Capital Metals PLC (AIM:CMET) is in financing talks in regard to the potential development of its Eastern Minerals mineral sands project in Sri Lanka.
The key moment occurred at the beginning of August, when the company was granted its first mining licences by a government that’s keener than ever to secure foreign investment after weathering various crises this year.
Sri Lanka’s political problems have, to a degree, acted as a drag on market sentiment towards Capital Metals, but there’s been no actual impact to the project itself.
The project remains as robust as ever, offering as it does an internal rate of return of 56% on 163,000 tonnes of average valuable heavy mineral production per year over an initial ten year life.
The capex requirement to positive cashflow is a very modest US$37.3mln, which is partly why chief executive Michael Frayne reckons the company might be able to roll offtake and other forms of financing into the same package.
“We’ve been having good discussions with strategic investors and offtakers,” he says.
“We’re feeling quite excited. We’ve got momentum going, and we’re becoming very, very real.”
True, the project might not be the biggest around, but it’s tapping into a market that’s crying out for material, and – which is perhaps more to the point – is increasingly uncertain where future supply is going to come from.
“Based on the opinions of experts we talk to, prices are expected to stay strong,” says Frayne. The recent stellar levels might not be sustained, it’s true, as the world learns to adjust to the disruption caused by the war in Ukraine.
But, on the other hand, security of supply is becoming almost as big an issue as pricing itself. The developed world is going to continue to need mineral sands in large quantities from reliable sources like Capital Metals and is quite likely to pay a premium to secure them.
In this context, the current valuation ascribed by the market to Capital Metals looks ungenerous to say the least. The net present value of Eastern Minerals – even without potential further expansion – stands at a wholesome US$155mln. Over its ten year life the project is likely to generate a net profit – yes, net – of US$262mln.
And yet the market capitalisation is a mere £10mln.
What’s going on?
The Sri Lanka discount is one factor, but as we’ve mentioned, although Sri Lankan politics has been turbulent, if anything that unrest has only served to increase the appetite in-country for the project to be developed. The IMF have now stepped in to help, and the situation looks to have stabilised. In addition, there’s no real precedent for sequestration in Sri Lanka politics, and the government itself is running projects similar to Capital Metals’ nearby.
The other factor at play might be a discounting of the share price in anticipation of any equity raise to get the project into production.
But, while it’s impossible to rule anything out, Capital Metals’ clear intention is to get the project up and running without the need for any significant further dilution.
What exact form that might take remains open to question, although offtake and debt are likely to play a role, and there may also be some form of strategic financing at the project level. It’s noteworthy too that some of the potential partners Frayne has been talking to reckon that the project can actually be developed for less than is currently budgeted.
Whether that’s true or not, it remains conceivable that once the funding doubts are removed the shares will re-rate substantially, as the market looks to close the gap between that US$155mln net present value and the £10mln market capitalisation – and that’s before considering any upside from anticipated expansion of the project.
How much of a re-rating is on the cards will depend on the kind of deal struck, but in a tight mineral sands market with a robust project and plenty of managerial and technical expertise to back it up, the potential is surely significant.