Ground Breakers: Rio annoints Sovereign and IGO reveals shock ~$1b nickel impairment

Rio to bankroll Sovereign’s Kasiya mineral sands study with strategic $40 million investment
Under the deal, mining giant could become the mine’s operator as it signals its intent to move into EV metal graphite
IGO could book impairment of almost $1 billion on Western Areas deal

Rio Tinto (ASX:RIO) has made no bones of its desire to move outside its tried and tested iron ore expertise and branch out into all the metals needed to power the world’s electric vehicle dreams.

Already a major copper producer, Rio is the only global major to move intently into lithium, eschewing the old world commodity views of its rival BHP (ASX:BHP), whose EV metals plans rest largely on expanding its historic copper and nickel businesses.

Rio’s twists of late have been earn-in deals to secure stakes in WA and Canadian lithium assets, moves that suggest it could be keen to take on larger lithium M&A if the price is right.

But its latest investment has come from left field, with Rio placing $40.4 million of venture capital with mineral sands hopeful Sovereign Metals (ASX:SVM).

Sovereign owns Kasiya in Malawi, the largest natural rutile discovery made globally with a resource of 1.8Bt at 1.01% rutile.

Rio already has an African mineral sands business at QUT in Madagascar and the troubled Richards Bay in South Africa’s Kwazulu-Natal region.

But it is the graphite by-product at Kasiya that seems to be catching Rio’s eye. The commodity is the largest raw material component by weight in a lithium ion (read: EV) battery, used in anodes in both LFP and NCM types.

Sovereign says Rio’s assistance and technical and market advice will be focused on the graphite co-product and spherical purified graphite for EV battery anodes.

Rio’s 15% stake will be acquired at 48.6c a share, a 10% premium to SVM’s 45-day VWAP, with another ~34.5 million options priced at a 21% premium of 53.5c able to be exercised within 12 months for up to $18.5m. That would take Rio’s potential holding to 19.99%, just below the takeover threshold.

Celebrations all round

Beyond the headline news of the investment itself, it stands to reason Rio could take a larger interest in the operation of the mine itself.

A clause in the deal enables Rio to become the operation on ‘arm’s length terms’ and get exclusive rights to 40% of the annual production to be outlined in an upcoming DFS.

That could make Rio a major supplier of graphite into the anode materials space joining smaller ASX companies like Syrah Resources (ASX:SYR), Talga Group (ASX:TLG), Evion Group (ASX:EVG) and Magnis Energy Technologies (ASX:MNS) in the burgeoning market.

SVM chairman Ben Stoikovich said the investment earmarked Kasiya as a globally significant project.

“This landmark agreement with Rio Tinto, one of the world’s largest and most accomplished global mining companies, is confirmation of Kasiya’s place as one of the most significant critical mineral discoveries in recent times,” he said.

“The experience and expertise that Rio Tinto brings will truly set Kasiya apart as a potentially globally significant supply of two critical minerals and take us all a step closer to supply chain decarbonisation and achieving net-zero.

“Furthermore, this is yet another step towards unlocking significant benefits from development of the Kasiya project for Malawi.

“We welcome Rio Tinto as a major shareholder of Sovereign and look forward to working with Rio Tinto as our strategic partner in the development of Kasiya.”

For Rio, it continues its diversification away from iron ore.

From 2026 more than 30% of its EBITDA will come from copper according to analysts from Goldman Sachs, with the Oyu Tolgoi mine in Mongolia to grow to upwards of 350,000tpa and 500,000tpa from 2028-2036.

Rio Tinto (ASX:RIO) and Sovereign Metals (ASX:SVM) share price today:

Whoopsie: IGO reveals how badly it overpaid for Western Areas

This is hardly the welcoming gift Rio executive Ivan Vella wanted at IGO (ASX:IGO).

The battery metals stock is ~6% today, after revealing it planned to book an impairment of between $880m and $980m on the value of the assets it acquired in the $1.3 billion takeover of Western Areas in 2022.

IGO was forced to adjust its all cash offer to the nickel rival up 15.2% after a surge in LME nickel prices last year on the back of a short squeeze which has now abated. Nickel metal is down around a third to a little over US$21,000/t YTD.

At the time it had faced a potential call from WSA independent expert KPMG that its initial offer was not fair and reasonable. It now looks like it was way over the odds.

But the big challenge has been higher costs at the operating Forrestania and the under construction Cosmos, the big nickel redevelopment the deal hinged on.

“The impairment relates to the reassessment of the accounting value at Cosmos and Forrestania to reflect higher capital and operating costs, challenges to the mine production schedule and delays in development at Cosmos,” IGO told shareholders today.

“As a result, guidance provided on 31 October 2022 with respect to Cosmos has been withdrawn.”

That guidance had Cosmos producing first concentrate from its 1.1Mtpa plant this quarter at a capital cost of $795m and $825m, up from initial WSA estimates of $425m.

The Western Areas deal was also a major catalyst for the study IGO is currently leading into a nickel sulphate plant at Kwinana with Andrew Forrest’s Wyloo Metals.

“Recording a significant impairment against the WSA assets is disappointing. While the project development team has made solid progress to advance Cosmos towards first production, capital and operating cost escalation and unforeseen operational challenges have impacted the value of the Project,” IGO acting CEO Matt Dusci said.

“A detailed independent review of the project development strategy and mine plan has now commenced and will provide a comprehensive assessment of the risks and opportunities for Cosmos. We will keep the market updated as this review progresses.

“As a long-life nickel asset, Cosmos remains important to our nickel business and provides potential downstream optionality via our aspirations to develop an Integrated Battery Materials Facility in Western Australia.”