INTERIM FINANCIAL REPORT

FOR THE HALF YEAR ENDED

31 DECEMBER 2023

abn 71 120 833 427

CORPORATE DIRECTORY

DIRECTORS' REPORT

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 2023 (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

Mr Frank Eagar                      Managing Director and CEO (appointed 20 October 2023)

Mr Ian Middlemas                  Non-Executive Director

Dr Julian Stephens                Non-Executive Director (previously Managing Director, Non-Executive as of 20 October 2023)

Mr Mark Pearce                      Non-Executive Director

Mr Nigel Jones                       Non-Executive Director

All Directors were in office from 1 July 2023 until the date of this report, unless otherwise noted.

Sovereign is focused on the development of its Kasiya rutile-graphite project (Kasiya or the Project) in Malawi. The Pre-Feasibility Study (PFS) confirmed Kasiya as a potentially major critical minerals project delivering industry-leading economic returns and sustainability metrics.

The Company's objective is to develop a large-scale, long life rutile-graphite operation, focusing on developing an environmentally and socially responsible, sustainable operation.

Figure 1: Sovereign's Kasiya project displaying location in South-East Africa

Kasiya is the largest rutile deposit in the world with more than double the contained rutile as its nearest rutile peer, Sierra Rutile. The Kasiya Mineral Resource Estimate (MRE) is 1.8 Billion tonnes (Bt) at 1.0% rutile resulting in 17.9 Million tonnes (Mt) tonnes of contained natural rutile and 24.4Mt of contained graphite. The MRE has broad zones of very high-grade rutile which occurs contiguously across a very large area of over 200km². Rutile mineralisation lies in laterally extensive, near surface, flat "blanket" style bodies in areas where the weathering profile is preserved and not significantly eroded. Kasiya's graphite co-product MRE is 1.8Bt at 1.4% graphite, containing over 24.4Mt of graphite.

PFS Results

·           Results of the PFS released in late 2023 demonstrated Kasiya's potential to become the world's largest rutile producer at an average of 222kt per annum and one of the world's largest natural graphite producers outside of China at an average of 244kt per annum based on an initial 25 year life-of-mine (LOM)

·           PFS delivered compelling economics with a post-tax NPV₈ of US$1.6 Billion and post-tax IRR of 28%. This long-life, multi-generational operation was modelled to initially generate over US$16 Billion of revenue and provide an average annual EBITDA of US$415 Million per annum

·           The PFS modelling was limited to only 25 years with an initial Probable Ore Reserves declared of 538Mt, representing only 30% of the total Project MRE

Project Optimisation

·           Sovereign advanced optimisation test work and technical studies for Kasiya with the Company's strategic investor, Rio Tinto

·           Significant field activities and a number of test work programs have commenced in order to provide data for the Project optimisation phase

·           The Company aims to become the world's largest, lowest cost and lowest-emissions producer of two critical minerals - titanium (rutile) and graphite

Rio Tinto invests $40.6m to become a 15% Strategic Investor 

·           Rio Tinto made an investment of A$40.6 million in Sovereign resulting in an initial 15% shareholding plus options to increase their position to potentially 19.99% within 12 months

·           Rio Tinto's investment represents a significant step towards unlocking a major new supply of low-CO₂ natural rutile and flake graphite

·           Under the Investment Agreement, Rio Tinto will provide assistance and advice on technical and marketing aspects including Sovereign's graphite co-product, with a primary focus on spherical purified graphite for the lithium-ion battery anode market

Key Management Appointments to Drive Project Optimisation and Development at Kasiya

·           Appointment of experienced African based mining executive, Mr Frank Eagar, as the new Managing Director and CEO

·           Previous Managing Director Dr Julian Stephens has transitioned to Non-Executive Director

·           Key technical appointments of experienced African engineering, social, environmental and legal teams to work on project optimisation and advancing the development of the Kasiya Project

Lithium-Ion battery graphite program upscaled

·           Over 60 tonnes of ore was extracted targeting production of an initial 600kg of natural graphite for lithium-ion battery anode test work and product qualification

·           The upscaled graphite qualification program will support ongoing Project studies

·           Sovereign and Rio Tinto have agreed to collaborate to qualify graphite from Kasiya, with a particular focus on supplying the spherical purified graphite (SPG) segment of the lithium-ion battery anode market

·           This graphite qualification program coincides with China's announced curbs on exports of natural graphite, a critical mineral for the US, EU, Japan and Australia

Figures 2 & 3: Bulk sample mechanised spiral drilling and sampling at Kasiya in November 2023

Extensions to Rutile & Graphite Mineralisation at Kasiya

·           Wide-spaced regional reconnaissance drilling, outside the current JORC (2012) compliant MRE area, identified a 8km extension of mineralisation to the south which remains open along strike and at depth

·           Results are testament to the world-class scale of the Kasiya deposit and demonstrate potential for a future increase of the Kasiya's MRE, which is already the largest natural rutile deposit and second largest flake graphite deposit in the world

Figure 4: Southern newly defined mineralised extensions at Kasiya

Strong Support from the Government of Malawi

·           The Government of Malawi has applauded the timely investment by Rio Tinto and marked it as a milestone towards realising the country's aspirations of growing the mining sector as a priority industry

·           PFS demonstrates Kasiya's potential to provide significant socio-economic benefits for Malawi including fiscal returns, job creation, skills transfer and sustainable community development initiatives

·           With mining being one of the key pillars for growth under Malawi's economic development strategy (Agriculture, Tourism, Mining - ATM Policy) and the potential for Kasiya to be a project of national significance, the Government has constituted an Inter-ministerial Project Development Committee to work alongside the Company to assist in the permitting process  

Highly-experienced social specialist appointed

·           Africa-based social specialist consultancy, SocialEssence were appointed to lead social and community development programs for Sovereign in Malawi

·           SocialEssence joins Sovereign's Owners Team and will design, implement, and manage several social and community initiatives which will feed into Project studies and permitting

·           SocialEssence has a strong and successful track record of implementing social responsibility programs across southern Africa, including at First Quantum Minerals' Zambian project

Commissioning of Sustainable Farming Initiative in Malawi

·           Sovereign initiated a Conservation Farming Program in Malawi as part of its sustainability initiatives related to the development of Kasiya

·           Local farmers will be trained in sustainable farming techniques to increase maize crop yield; protect soil from erosion and degradation; and to improve long term food security

·           Supporting local communities in addressing their social priorities is a core principle of Sovereign's ESG Strategy as the company advances the development of Kasiya

·           Sovereign's owner's team have previously implemented this program at First Quantum Minerals' Zambian operations where over 7,000 farmers were participating in the program by 2022

Figure 5: Local communities embracing the conservation farming program

Transfer of Malingunde licence to NGX Limited

In January 2024, NGX Limited (NGX) was issued with a retention licence of the Malingunde graphite project which fully completed the demerger of Sovereign's standalone graphite projects. In 2023, Sovereign successfully demerged its standalone graphite projects (Nanzeka Project, Malingunde Project, Duwi Project and Mabuwa Project) into NGX, which listed on ASX in June 2023.

The net operating loss after tax for the half year ended 31 December 2023 was $6,976,503 (2022: $8,486,503) which is attributable to:

(i)         Interest income of $938,402 (2022: $138,366) earned on term deposits held by the Group;

(ii)        exploration and evaluation expenditure of $5,027,397 (2022: $5,792,042), 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 PFS at its Kasiya Project in Malawi;

(iii)       business development expenses of $996,548 (2022: $1,130,083) which are attributable to the Group's investor and shareholder relations activities including but not limited to public relations costs, marketing and digital marketing, broker and advisor fees, travel costs, conference fees, business development consultant fees and costs of the Group's ASX and AIM listings; and

(iv)       non-cash share based payments expenses of $1,089,974 (2022: $1,061,657) 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.

At 31 December 2023, the Group had cash reserves of $39,436,707 (30 June 2023: $5,564,376) placing it in an excellent financial position to continue with the development of Kasiya.

At 31 December 2023, the Company had net assets of $44,263,313 (30 June 2023: $9,672,569), an increase of 358% compared with the prior period. This is largely attributable to the increase in cash reserves following the investment made by Rio Tinto in the period.  

Other than the above, there are no matters or circumstances which have arisen since 31 December 2023 that have significantly affected or may significantly affect:

·       the operations, in periods subsequent to 31 December 2023, of the Group;

·       the results of those operations, in periods subsequent to 31 December 2023, of the Group; or

·       the state of affairs, in periods subsequent to 31 December 2023, 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 17 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

Frank Eagar

Managing Director and CEO

13 March 2024

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE HALF YEAR ENDED 31 DECEMBER 2023

The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2023

The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE HALF YEAR ENDED 31 DECEMBER 2023

The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE HALF YEAR ENDED 31 DECEMBER 2023

The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes.

NOTES TO THE FINANCIAL STATEMENTS

FOR THE HALF YEAR ENDED 31 DECEMBER 2023

1.       MATERIAL ACCOUNTING POLICY INFORMATION

Sovereign Metals Limited (the "Company") is a for profit company limited by shares and incorporated in Australia, whose shares are publicly traded on the Australian Securities Exchange and the AIM Market of the London Stock Exchange. The consolidated interim financial statements of the Company as at and for the period from 1 July 2023 to 31 December 2023 comprise the Company and its subsidiaries (together referred to as the "Group"). The nature of the operations and principal activities of the Group are as described in the Directors' Report. The interim consolidated financial statements of the Group were authorised for issue in accordance with the resolution of the directors on 12 March 2024.

This interim financial report does not include all the notes of the type normally included in an annual financial report. Accordingly, this report is to be read in conjunction with the audited annual report of Sovereign for the year ended 30 June 2023 (where comparative amounts have been extracted from) and any public announcements made by the Group during the interim reporting period in accordance with the continuous disclosure requirements of the Corporations Act 2001.

(a)    Basis of Preparation of Half Year Financial Report

The consolidated financial statements have been prepared on the basis of historical cost, except for the revaluation of certain financial instruments. Cost is based on the fair values of the consideration given in exchange for assets.  All amounts are presented in Australian dollars. There have been no changes in the critical accounting judgements or key sources of estimation since 30 June 2023.

(b)    Statement of Compliance

The consolidated interim financial report complies with Australian Accounting Standards, including AASB 134 which ensures compliance with International Financial Reporting Standard ("IFRS") IAS 34 "Interim Financial Reporting" as issued by the International Accounting Standards Board. The accounting policies adopted in the preparation of the half-year financial report are consistent with those applied in the preparation of the Group's annual financial report for the year ended 30 June 2023, except for new standards, amendments to standards and interpretations effective 1 July 2023. In the current half year, the Group has adopted all of the new and revised Standards and Interpretations issued by the AASB that are relevant to its operations and effective for the current annual reporting period.

(d)    Issued standards and interpretations not early adopted

Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Group for the reporting period ended 31 December 2023. Those which may be relevant to the Group are set out in the table below, but these are not expected to have any significant impact on the Group's financial statements:

2.       SEGMENT INFORMATION

AASB 8 requires operating segments to be identified on the basis of internal reports about components of the Consolidated Entity that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The Consolidated Entity has one operating segment, being exploration in Malawi.

3.       EXPLORATION AND EVALUATION ASSETS

Note:

(i)          The ultimate recoupment of costs carried forward for exploration and evaluation is dependent on the successful development and commercial exploitation or sale of the respective areas of interest..

4.       EQUITY SECURITIES ISSUED

(c)        Movements in Ordinary Share Capital were as follows:

(d)        Movements in Options and Performance Rights were as follows:

Notes

(i)   The value of performance rights granted during the period is estimated as at the date of grant based on the underlying share price (recognised over the vesting period (if applicable) in accordance with Australian Accounting Standards.

During the period, 1,300,000 "Definitive Feasibility Study Milestone" performance rights were issued and 6,100,000 "Pre-Feasibility Study Milestone" performance rights converted into ordinary shares, the terms of which are consistent with what is disclosed in the Group's Annual Report for 30 June 2023. During the period, 3,150,000 "Grant of Mining Licence Milestone" performance rights which convert on the unconditional grant of a Mining Licence at the Kasiya Rutile Project in accordance with the relevant Malawi mines act and 4,150,000 "Final Investment Decision Milestone" which convert on a documented resolution of the Board authorising the construction of the Kasiya Rutile Project were issued.

5.       LOSS PER SHARE

The following reflects the loss and share data used in the calculations of basic and diluted loss per share:

Non-dilutive securities

As at 31 December 2023, 36,549,598 unlisted Options and 16,410,000 unlisted Performance Rights (which represent 50,959,598 potential Ordinary Shares) were non-dilutive as they would decrease the loss per share. As at 31 December 2022, 11,105,125 unlisted Incentive Options and 12,800,000 unlisted Performance Rights (which represent 23,905,125 potential Ordinary Shares) were non-dilutive as they would decrease the loss per share.

Conversions, calls, subscriptions or issues after 31 December 2023

Since 31 December 2023, no Performance Rights were issued. Other than the above, there have been no conversions to, calls of, or subscriptions for ordinary shares or issues of potential ordinary shares since the reporting date and before the completion of this financial report.

6.       COMMITMENTS AND CONTINGENCIES

(a)        Commitments

As a condition of retaining the current rights to tenure to exploration tenements, the Group is required to pay an annual rental charge and meet minimum expenditure requirements for each tenement. These obligations are not provided for in the financial statements and are at the sole discretion of the Group. The majority of the remaining exploration commitments relate to licences with a term greater than one year. For the purposes of disclosure, the Group has apportioned the remaining commitments on an equal monthly basis over the remaining term of the exploration licences.

(b)        Contingencies

At the last annual reporting date, the Consolidated Entity did not have any material contingent liabilities.  There has been no material change in contingent assets and liabilities of the Consolidated Entity during the half year.

7.       DIVIDENDS PAID OR PROVIDED FOR

No dividend has been paid or provided for during the half year (2022: nil).

8.       FAIR VALUE OF FINANCIAL INSTRUMENTS

The net fair value of financial assets and financial liabilities approximates their carrying value.

9.       SUBSEQUENT EVENTS AFTER BALANCE DATE

There are no matters or circumstances which have arisen since 31 December 2023 that have significantly affected or may significantly affect:

·       the operations, in periods subsequent to 31 December 2023, of the Group;

·       the results of those operations, in periods subsequent to 31 December 2023, of the Group; or

·       the state of affairs, in periods subsequent to 31 December 2023, of the Group.

DIRECTORS' DECLARATION

In accordance with a resolution of the Directors of Sovereign Metals Limited, I state that:

In the opinion of the Directors:

(a)        the financial statements and notes thereto are in accordance with the Corporations Act 2001, including:

(i)         complying with Accounting Standard AASB 134: Interim Financial Reporting and the Corporations Regulations 2001; and

(ii)        giving a true and fair view of the consolidated entity's financial position as at 31 December 2023 and of its performance for the half year ended on that date.

(b)        there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

This declaration is signed in accordance with a resolution of the Board of Directors made pursuant to section 303(5) of the Corporations Act 2001.

On behalf of the Board

Frank Eagar

Managing Director and CEO

13 March 2024

COMPETENT PERSON STATEMENT

Competent Person Statement

The information in this announcement that relates to Production Targets, Ore Reserves, Processing, Infrastructure and Capital Operating Costs, Metallurgy (rutile and graphite) is extracted from the announcement dated 28 September 2023 entitled 'Kasiya Pre-Feasibility Study Results'. Sovereign confirms that: a) it is not aware of any new information or data that materially affects the information included in the original announcement; b) all material assumptions and technical parameters underpinning the Production Target, and related forecast financial information derived from the Production Target included in the original 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 presentation have not been materially modified from the original announcement.

The information in this announcement that relates to the Mineral Resource Estimate is extracted from an announcement dated 5 April 2023 entitled 'Kasiya Indicated Resource Increased by over 80%' which is available to view at www.sovereignmetals.com.au and is based on, and fairly represents information compiled by Mr Richard Stockwell, a Competent Person, who is a fellow of the Australian Institute of Geoscientists (AIG). Mr Stockwell is a principal of Placer Consulting Pty Ltd, an independent consulting company. Sovereign confirms that a) it is not aware of any new information or data that materially affects the information included in the original announcement; b) all material assumptions included in the original 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 announcement have not been materially changed from the original announcement.

* RutEq. Formula: Rutile Grade x Recovery (100%) x Rutile Price (US$1,484/t) + Graphite Grade x Recovery (67.5%) x Graphite Price (US$1,290/t) / Rutile Price (US$1,484/t). All assumptions are taken from this Study ** Any minor summation inconsistencies are due to rounding.

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.

AUDITOR'S INDEPENDENCE DECLARATION

INDEPENDENT AUDITOR'S REVIEW REPORT