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SOVEREIGN METALS LIMITED

ABN 71 120 833 427

INTERIM FINANCIAL REPORT FOR THE HALF YEAR ENDED 31 DECEMBER 2022

CORPORATE DIRECTORY

The Directors of Sovereign Metals Limited present their report on Sovereign Metals Limited (Sovereign or the Company or Parent) and the entities it controlled at the end of, or during, the half year ended 31 December 2022 (Consolidated Entity or Group).

DIRECTORS

The names of Directors in office at any time during the financial period or since the end of the financial period are:

Current Directors

Mr Benjamin Stoikovich       Chairman

Dr Julian Stephens                Managing Director

Mr Ian Middlemas                  Non-Executive Director

Mr Mark Pearce                      Non-Executive Director

Mr Nigel Jones                       Non-Executive Director

All Directors were in office from 1 July 2022 until the date of this report, unless otherwise noted.

Highlights during and subsequent to period end

Kasiya Rutile Project PFS continues to progress on schedule

·        Sovereign is well advanced with the Pre-Feasibility Study (PFS) for the Kasiya Rutile Project (Kasiya), an industry-leading major source of critical raw materials from Malawi. 

·         The PFS will build on the Expanded Scoping Study (ESS) which confirmed Kasiya as potentially one of the world’s largest and potentially lowest cost producers of natural rutile and natural graphite with a carbon-footprint substantially lower than other current and planned producers.

·           The PFS is on track to be completed in H1 2023 with all major works packages well progressed.

Resource infill drilling completed

·         The Company completed a 4,660 metre, 191-hole deeper air-core (AC) and 2,206 metre, 247-hole push tube (PT) mineral resource infill drilling program to upgrade the Kasiya Mineral Resource Estimate (MRE), with the update targeted for late Q1 2023.

·            The drilling program confirmed consistency of high-grade rutile and graphite mineralisation laterally and at depth.

·           Infill core PT drilling of numerous Inferred category pits and potential pit extensions is expected to add new blocks of Indicated material.

Offtake MoU and Market Alliance with major Japanese trader

·           In July 2022, Memorandum of Understanding (MoU) (non-binding) was signed with Mitsui & Co Ltd (Mitsui), one of the largest global trading and investment companies in Japan.

·           The MoU establishes a marketing alliance and offtake for 30,000 tonnes of natural rutile per annum. The alliance will allow Sovereign to leverage Mitsui’s extensive network and their market-leading understanding of the titanium industry and global logistics.

Offtake MoU with Chemours, one of the world’s largest’ s producers of high-quality titanium dioxide pigment

·           In November 2022, a MoU (non-binding) was signed for supply of 20,000 tonnes of natural rutile per annum from Kasiya to the US-based Chemours Company (Chemours), one of the world’s largest producers of high-quality titanium dioxide pigments.

Sovereign to Demerge Standalone Graphite Projects

·           Sovereign to demerge its standalone Graphite Projects (being the Nanzeka, Malingunde, Duwi and Mabuwa Projects) into a 100%-owned subsidiary, NGX Limited, via an in-specie distribution.

·           The Demerger seeks to unlock the value of the Graphite Projects for Sovereign shareholders and separate Kasiya and its standalone Graphite Projects into two distinct companies.

·           General Meeting for Demerger to take place on 17 March 2023.

Sovereign Metals Limited (ASX: SVM & AIM: SVML) is an ASX and AIM-listed company focussed on the development of its Kasiya rutile project (Kasiya) in Malawi.

Kasiya, located in central Malawi, is the largest natural rutile deposit and one of the largest flake graphite deposits in the world. Sovereign is aiming to develop an environmentally and sustainable operation to supply highly sought-after natural rutile and graphite to global markets.

Sovereign is completing a PFS which will build on the ESS, released in June 2022, with targeted completion in H1 2023.

The ESS confirmed Kasiya as potentially one of the world’s largest and lowest cost producers of natural rutile and natural graphite with a carbon-footprint substantially lower than current alternatives. The ESS showed outstanding results including:

·           a two-stage development (stage 2 self-funded) with full production at 24Mtpa throughput producing 265kt rutile and 170kt graphite per annum over a 25 year mine life

·           exceptional economics including a post-tax NPV₈ of US$1,537m and post-tax IRR of 36%

·       a large-scale operation with a low-cost profile resulting from the deposit’s near surface nature, high-grade, conventional processing flowsheet, and excellent existing infrastructure

The Company commenced a PFS which will build on the ESS which confirmed Kasiya as one of the world’s largest and potentially lowest cost producers of natural rutile and natural graphite with a carbon-footprint substantially lower than other current and planned producers.

The PFS is advancing well under the guidance of globally recognised consultants and is on schedule to be completed by its target date of H1 2023.

During the period, the Company completed a 4,660 metre, 191-hole AC and 2,206 metre, 247-hole PT drilling program at Kasiya. Drilling was conducted on a nominal 200m x 200m grid spacing targeting upgrading of mineralisation into the Indicated category which could convert to Probable Reserves as part of the forthcoming PFS. The AC results confirmed that rutile mineralisation is continuous in many pit areas from surface down to the top of saprock, normally between 20m and 30m from surface.

Mitsui

In July 2022, Sovereign entered into a non-binding MoU with Mitsui, one of the largest global trading and investment companies in Japan. The MoU establishes a marketing alliance and offtake for 30,000 tonnes of natural rutile per annum from the Company’s world-class Kasiya project.

This MoU creates a marketing alliance between the two parties to jointly market Sovereign’s rutile across Asia and other markets. The alliance will allow Sovereign to leverage off Mitsui’s extensive network and their market-leading understanding of the titanium industry and global logistics.

Mitsui has shared samples of rutile product from Kasiya with Asian end-users that have confirmed its premium chemical specifications should be suitable for use in their titanium sponge and pigment processes, as a precursor for high-grade, high-specification titanium metal and pigment production.

Chemours

In November 2022, Sovereign entered into a non-binding MOU with Chemours for the potential supply of 20,000 tonnes per annum of natural rutile from Kasiya.

The MOU covers the potential supply of 20,000 tonnes per annum of natural rutile at Stage 1 nameplate capacity and an option to take additional product (tonnage to be agreed) when Kasiya reaches Stage 2 nameplate capacity. Further, volumes may be varied up or down by mutual agreement and pricing will reference market prices of the day (both to be included in the definitive agreement).

The MOU is non-exclusive and non-binding and remains subject to negotiation and execution of the definitive agreement. The MOU will expire two years from the execution date but can be extended by agreement by both parties should a definitive agreement not have been reached by that time.

Chemours is a leading provider of performance chemicals that are key inputs in end-products and processes across a variety of industries. Chemours operates 29 manufacturing sites serving approximately 3,200 customers in approximately 120 countries.

Its Titanium Technologies segment is one of the world’s largest producers of high-quality titanium dioxide (TiO₂) pigment and aspires to be the most sustainable TiO₂ enterprise in the world. Using its proprietary chloride technology-pioneered in 1931 and improving ever since-Chemours provides innovative TiO₂ solutions for coatings, plastics, and laminates.

It operates four TiO₂ pigment production facilities: two in the United States, one in Mexico, and one in Taiwan totalling TiO2 pigment nameplate capacity of 1.25 million tonnes per year. In the year ended 31 December 2021, Chemours’ Titanium Technologies segment reported net sales of US$3.4 Billion.

The Company is continuing product marketing with further offtake MOUs expected to be executed in the near-term.

In December 2022, Sovereign announced that it intends to undertake a demerger (Demerger) whereby Sovereign’s Malawian graphite projects, being the Nanzeka Project, Malingunde Project, Duwi Project and Mabuwa Project (Graphite Projects), are to be demerged through NGX Limited (NGX), a wholly owned subsidiary of the Company. This will allow Sovereign to focus on the development of the Kasiya while unlocking value in its Graphite Projects for shareholders.

The Demerger allows Sovereign and the existing management team to focus on its flagship Kasiya Rutile Project, the largest natural rutile deposit in the world, with Sovereign retaining all graphite co-product from Kasiya.

Sovereign proposes, subject to shareholder approval, to demerge the Graphite Projects via a spin-out of NGX and in-specie distribution of NGX fully paid ordinary shares (NGX Shares) to Sovereign shareholders by issuing one (1) NGX Share for every eleven (11) Sovereign shares (SVM Shares) held (Distribution), allowing Sovereign shareholders to retain exposure to the value and upside of the Graphite Projects.

Upon completion of the Demerger, NGX intends to seek admission to the official list of the ASX. NGX will undertake a capital raising to satisfy the ASX admission requirements.

Sovereign shareholders will have the opportunity to retain further exposure to the value and upside of the Graphite Projects as the NGX IPO is expected to comprise a priority offer to existing shareholders on the basis of one (1) new NGX Share for every one (1) NGX Share received pursuant to the Demerger to raise approximately $8,600,000 and a general offer of $1,000,000 to assist with satisfying ASX spread requirements. This will ensure there is no cash outflow from Sovereign to NGX as part of the Demerger, other than applicable Sovereign expenses to effect the Demerger. The terms of the NGX IPO are yet to be finalised however.

The General Meeting for the Demerger is to take place on 17 March 2023.

The net operating loss after tax for the half year ended 31 December 2022 was $8,486,503 (2021: $7,716,384) which is attributable to:

(i)       exploration and evaluation expenditure of $5,792,042 (2021: $4,188,770), which is attributable to the Group’s accounting policy of expensing exploration and evaluation expenditure (other than expenditures incurred in the acquisition of the rights to explore) incurred by the Group in the period subsequent to the acquisition of the rights to explore up to the successful completion of definitive feasibility studies for each separate area of interest. The exploration and evaluation expenditure in the current period predominately relates to the Group’s on-going PFS at its Kasiya in Malawi and associated MRE drilling;

(ii)      business development expenses of $1,130,083 (2021: $894,214) which are attributable to the Group’s costs in relation to its listing on the AIM Market of the London Stock Exchange and investor and shareholder relations including public relations, marketing and digital marketing, conference fees and travel costs;

(iii)     one off upfront costs in relation to the demerger of NGX of $121,839 (2021: nil); and

(iv)   non-cash share based payments expenses of $1,061,657 (2021: $2,210,324) which is attributable to the Group’s accounting policy of expensing the value of shares, incentive options and rights (estimated using an appropriate pricing model) granted to key employees, consultants and advisors. The value of incentive options and rights is measured at grant date and recognised over the period during which the option and rights holders become unconditionally entitled to the incentive securities.

Other than the above, there are no matters or circumstances which have arisen since 31 December 2022 that have significantly affected or may significantly affect:

·       the operations, in periods subsequent to 31 December 2022, of the Group;

·       the results of those operations, in periods subsequent to 31 December 2022, of the Group; or

·       the state of affairs, in periods subsequent to 31 December 2022, of the Group.

Section 307C of the Corporations Act 2001 requires our auditors, Ernst & Young, to provide the directors of Sovereign Metals Limited with an Independence Declaration in relation to the review of the half year financial report.  This Independence Declaration is on page 15 and forms part of this Directors’ Report.

This report is made in accordance with a resolution of the directors made pursuant to section 306(3) of the Corporations Act 2001.

For and on behalf of the Directors