Electric car sales have been bumpy of late. Consumer enthusiasm has been muted and forecasters have been forced to dampen expectations for this year.
Over time, however, these vehicles are still predicted to become a major feature of our roads, as car-makers increasingly move away from traditional motors and ramp up production of their electric equivalents.
Lithium is a critical ingredient of the batteries that power most electric vehicles. But they also need graphite, and today, more than 80 per cent of the world’s graphite is mined and processed in China. This is a problem.
Driving sales: Sovereign Metals is producing graphite needed for the batteries in electric cars
Last year, for instance, President Xi Jinping curbed graphite exports on the grounds of national security and the US responded by imposing a 25 per cent tax on all Chinese graphite.
The tax was designed to encourage exploration elsewhere and Sovereign Metals is one such explorer.
Founded by an Australian geologist, Sovereign spent several years focused on a small graphite mine in East Africa’s Malawi.
In 2018, however, the firm discovered a neighbouring site exceptionally rich in both graphite and rutile, the raw ingredient for titanium.
Today, the company has rights over a 600 square mile site, which contains the world’s largest rutile deposit and the second largest store of graphite.
This find’s significance has been recognised by governments, potential customers and, crucially, Rio Tinto, the world’s second largest mining group.
Rio took a 15 per cent stake in Sovereign in the summer of 2023 and earlier this month took that holding up to 19.9 per cent.
Not only has this provided Sovereign with plenty of cash in the bank but Rio is also providing technical expertise and support to help chairman Ben Stoikovich move from exploration to development to commercial production. Rio did not become a titan of the mining industry by picking losers.
The group spent 18 months checking Sovereign’s credentials before buying into the business and its investment has grown ever since.
The rationale behind boss Jakob Stausholm’s decision is clear. Titanium and graphite are regarded as critical minerals by world governments.
Electric vehicles need graphite to move from A to B. Titanium is widely used in military vehicles, commercial planes and space craft as it does not rust and has the highest strength-to-weight ratio of all known metals.
Many titanium deposits require extensive processing to turn them into commercially useful materials. Sovereign’s is already 95 per cent pure so production costs can be kept low, and carbon emissions are minimal – a big advantage for customers seeking to improve their environmental footprint.
Japanese industrial giant Mitsui and New York-listed Teflon maker Chemours have already agreed to buy Sovereign’s rutile once production begins, and graphite contracts are also expected soon.
Last week, the company installed a new test facility to show potential customers how good its graphite is.
And, as discussions advance on both fronts, Stoikovich and his crew are working hard to ensure that their mine is as technically advanced and economically efficient as possible.
Liaising with experts from Rio Tinto, Sovereign has created a ‘mini-mine’, trialling excavation and reparation techniques to find what works best. There is a pilot processing plant, too, showcasing the quality of Sovereign’s minerals to would-be customers.
Large deposits of critical minerals tend to attract plenty of attention and Sovereign’s are no exception. Government officials from the UK, US and Japan have visited the Malawi site and the group is a key participant in a UN-related panel this week in New York.
Mining in Africa can be fraught with political risk but the Malawi government has proved highly supportive – and with good reason.
Malawi is the ninth poorest country in the world and Sovereign’s mine could boost annual economic output by 15 per cent.
Efforts are under way to help neighbouring farming communities, while employees are largely local.
Building a mine is very expensive and early studies suggest Sovereign will need around $600million (£450million) to move into commercial production. The project is also likely to take several years.
But Sovereign has money in the bank, no debt and a deep-pocketed investor providing financial and operational muscle.
Stoikovich earned his spurs as a banker providing funds to mining groups so is well connected and the association with Rio is a clear boost too.
MIDAS VERDICT: Like all early-stage miners, Sovereign is not without risk but it could prove highly rewarding for intrepid investors. There is always the chance of a bid from Rio Tinto too. At 32p, the shares look tempting.
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