Do not bury your head in the sand with Capital Metals
“…With a fully-funded programme ahead and the prospect of the award of key permits in the next few months the Project has considerable further potential with only 5pc of the licence area so far having been explored…”
Mining and oil and gas stocks are not the only way to seek to take advantage of the current upturn in the commodities market. We recently highlighted Fox Marble Holdings (AIM:FOX) as a possible alternative means of gaining exposure. Prospective mineral sands producer Capital Metals (AIM:CMET) might be another.
Capital, operating since 2015, received an infusion of new capital through a reverse takeover, announced last October and confirmed in January, by Equatorial Palm Oil – formerly listed on AIM as PAL – which had focused on palm oil development and production in Liberia. The £15.84m acquisition, funded through a share issue and supported by a £2m placing, is designed to develop the Eastern Minerals Project, a strip of shoreline on Sri Lanka’s eastern seaboard, some 220km east of Colombo, and 30km from the port of Oluvil.
The 84 km sq licence area has a JORC Resource of 17.2Mt, with an average grade of 17.6pc Total Heavy Minerals (THM) from surface down to a depth of three metres, one of the highest-grade deposits in its peer group.
Capital expects operating costs to be low given the presence of high grade minerals so close to the surface, which can be accessed without blasting or chemicals. The Project has considerable further potential: only 5pc of the licence area has so far been explored; drilling that has probed depths below three metres has indicated grades of more than 26pc THM; and the company has made applications for nine additional exploration licenses covering a further 623 sq km.
Ancient sands, new technologies
A finer grade of sand than aggregates such as crushed rock and gravel used by the construction industry, mineral sands were originally formed as crystals in igneous rocks such as granite or basalt. After millions of years of erosion by wind, rain and rivers the resulting grains were washed down to the sea to become part of the coastal sands of ancient beaches. Tidal movements washed away the lighter mineral sand grains – the quartz sands now mined in coastal waters – leaving the heavier mineral sands to accumulate on shorelines. The primary minerals so far identified at the Eastern Minerals Project are zircon, the titanium ores rutile and ilmenite, and garnet.
Zircon, which has been dated as the oldest terrestrial material on Earth, formed nearly 4.4 billion years ago, is a key resource for the ceramic industry, used for glazes and as an opacifier for kitchen and bathroom tiles, dinnerware, and decorative ceramics. It is in increasing demand for use in catalytic converters to control motor vehicle emissions.
Rutile and ilmenite produce titanium dioxide, a non-toxic white pigment with the capacity to reflect light, used in commercial paints and for the manufacture of plastics, paper, sunscreens, foodstuffs, cosmetics and toothpaste.
Titanium metal is a light, inert and strong metal with a high melting point used in heart pacemakers, artiﬁcial limbs and joints, spectacle frames and watches. As strong as steel but no more than half its weight, the metal has been used for the construction of space shuttles and the International Space Station, and for military and commercial aircraft. When formed into an alloy with metals such as iron, manganese and aluminium it can be used in power stations, paper mills, oil reﬁneries and desalination plants.
Garnet sand is a tough abrasive, a cost-effective replacement for silica sand in sand blasting, commonly used in water jets to cut steel and other materials.
Serving the world’s commodities market
Capital is seeking to join a relatively narrow group of mineral sands producers. The three main suppliers, Rio Tinto, Tronox and Iluka Resources, produce some two thirds of the world’s zircon, ilmenite and rutile, most of it mined in Australia and South Africa.
Demand and supply ebb and flow with the commodities cycle. Demand has been driven in recent years by the industrialisation of China and India, and has been particularly strong for titanium ores, prices rising 7pc even through the pandemic. Zircon prices were rising prior to the pandemic, and the global garnet market is expected to growth by around 6pc over the next five years.
Alhough – as we discussed last month – it is unclear whether the world is entering a new commodities supercycle, it seems commodities will be in high demand for some time as the international economy recovers from Covid-19 and demand rises for minerals essential for the energy transition.
Capital set out its post-takeover path to market in a corporate and operational update last month. The granting of its Industrial Mining License (IML) is conditional on an Environmental Impact Assessment (EIA), currently open to public consultation, which the company hopes will be approved by the end of H1 this year. In anticipation of the granting of the IML Capital is discussing field access arrangements with local land owners, and undertaking a development study and economic analysis, due for completion by the end of H1 2020, that will look ahead to a mining operation targeting yearly production of an estimated 1.65 million tonnes.
Once the IML is granted Capital will look to conclude ongoing discussions with potential offtake partners and enter into agreements involving some form of prepayment or financing arrangement. The company will also seek funding for the estimated $35m cost of constructing onsite facilities capable of processing around 1.65Mt per annum. A ‘wet’ plant will be used to separate the heavy minerals from the silica sands, creating a Heavy Mineral Concentrate (HMC) that will be processed at a ‘dry’ plant where the zircon, garnet, rutile and ilmenite elements will be separated from non-commercial silica sands.
Capital expects funding for the plants to comprise a mixture of debt ﬁnance, equity and advance payments from off-take customers. Construction is scheduled to begin in Q4 2021, with first production in H1 2022. The company has also submitted new drilling programmes to the Sri Lankan regulators for further exploration of the Project area.
Mineral sands exploration has become an increasingly sensitive environmental issue, as concerns rise about the sheer volume of sand extracted for industrial and commercial use. Sand is now second only to water in terms of the volume of natural resources that are extracted and traded globally. Exploitation of lakes, rivers and coastal areas has reduced biodiversity, disrupted fishing communities, lowered water tables, and increased flood risk. Abundant Saharan and Arabian sand tends to be too fine for use in construction, accounting for the irony of northern African and Gulf countries importing sand for industrial use.
Capital’s EIA seeks to highlight the company’s commitment to undertaking its work in an environmentally responsible manner. Well regulated mineral sands programmes integrate land rehabilitation into the mining process. The shallow depth of mineral sands deposits allows them to be mined using conventional surface mining methods including bulldozers, excavators and trucks. Topsoil, subsoil and clay is removed and stockpiled separately to allow it to be progressively returned after the mining process. The mineral sand deposit is then removed from the ground before water is added to allow it to be pumped to a processing plant where the valuable heavy minerals are separated from the sand. Sand is pumped back to the mined area, the water is removed for reuse and the sand is returned to the ground. Subsoil and topsoil are then replaced and the land rehabilitated back to its original use.
Challenges and opportunities
Capital has much work to do before it can take its place among a relatively select set of mineral sands producers. The company is well positioned to obtain the environmental and mining permits it requires, but it faces the further challenges of securing funding for its plants and building a customer base.
But with funding secured for its current objectives of securing necessary permits and mapping future operations, Capital has a clear path to realising its ambition. Its most recent set of interim results stated a pre-fundraise loss for the six months ended 30 September 2020 of $353,588, down from $508,704 for the corresponding period in 2019, reflecting a significant reduction in administrative expenditure.
The company’s share price is up to around 20p from around 12p at the start of the year. With a fully-funded programme ahead and the prospect of the award of key permits in the next few months, Capital Metals is another value stock we think worth watching.