sovereign metals limited (svm) · the potential of saprolite hosted graphite mineralisation was...

TAYLOR COLLISON LTD. www.taylorcollison.com.au ABN 53008172450 AFSL 247083 i

MARK GORDON [email protected] +612 9377 1500 www.taylorcollison.com.au

Sovereign Metals Limited (SVM) Drilling Results Confirm Central Malawi Rutile Potential

Our View The results of drilling to date at the 100% owned Central Malawi Rutile Project (“the Project”) confirm the potential for Sovereign Metals Limited (“Sovereign” or “the Company”) to make significant rutile discoveries, which is the premium titanium dioxide feedstock. The results are well-timed and present an ideal opportunity for Sovereign, with rutile markets in structural deficit, and with global production forecast to fall to ~350,000 tpa by 2025, less than half of the 2017 production of 720,000 tonnes. There is also a global shortage of other chloride grade titanium dioxide feedstocks, which has resulted in increasing prices. The work by Sovereign has thus far identified several large prospects with high grade mineralisation starting from surface, and with rutile grades and quality on par with those for current major producers, including Iluka Minerals (ASX: ILU, “Iluka”) and Base Resources (ASX: BSE, “Base”). Iluka’s Sierra Rutile operation in Sierra Leone and Base’s Kwale operation in Kenya are currently the largest global producers of rutile. A large, technically and economically viable discovery by Sovereign could see Malawi become a significant player in global markets. The rutile quality, which includes being of high purity and having an ideal grainsize distribution has been demonstrated by test work carried out on concentrates produced from bench scale separation work on the saprolite-hosted rutile mineralisation – this work also demonstrated that the rutile is readily separated from the gangue minerals to produce a clean concentrate. Should viable mineralisation be delineated these factors, and the mono-mineralic nature of the valuable heavy mineral assemblage, point towards an operation with a simple processing circuit, and hence the potential for relatively low operating and capital costs. Another factor pointing towards a relatively low-cost operation is ready access to infrastructure, including rail and port, with the rail of the recently upgraded Nacala Infrastructure Corridor connecting the region to the deep-water port at Nacala in Mozambique – the rail runs within less than 10 km of a number of key prospects. Hand-auger drilling is currently underway, with aircore and sonic drilling over the large Kasiya and Bua Channel prospects due to commence following the end of the wet season in April/May. This is targeted towards delivering an initial Mineral Resource Estimate (“MRE”) by the end of 2020. We would thus expect steady news flow in coming months. Key Points • Solid results to date – Drilling by Sovereign has returned strong results

underlining the prospectivity for large scale, high grade and marketable rutile mineralisation, and with the potential for further discoveries.

• Cost effective exploration – Given only the requirement for shallow auger, sonic and aircore drilling, exploration is relatively low cost and quick.

• Infrastructure rich – The area is readily served by rail and road, and being located near the Malawian capital Lilongwe, services.

• Rutile market in deficit – The rutile market is currently in structural deficit, with production forecast to more than halve by 2025 from 720 kt in 2017. Should the potential for large scale deposits be demonstrated, we would expect that Sovereign would attract the attention of a current rutile producer.

• Experienced board and management – Company personnel have extensive experience and exploration success in the junior resources sector, including 14 years’ invaluable Malawian experience. Personnel hold Sovereign shares, aligning their interests with those of other shareholders.

• Stable jurisdiction – Since independence from Great Britain in 1964, Malawi has been one of the more stable of the African countries.

• Updated mining law – Malawi has a recently updated and transparent mining law, similar to that in other African mining jurisdictions.

7 April 2020

Recommendation: Spec Buy

Summary (AUD) Market Capitalisation (undiluted) $36.32m Market Capitalisation $36.32m (with in-money options) Share price (6 April, 2020) $0.095 52 week low $0.075

52 week high $0.15

Cash (31/12/19) $1.75m

January 2020 placement $2.00m

Ordinary shares (undiluted) 382.3m

Fully diluted 419.8m

Unlisted options (total) 37.53m

In-money options 0.00m

Share price graph (AUD)

Directors & Management Mr Ian Middlemas Chairman

Dr Julian Stephens Managing Director

Mr Mark Pearce Non-Executive Director

Mr Sam Cordin Business Development Manager

Mr Lachlan Lynch Company Secretary

Top Shareholders Ian Middlemas 3.86%

Mark Savage 3.65%

Grant Paterson 2.77%

Julian Stephens 2.63%

Top 20 35.87%

Directors and Management 7.82%

TAYLOR COLLISON LTD. www.taylorcollison.com.au ABN 53008172450 AFSL 247083 ii

Sovereign Metals Limited (SVM) 7 April 2020

Table of Contents

Company & Project Background .................................................................................................................................................... 1 Central Malawi Rutile Project – Sovereign 100% ........................................................................................................................... 2

Location, Tenure and Infrastructure .......................................................................................................................................... 2 Geology and Mineralisation ....................................................................................................................................................... 3 Mining and Exploration History .................................................................................................................................................. 5 Work Undertaken by Sovereign ................................................................................................................................................ 5

Graphite Projects – Sovereign 100% ........................................................................................................................................... 11 Introduction ............................................................................................................................................................................. 11 Malingunde Saprolite Graphite Project .................................................................................................................................... 11 Duwi Flake Graphite Project .................................................................................................................................................... 13

Current and Upcoming Activities .................................................................................................................................................. 14 Comparatives ............................................................................................................................................................................... 14 Board and Management ............................................................................................................................................................... 16 Risks ............................................................................................................................................................................................ 16 Background – Malawi ................................................................................................................................................................... 17

Geography and History ........................................................................................................................................................... 17 Demographics ......................................................................................................................................................................... 17 Politics ..................................................................................................................................................................................... 17 Economy ................................................................................................................................................................................. 17 Mineral Potential and Regulation............................................................................................................................................. 18

Background – The Mineral Sands Industry .................................................................................................................................. 20 Introduction ............................................................................................................................................................................. 20 Titanium Dioxide...................................................................................................................................................................... 21 Zircon ...................................................................................................................................................................................... 22 Pricing ..................................................................................................................................................................................... 22

Appendix – Photographs .............................................................................................................................................................. 24

TAYLOR COLLISON LTD. www.taylorcollison.com.au ABN 53008172450 AFSL 247083 1


Company & Project Background Although Sovereign’s focus is now on rutile (with the current tenements shown in Figure 1), the Company commenced operations in Malawi in 2012, with the acquisition of the Central Malawi Graphite Project, as announced to the market on August 14, 2012 (with some current license areas subject to a 2% gross profit payable to the vendor). The interest in graphite was due to the location over Proterozoic mobile belts of East Africa, which host the world class deposits of Mozambique and Tanzania.

Figure 1: Central Malawi tenements (Source Sovereign)

Initial interest was on hard rock mineralisation, with this resulting in the completion of a Scoping Study for the Duwi Flake Graphite Project (“Duwi”, Resources of 86 Mt @ 7.1% TGC, Figure 9) in September 2015; it was planned to carry this through to Feasibility, however this was discontinued, with the focus changing to saprolite hosted mineralisation.

The potential of saprolite hosted graphite mineralisation was recognised whilst the Company was working on Duwi, with this, given the soft host rock and liberation of target minerals from gangue due to the weathering, providing the potential for low-cost operations. Activities led to the discovery and delineation of the 28.8 Mt @ 7.1% TGC saprolite-hosted graphite mineralisation at Malingunde, for which a Pre-Feasibility Study (“PFS”) was completed, the positive results of which were released to the market on



November 7, 2018. The saprolite mineralisation is part of a broader Resource, that also contains transitional and fresh material, of 65.1 Mt @ 7.1% TGC.

Work at Malingunde included considerable progress on community and environmental studies including the completion of the Environmental and Social Impact Assessment (“ESIA”). The experience gained and lessons learned during the Malingunde ESIA process, including understanding the ins and outs and navigating the legislation will be invaluable when it comes to undertaking such studies for rutile operations. This process also provided the opportunity to educate stakeholders about the benefits and process of mining, and hence the Company, with new projects, will not be starting off at first base in community relations aspects.

In addition, an MOU for rail and port access was signed with Central East African Railways for the transport of 100,000 t of product from Lilongwe to the deep-water port of Nacala in Mozambique (Figure 1). This agreement is still in good standing, with the parties currently undertaking some fine tuning, before moving to a definitive agreement.

Market conditions intervened at Malingunde, with the slump in graphite prices (and equities) halting progress on the desk top aspects of a Definitive Feasibility Study (“DFS”) – all field work however had been completed by that time. It was recognised during metallurgical test work that the saprolite graphite tails contained appreciable rutile, the most valuable of the TiO2 feedstocks, and a valuable target of heavy mineral sands (“HMS”) operators. At the time rutile was considered as a potential by-product for the planned graphite operations – Malingunde proper contains ~0.8% to 0.9% rutile.

This resulted in Sovereign carrying out a programme of re-assessing auger samples from the graphite exploration, which identified several promising rutile-in-saprolite prospects. A key aspect of rutile however (like several specialty minerals) is that it needs to meet relatively tight specifications to be marketable and to attract premium prices. As such, before embarking on further, more cost intensive work over the rutile prospects, Sovereign carried out bench scale metallurgical test work and quality assessment, with this showing that the Malawian rutile is comparable to high quality rutile from major global producers, including Iluka, Tronox (NY: TROX) and Base Resources. The work also highlighted that rutile could be readily separated from the host material using standard, off the shelf processes.

In addition to the saprolite prospects, the Bua Channel (Figure 3, Photographs 5 and 6) was identified as a host for potential sand hosted fluvial placer mineralisation – further prospect evaluation and resource definition work is now underway on a number of the rutile prospects.

Given the current focus on rutile, this note will concentrate on this commodity, with a brief overview of the graphite towards the end. That is not to say that the graphite potential should be forgotten. Our view is that these have the potential to provide significant future value should graphite markets improve. There is also the potential for graphite to be a valuable by-product for any future rutile operation (and vice versa).

Central Malawi Rutile Project – Sovereign 100%

Location, Tenure and Infrastructure

The Company’s tenements are situated in Central Malawi (Figures 1 and 2) – these include eight Exclusive Prospecting Licenses (“EPLs”), covering an area of 3,713 km2. All EPLs are currently in good standing, with expiry dates (including allowed renewals) ranging from 2021 to 2027.

Being located over agricultural land, and largely within a 75 km radius of Lilongwe, the region is well served by services and infrastructure, including rail, road and air. With a population of around one million, Lilongwe is Malawi’s largest city as well as being the capital. Some of the tenement areas are close to grid power, with key rutile prospects, including Kasiya, Railroad and Railroad West all being within 10 km of a 33 kV line – this passes through Railroad (Figure 2 and Photograph 2).

Power in Malawi, which is ~95% sourced from hydro, can be unreliable at times of peak demand (~350 kW), which is close to the installed capacity of 369 kW. Steps are well underway to address this, with new power stations planned or under development. These include the 60 MW Canadian funded Kanzimbe solar project (due for completion in 2021/22), and the 10 MW Tedzani 4 hydro station. Larger potential developments include the 300 MW Kammwamba thermal power station, which requires financing, and the 300 MW Mpatamanga IFC backed hydro power station, for which a finance/development partner is being sought.

A crucial aspect is ready access to rail, with this including the Nacala Logistics Corridor, with the concessionaire, Central East African Railways, (“CEAR”) in Malawi and CDN in Mozambique being a JV between Vale, Mitsui and the Mozambique and Malawi Governments, and being managed by Vale. The development of the corridor was started in 2012, with the main aim to upgrade and extent the existing rail to allow for the transport of coal from Vale/Mitsui’s Moatize Coal Mine in western Mozambique to the Indian Ocean deep water port of Nacala, which has a capacity of 18 mtpa, and with significant spare capacity. The Moatize-Nacala line comprises 912 km of 1,067 mm gauge rail (Figure 1). The cost of the complete project was in the region of US$5 billion.

The main Moatize-Nacala railway links to the line to Lilongwe at Nkaya Junction – this line extends past Lilongwe (and the Railway and Railway West rutile prospects, Photograph 2) to Chipata in Zambia, and there is a proposal to extend this link



through to the TAZARA railway at Mpika. The distance from Lilongwe to Nacala is 872 km. An upgrade from Kanengo (Lilongwe) was recently completed, with the line from Kanengo to Zambia currently in the process of being refurbished.

A key element of the rail is the requirement that 25% of the 18 mtpa capacity be reserved for Malawian cargo, with the rail operators therefore keen to attract third part users. Sovereign had, as part of the planned Malingunde Graphite Project, signed an MOU with CEAR, which is still in place.

The ready access to rail and port results in significant operating and capital cost advantages to any project. The Company, as part of the Malingunde PFS, received quotes from logistics operators that suggested all up transportation operating costs of US$66/tonne, from the mine gate to FOB vessel at Nacala – this included a rail component in the order of US$40/tonne.

Figure 2: Central Malawi tenements, showing rutile prospects and key infrastructure (Source: Sovereign)

Geology and Mineralisation

The Project is located over units of the Mesoproterozoic Muva Supergroup, a highly metamorphosed clastic and chemical shallow water sedimentary package that was originally deposited as part of the Irumide mobile belt of central to north Malawi, with deposition following the earlier 2,300 to 1,800 Ma Ubendian Orogeny.



Units within the Muva Supergroup, which overlies the Ubendian Supergroup, include a package of schists and paragneisses (gneisses sourced largely from a sedimentary protolith), which were metamorphosed to up to granulite facies during the Irumide (commencing at ~1,100 Ma) and the polycyclic Mozambiquan (~900 – 450 Ma) orogenies – the latter is part of the broader Pan-African orogenic event. The Pan-African event ended with the cratonisation of much of Africa, with subsequent events in the Project area relating to weathering – other areas of Malawi have seen deposition related to the Karoo system and rifting as part of the East African Rift Zone. The Muva Supergroup includes several belts of graphitic schist (derived largely from carbonaceous mudstones, Figure 9), which were the initial exploration targets for Sovereign. It is similar units that are the hosts for the known graphite deposits throughout East Africa, including in Mozambique and Tanzania.

A large part of the tenements (central and western) are located over the gently undulating Lilongwe Plain, which is also characterized by well-developed dendritic drainage and has a thin veneer of colluvium and alluvium, masking the underlying geology. These areas have undergone strong lateritic weathering to a depth of up to 35 m, which has led to the concentration of rutile (and graphite) mineralisation in the saprolite which is of interest to Sovereign. Areas west of Lilongwe are hillier, and thus do not exhibit the strong weathering – it is in such an area that the Duwi hard rock graphite project is located (Figure 9).

Rutile and graphite are minerals formed as a result of the high grade metamorphism of the clastic/chemical sedimentary protolith, with both of them being relatively stable in the weathering profile. As such they can undergo residual concentration due to the removal of other minerals and elements during the weathering, in addition to liberation from the gangue minerals, an important factor in processing of the material.

Although the rutile was initially found in association with the graphite and graphitic gneisses, there is no general chemical, spatial or geological relationship between graphite and rutile mineralisation, and thus areas away from the graphitic schists can also be considered prospective for rutile. For some reason some areas of the metamorphic rocks are anomalously high in rutile.

Rutile mineralisation within the Project takes two main forms (Figure 3):

• Residual saprolite-hosted, as at Kasiya, Railroad and Railroad West; and,

• Sand-hosted fluvial mineralisation, as at Bua Channel.

Figure 3: Rutile deposit model (Source: Sovereign)



Mineral sands activities globally are generally associated with the remobilised (alluvial, fluvial, deltaic and dune) deposits (Figure 3), with these the result of erosion and transport of in-situ weathered material and subsequent deposition in suitable trap sites. These processes can result in the upgrade of the target heavy minerals through the preferential deposition in the traps. As shown in Figure 3, Sovereign’s Bua Channel prospect represents sand-hosted fluvial mineralisation.

Sovereign’s main target, in-situ, saprolite hosted rutile mineralisation, is, as mentioned earlier, the result of weathering processes upgrading the rutile grade through in-situ residual concentration. The more intense weathering (and hence removal of more of the mobile material) at the top of the profile will result in a higher residual concentration of the immobile minerals closer to the surface – this is shown for Kasiya in Figure 6, with the highest rutile grades commencing at the surface (which has important ramifications for any mining operation, in that it will result in a low strip ratio). The upgrade can be in the order of 1.5 times.

Mining and Exploration History

The only significant exploration within the Project area has been that carried out by Sovereign. Early work, largely mapping has been undertaken by the Geological Surveys of Nyasaland, and then Malawi.

Work Undertaken by Sovereign

Initial Activities

Rutile was first recognised in the tailings from the graphite metallurgical test work undertaken in 2018, and it was demonstrated that the rutile could be separated and recovered from the tails through regular mineral sands treatment processes. The Company then reassessed 125 auger holes, originally drilled during the graphite exploration programme, with this identifying widespread rutile within the tenements.

Metallurgy

A critical aspect of the specialty resources markets is product specifications, and thus, prior to committing significant funds to ongoing exploration for and appraisal of the rutile prospects, the Company undertook metallurgical test work of the auger samples and quality test work on the resulting rutile concentrate. This highlighted that a quality product with chemistry and size distribution comparable with that from major rutile producers could be readily produced using standard mineral sands processing. Rutile from various sources is compared in Table 1.

Table 1: Comparison of Sovereign’s rutile specifications to leading global producers (Source: Sovereign)

Comparison of Sovereign’s rutile specifications to leading global producers

Constituent Malawi Rutile (Sovereign)

Sierra Rutile (Iluka

RBM (Rio Tinto)

Kwale (Base Resources)

Namakwa Sands

(Tronox) TiO2 % 96.0 96.29 93.30 96.18 94.50

ZrO2+HfO2 % 0.14 0.78 1.30 0.72 1.10

SiO2 % 1.29 0.62 2.00 0.94 2.00

Fe2O3 % 0.97 0.38 0.70 1.25 0.8

Al2O3 % 0.33 0.31 0.90 0.23 0.6

Cr2O3 % 0.046 0.19 0.11 0.17 0.14

V2O5 % 0.50 0.58 0.40 0.52 0.33

Nb2O5 % 0.25 0.15 0.30 - 0.04

P2O5 % 0.036 0.01 0.03 0 0.02

MnO % <0.01 0.01 - 0.03 0.4

MgO % 0.01 <0.01 - 0.1 0.01

CaO % 0.02 0.01 - 0.04 0.04

SO3/S % 0.048 <0.01 <0.05 - 0.01

Sn % 0.005 - - - -

U+Th ppm 30 26 100 - -

Size d50 µm 123 - 124 - 124 “Iluka” is Iluka Resources Limited; “Rio Tinto” is Rio Tinto plc; “Base Resources” is Base Resources Limited; “Tronox” is Tronox Holdings plc. “-“ is not disclosed. Sources: RBM data from World Titanium Resources Ltd TZMI Conference Presentation November 2011 (Updated January 2012); Sierra Rutile, Kwale and Namakwa Sands data from BGR Assessment Manual titled “Heavy Minerals of Economic Importance” 2010.



Prospect Definition and Delineation

Initial dedicated rutile exploration work included a programme of soil sampling on 10 km spaced lines which identified six zones of rutile mineralisation over large areas requiring follow up – these initial zones included Railroad and Railroad West (Figure 4). The soil sampling was augmented by some shallow hand auger drilling to confirm (or otherwise) the presence of rutile through the laterite profile, with this returning quality results.

Initial hand auger follow up work was undertaken at the Railroad and Railroad West prospects, with this then followed by aircore drilling (68 holes for 830 m) and hand auger (101 holes for 800 m) over a further three targets, including the Bua Channel fluvial sand target, with results to date from the Bua Channel returning very encouraging results.

Further soil and shallow auger sampling then identified the Kasiya prospect in early 2020, with this followed by grid auger drilling which has returned excellent initial results with a number of intersections greater than 1% rutile, and the majority greater than 0.7% rutile – as a comparison we note that the rutile Resource grade at Sierra Rutile is 1.10%, and the Reserve grade is 1.30%. The Kasiya and Bua Channel prospects are detailed separately below.

The rutile assaying is quantitative, with heavy mineral concentrates being prepared in Malawi (Photograph 4), with the concentrates then being sent to ALS Laboratories in Perth for quantitative assessment of the valuable heavy mineral assemblage.

Figure 4: Key saprolite rutile prospects (Source: Sovereign)

Kasiya

The initial reconnaissance sampling identified an anomaly in the order of 4 km long x 2.4 km wide at Kasiya (Figure 4). Follow up auger sampling commenced in February 2020, with results from the initial 19 holes released to the market on March 16, 2020 – these results are presented in Figures 5 and 6, and Table 2. The auger sampling, which is ongoing, has been undertaken on nominal 400 m x 200 m and 800 m x 800 m grids, with 18 of the 19 holes returning significant intercepts of rutile mineralisation, and with eleven ending in mineralisation (Table 2).



Figure 5: Kasiya auger plan (Source: Sovereign)

Figure 6: Kasiya section (Source: Sovereign, refer to Figure 5 for location and Table 2 for all intersections)



Our analysis of the limited results released to date indicates an average intersection length for all mineralised holes of 7.6 m, with a length weighted average grade of 0.89% rutile, with grades being reasonably consistent over the area drilled. Seven of the holes have overall intersections of over 1% rutile, with an average intersection of 7.14 m @ 1.13% rutile. This is for complete intersections only – we have not separated out the higher-grade sub-intersections. We also note that all overall intersections, and the majority of the higher grade splits start from surface.

This analysis should be considered indicative only and should not be extrapolated to indicate what a Resource grade may be, as this will depend upon future results.

Table 2: Kasiya initial auger results (Source: Sovereign, Taylor Collison analysis)

Kasiya initial auger results Hole ID Hole

Depth From (m) Downhole

To (m) Downhole Length (m) Rutile % % m End in Min?

KYHA0020 11 0 4 4 1.24 4.96 No

KYHA0021 13 0 13 13 1.09 14.17 Yes

inc 13 10 13 3 1.27 3.81 Yes

KYHA0022 9 0 9 9 0.88 7.92 Yes

inc 9 0 2 2 1.33 2.66 No

KYHA0023 14 0 14 14 0.92 12.88 Yes

inc 14 0 5 5 1.19 5.95 No

inc 14 0 3 3 1.38 4.14 No

KYHA0024 12 0 7 7 0.91 6.37 No

inc 12 0 2 2 1.13 2.26 No

KYHA0025 12 0 12 12 1.04 12.48 Yes

inc 12 0 8 8 1.17 9.36 No

inc 12 0 5 5 1.3 6.5 No

KYHA0026 8 0 8 8 0.74 5.92 Yes

inc 8 0 3 3 1.04 3.12 No

KYHA0027 7 0 7 7 1.27 8.89 Yes

inc 7 0 3 3 1.8 5.4 No

KYHA0028 7 0 2 2 1.4 2.8 No

KYHA0029 6 0 2 2 1.18 2.36 No

KYHA0030 9 0 0 0 0 0 No

KYHA0031 10 0 5 5 0.65 3.25 No

KYHA0032 14 0 14 14 0.63 8.82 Yes

inc 14 0 3 3 0.94 2.82 No

KYHA0033 14 0 5 5 0.65 3.25 No

KYHA0034 12 0 12 12 0.81 9.72 Yes

inc 12 0 6 6 1.08 6.48 No

inc 12 0 3 3 1.36 4.08 No

KYHA0035 10 0 10 10 1.06 10.6 Yes

inc 10 3 10 7 1.21 8.47 Yes

inc 10 6 10 4 1.46 5.84 Yes

KYHA0036 6 0 6 6 0.62 3.72 Yes

KYHA0037 10 0 3 3 0.89 2.67 No

KYHA0038 11 0 11 11 0.66 7.26 Yes

inc 11 4 11 7 0.75 5.25 Yes



Bua Channel

Unlike Kasiya, Railroad and Railroad West which are saprolite hosted rutile prospects, Bua Channel is a fluvial sand-hosted placer rutile prospect (Figure 3, Photographs 5 and 6). The channel extends for some 50 km in a northeasterly direction, with Sovereign recently being granted an EPL along the channel to the NE of the current area of activities (Figures 2 and 7).

Initial results from aircore drilling at the Bua Channel prospect were released to the market on February 3, 2020, with these presented in Figures 7 and 8, and Table 3. The initial aircore programme, which followed up successful auger drilling, included 54 aircore holes for 473 m which were drilled prior to the November onset of the wet season in 2019, with the results of 17 holes (148 m) being received to date. This drilling tested an eight km long section of the channel which generally varies between 500 m and 700 m in width. The fluvial sands have an average depth in the order of ~8 m (Figure 8 and Table 3).

Figure 7: Bua Channel aircore traverses (Source: Sovereign)

Our analysis of the complete intersections results released to date indicate an average grade of 0.67% rutile, 1.11% ilmenite, 0.06% zircon and 21.62% slimes (broadly similar to grades, including slimes, from some operations globally), with an average intersection length 5.8 m. The ilmenite, at 60% TiO2, is high quality, and thus would likely be suitable for the chloride feedstock market.

As for the analysis of the Kasiya results we note these should not be used as a guide to future results, which could be significantly different.



Figure 8 – Bua Channel cross section Z5 2000 (Source: Sovereign, refer to Figure 7 for location)

Table 3 – Bua Channel aircore results (Source: Sovereign)

Bua Channel aircore results Hole ID Hole

Depth From To Interval Rutile % Ilmenite % Zircon % Slimes %

BSAC0001 6.5 No significant results

BSAC0002 11 5 8 3 0.70% 1.14% 0.07% 16.70%

Inc 5 7 2 0.79% 1.31% 0.07% 14.00%

BSAC0003 11 2 6 4 0.58% 0.96% 0.05% 27.20%

BSAC0004 7.5 2 7.5 5.5 0.62% 1.02% 0.05% 16.00%

BSAC0005 9.5 0 7 7 0.60% 0.96% 0.06% 22.10%

Inc 0 3 3 0.77% 1.18% 0.09% 32.80%

BSAC0006 7.5 0 7.5 7.5 0.63% 1.02% 0.06% 28.00%

BSAC0007 11 0 9.5 9.5 0.66% 1.06% 0.07% 33.10%

BSAC0008 7 4 7 3 0.72% 1.20% 0.06% 13.20%

Inc 6 7 1 0.92% 1.52% 0.08% 15.80%

BSAC0009 7 1 7 6 0.59% 0.96% 0.06% 15.70%

Inc 6 7 1 0.99% 1.52% 0.12% 27.50%

BSAC0010 9 0 8 8 0.60% 0.99% 0.05% 22.50%

Inc 4 8 4 0.70% 1.17% 0.06% 19.40%

BSAC0011 8 0 8 8 0.79% 1.31% 0.07% 19.80%

Inc 5 8 3 0.92% 1.53% 0.08% 16.90%

BSAC0012 11 0 8 8 0.88% 1.46% 0.08% 17.00%

Inc 3 8 5 1.02% 1.69% 0.09% 19.10%

BSAC0013 8 0 7 7 0.85% 1.42% 0.08% 23.70%

Inc 4 7 3 0.96% 1.60% 0.08% 18.50%

BSAC0014 8 2 7 5 0.54% 0.91% 0.05% 22.70%



Bua Channel aircore results Hole ID Hole

Depth From To Interval Rutile % Ilmenite % Zircon % Slimes %

BSAC0015 10 No significant results

BSAC0016 8 3 6 3 0.53% 0.85% 0.06% 26.10%

BSAC0017 8 3 6 3 0.62% 1.03% 0.05% 19.00%

Graphite Projects – Sovereign 100%

Introduction

As discussed previously, Sovereign was first attracted to Malawi because of the graphite potential which had been initially recognised by the Geological Survey of Nyasaland in the early 1900s. The geology, being located over the Proterozoic mobile belts, is similar to that hosting a number of deposits in East Africa, including those of Syrah Resources (ASX: SYR), Walkabout Resources (ASX: WKT) and Ecograf (ASX: EGR) amongst others.

Sovereign’s graphite projects and targets are shown in Figure 9 – please note that tenement boundaries and areas have changed since this figure was produced. The one of main interest regarding rutile is Malingunde, with this discussed in more detail below. The figure also highlights the identified and interpreted prospective graphitic gneiss belts, of which there are a few 100s of kilometers of strike within the licenses.

Figure 9: Graphite deposits and prospects (Source: Sovereign)

Malingunde Saprolite Graphite Project

As discussed earlier, the prospectivity for saprolite hosted graphite mineralisation was first recognised in 2016, which led to the discovery of Malingunde, completion of a PFS and completion of field studies and the EISA process by late 2019, when the desktop studies for the DFS were put on hold.



Metallurgical test work highlighted the potential to produce a high grade concentrate with a grade of 97% from an overall recovery of 90%, and with 50% of the product being in the valuable “large” and larger flake sizes, making the product suitable for a broad range of applications. In addition, it was shown that the flake could be readily upgradeable to “5-nines” +99.999% carbon purity.

The PFS, based on Resources and Reserves as presented in Tables 4 and 5, resulted in the lowest operating cost flake graphite project globally, with results of the study presented in Table 6.

The potential for a low-cost operation is by virtue of the mineralisation being hosted in saprolite, thus it is readily mined by free-dig methods, and can be separated from the host by simple scrubbing (as is common in mineral sands) – this reduces both operating and capital costs, and will be a similar process for any future saprolite-hosted rutile operation. We would expect that, should a future combined operation be considered feasible, that both the rutile and graphite streams would utilize the same plant front-end.

The mine gate operating costs of US$257/tonne of concentrate equate to an operating cost of US$22/tonne of ore treated, with our view being that these costs are reasonable. This should not be directly applied however to the potential costs of any future rutile operation due to differences in scale – as an example, Base Resources’ Kwale operation currently mines ~18 mtpa (30 times larger than the proposed Malingunde operation) at a cash cost in the order of US$5.50/tonne mined. In addition, the back ends of the rutile and graphite plants are different.

One cost that may be considered directly comparable however is logistics, with these, as mentioned previously, being US$66/tonne from mine gate to FOB Nacala port. This was largely sourced from quotes from the relevant logistics operators.

Finally, our view is that there is potential value in the graphite, which could be realised on any future improvement in the graphite markets.

Table 4 – Malingunde MRE – 4% and 7.5% TGC cutoff (Source: Sovereign)

Malingunde MRE – 4% and 7.5% TGC cutoff MALINGUNDE MINERAL RESOURCE ESTIMATE

4.0% cut-off grade

Measured Indicated Inferred Total Tonnes (Mt) Grade (% C) Tonnes (Mt) Grade (% C) Tonnes (Mt) Grade (% C) Tonnes (Mt) Grade (% C)

Saprolite 4.8 8.50% 18.7 7.10% 5.4 6.30% 28.8 7.20% Saprock - - 13.6 7.40% 3.3 6.30% 16.9 7.20% Total 4.8 8.50% 32.3 7.20% 8.6 6.30% 45.7 7.20%

MALINGUNDE MINERAL RESOURCE ESTIMATE 7.5% cut-off grade

Measured Indicated Inferred Total Tonnes (Mt) Grade (% C) Tonnes (Mt) Grade (% C) Tonnes (Mt) Grade (% C) Tonnes (Mt) Grade (% C)

Saprolite 2.7 10.00% 5.4 9.60% 1.1 9.00% 9.2 9.70% Saprock - - 4.7 10.00% 0.6 9.10% 5.3 9.90% Total 2.7 10.00% 10.1 9.80% 1.7 9.00% 14.5 9.70% Fresh rock - - - - 6.5 9.90% 6.5 9.90% Total resource 2.7 10.00% 10.1 9.80% 8.3 9.70% 21 9.80%

Table 5 – Malingunde Ore Reserves (Source: Sovereign)

Malingunde Ore Reserves Proved Probable Total

Tonnes (Mt) Grade (% C) Tonnes (Mt) Grade (% C) Tonnes (Mt) Grade (% C) Saprolite 3.1 9.5% 5.3 8.9% 8.4 9.1% Saprock - - 1.2 12.3% 1.2 12.3% Total 3.1 9.5% 6.4 9.5% 9.5 9.5%

Table 6 – Malingunde project parameters

Malingunde project parameters Unit Estimated Value ECONOMIC Development capital US$m 33 Indirect costs & contingency US$m 16 Total development capital US$m 49 Sustaining capital (over life-of-mine) US$m 23



Malingunde project parameters Unit Estimated Value Mine gate opex. (LoM, ex. royalties, inc. G&A) US$/t conc. 257 Transport & logistics cost US$/t conc 66 Average LOM operating cost (FOB Nacala) US$/t conc 323 PHYSICAL Average annual plant throughput tpa 600,000 Average annual concentrate production tpa 52,000 LoM average feed grade % 9.5% LoM average product grade % TGC 97.0% LoM average recovery % 90% Mine life Years 16 LoM average strip ratio (inclusive of capitalised pre-strip) waste : ore 1.0

FINANCIAL NPV (10%) – Pre-tax US$m 201 NPV (10%) – Post-tax US$m 141 IRR – Pre-tax % 56 IRR – Post-tax % 43 Basket price applied US$/t conc. 1,216 EBITDA average LoM US$m 42 EBITDA average long term (after year 7) US$m 45 Annual revenue average (post ramp-up) US$m 62

Duwi Flake Graphite Project

Duwi, located just 15 km east of Lilongwe, was the first hard-rock discovery that merited further work – this resulted in the completion of a positive Scoping Study in September 2015 – plans were to progress, however the recognition of saprolite hosted mineralisation in the region, with the potential (as realised in the Malingunde studies) for lower costs resulted in the Company changing focus to the saprolite material.

That being said however, Duwi still presents a potential valuable asset should markets improve. There is also significant potential to expand this Resource.

Table 7 presents the MRE as used in the Scoping Study. We have not included the Ore Reserves or study results here as, using current assumptions, these would be significantly different than those in the Scoping Study, and there is no relationship to potential costs for a rutile operation. One exception here however is freight/logistics costs – the Duwi Scoping Study used US$128.9/tonne concentrate, almost double that of the Malingunde PFS estimate of US$66/tonne, with the latter largely being based on supplier quotes, and which we consider would be the more accurate.

Table 7 – Duwi MRE – 5% TGC cutoff (Source: Sovereign)

Duwi MRE – 5% TGC cutoff

Deposit JORC Classification

Tonnes (Mt) TGC (%) Tonnes Graphite (MT)

Duwi Main

Indicated 35.2 7.2 2.52

Inferred 34.3 7.3 2.49

Total 69.5 7.2 5.01

Duwi Bend Inferred 7.8 7.2 0.56

Total 7.8 7.2 0.56

Nyama Inferred 8.6 6.5 0.56

Total 8.6 6.5 0.56

Total

Indicated 35.2 7.2 2.52

Inferred 50.7 7.1 3.61

Total 85.9 7.1 6.13 Note: The Mineral Resource was estimated within constraining wireframe solids based on a nominal lower cutoff grade of 5 % TGC. The resource is quoted from blocks above 5 % TGC. Differences may occur due to rounding.



Current and Upcoming Activities The Company is continuing the appraisal of the key prospects, with the overall aim to define substantial JORC-2012 compliant rutile Resources by the end of 2020, that will be of a size and grade to be able to support a long-term, large scale mining operation.

Current activities including ongoing auger sampling at Kasiya and other saprolite-hosted prospects, with planning underway for sonic and aircore drill programmes at Kasiya and Bua Channel, which are planned to commence in April/May, following the end of the wet season.

This should result in continuing positive news flow.

Comparatives Sovereign is one of only a few junior mineral sands explorers listed on the ASX, however there are several developers and producers, including Base and Iluka, both with significant rutile production. Given location and style of mineralisation, Sovereign is not directly comparable to any, however Base could represent an indication as to the potential for upside from the rutile mineralisation should significant discoveries be made and proceed towards production.

Some may argue that Sovereign could be treated as being amongst the graphite developers, of which there are several in East Africa. Sovereign, in our view, is reasonably valued on a comparative basis on an EV/tonne contained TGC basis, however with this comparison not including any value for the mineral sands.

One method that mineral sands deposits can be compared on is the in-ground and basket value of the valuable mineral assemblages. Table 8 compares Reserves and Resources for projects at various stages – note that the term “development” includes projects that are currently the subject of development studies. The majority of the data is the latest available, and in most cases presents the current (i.e. depleted) Resources and Reserves for a particular project.

In this we have included data for the main rutile producers, including Base, Iluka and Tronox. In the case of Base, we have included the pre-production Reserves and Resources for the Central Dune, for which mining has recently been completed. Base has now moved to the South Dune.

In this we have included two financial parameters – the value/tonne of mineralisation, and the basket value – these need to be treated as indicative only, as they don’t take into consideration factors such as recovery amongst others.

The value per tonne of mineralisation is the in-ground value of a tonne in place, calculated on the published grades, a zircon price of US$1,500/tonne, rutile price of US$1,200/tonne, leucoxene price of US$450/tonne and an ilmenite price of US$200/tonne.

The “basket” price is the theoretical value of a tonne of valuable heavy mineral concentrate with the mineral mix as per the Resource/Reserve mix.

As a comparison, the limited results from Bua Channel and Kasiya released to date have average values per tonne of mineralisation in the order of US$11 to US$13, with a basket price of US$1,200 for Kasiya and US$600 for Bua Channel. This indicates, that should these sorts of grades continue to be intersected, and that a large enough Resource be delineated, that there is the potential for these prospects to host a viable deposit. Please note that this is indicative only – there is no guarantee that a potentially viable deposit will be found.

Table 8 – HMS deposit comparison (Source: Taylor Collison analysis)

HMS deposit comparison

Deposit Type Current Stage

Total Tonnage

(Mt)

Total HM

Grade Ilmenite +

Leucoxene Rutile% Total Ti %

Zircon %

Value/ t min

Basket Value

ILU Murray Basin Resources Various 195 16.81% 9.21% 2.28% 11.49% 1.80% $72.78 $547

SFX Night Train HG Resources Development 50 5.90% 4.29% - 4.29% 0.82% $27.67 $541

ILU Eucla Resources Operating 361 4.80% 2.65% 0.13% 2.77% 1.23% $25.29 $631

ILU Eucla Reserves Operating 87 2.94% 0.81% 0.15% 0.96% 1.39% $24.19 $1,031

SFX Thunderbird Reserves Development 748 11.93% 3.83% - 3.83% 0.91% $22.64 $478

TROX Namakwa All Reserves Development 657 6.23% 2.83% 0.57% 3.41% 0.65% $22.32 $550

BSE Kwale Central 2013 Resources Pre-ops, now mined out 76 6.12% 3.40% 0.80% 4.21% 0.37% $22.03 $481

BSE Kwale Central DFS Reserves Pre-ops, now mined out 76 5.97% 3.36% 0.79% 4.15% 0.36% $21.61 $479

ILU Sri Lanka Resources Development 673 8.11% 5.48% 0.35% 5.83% 0.28% $19.40 $318



HMS deposit comparison

Deposit Type Current Stage

Total Tonnage

(Mt)

Total HM

Grade Ilmenite +

Leucoxene Rutile% Total Ti %

Zircon %

Value/ t min

Basket Value

TROX Dongara Reserves Development 62 5.20% 2.53% 0.46% 3.00% 0.57% $19.12 $537

TROX KZN All Reserves Development 242 5.80% 3.59% 0.39% 3.98% 0.45% $18.49 $418

MLM Urquart Point Resources Development 3 5.94% 0.75% 0.65% 1.40% 0.61% $18.48 $918

ILU Perth Basin Resources Operating 994 5.59% 3.15% 0.28% 3.43% 0.58% $18.33 $457

ILU Ambrosia Resources Operating 149 2.23% 0.18% 0.10% 0.28% 1.11% $18.25 $1,313

ILU Perth Basin Reserves Operating 144 6.77% 4.24% 0.25% 4.49% 0.42% $17.76 $362

BSE Ranobe Reserves Development 586 6.51% 4.90% 0.07% 4.97% 0.38% $16.50 $309

ILU Sierra Leone Resources Operating 739 2.03% 0.82% 1.11% 1.93% 0.10% $16.43 $810

DRX Cyclone Reserves Development 138 2.60% 1.06% 0.07% 1.13% 0.72% $15.82 $855

ILU Sierra Leone Reserves Operating 272 1.30% - 1.30% 1.30% - $15.60 $1,200

STA Fungoni Reserves Development 12 3.89% 1.65% 0.16% 1.80% 0.67% $15.24 $617

SFX Night Train Resources Development 130 3.30% 2.39% - 2.39% 0.45% $15.07 $531

SFX Thunderbird Resources Development 3230 6.91% 2.30% - 2.30% 0.57% $14.17 $493

DRX Cyclone Resources Development 204 2.28% 1.03% 0.06% 1.10% 0.62% $14.13 $825

BSE Kwale South Reserves Operating 62 3.74% 2.13% 0.51% 2.64% 0.22% $13.77 $480

ILU USA Resources Rehabilitation 90 4.79% 3.09% - 3.09% 0.50% $13.63 $380

BSE Ranobe Resources Development 1293 5.06% 3.68% 0.10% 3.78% 0.27% $12.65 $312

MZI Keysbrook Resources Development 86 2.19% 1.80% - 1.80% 0.26% $12.39 $601

BPL Jaws Resources Development 63 1.90% 0.63% 0.55% 1.18% 0.19% $12.01 $878

SFX Eneabba All Resources Development 163 2.92% 1.86% 0.20% 2.07% 0.37% $11.93 $490

TSL Mannar Resources Development 90 6.60% 3.62% 0.12% 3.74% 0.13% $11.74 $303

RIO RBM All Reserves Operating 1500 2.72% 2.24% 0.14% 2.38% 0.34% $11.30 $415

RIO QMM All Resources Operating 1427 4.34% 4.14% - 4.14% 0.20% $11.28 $260

BSE Kwale South Resources Operating 114 3.00% 1.72% 0.41% 2.12% 0.18% $11.00 $477

STA Fungoni Resources Development 22 2.82% 1.18% 0.12% 1.30% 0.47% $10.99 $619

STA Tajiri Resources Development 268 3.30% 1.96% 0.21% 2.17% 0.12% $8.31 $362

TROX Cooljarloo West Reserves Development 130 2.00% 1.21% 0.17% 1.38% 0.24% $8.07 $498

TROX Cooljarloo Reserves Development 290 1.82% 1.11% 0.14% 1.25% 0.18% $6.66 $464

STA Coburn All Resources Development 1606 1.21% 0.64% 0.08% 0.72% 0.26% $6.31 $644

STA Coburn All Reserves Development 523 1.12% 0.58% 0.07% 0.66% 0.25% $5.97 $657

MDL Grande Cote Resources Operating 1847 1.40% 1.05% 0.03% 1.08% 0.15% $4.85 $393

BSE Kwale North Resources Development 170 1.48% 0.67% 0.18% 0.85% 0.09% $4.83 $515

MDL Grande Cote Reserves Operating 1765 1.44% 1.02% 0.03% 1.06% 0.15% $4.72 $393

SFX McCalls Resources Development 3610 1.29% 1.08% 0.05% 1.13% 0.06% $3.81 $318

SFX Mindarra Springs Resources Development 2200 1.60% 1.15% 0.01% 1.16% 0.07% $3.57 $290



Board and Management

Ian Middlemas, B. Com, CA – Non-Executive Chairman

Mr Middlemas is a Chartered Accountant, a member of the Financial Services Institute of Australasia and holds a Bachelor of Commerce degree. He worked for a large international Chartered Accounting firm before joining the Normandy Mining Group where he was a senior group executive for approximately 10 years. He has had extensive corporate and management experience and is currently a director with a number of publicly listed companies in the resources sector.

Mr Middlemas was appointed a Director of Sovereign Metals Limited on 20 July 2006.

Julian Stephens, B. Sc (Hons), PhD, MAIG – Managing Director

Dr Stephens is a Geologist with extensive experience in the resources sector having spent in excess of 20 years in board, executive management, senior operational and economic geology research roles for a number of companies. He has spent in 16 of those years working on African projects including 12 years on projects in Malawi. Dr Stephens holds a PhD from James Cook University and is a member of the Australian Institute of Geoscientists. Dr Stephens led the team that discovered the rutile and graphite deposits in Malawi.

Dr Stephens was appointed a Director of Sovereign Metals Limited on 22 January 2016 and subsequently appointed Managing Director in June 2016.

Mark Pearce, B. Bus, CA, FCIS,F Fin – Non-Executive Director

Mr Pearce is a Chartered Accountant and is currently a director of several listed companies that operate in the resources sector. He has had considerable experience in the formation and development of listed resource companies and has worked for several large international Chartered Accounting firms. Mr Pearce is also a Fellow of the Institute of Chartered Secretaries and the Financial Services Institute of Australasia.

Mr Pearce was appointed a Director of Sovereign on 20 July 2006.

Sam Cordin, B. Com, CA – Business Development Manager

Mr Cordin is an experienced Chartered Accountant who commenced his career at a large international accounting firm and has since been involved with a number of ASX and AIM listed exploration and development companies operating in the resources sector, including most recently Salt Lake Potash Limited.

Lachlan Lynch, B. Com, CA – Company Secretary

Mr Lynch is a Chartered Accountant who commenced his career at a large international Chartered Accounting firm, before moving to commerce in the role of financial controller and company secretary. Mr Lynch now works in the corporate office of a number of public listed companies focused on the resources sector.

Risks There are risks associated with investments in junior resource companies. Key risks that apply to Sovereign are presented below.

• Exploration Risk – This is the key risk facing Sovereign (as for all junior explorers); this includes the risk of finding an initial discovery, as well as advancing prospects to a stage that they may be suitable for development.

• Sovereign Risk – Although Malawi has generally been stable since independence, it is in Africa, a continent that can throw up unexpected events.

• Markets and Funding – Junior explorers such as Sovereign are at the mercy of the equities and metals markets with the need to raise capital to undertake activities. Adverse movements will negatively affect the ability to raise capital, and when capital is raised under such conditions excessive dilution can occur. In addition, exploration carried out under restricted budgets can be less than optimal.

• Development and Permitting Risk – Although well down the track and not immediate, should economically viable mineralisation be discovered, there is always the risk that development approvals may not be granted, or else that they may take significant time to grant.



Background – Malawi

Geography and History

The Republic of Malawi is a landlocked, Central-East African country, with a total area of 118,484 km2, of which 20,404 km2 (17.2%) is the water surface of Lake Malawi, the 3rd largest lake in Africa, and the southernmost of the great lakes associated with the East African Rift system. The country is bordered by Zambia to the west, Tanzania to the north and north-east, and Mozambique to the southwest, south and east. The climate is sub-tropical and strongly seasonal, with a wet season from November to May and a dry season from May to November – the average annual rainfall for Lilongwe is 900 mm.

Hominid history in what is now Malawi begins at least 2.3 to 2.5 Ma, with a jawbone that was discovered near Uraha Village being dated at that age. Subsequently the region has been occupied by a number of different groups, culminating in the arrival of Bantu-speaking people some time in the first millennium AD.

The first known Europeans to visit were the Portuguese in 1530, with activities including trading goods for slaves with the local tribes – slave trading was also active in the 19th factory with the Swahili and Arab slave traders, who developed settlements along the shores of Lake Malawi, with this including the Islamisation of some groups.

Arguably the most well-known European to visit the area was Dr David Livingstone, who was the next significant contact after the Portuguese. Livingstone “discovered” Lake Malawi in 1859, with this ultimately leading to the establishment of the British Central African Protectorate in 1883, with the name changed to Nyasaland in 1907. Nyasaland was joined with Southern and Northern Rhodesia in 1953 to form the Federation of Rhodesia and Nyasaland – this was dissolved in 1953.

The road to independence effectively began in 1962, with a constitutional conference in London agreeing to give Nyasaland self-governance in February 1963 – this resulted in Hastings Banda becoming Prime Minister, however with Great Britain still having significant control over finances, security and the judiciary – this changed following the adoption of a new constitution in May of that year. This was followed by full independence in 1964, with Malawi also becoming a full member of the Commonwealth, a position it still holds today. Subsequent events are mentioned in the section on politics.

Demographics

The current estimated population is ~20 million, with this being around 80% rural and 97% local – foreign ethnic groups make up some 3% of the population. The largest cities are Lilongwe (the capital, ~one million) and Blantyre (~900,000). Blantyre is the capital of the southern region and is also the commercial and industrial hub of the country. Malawi has a generally young population with a high growth rate, and a median age of around 17. Life expectancy (both sexes) is ~63 years, with this increasing significantly from 50 in 2000. The period has seen considerable advancements in medical care.

The official language is English, with several local languages also being in common usage. Christian religions dominate with 77.3% of the population, with Muslims comprising 13.8%.

Politics

Since 1994, Malawi has been a Presidential multi-party democracy, with the 193 seats of the unicameral National Assembly representing single constituencies. The President of Malawi, currently Dr Arthur Mutharika, is both the head of state and head of government and can serve a maximum of two five-year terms. The cabinet, which, with the President and Vice President forms the executive branch of government is appointed by the President, with the Vice President being elected along with the President.

Elections are generally tripartite, with concurrent elections for the President, National Assembly and local government being held every five years. Local government, for which the first elections were held in 2000, includes 28 districts in three regions administered by regional administrators and district commissioners.

The most recent election was held on May 21, 2019, with the current president being returned to office and his party, the Democratic Progressive Party, being the largest in the National Assembly with 62 seats. However, the result of the presidential election was annulled by the Constitutional Court in February 2020, with new elections ordered to be held within 150 days.

Prior to 1994, and post-independence in 1964, Malawi was a single party state ruled by Hastings Banda, who was, in 1970, declared as President for Life of the Malawi Congress Party (“MCP”), and in 1971 he was declared President for Life of Malawi.

Civil unrest led to a referendum being held in 1993 that led to the adoption of the current system, and the deposing of Banda.

Economy

Malawi is one of the poorest countries in Africa, and one of the globe’s least developed countries. The economy is largely based on agriculture, which makes up 29% of the estimated 2017 GDP (PPP) of US$22.4 billion (~US$1,100 per capita), and 80% of export revenue, which was estimated at US$1.42 billion in 2017. The main exports include tobacco (55%), dried legumes (9%) and sugar (7%). However, with 2017 imports at ~US$2.34 billion and ongoing trade and budget deficits Malawi relies heavily on institutions, such as the World Bank and IMF for support.



The average annual wage is ~US$290, with ~50% of the population living below the poverty line, and an unemployment rate (estimated in 2013) of 20.4%, with an overall employment rate of ~40%.

Given the above Malawi is keen to attract foreign investment and promote development, with the Nacala Infrastructure Corridor being a vital plank in the strategy. It also wishes to diversify exports away from agriculture, with these products being vulnerable to times of poor rainfall (which also affects the key domestic food staples including maize and cassava).

Another factor driving the wish to further develop the economy are the current demographics, with significant numbers of currently school age people expected to enter the work force in coming years.

Mineral Potential and Regulation

One area the country is looking at developing is the minerals industry, with the ability to generate revenue through exports, royalties and taxes, and provide employment. The country is largely under-explored, however is, or has been a producer of several commodities, including graphite, uranium, coal, gemstones and limestone. In addition to rutile, it is also considered prospective for magmatic Ni-Cu-Co mineralisation, and has demonstrated prospectivity for rare earth elements, as shown by Mkango Resources’ (LSE: MKA.L, TSX.V: MKA, “Mkango”) Sogwe Hill project.

One of the highest profile deposits is Lotus Resources’ (ASX: LOT, “Lotus”), Kayelekera Uranium project, which has just been acquired from Paladin Energy (ASX: PDN, “Paladin”) – the Government of Malawi retains a 15% free carried interest in Kayelekera. The deposit, which is a sandstone-hosted deposit in a Permian Karoo aged rift basin had a pre-mining Resource of ~44 Mlb U3O8, and had been on care and maintenance since 2014 after producing 10.9 Mlb of U3O8 since 2007.

The Permian basins, in the north of the country, are also host to the Livingstonia uranium deposit and a number of coal deposits.

Mining and exploration activities are regulated through the recently enacted 2019 Mines and Minerals Act (“the Act”), which replaces the original 1981 Act. This puts the overall administration of the sector in the hands of the Mineral Resources Committee, which comprises secretaries and commissioners from a number of ministries and agencies.

Some of the key elements of the Act include the introduction of requirements for the development of a community engagement plan in consultation with the relevant stakeholders (as is the case now in many jurisdictions), as well as fiscal certainty.

Fiscal elements, both in the Act and tax legislation, include:

• The right of the government to take up to a 10% free carried equity stake in a large-scale project,

• Fixed royalties, including 10% for precious and semi-precious stones, 7.5% for unmanufactured commercial minerals and 5% for all others,

• A fixed company tax rate of 30%; and,

• Withholding taxes of 10% for interest and dividend payments and 15% for management fees.

Previously the fiscal framework for a project was negotiated on a case by case basis, as was done for Kayelekera.

In other elements, including tenure, the Act is like that in most mining jurisdictions.

Tenement types include:

• Reconnaissance Licenses,

• Exclusive Prospecting Licenses,

• Medium and Large-Scale Mining Licenses,

• Small Scale Mining Licenses; and,

• Artisanal Mining Permits.

Reconnaissance and Exclusive Prospecting Licenses can be held by foreign companies, whereas other license types can only be held by companies incorporated in Malawi, or Malawian citizens.

Reconnaissance Licenses are valid for a period of 12 months (and may be extended for a further single 12-month term), and are, as the name suggests, to be used for early stage reconnaissance activities, the results of which wouldl be used to decide on areas to be included in EPL applications.

EPLs are granted for an initial term normally of three years, with the option to renewal for a further two two-year terms, with a mandatory 50% relinquishment at each renewal.

A Mining License can be granted for a term of up to 25 years, and as in other jurisdictions requires a variety of studies, including technical, environmental and social to be completed and approved.



Major environmental and social/community studies/plans, in addition to other requirements include:

• The Environmental and Social Impact Assessment, which includes three phases, the Project Brief, Environmental Scoping and the ESIA process,

• A Resettlement Action Plan (“RAP”); and,

• An Environmental and Social Management Plan (“ESMP”).

Social and community requirements include such factors as community development, employment and training amongst others as is usual for other countries.

Where economically significant mineralisation has been found, but due to various reasons may not be viable to be developed at the time, a Retention License can be applied for, with a maximum term of five years.



Background – The Mineral Sands Industry

Introduction

The mineral sands industry is the key supplier of zircon and titanium dioxide minerals worldwide - these are key feedstocks for industrial uses, with Africa being a major global producer, particularly of rutile and zircon.

In 2018 global production included 1.2 Mt of zircon and 7.4 Mt of titanium dioxide feedstock – the industry structure and 2018 production is shown in Figures 10 and 11.

Figure 10: Mineral sands industry structure (Source: Iluka)

Figure 11: Mineral sands production 2018 (Source: Iluka)



Titanium Dioxide

The majority (90%) of titanium dioxide is used in the pigment industry, being used in various products, including paints, coatings, paper and inks. It is a key white pigment in that it has a high refractive index (whiteness), provides UV protection and in non-toxic.

Other uses include as a metal (military, aerospace and specialty applications) and for welding rod core wire.

Pigment is produced from the titanium dioxide feedstocks using two main routes – chloride and sulphate, with chloride generally being cleaner and requiring higher grade feedstocks (Figure 10). Most Chinese capacity is for sulphate grade feedstock; western producers generally use the chloride process. In 2018 (total production 7.4 Mt) the major titanium dioxide producer was China (28%) with South Africa and Australia both producing ~11.5%. However, all Chinese production is Ilmenite, with Australia (24%), Sierra Leone (19%) and South Africa (17%) being the main rutile producers.

Unlike zircon, where the market is supplied by a single product, the titanium dioxide market uses several products feeding the different processing routes. Key products sold by producers are shown in Table 9 and Figures 10 and 11. What can be seen is that 36% of the products sold to end users and pigment manufacturers are upgraded products, with the remaining 64% being raw materials. In addition, approximately 52% of feedstocks are chloride grade and 48% sulphate grade.

Rutile, having the highest grade, is the preferred feedstock, in that it requires less processing and produces less waste than other feedstocks (Figure 10). This is also reflected in the price differential for the different feedstocks (Figure 12).

Table 9: Titanium dioxide products sold, 2018 (Source: Iluka)

Titanium dioxide products sold Product, approx market share TiO2% Notes End Uses

Rutile – 10% 95-97 Mined product Pigments, metal

Synthetic rutile – 3% 88-95 Upgraded from ilmenite in a furnace Pigments

Ilmenite Sulphate – 42% Chloride – 12%

52-54 58-62

Processed to pigment - sulphate processing Processed to pigment - chloride processing

Pigments

Slag Sulphate – 11% Chloride – 19% Upgraded – 3%

80-85 85-90 95

Upgraded from sulphate ilmenite in a furnace Upgraded from chloride ilmenite in a furnace Upgraded from ilmenite

Pigments

Figure 12: Titanium dioxide feedstock pricing (Source: Iluka)



Australian share of total TiO2 feedstock production had fallen from 24% of 6.5 Mt in 2011 (1.6 Mt) to 20% of 7.4 Mt in 2018 (0.868 Mt), again largely due to Iluka curtailing production and sales. Rio Tinto (20% in 2017) is the largest producer, with operations in South Africa (Richards Bay), QIT (Canada) and QMM (Madagascar), however is has encountered difficulties at Richards Bay.

In 2018 Rio was the largest producer of titanium dioxide feedstocks by company (34%), followed by Tronox/Cristal (26%) and Iluka (13%). Sierra Rutile, Iluka’s Sierra Leone operation, is currently the world’s largest single rutile producer, which produced 137.2 kt in 2019, with total Iluka production being 184.1 kt. This was down from total 2017 production of 302.1 kt, partly due to the closure of the Murray Basin operations in late 2017. Other significant producers include Base from the Kwale operation in Kenya – this produced 79.0 kt in 2019, down from 95.7 kt in 2018, with operations moving from the higher-grade Central Dune deposit to the South Dune – forecast production for FY20 is 75 kt to 81 kt. Another significant producer is Tronox, which has the capacity to produce 91 ktpa, and which produced 78 kt in 2018 from its South African and West Australian operations.

Between them, Iluka, Base and Tronox produced ~60% of global rutile in CY17 and CY18 – assuming that Tronox’s CY19 production is as for 2018, this proportion will remain largely the same.

Zircon

The zircon market is supplied by the one product, zircon. The major use for zircon is in ceramics, with this comprising some 50% of the 2018 global demand of 1.2 Mt, with approximately 90% of the ceramics demand from tile manufacture. Other uses include chemicals (20%) and in refractory/foundry products (30%) - the chemical demand is currently the largest growing, with a 10-year CAGR of 11%.

China is the largest market, comprising 40% in 2017, with this region seeing significant growth, largely due to the rapid urbanisation during the 2000’s driving increased demand for tiles and other ceramics – tiles comprise approximately 75% of all floor coverings in China (source: Iluka). Other major markets include Europe (20% in 2017) and North America (9% in 2017).

Urbanisation is seen to be the key driver of zircon demand, largely due to increasing demand for tiles and other ceramic products.

Australia is the largest supplier globally, providing 38% of the world’s production in 2018, with Iluka alone supplying 28% of the global demand. Australia’s (and Iluka’s) shares of global production were significantly down on the 2011 figures (50% and 38% respectively), largely due to weakening demand and lower prices prior to the pickup in prices in 2017.

Pricing

The mineral sands market is relatively opaque – prices are generally fixed between the producer and buyer, and until 2009-2010 were largely on long term contracts, leading to relatively stable prices and a disincentive to bring on new production.

Since 2010, changes in demand and supply have led to contracts more commonly being negotiated quarterly or half yearly.

Figure 13 presents the price performance of valuable heavy mineral products from 2005 to 2018.

Figure 13: Mineral sands product prices – 1980 to 2018 (Source: Iluka)



2000 to 2010 saw a steady rise in zircon prices of around 12% CAGR, largely due to the rapid urbanisation in China driving demand for ceramics, and hence zircon - there was a minor blip during the GFC, largely due to non-Chinese factors. The same period saw titanium dioxide feedstock prices rise by an average of 5% CAGR. This was followed by a significant rise in prices in all commodities starting in 2010. This was as a result of supply constraints enabling producers to renegotiate prices away from long term contracts, which were a disincentive on bringing on new production.

A noticeable feature is the sharp decrease in prices in 2013, which continued into 2016 – this followed slowing in demand during 2012, largely due to weakening global economic conditions.

Reduced prices in this period saw curtailing of operations, and, especially in the case of zircon, selling from stockpiles (particularly by Rio Tinto) which saw prices remain depressed. TZMI expected that in the case of sulphate ilmenite, feedstock inventories had peaked, and were depleted by early 2017, with this also coinciding with increasing demand, and with the possibility of no new operations coming on stream.

They forecast that this will lead to a deficit of up to one million TiO2 units (around 2 Mt of feedstock) by 2020-2021, with prices now increasing due to tightening markets. In addition, some Chinese supply has historically come as a by-product from domestic magnetite mines – with falling iron ore prices a number of these are closing and thus also affecting ilmenite supply.

Titanium supply deficits include those for rutile – Iluka’s view is that rutile markets are now in structural deficit, and has forecast that supply may drop to around 350 kt by 2023, around half of the 2017 supply of 720 kt. This provides a good opportunity for Sovereign and should also result in continuing increase in prices (depending on economic conditions). Rutile pricing had historically followed that of US pigment prices with a 6 to 12-month lag, however this has decoupled since 2017 with the decrease in supply.

With regards to zircon, the forecast is for significant reduction in production from existing operations, with this pointing to a reduction in existing supply to ~750,000 t by 2025. This has followed a period where potential supply has been greater than demand due to overstocking and hence weighed on prices. Also, community unrest at Rio’s Richard Bay Minerals operations recently caused supply disruption supply disruption - in 2014 this produced some 16% of global zircon supply.



Appendix – Photographs This Appendix presents a series of photographs showing various aspects of the Company’s activities in Malawi.

Photograph 1: Paved route S127 heading towards both Bua and Kasiya (Source: Sovereign)

Photograph 2: Railroad prospect, highlighting rail and power infrastructure (Source: Sovereign)



Photograph 3: Field geologist Sampson inspecting hand-auger samples (Source: Sovereign)

Photograph 4: In Country Manager Dries Kruger inspecting shaking table – used to prepare heavy mineral concentrates (Source: Sovereign)



Photograph 5: Drone view of Bua Channel, highlighting size and general landform (Source: Sovereign)

Photograph 6: Aircore drilling at Bua Channel (Source: Sovereign)


Sovereign Resources Limited (SVM) 7 April 2020

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