Garimpeiro does not recommend loading up in a rumoured takeover target in the hope the rumour is on the mark and there is a takeover premium to be had.

More often than not the takeover talk amounts to nothing and the investor is left holding the baby while others have moved on.

So as an investment strategy, it can suck. Still, every now and then a “situation’’ comes along that can warrant attention.

This week’s example is the Malawi rutile and graphite developer Sovereign Metals (ASX:SVM), trading mid-week at 67c for a market cap of $398 million.

Sovereign owns the world-scale Kasiya project on the Lilongwe Plain to the west of Malawi’s capital. We know it is world-scale all right because it has attracted the attention of Rio Tinto (ASX:RIO), no less.

Rio moved on to Sovereign’s share register in June 2023 by taking up a 15% placement of shares at 48.6c each or a total of $40.4 million, with a chance to go to 19.76% by exercising a mid-2024 option over an additional 34.54m shares at 53.5c each – $18.48m in total.

Right on cue, it has just exercised that option in what followers of Sovereign reckon could well lead to Rio moving to acquire the rest of the company once Kasiya’s development as the world’s biggest natural rutile and graphite producer is all locked down, or de-risked as merchant bankers put these things.

Now Sovereign’s share price has been a strong performer of late in response to Rio’s option to go 19.76% of the company, and the associated chatter about if, when and at what price it would make a bid for the rest.

A fistful of dollars (per share)

The if and when remains up in in the air. But if it eventually does bid, the status of Kasiya as something special suggests any offer for the minorities would have to be upwards of $1 a share.

That is based on a quarter of the $US1.6 billion ($A2.4b) net present value (8% discount rate) for Kasiya arrived at in an economic assessment of the project mentioned by Sovereign in an investor presentation lodged on the ASX in early February.

In Aussie dollars, we’re talking about $600m for 25% of the NPV which, neatly enough, is the equivalent of a little more than $1 a share. But given Kasiya’s world-class status, maybe 50% of the stated NPV or $2 a share would be more appropriate.

Garimpeiro again cautions that this sort of market chatter could be horribly off the mark. It is what the scuttlebutt is on Sovereign though. So it could well be one to watch in the next year or two if for nothing else then the sport of it all.

Rio doesn’t need to bid in the near-term because Sovereign, with input from Rio, has got Kasiya in an optimisation phase ahead of completing a definitive study.

At this stage it can be said that apart from potentially being the biggest natural rutile (high grade titanium dioxide) and graphite producer, Kasiya is also shaping up as the lowest cost producer because of the dual revenue streams.

The “natural’’ status of the rutile and graphite is also super important in Rio’s deliberations. Unlike the energy intensive titanium dioxide produced from low grade ilmenite or synthetic rutile, the natural stuff is essentially direct shipping ore. Same goes for natural graphite over the synthetic  stuff.

As it is, Rio recognises it has an emissions problem with its existing titanium operations in Quebec, South Africa and Madagascar which are based on upgrading ilmenite. The operations are Rio’s second biggest source of process emissions after alumina/aluminium processing.

According to Sovereign’s pre-feasibility study, Kasiya’s carbon intensity would be the lowest in the world thanks to it starting off with 95%-plus rutile grades compared with the 30-60% rutile grades found in ilmenite-based operations.

The PFS pointed to annual production from Kasiya of  222,000t of rutile and 244,000t of graphite from the hydro-mining of the homogenous and friable orebody. Average annual EBITDA over an initial 25-years was estimated at $US415 million ($A622 million).

On a 100% basis, it would be worth having for a company of Rio’s scale.

At Stockhead we tell it like it is, while Sovereign Metals was a Stockhead advertiser at the time of writing, it did not sponsor this article.


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