Capital Metals plc Michael Frayne (CEO) James Mahony (CFO)	Via Vigo Consulting
Vigo Consulting (Investor Relations) Ben Simons / Oliver Clark	[phone] [e-mail]
SPARK Advisory Partners (Nominated Adviser) Neil Baldwin / James Keeshan	[phone]
WH Ireland Limited (Joint Broker) Harry Ansell / Katy Mitchell	[phone]
Tavira Securities Limited (Joint Broker) Jonathan Evans / Oliver Stansfield	[phone]

About Capital Metals plc

Capital Metals is developing the Eastern Minerals Project in the Eastern Province of Sri Lanka, approximately 220km east of Colombo. The Eastern Minerals Project is one of the highest-grade mineral sands projects globally, with a current JORC Resource of 17.2Mt with an average grade of 17.6% Total Heavy Minerals, and potential for resource extension. Our goal is to become a high margin producer of mineral sands for the international market, with a commitment to applying best-in-class mining practices and bringing significant positive benefits to Sri Lanka and the local community with over 300 direct new jobs to be created and over US$100m in direct government royalties and taxes.

Additional information

Capital Metals (via its subsidiaries) owns the exploration licences that comprise the Eastern Minerals Project ("EMP"). The EMP is located in the Ampara District of the Eastern Province of Sri Lanka, approximately 220km east of Colombo. Capital Metals is listed on the London Stock Exchange AIM market. The EMP comprises the Project Licences which cover 108 sq km. Since September 2016, CMET has made additional licence applications, totalling 599 sq km, surrounding its current licences both onshore and offshore, to cover potential extensions to the mineral sands deposits.

The mineral sands deposit consists of active coastal sand and older sand berms that form a continuous strip of sand with concentrations of heavy minerals. The THM component of the mineral sand deposit is composed of valuable ilmenite, rutile, zircon, and garnet. The sand component is composed predominantly of quartz with a small percentage of feldspar.

In June 2016, a Scoping Study was produced, including a Mineral Resource Estimate, based on the drilling and sampling work to date. Preliminary assumptions for operating costs and recoveries that were assessed during the Scoping Study were in turn benchmarked against similar mineral sands projects. The Scoping Study concluded a total mineral resource of 17.2Mt at an average heavy minerals grade of 17.6% for total contained heavy minerals in excess of 3Mt. The largest component of these resources was ilmenite, constituting almost 35% of the total heavy mineral assemblage.

Resources

Optiro Pty Limited ("Optiro"), a mineral resource consulting and advisory group, has reviewed the documentation provided for the EMP resource model in June 2016. As part of this review, visual validation of the block model was carried out by examining cross-section and plan views of the drill hole data and the estimated block grades.

In Optiro's opinion, the Mineral Resource models provide a realistic estimation and classification of the global Mineral Resources as summarised below:

Deposit	Classification	Tonnes (Mt)	THM grade (%)	Contained THM (kt)
Total	Measured	5.82	19.9%	1,159
	Indicated	8.60	16.6%	1,432
	Inferred	2.79	16.0%	446
	Total	17.21	17.6%	3,037

Project Description

Capital Metals is currently working towards the grant of its first Industrial Mining Licence ("IML") which will be issued by the Geographical Survey and Mines Bureau of Sri Lanka ("GSMB"). In November 2021, CMET announced the approval of its Environmental Impact Assessment ("EIA"). The completion of the EIA is required by the GSMB in order to issue the IML for the Project.

Capital Metals is committed to applying best practice in its mining operations, including continuous post mining rehabilitation. The proposed method of cell mining aims to ensure a minimal active footprint and prompt rehabilitation of the mined areas. Planned operations will have appropriate buffer and exclusion zones identified as a result of the EIA study, which went through a stringent public and governmental review process.

The Study considered a number of development scenarios, which were analysed through the Financial Model.  The Base Case, which outlined a four-stage development strategy over three and a half years, was selected as the preferred development option.

Base Case

The Base Case represents the Project economics based on the Study undertaken by IHC Mining aiming to exploit the Mineral Resources defined by the Mineral Resource Estimate (dated 2016).

The heavy mineral sands are expected to be extracted using surface mining techniques due to the shallow nature of the orebody. Material will be transported to mobile wet concentrator plants (WCPs) to produce a Heavy Mineral Concentrate. The HMC will then be transported to a Mineral Separation Plant to produce ilmenite, rutile, zircon and garnet products.

Oversized materials and tailings rejected will be returned to the mining areas for disposal, allowing for continuous rehabilitation of the mining areas.

The Base Case was selected as the preferred option after taking into consideration the following

points:

· Despite not generating the highest NPV or quickest payback, the Base Case rather takes into account a number of factors, namely:

o  it provides the smoothest (lowest start-up) lending/debt profile;

o  it simplifies the social licence to operate (minimal footprint and disturbance);

o  it offers the greatest flexibility if considering upgrading the Mineral Resource / Ore

Reserve inventory for a dredging scenario; and

o  it provides the lowest technical exposure for Capital Metals taking into consideration the development of mine sites, port development, establishment of the owner's team for operations and securing production/export targets.

The Base Case assumes a 3.5 year staged scale-up as follows:

Stage 1 - using a Mining Unit Plant ("MUP") and a Wet Concentrator Plant ("WCP") at a mining rate of 0.55Mtpa to produce a Heavy Mineral Concentrate that is then washed through a Concentrate Wash Plant ("CWP") to be ready for sale

Stage 2 - using a Magnetic Mineral Separation Plant ("MMSP") to refine the HMC into ilmenite, garnet and non-magnetic concentrate products

Stage 3 - adding a second MUP and WCP to increase the mining rate to 1.1Mtpa and proportionally increasing operating hours at the CWP and MMSP

Stage 4 - adding a third MUP and WCP to increase the mining rate to 1.65Mtpa, upgrades to the throughput capacity of the CWP, MMSP and the installation of a non-magnetic MSP ("NMSP")

The Base Case assumes that each stage is implemented approximately 12-18 months apart which enables a steady ramp up of production and minimises the overall funding requirement.

The Base Case also identifies a number of owners costs including working capital, resource planning and port upgrades.

The capex estimate for the Base Case is as follows:

	Stage 1	Stage 2	Stage 3	Stage 4	Grand Total
	US$m	US$m	US$m	US$m	US$m
OWNERS COST
Owners cost incl working capital	6.3	0.1	0.1	0.1	6.6
Port and Admin	2.7	-	0.2	0.1	3.0
Resource	3.5	-	1.6	0.6	5.7
TOTAL OWNERS COST	12.4	0.1	1.9	0.8	15.2
MINING & PROCESSING
Mining Unit I	6.7	-	-	-	6.7
Mining Unit II	-	-	6.0	-	6.0
Mining Unit III	-	-	-	6.0	6.0
Concentrate Wash Plant	2.0	-	-	0.6	2.6
Magnetic MSP	-	9.8	-	1.4	11.1
Non-Magnetic MSP & Zircon Plant	-	-	-	10.7	10.7
Load-out facilities	2.7	-	3.1	1.9	7.6
Process Water System	0.7	-	0.5	0.3	1.5
TOTAL PROCESS CAPEX	12.1	9.8	9.6	20.8	52.3
TOTAL CAPEX	24.5	9.9	11.5	21.6	67.5
Contingency 20%	4.9	2.0	2.3	4.3	13.5
GRAND TOTAL CAPEX	29.4	11.9	13.8	25.9	81.0

The Base Case requires funding of only US$37.3m (see below). The total cost to produce final mineral sands products at a rate of 1.65Mtpa is US$81m (including 20% contingency), with this balance of $43.7m to be funded from cashflow.

The Base Case funding requirement is as follows:

Stage 1 Capex	$29.4m
Stage 2 Capex	$11.9m
Net Revenue Year 1 (part)	($4.0)m
Total Funding Requirement	$37.3m

Revenue and Operating Costs

The IHC study assesses the operating costs for each stage of the Project as well as the Government royalty payable:

REVENUE & OPERATING COSTS
	Total	US$/t VHM	US$/t Ore
Revenue	645.3m	394.23	45.09
Operating Costs	194.7m	118.96	13.61
Government Royalty	59.5m	36.39	4.16
Operating Cashflow	391.0m	238.88	27.32
Revenue to Cost Ratio	2.54

Base and Upside Pricing Case

For the Study, IHC Mining and the Company obtained pricing assumption curves from TZMI, the global independent mineral sands consulting group. The base pricing curve used in the Base Case considers current pricing and future supply demand expectations for each mineral before reverting to a long-term price.

The average price realised during the Project for the Base Case is shown below alongside current market prices ("Spot Price") which suggest even more attractive economics are feasible :

	BASE	SPOT PRICE
	USD$/tonne	USD$/tonne
Ilmenite	231	380
Garnet	245	3001
Zircon	1,777	2,000
Rutile	1,617	1,500 2

¹   Directors' estimate

²   The Directors believe there will be a rutile supply shortage in the coming years

Note that HMC is sold during the scale-up phase which will result in a lower price received for the contained VHM.

TZMI also noted that potential existed for prices for the Project's mineral products to remain higher than their base case pricing estimate. The upside price case assesses Project economics where the average price across all minerals was 24% higher and increased the NPV₈ to US$235m and IRR to 73%.

Comparison of Base and Upside Price Assumptions

PRICE ESTIMATE		BASE	UPSIDE
NPV8	USD$m	155	235
IRR		56%	73%
Payback	Years	3.7	3.2
Capex	USD$m	81.0	81.0
Capex Funding	USD$m	37.3	36.4
NPV/Capex Funding		4.2	6.5
RC Ratio		2.5	3.0

Sensitivity Analysis

Pricing for mineral sands are currently above the average price used in the PEA. Sensitivity analysis shows that the Project economics are most sensitive to price and product recovery. 

SENSITIVITY ANALYSIS
		-20%	-10%	0%	10%	20%
Commodity Price	USD$m	88	122	155	189	223
Reserves	USD$m	185	169	155	140	126
Recovery	USD$m	7	73	155	255	375
Capex	USD$m	169	162	155	149	142
Opex	USD$m	174	165	155	146	137
Discount Rate		8%	9%	10%	11%	12%
	USD$m	155	146	137	129	121

Cautionary Statement:

The Preliminary Economic Assessment ("PEA") summarised in this news release is preliminary in nature and is intended to provide an assessment of the Project's economic potential and design options.  The PEA mine plans and economic models include numerous assumptions and the use of Inferred Resources. Inferred Resources are considered to be too speculative geologically to have economic considerations applied to them that would enable them to be categorised as mineable reserves. Mineral resources that are not mineral reserves do not have demonstrated economic viability. There is no assurance that the results projects in the PEA will be realised.

 

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