SOVEREIGN METALS LIMITED

NEWS RELEASE | 16 June 2022

KASIYA EXPANDED SCOPING STUDY RESULTS

EXCEPTIONAL ECONOMICS CONFIRM KASIYA AS AN INDUSTRY-LEADING SOURCE OF CRITICAL RAW MATERIALS

Sovereign Metals Limited (the Company or Sovereign) is pleased to announce the results of the Expanded Scoping Study (Scoping Study or Study) for the Company's Kasiya Rutile Project (Kasiya or the Project) in Malawi.

In April 2022, Sovereign announced a new JORC Mineral Resource Estimate (MRE) for Kasiya which confirmed the Project as the world's largest rutile (titanium dioxide) deposit and one of the world's largest flake graphite deposits.

The Expanded Scoping Study based on the April 2022 MRE confirms that Kasiya will be 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 while significantly contributing to the social and economic development of Malawi.

KEY EXPANDED SCOPING STUDY HIGHLIGHTS

·    Significant increase in NPV and EBITDA from the 2021 Initial Scoping Study with lower operating costs for a relatively small increase in Capex to first production

·    Potential to become a major producer in both the natural rutile and graphite markets with steady state  production of 265,000 rutile and 170,000 tonnes of graphite with a 25-year mine life

·    Low capital costs to first production due to exceptional existing available infrastructure offering significant cost reductions and providing optionality and scalability

·    Low operating cost and high margins due to deposit size, zero strip ratio of soft, friable high-grade mineralisation from surface, amenability to hydro-mining, conventional processing, deposit location and low transport costs

·    Extremely favourable market fundamentals as rutile (titanium) and natural graphite deemed critical raw materials for the US and EU based on economic importance and supply risk

·    Natural rutile market in structural deficit with current global supply estimated to decline 45% in the next three years with graphite demand set to soar as electric vehicle production is forecast to increase 12-fold by 2040

·    Natural ESG benefits for Kasiya:

o  Substantially reduced CO₂ emissions for both rutile and graphite compared to current alternatives, including substantial Scope 3 emissions reductions for pigment production from rutile compared to alternative feedstocks

o  Significant social and economic benefits for Malawi including job creation, fiscal returns, training and continued community social initiatives

·    Study based on conservative commodity price estimates. Long-term rutile price (real) of US$1,254/t versus current spot price of +US$2,200/t¹ and long-term natural graphite basket price (real) of US$1,085/t versus current equivalent spot price of US$1,223/t²

Managing Director, Dr Julian Stephens

"The Expanded Scoping Study demonstrates Kasiya is a Tier 1 minerals project being the largest natural rutile resource and one of the largest graphite resources in the world. Both minerals are classified on the Critical Minerals lists of the US and EU and rutile is in extreme market supply deficit. In light of these factors, Kasiya is seen as a highly strategic project with the potential to be a major supplier in both rutile and graphite markets.

The project benefits from existing high-quality infrastructure and has inherent ESG advantages. Natural rutile has a far lower carbon footprint compared to other titanium feedstocks used in the pigment industry, and natural graphite is a key component in lithium-ion batteries - crucial to de-carbonising the global economy. Further, the vast majority of power for the planned Kasiya mining operation will be supplied by renewable hydro and solar - giving the mine itself a very low carbon footprint.

The future development of the Kasiya Rutile Project will bring substantial benefits to Malawi in terms of GDP, royalties, taxes, employment and training, local business opportunities and community development."

ENQUIRIES

To view the announcement in full including all illustrations and figures, please refer to the announcement at http://sovereignmetals.com.au/announcements/.

KASIYA EXPANDED SCOPING STUDY OUTCOMES

Sovereign's Expanded Scoping Study for Kasiya is based on the updated MRE reported in April 2022, of 1.8Bt containing 18Mt rutile at 1.01% and 23.4Mt graphite at 1.32%. The Study envisages a 25-year mine life during which time both rutile and graphite are produced during two stages:

Stage 1         Years 0-5: 12Mt of ore processed per annum to produce approximately 145,000 tonne of natural rutile and 85,000 tonnes of flake graphite per annum

Stage 2           Years 5-25: Add 12Mt capacity for total 24Mt of ore processed per annum to produce approximately 260,000 tonnes of natural rutile and 170,000 tonnes of flake graphite per annum

EXPANDED SCOPING STUDY OVERVIEW

Sovereign is aiming to develop an environmentally and socially sustainable operation to be the largest supplier of highly sought-after natural rutile to global markets and an important low-cost natural graphite supplier.

The proposed large-scale operation will process soft, friable mineralisation from surface. The operation will primarily employ conventional hydro-mining to produce a slurry that is pumped to a Wet Concentration Plant (WCP) where the material is sized. A Heavy Mineral Concentrate (HMC) is produced via processing the sand fraction through a series of gravity spirals. The HMC is transferred to the dry Mineral Separation Plant (MSP) where premium quality rutile is produced via electrostatic and magnetic separation.

Graphite rich concentrate is collected from the gravity spirals and processed in a separate graphite flotation plant, producing a high purity and high value coarse-flake graphite product.

The Project has excellent surrounding infrastructure including bitumen roads, a high-quality rail line connecting to the deep-water of Nacala on the Indian Ocean and hydro-sourced grid power. At full production, rutile and graphite products will be railed directly from a purpose built rail dry port at the mine site eastward via the Nacala Logistics Corridor (NLC) to the deep-water port of Nacala or southward via the Sena Rail Line to the deep-water port of Beira.

LOW CARBON ADVANTAGE FOR TWO CRITICAL RAW MATERIALS

Natural Rutile - critical to lowering the Titanium industry's carbon footprint

Like many other industries globally, the titanium dioxide pigment industry is targeting reduced carbon emissions, reduced energy consumption and a move toward renewable energy and waste minimisation.  A shift towards a greater percentage of natural rutile feedstock offers the titanium pigment industry a simple and short lead-time opportunity to significantly lower its carbon intensity and total environmental impact.

Sovereign's natural rutile product is expected to have substantially lower Global Warming Potential (GWP) (Scope 1, 2 and 3 scope emissions) when compared to other titanium feedstock alternatives produced by upgrading ilmenite (i.e., synthetic rutile and titania slag). Using natural rutile from Kasiya as titanium feedstock for the chloride pigment process would significantly reduce Scope 1, 2 and 3 greenhouse gas emissions.

Titanium feedstock is a key component of various industrial and consumer products. Therefore, utilising natural rutile such as from Kasiya, as direct use titanium feedstock could hold the solution to developing low-carbon footprint products including low carbon paints.

Natural Graphite - a significant component in lithium-ion batteries for electric vehicles

The lithium-ion battery sector is the main emerging market for flake graphite. Greater capacity batteries, such as those required for electric vehicles, are expected to drive significant demand for graphite over the coming years. It is forecast the battery sector will drive the largest demand for graphite by 2028, with graphite making up to 50% of the composition of a lithium-ion battery.

Currently, China is the world's largest supplier of natural flake graphite. In 2020, leading data provider and market intelligence publisher Benchmark Mineral Intelligence reported that China produced 86% of all lithium-ion battery anodes from natural and synthetic graphite and 100% of all the world's natural graphite anodes.

Sovereign's natural flake graphite concentrate has significantly lower greenhouse gas emissions than the Chinese produced natural flake graphite concentrate from the Heilongjiang Province. Each tonne of Sovereign's natural graphite is estimated to have a GWP of 0.2 tonnes CO₂e - 5x lower than producing natural flake graphite concentrate in the Heilongjiang Province, China and 103x lower than production of synthetic graphite.

The significantly lower GWP for Kasiya graphite is due to the fact that it is hosted in soft, friable saprolite material which will be mined via hydro methods (high pressure water monitors) powered by renewable energy sources - hydro power from the Malawi grid and on-site solar power. This is opposed to the production in Heilongjiang Province, China where hard-rock ore requires drilling, blasting, excavation, trucking, crushing, and grinding - overall high CO2e activities.

SUSTAINABLE AND ESG DRIVEN PROJECT DEVELOPMENT STRATEGY

Sustainability is a vital element of Sovereign's strategy for Kasiya. The Company is committed to making informed choices that improve our corporate governance, financial strength, operational efficiency, environmental stewardship, community engagement and resource management.

The Project aims to meet the requirements of international guidelines and standards, including the IFC Performance Standards on Environmental and Social Sustainability (IFC, 2012), the World Bank Group Environmental, Health and Safety Guidelines (WBG, 2007), the Equator Principles (Equator Principles Association, 2020) and the International Council on Mining & Metals (ICMM) principles for future studies and development phases of the Kasiya project.

The Kasiya project will be designed considering both the Equator Principles and Scope 1, 2 and 3 emissions under the Green House Gas protocol so that the design meets high Environmental, Social and Governance (ESG) standards from the outset.

·     Access to hydro-generated grid power and a solar power system to be installed on site will ensure low carbon power supply for the project and the use of predominantly rail rather than road transport for rutile and graphite products will further help give the mine a low carbon footprint.

·      The Scoping Study contemplates that the operation will use a closed, zero discharge process water circuit and tailings storage facility designed for chemically benign tailings during operations which will be rehabilitated and restored progressively.

·     Sovereign continues to undertake several initiatives to assist in the development of Malawi and its local communities. The Company aims to become an industry leader in social responsibility having successfully worked with communities in Malawi over the last decade who remain highly supportive and are well positioned to benefit from the development of new mining projects.

LOW-COST OPERATION

Kasiya's low operating costs are achieved through deposit size and grade, zero strip ratio, location and excellent existing operational infrastructure. Central Malawi boasts hydropower and an extensive sealed road network. The Kasiya Rutile Project is strategically located in close proximity to the capital city of Lilongwe, providing access to a skilled workforce and industrial services.

The existing quality logistics routes to the Indian Ocean deep-water ports of Nacala and Beira for the export of products to global markets provides significant capital cost savings for Kasiya compared to many other undeveloped minerals projects.

The soft, friable and high-grade mineralisation occurring from surface results in no waste stripping requirement and the amenability to hydro-mining means the mining cost component is kept relatively low.

One of the highest Revenue : Cost of Sales Ratio in the Mineral Sands Industry

The revenue-to-cash cost ratio of 3.0x positions Kasiya in the first quartile compared to other undeveloped mineral sands operations. The production of high value natural rutile and graphite provides strong margins with a cash margin of over 67% for the life of the operation.

The Study has applied conservative pricing assumptions for both products which still results in a strong position on the revenue to cost ratio. This supports the robustness of the Kasiya operation and its strong profitability during different pricing environments and the revenue stability of two different products with different demand drivers.

Lowest Cost Flake Graphite Project in the World

Benchmarking the co-product production cost of graphite from Kasiya based on the Study results against peer flake graphite projects positions Kasiya as the lowest operating cost graphite project in the world. Kasiya has an average life-of-mine FOB (Nacala) operating cost of US$320 per tonne of product (rutile plus graphite). On an incremental cost basis reflecting graphite production as a co-product to primary rutile production, the operating cost is US$140 per tonne of graphite produced (FOB Nacala).

CRITICAL RAW MATERIALS

Titanium and natural graphite have been classified as critical raw materials by the US and EU due to a combination of their scarceness and China-controlled supply chains, and requirement for the decarbonisation of the global economy as part of the energy transition.

Current sources of natural rutile are in decline as several operations' reserves are depleting concurrently with declining ore grades. These include Iluka Resources' (Iluka) Sierra Rutile and Base Resources' Kwale operations in Kenya.

Global rutile supply is projected to decline rapidly beyond 2023, following the scheduled closures of Base Resource's Kwale and Iluka's SRL operations unless mine life extension is approved (TZMI). There are limited new deposits forecast to come online, and hence supply of natural rutile is likely to remain in structural deficit for the long term, even with Kasiya at full production.  

DISCLOSURES & DISCLAIMERS

Scoping Study Parameters - Cautionary Statements

The Scoping Study referred to in this announcement has been undertaken to determine the potential viability of an open pit mine, rutile and graphite processing plant constructed onsite at the Kasiya project in Malawi and to reach a decision to proceed with more definitive studies. The Scoping Study has been prepared to an accuracy level of ±30%. The results should not be considered a profit forecast or production forecast.

The Scoping Study is a preliminary technical and economic study of the potential viability of the Kasiya project. In accordance with the ASX Listing Rules, the Company advises it is based on low-level technical and economic assessments that are not sufficient to support the estimation of ore reserves. Further evaluation work including infill drilling and appropriate studies are required before Sovereign will be able to estimate any ore reserves or to provide any assurance of an economic development case.

61% of the total production target is in the Indicated Mineral Resource category with 39% in the Inferred Mineral Resource category. 100% of the scheduled throughput over the first eight and half years of production is in the Indicated Mineral Resource category, with 0% in the Inferred Mineral Resource category. The Company has concluded that it has reasonable grounds for disclosing a production target which includes a modest amount of Inferred material. However, there is a low level of geological confidence associated with Inferred mineral resources and there is no certainty that further exploration work (including infill drilling) on the Kasiya deposit will result in the determination of additional Indicated Mineral Resources or that the production target itself will be realised.

The Scoping Study is based on the material assumptions outlined elsewhere in this announcement. These include assumptions about the availability of funding. While Sovereign considers all the material assumptions to be based on reasonable grounds, there is no certainty that they will prove to be correct or that the range of outcomes indicated by the Scoping Study will be achieved.

To achieve the range outcomes indicated in the Scoping Study, additional funding will likely be required. Investors should note that there is no certainty that Sovereign will be able to raise funding when needed. It is also possible that such funding may only be available on terms that dilute or otherwise affect the value of the Sovereign's existing shares. It is also possible that Sovereign could pursue other 'value realisation' strategies such as sale, partial sale, or joint venture of the Project. If it does, this could materially reduce Sovereign's proportionate ownership of the Project.

The Company has concluded it has a reasonable basis for providing the forward looking statements included in this announcement and believes that it has a reasonable basis to expect it will be able to fund the development of the Project. Given the uncertainties involved, investors should not make any investment decisions based solely on the results of the Scoping Study.

Competent Person Statements

The information in this announcement that relates to Production Targets is based on and fairly represents information provided by Mr Ryan Locke, a Competent Person, who is a Member of The Australasian Institute of Mining and Metallurgy. Mr Locke is employed by Orelogy Group Pty Ltd, an independent consulting company. Mr Locke has sufficient experience, which is relevant to the style of mineralisation and type of deposit under consideration, and to the activity he is undertaking, to qualify as a Competent Person as defined in the 2012 Edition of the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves'. Mr Locke consents to the inclusion in the Announcement of the matters based on his information in the form and context in which it appears.

The information in this announcement that relates to Processing, Infrastructure and Capital and Operating Costs is based on and fairly represents information compiled or reviewed by Mr Matthew Langridge, a Competent Person, who is a Fellow Member of The Australasian Institute of Mining and Metallurgy. Mr Langridge is employed by DRA Global Ltd, an independent consulting company. Mr Langridge has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activities undertaken. Mr Langridge, consents to the inclusion in the Announcement of the matters based on his information in the form and context in which it appears.

The information in this announcement that relates to Metallurgy - rutile is based on and fairly represents information compiled or reviewed by Mr Paul Marcos, a Competent Person, who is a Fellow Member of The Australasian Institute of Mining and Metallurgy. Mr Marcos is an employee of Sovereign and a holder of shares and performance rights in Sovereign. Mr Marcos has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activity being undertaken, to qualify as a Competent Person as defined in the 2012 Edition of the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves'. Mr Marcos consents to the inclusion in the report of the matters based on his information in the form and context in which it appears.

The information in this announcement that relates to Metallurgy - graphite is based on and fairly represents information compiled or reviewed by Mr Russell Bradford, a Competent Person, who is a Fellow Member of The Australasian Institute of Mining and Metallurgy. Mr Bradford is employed by Jem-Met Pty Ltd, an independent consulting company. Mr Bradford is a holder of shares and performance rights in Sovereign. Mr Bradford has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activities undertaken. Mr Bradford consents to the inclusion in the Announcement of the matters based on his information in the form and context in which it appears.

The information in this announcement that relates to the Mineral Resource Estimate is extracted from the announcement dated 5 April 2022. The announcement is available to view on www.sovereignmetals.com.au. Sovereign confirms that a) it is not aware of any new information or data that materially affects the information included in the announcement; b) all material assumptions included in the announcement continue to apply and have not materially changed; and c) the form and context in which the relevant Competent Persons' findings are presented in this report have not been materially changed from the announcement.

Forward Looking Statement

This release may include forward-looking statements, which may be identified by words such as "expects", "anticipates", "believes", "projects", "plans", and similar expressions. These forward-looking statements are based on Sovereign's expectations and beliefs concerning future events. Forward looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of Sovereign, which could cause actual results to differ materially from such statements. There can be no assurance that forward-looking statements will prove to be correct. Sovereign makes no undertaking to subsequently update or revise the forward-looking statements made in this release, to reflect the circumstances or events after the date of that release.

Further Important Information for this Announcement

This Study has been prepared and reported in accordance with the requirements of the JORC Code (2012) and relevant ASX Listing Rules.

The Study has been prepared to an accuracy level of ±30%. The primary purpose of the Study is to establish whether or not to proceed to the next stage of feasibility studies. The Study results should not be considered a profit forecast or production forecast. As defined by the JORC Code, a "Scoping Study is an order of magnitude technical and economic study of the potential viability of Mineral Resources. It includes appropriate assessments of realistic assumed Modifying Factors together with any other relevant operational factors that are necessary to demonstrate at the time of reporting that progress to a Pre-Feasibility Study can be justified."

The Modifying Factors included in the JORC Code have been assessed as part of the Study, including mining, processing, infrastructure, economic, marketing, legal, environmental, social and government factors. The Company has received advice from appropriate experts when assessing each Modifying Factor.

Following an assessment of the results of the Study, the Company has formed the view that the next stage of feasibility studies is justified for Kasiya. Feasibility Studies will provide the Company with far more comprehensive assessment of a range of options for the technical and economic viability of Kasiya which by international standards should be sufficient detail for project development financers to base an investment decision.

The Company has concluded it has a reasonable basis for providing any of the forward-looking statements included in this announcement and believes that it has a reasonable basis to expect that the Company will be able to fund its stated objective of completing feasibility studies for Kasiya. All material assumptions on which the forecast financial information is based are set out in this announcement.

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ('MAR'). Upon the publication of this announcement via Regulatory Information Service ('RIS'), this inside information is now considered to be in the public domain.

Qualified Person

Information disclosed in this announcement has been reviewed by Dr Julian Stephens (B.Sc (Hons), PhD, MAIG), Managing Director, a Qualified Person for the purposes of the AIM Rules for Companies.

SUMMARY OF MATERIAL ASSUMPTIONS

Material assumptions used in the estimation of the production target and associated financial information are set out in the following table.

MODIFYING FACTORS

The Modifying Factors included in the JORC Code (2012) have been assessed as part of the Expanded Scoping Study, including mining, processing, metallurgical, infrastructure, economic, marketing, legal, environmental, social and government factors. The Company has received advice from appropriate experts when assessing each Modifying Factor.

A summary assessment of each relevant Modifying Factor is provided below.

Mining - refer to section entitled 'Mining' in the Full Announcement at http://sovereignmetals.com.au/announcements/.

The Company engaged independent consultants Orelogy Mining Consultants Pty Ltd and Fraser Alexander to carry out the pit optimisations, mine design, scheduling and mining cost estimation for the Kasiya Scoping Study. The proposed mining method is hydro mining with minor dozer assistance. This is considered appropriate for this style of shallow, saprolite-hosted rutile and graphite mineralisation. This methodology is used across numerous mineral sands operations, particularly in Africa, and is well suited for this style of mineralisation.

61% of the total production target is in the Indicated resource category with 39% in the Inferred resource category. 100% of the scheduled throughput over the first eight and a half years of production is in the Indicated category, with 0% in the Inferred category- the payback period for the Project is 2.6 years from the start of operations. The Company has concluded that it has reasonable grounds for disclosing a production target which includes a modest amount of Inferred material. However, there is a low level of geological confidence associated with Inferred mineral resources and there is no certainty that further exploration work (including infill drilling) on the Kasiya deposit will result in the determination of additional Indicated mineral resources or that the production target itself will be realised.

Metallurgy and Processing - refer to section entitled 'Metallurgy and Process Design' in the Full Announcement at http://sovereignmetals.com.au/announcements/.

Rutile

The Company completed bulk rutile test-work programs at the globally recognised Allied Mineral Laboratories (AML) in Perth, Australia. The latest program was supervised by Sovereign's Head of Development, Paul Marcos. Mr Marcos is a metallurgist and process engineer and a mineral sands industry veteran. Bulk test-work programs have confirmed premium grade rutile can be produced via a simple and conventional process flow sheet.

Processing engineering was completed by DRA Global who developed the process plant design and associated cost estimate for the Scoping Study. An average product grade of 96% TiO2 and average recovery of 98% for rutile has been applied in the Scoping Study.

Graphite

The Company engaged veteran graphite metallurgist Oliver Peters, MSc, P.Eng., MBA (Consulting Metallurgist for SGS and Principal Metallurgist of Metpro Management Inc.) to complete initial test-work for graphite recovery. Mr Peters has over 25 years' experience in metallurgy on graphite and other commodities. He has operated numerous graphite pilot plants and commissioned a number of full-scale processing facilities. Mr Peters has developed the process flowsheet employed for the Malingunde PFS which has been largely adopted for this Study. DRA's Senior Engineer, Stewart Calder considers this appropriate based on the similarities of the material and the early stage of the project.

Processing engineering was completed by DRA Global who developed the process plant design and associated cost estimates for the Scoping Study. Overall average graphite recovery applied was 62% with gravity tails recovery being 74% and flotation plant recovery being 84%. Overall concentrate grades average 96% C(t) with 60% of the graphite flake product being larger than 180µm.

Rutile & Graphite

It is acknowledged that laboratory scale test-work will not always represent actual results achieved from a production plant in terms of grade, chemistry, sizing and recovery. Further test-work will be required to gain additional confidence of specifications and recoveries that will be achieved at full-scale production.

Overall, the process flow-sheet is conventional for both rutile and graphite with no novel features or equipment incorporated.

Infrastructure - refer to section entitled 'Infrastructure' in the Full Announcement at http://sovereignmetals.com.au/announcements/.

Kasiya is located approximately 40km north west of Lilongwe, Malawi's capital, and boasts excellent access to services and infrastructure. The site is serviced by a dual lane, sealed bitumen road that links to Lilongwe and the underutilised operational intermodal rail siding at Kanengo.

The proximity to Lilongwe gives the project a number of benefits, including access to a large pool of professionals and skilled tradespeople, as well as industrial services.

The Company appointed JCM Power (JCM) to design a preliminary Independent Power Producer (IPP) solution for Kasiya. JCM is a Canada-headquartered IPP which develops, constructs, owns and operates renewable energy and storage projects in emerging markets across the globe. JCM provided an estimated, levelized cost of energy (LOCE) on a Power Purchase Agreement (PPA).

Transport cost estimates were provided by Morgan Sterling Consultants (MSC) based on market data, suppliers' quotations, industry databases, industry contacts and MSC's existing knowledge of southern African transport infrastructure and freight markets. MSC is an independent consultant with substantial experience in the management of transport logistics studies in southern Africa.

Marketing - refer to sections entitled 'Marketing Strategy' in the Full Announcement at http://sovereignmetals.com.au/announcements/.

Rutile

The Company engaged market leading TZMI to provide a bespoke marketing report to support the Scoping Study. TZMI is a global, independent consulting and publishing company which specialises in technical, strategic and commercial analyses of the opaque (non-terminal market) mineral, chemical and metal sectors.

TZMI's assessment has confirmed that, based upon their high-level view on global demand and supply forecasts for natural rutile, and with reference to the specific attributes of Kasiya, there is a reasonable expectation that the product will be able to be sold into existing and future rutile markets.

Given the premium specifications of Kasiya's natural rutile, the product should be suitable for all major natural end-use markets including TiO2 pigment feedstock, titanium metal and welding sectors.

Graphite

The Company engaged Fastmarkets, a specialist international publisher and information provider for the global steel, non-ferrous and industrial minerals markets, to prepare a marketing report for graphite.

Fastmarkets' assessment has confirmed that based upon their high-level view on global demand and supply forecasts for natural flake graphite, and with reference to the specific attributes of Sovereign's projects, there is a reasonable expectation that the product from Sovereign's projects will be able to be sold into existing and future graphite markets. Given the extremely low-cost profile and high-quality product, it is expected that output from Kasiya will be able to fill new demand or substitute existing lower quality / higher cost supply.

Project considerations taken by Fastmarkets in forming an opinion about the marketability of product include:

-          Modest production target

-          Low capital costs (incremental)

-          Low operating costs

-          High quality concentrate specifications

Industry participants confirm that the highest value graphite concentrates remain the large, jumbo and super-jumbo flake fractions, primarily used in industrial applications such as refractories, foundries and expandable products. These sectors currently make up the significant majority of total global natural flake graphite market by value.

Fastmarkets have formed their opinion based solely upon project information provided by Sovereign Metals to Fastmarkets and have not conducted any independent analysis or due diligence on the information provided.

Economic - also refer to sections entitled 'Cost Estimations' and 'Financial & Economic Analysis' in the Full Announcement.

Capital estimates for the procress plant have been prepared by DRA, together with input from the Company and other contributing consultants using combinations of cost estimates from suppliers, historical data, benchmarks and other independent sources. The intended accuracy of the initial capital cost estimate for the Project is ±30%.

Capital costs include the cost of all services, direct costs, contractor indirects, EPCM expenses, non-process infrastructure, sustaining capital and other facilities used for the mine. Capital costs make provision for mitigation expenses and mine closure and environmental costs.

Working capital requirements of US$34m (including contingency) for plant commissioning and full ramp-up have been excluded in the headline capital estimate but included in the financial modelling.

Mining costs have been estimated by Fraser Alexander, a regional leader in hydro-mining and materials handling. Mining costs have been built up from first principles based on equipment, vendor, and contractor quotations, local unit cost rates, and benchmarked costs.

Labor costs have been developed based on a first-principles build-up of staffing requirements with labor rates benchmarked in Malawi and expatriate rates benchmarked for professionals from South Africa and other jurisdictions.

A Government royalty of 5% (applied to revenue) and a vendor profit share of 2% (applied to gross profit) has been included in all project economics. A 0.45% royalty (applied to revenue) has been applied for the community development fund.

Rehabilitation and mine closure costs are included within the reported operating cost and sustaining capital figures.

A detailed financial model and discounted cash flow (DCF) analysis has been prepared by the Company in order to demonstrate the economic viability of the Project. The financial model and DCF were modelled with conservative inputs to provide management with a baseline valuation of the Project.

The DCF analysis demonstrated compelling economics of the prospective Project, with an NPV (ungeared, after-tax, at an 8% discount rate) of US$1,537 million,  and an (ungeared) IRR of 36%.

Sensitivity analysis was performed on all key assumptions used. The robust project economics insulate the Kasiya Project from variation in market pricing, capital expense, or operating expenses. With a rutile and graphite concentrate price 30% lower than the Scoping Study prices the Project still displays a positive NPV (ungeared, after-tax, at an 8% discount rate) of US$683 million and IRR of 22%.

Payback period for the Project is 2.6 years from the start of production. The payback period is based on free-cash flow, after taxes.

Sovereign estimates the total capital cost to construct the mine to be US$372m (which includes a contingency of 30% of direct and indirect costs).

Key parameters are disclosed in the body of the announcement, and include:

-          Life of Mine: 25 years

-          Discount rate: 8%

-          Tax rate: 30%

-         Resource Rent Tax (RRT) of 15% after tax profit is currently legislated in the Taxation Act. It is understood that it is not currently being applied to mining projects in Malawi and it is uncertain if it would apply to Sovereign's projects in the future. The Company has not applied RRT in any of its financial analysis.

-         Royalty rate: 5% royalty (Government), 2% of gross profit (Original Project Vendor) and 0.45% Community Development Fund.

-        Pricing:  Rutile average price of US$1,308 per tonne and Graphite average basket price of US$1,085 per tonne

The financial model has been prepared internally by the Company using inputs from the various expert consultants and has been reviewed by BDO an independent leading accountancy, tax and advisory services firm to validate the functionality and accuracy of the model.

The Company engaged the services of advisory firm, Argonaut, with regards to project economics. Argonaut is a financial advisory firm which specialises in multiple sectors, including metals and oil & gas. Argonaut is well regarded as a specialist capital markets service provider and has raised project development funding for companies across a range of commodities including the industrial and speciality minerals sector. Following the assessment of a number of key criteria, Argonaut has confirmed that, on the basis that a DFS arrives at a result that is not materially negatively different than the Scoping Study as noted above, all in-country government and regulatory approvals are received, commercial offtake agreements are in place for the majority of Rutile and Graphite production for at least the first five years of mine life, and that there has not been any material adverse change in financial condition, results of operations, business or prospects of the Company/or political and business environment in Malawi and/or financial or capital markets in general, Sovereign should be able to raise sufficient funding to develop the Project.

An assessment of various funding alternatives available to Sovereign has been made based on precedent transactions that have occurred in the mining industry, including an assessment of alternatives available to companies that operate in industrial and specialty minerals sector. The assessment and advice from Argonaut Capital (referred to above) indicates that financing for industrial mineral companies often involves a broader mix of funding sources than just traditional debt and equity. Argonaut Capital considers that given the nature of the Project, funding is likely to involve specialist funds, with potential funding sources including, but not limited to, traditional equity and debt, royalty financing and off-take agreements, at either the corporate or project level. It is important to note that no funding arrangements have yet been put in place as these discussions continue to take place. The composition of the funding arrangements ultimately put in place may also vary, so it is not possible at this stage to provide any further information about the composition of potential funding arrangement.

Since initial exploration of the Kasiya Project in November 2019, the Company has completed extensive drilling, sampling, metallurgical test-work, geological modelling and defined an Indicated and Inferred Mineral Resource Estimate. Over this period, with these key milestones being attained and the Project de-risked, the Company's market capitalisation has increased from approximately A$18m to over A$210m. As the Project continues to achieve key milestones, which can also be significant de-risking events, the Company's share price could be anticipated to increase.

The Company is debt free and is in a strong financial position, with approximately A$20m cash on hand (31 May 2022). The current financial position means the Company is soundly funded to continue into a PFS phase to further develop the Project.

The Company's shares are listed on the ASX and AIM which are premier markets for growth companies and provides increased access to capital from institutional and retailed investors in Australia and the UK.

Sovereign has an experienced and high-quality Board and management team comprising highly respected resource executives with extensive technical, financial, commercial and capital markets experience. The directors have previously raised more than A$1.75bn from capital markets for a number of exploration and development companies.

As a result, the Board has a high level of confidence that the Project will be able to secure funding in due course, having particular regard to:

1.   Required capital expenditure;

2.   Sovereign's market capitalisation;

3.   Recent funding activities by directors in respect of other resource projects;

4.   Recently completed funding arrangements for similar or larger scale development projects;

5.   The range of potential funding options available;

6.   The favourable key metrics generated by the Kasiya Project;

7.   Ongoing discussions for potential offtake agreements; and

8.   Investor interest to date.

Environmental, Social, Legal and Governmental - refer to section entitled 'Environmental & Social Impact' in the Full Announcement at http://sovereignmetals.com.au/announcements/.

Sovereign is committed to conduct its activities in full compliance to the requirements of national regulations, its obligations under international conventions and treaties and giving due consideration to international best practices and policies. The Company has appointed an experienced environmental consultant to manage the ESIA process, and environmental and social baseline studies have commenced with appropriately qualified independent experts. The Company has also completed a high-level risk assessment to identify major environmental and social risks which could affect the development of the Project, along with mitigating strategies to allow identified risks to be addressed early in the project design phase.

The Company has embarked on several community engagement exercises in the area and there is a general positive acceptance of the Project. Social responsibility costs of US$80m have been included in this Study, as well as a 0.45% revenue royalty for the community development fund. This figure will be further assessed as part of the overall ESIA for the Project as it advances to PFS and DFS.

Based on the current assessments and commenced ESIA, the Company believes there are no environmental issues currently identified that cannot be appropriately mitigated in accordance with standard practices adopted for the development of mining projects.

Subject to further successful exploration and achieving positive technical studies, Sovereign endeavours to apply for a ML to secure mineral deposits for mining. Under the Mines Act there are  certain requirements, milestones and approvals required prior to submission of a ML application. At this point of Kasiya's development, the Company notes no known issues or impediments obtaining a ML under normal coarse of business.

Under the Mines Act, The Government of Malawi shall have the right, but not the obligation, to acquire, directly or through a Government nominee, without cost, a free equity ownership interest of up to ten percent (10%) in any mining project that will be subject to a large-scale mining licence (>5Mt mined per annum or >US$250m Capex).

SOURCES

APPENDIX 1 - MINERAL SANDS PEER INFORMATION

APPENDIX 2 - GRAPHITE PEERS INFORMATION

1. Canadian dollar (CAD) costs converted to US$ at CAD1.307 / US$

2. Operating costs shown are actual C1 cash costs for Q1 2022; Steady State Production is last quarter natural graphite production annualised

3. Includes Phase 1 (Feasibility Study Stage) and Phase 2 (PEA Stage)

APPENDIX 3 - RUTILE MINERAL RESOURCES INFORMATION

Detailed Mineral Resources by Category

* Rutile grade calculated as HM% times rutile % of assemblage

APPENDIX 4 - GRAPHITE RESOURCE INFORMATION

Detailed Mineral Resources by Category