Central East African Railways, in which Vale and Mitsui are part owners, has agreed to enter into negotiations for a binding agreement that Sovereign says provides a pathway for the transport of its graphite concentrates, a milestone in advancing the development of the “exceptionally low-cost, high-quality natural flake graphite project” at Malingunde.
The deal with the infrastructure and logistics consortium considers provision of transporting and shipping up to 100,000 tonnes per annum of concentrates over 20 years.
Initially Sovereign is looking at an initial production target of 44,000tpa and a total mine life of 17 years at that rate.
CEAR will supply and maintain all infrastructure, equipment and personnel required to provide the services, which Sovereign estimated could cost around US$65/t free-on-board in its scoping study.
Rail is cheaper than the alternative road option.
CEAR and Mozambican sister company, Corridor Desenvolvimento Do Norte, operate the Nacala Railway Corridor concession, more than 1000km of rail lines connecting inland areas of Moazambique to the deepwater port of Nacala.
The rail link was part of a $5 billion development to support coal extraction activities in the Tete region of Mozambique, and a spur line north to Malawi’s capital, Lilongwe, passes within just 25km of Malingunde.
The company expects to finalise a deal for rail access by mid-2018.
Sovereign expects to need one train shipment every two weeks.
Earlier this year the company released its scoping study suggesting Malingunde would need less than US$30 million to develop and would have costs of $301/t, around half the cost of graphite at the time.
Payback is expected in two years.
In April the company said its project was the world’s largest reported soft saprolite-hosted graphite resource with 65.1 million tonnes at 7.1% total graphitic carbon, including a high-grade component of 8.9Mt at 9.9% TGC, at a 7.5% cut-off.
A resource upgrade was expected in September following infill drilling.
Financing discussions are ongoing, and is one of the final hurdles between the junior and a final investment decision after the successful testwork to produce concentrates with 98% TCG, offering the company potential access to premium markets and greater product diversity.
Shares in Sovereign were up some 14% this morning to A12c as investors digested the news.
Bell Potter analyst Duncan Hughes said the prospect of a deal with a reputable consortium was "encouraging news", providing a significant de-risking event for the project that is situated in a landlocked country, and setting its project up as potentially one of the lowest cost future East African graphite exporters.
Hughes believed the company would look at a mix of debt and equity to fund development of Malingunde.
Bell Potter has a speculative buy recommendation on Sovereign with a valuation of 30c.
