Capital Metals - on the verge of production? Gary Newman writes...

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Capital Metals (CMET) has been covered in the past on ShareProphets, both positively and negatively, and, on behalf of a reader, Tom Winnifrith asked me to take a look and give my latest thoughts on this Sri Lankan-focussed miner. You see, we do read your emails. To be honest, my initial thoughts were that it doesn’t look that exciting as it is looking to start mining Total Heavy Minerals (THMs), which include ilmenite, zircon, rutile and garnet, none of which are metals that I really follow closely and don’t seem to have the obvious appeal of base metals such as copper, iron and nickel, or the precious metals. But it would be silly to completely dismiss the company and its potential on that basis alone, as there is obviously a market for the minerals that it is looking to produce and they are found in every day products and there is demand for them, so really they shouldn’t be treated any differently to any other commodity. Especially when you look at price movements for these minerals recently, which were all showing strength based on supply and demand dynamics, alongside expectations of that demand increasing as the world economy started to recover post-Covid. In addition to that, whilst a lot of the focus surrounding the Russia-Ukraine conflict has revolved around other commodities, it has still had a significant impact on some of these THMs.

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Capital Metals is currently at the stage that quite a few small mining companies reach, where it has defined a resource in the ground, but as yet hasn’t secured the necessary funding to actually extract the resource and take the project through to production. The success or failure here - ignoring short term share price spikes which all these companies seem to get from time to time - basically revolves entirely around whether or not the resource will ever be produced and, if it is, then how profitable that proves to be for the company. In terms of the resource itself, the figures do look impressive, with total JORC resources of 3.04mt of THM at a 5% cut off grade – the average grade is very high for this type of project at 17.6% - and with 1.16mt of that resource in the measured category. So far there has been fairly limited exploration as well, with just 5% of the project area drilled, and the current JORC resource only covers the top 3m below the surface, and with previous deeper drilling back in 2018 showing grades in excess of 26%. The company carried out more drilling last autumn, on the southern part of the area, and results are due imminently, and with the potential to increase the current resource estimates. Like with so many of these companies though, all of this is pretty meaningless unless it finds a way to actually produce the resource, and as much as people on the bulletin boards get excited about how much the minerals could be worth and come up with all sorts of figures it all boils down to the company actually taking things to the next stage.

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In terms of that, Capital Metals seems to be at the stage where we will soon know whether it is likely to be a success or failure, as it has already had its Environmental Impact Assessment approved and the Sri Lankan government appears to be supportive, which should also help it secure its industrial mining licence – which has already been submitted and is awaiting a decision. At the same time, it is also carrying out a study into the development of the project – which is planned to happen in two stages, initially producing heavy mineral concentrate, prior to stage two which will the products separated – and, assuming the mining licence is granted, it will be aiming to sign offtake agreements and project finance. One aspect here which is encouraging in terms of the likelihood of it reaching production is the low capex requirements of the project - $10 million for stage 1 and an additional $25 million for stage 2 – which makes it attainable even for a company with a current market cap of just £13 million. Although I do think that there will likely be an equity element to the funding, rather than it all coming via debt, and if that is the case then investors need to consider how dilutive that might be and at what price – but assuming that it reaches that stage at all, it will mean there has been other positive newsflow leading up to that and the share price could well be higher than the current 7.5p on the ask.

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The share price is at the same level as that which the company recently raised £1.25 million at in order to progress operational work over the coming year. It is also the lowest price that the shares have traded at since being readmitted to trading early last year following the completion of a reverse takeover via the acquisition of Capital Metals Limited. The deal for that equated to £15.84 million in cash and shares, with a large amount (86.7%) of the value of the readmitted company being attributed to the new shares, the bulk of which (132 million) were used as consideration for the acquisition, and with the placing and subscription being carried out at a price of 12p. Although this company doesn’t really appeal to me personally as an investment - due to what it is potentially going to be producing and the size of the business - I can see why others might be interested here as there is the potential for production to commence later this year, although in my experience these things always seem to take longer than management expects them to. If the company does manage to produce its resources, and prices for those commodities remain as strong as the company expects, then there is plenty of potential share price upside from the current levels and so I can see why some will invest in this as a speculative Buy.

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Filed under: Capital Metals, Julie Meyer, Tern, Ocado, Deliveroo, Trainline, Mobile Streams, Centamin

2022-03-17 14:56:04

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