REG - Capital Metals PLC - Results of Development Study and Project Economics

Capital MetalsAnnouncement

12/05/2022 07:00

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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) ("NPV(8)") of US$155m, with
a Upside Price Case IRR of 73% and NPV(8) 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 NPV(8) 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                           Via Vigo Consulting

 Michael Frayne (CEO)

 James Mahony (CFO)

 Vigo Consulting (Investor Relations)         +44 (0)20 7390 0234

 Ben Simons / Oliver Clark                    capitalmetals@vigoconsulting.com
 SPARK Advisory Partners (Nominated Adviser)  +44 (0)20 3368 3554

 Neil Baldwin / James Keeshan
 WH Ireland Limited (Joint Broker)            +44 (0)20 7220 1666

 Harry Ansell / Katy Mitchell
 Tavira Securities Limited (Joint Broker)     +44 (0)20 7100 5100

 Jonathan Evans / Oliver Stansfield

 

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  Stage  Grand Total

                                                        3      4
                                      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         300(1)
 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 NPV(8) to US$235m and IRR to 73%.

Comparison of Base and Upside Price Assumptions

 PRICE ESTIMATE            BASE  UPSIDE
 NPV(8)             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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