Savannah Resources plc (AIM: SAV) has given DirectorsTalk its interim financial results for the six months ended 30 June 2017.
HIGHLIGHTS
OPERATIONS
-- International resource development company poised to move into production -- Mining targeted to commence at Oman copper projects in H1 2018
o Targeting an underground mine at Mahab 4 and open-cut mine development Maqail South
o Intention to install a central processing plant and tailings storage facility to be used by both mines
o Preliminary metallurgical results confirm that a saleable, high grade, low contaminant copper concentrate can be produced with recoveries exceeding 88% with silver credits
o Low-cost flotation process and relatively low primary milling power requirements expected
o Awaiting final licencing approval
— Mutamba Heavy Minerals Sands Project in Mozambique being developed as part of a Consortium Agreement with industry major Rio Tinto – production targeted for 2020
o 26% increase in resource size and an 8% increase in total heavy minerals (‘THM’) grade to 4.4 billion tonnes at 3.9% THM – includes a high-grade zone of 92Mt at 6.2% THM
o Scoping Study proves potential for a financially robust, long life mineral sands project that is anticipated to provide excellent financial returns with relatively modest capital requirements
o Based on a resource of 451Mt at 6.0% THM, average annual production of 456,000t of roasted ilmenite and 118,000t of non-magnetic concentrate (rutile and zircon) could be achieved over an initial life of mine of 30 years, with potential revenues of US$4.23 billion and pre-tax NPV of US$335 million achievable
o Preliminary Feasibility Study underway
o Bulk sampling programme on track to commence H1 2018 – construction of a 20 tonne per hour pilot plant commenced
— Expanded portfolio via the acquisition of a 75% interest in a series of highly prospective lithium projects in the north of Portugal
o Primary focus on advancing the Mina do Barroso Project, which with an approved Mining Plan, Environmental Impact Assessment and a 30-year Mining Licence offers near term mining opportunity
o Appears amenable to producing a high-grade (over 6% Li(2) O), clean, low iron, lithium concentrate product
o Drilling underway to define a JORC compliant Mineral Resource estimate – results already successfully extended the strike and depth extents of the known pegmatites and include – 36m at 1.26% Li O from 29m at Reservatorio deposit and 18m at 1.27% Li O from 1m at Grandao deposit
o With a defined resource, a development decision could be made by the end of 2018
-- Assessing ways in which to best realise value from two lithium projects in Finland
FINANCIAL
— Investments in intangible and exploration project assets of GBP2.90m during the period, including the acquisition of the new lithium projects in Portugal
— Operating loss of GBP1.53m reflects the continued high tempo of mine development activities and expansion of portfolio
-- Cash placings and subscriptions in March 2017 which raised gross proceeds of GBP3.25m
— Cash balance of GBP1.29m at the reporting date and further strengthened post balance sheet subscriptions of GBP1.32m in July 2017
CHAIRMAN’S STATEMENT
The six months under review have been an extremely active time for our Company, documented with significant news flow, which is reflective of our active growth strategy. We are committed to maintaining this pace and have a defined development programme in order to maximise value from our multi-commodity portfolio in Oman, Mozambique, Finland and most recently Portugal, which aims to build upon our position as an international resource development company moving to production.
I am pleased to report that we are now well poised to transition into production, with copper mining expected to commence in Oman in H1 2018. We are also on track to commence bulk sampling at our Mutamba Heavy Mineral Sands Project in Mozambique in H1 2018. Alongside these developments, we have made tangible progress in strategically expanding our asset portfolio, via the acquisition of a series of highly prospective lithium projects with near-term production potential in the north of Portugal. With an approved Mining Plan, Environmental Impact Assessment and a 30-year Mining Licence, a development decision could be made as early as the end of 2018 once we have a defined JORC resource. Accordingly, drilling is well underway to support a targeted JORC compliant Mineral Resource Estimate. This will incorporate historical data we have available to us and I am pleased to report that initial results from drilling to date are very encouraging. We therefore believe the next six months will be equally active and significant for Savannah.
Oman: Blocks 4 and 5, Copper Project
We have the rights to two blocks (Blocks 4 and 5) covering 1,004km(2) in the copper-rich, Semail Ophiolite Belt in the Sultanate of Oman; a region proven to host clusters of moderate to high-grade copper deposits with gold credits and metallurgically simple ores. The two blocks are located approximately 180km northwest of Muscat, the capital city of Oman, and within close proximity to the deep-water export Port of Sohar. With an established resource of 1.7Mt at 2.2% copper, work is now focused on advancing our copper portfolio into high margin, low cost production. Mining is targeted to commence in H1 2018.
The Mineral Resource Estimate comes from two primary deposit areas in Block 5 – 1.51Mt at 2.1% copper at Mahab 4 and 0.16Mt at 3.8% copper at Maqail South – and our focus during the period has centred on finalising our mining and processing plans. It is our intention that Mahab 4 will be developed as an underground mine, whilst the resource at Maqail South will be an open-cut mine development. To support both these operations, we propose installing a processing plant and tailings storage facility (‘TSF’) on an area on the adjacent Block 4. Run-of-mine crushed ore will be trucked to the plant which will produce a copper concentrate for shipment to export markets. Tailings produced from the processing plant will be stored under a strategy that is currently being reviewed by the Ministry of Environment and Climate Affairs (‘MECA’). Our strategy has received in principle approval from MECA in that they have confirmed that it is worthy to be considered for licencing.
In support of future development, all regulatory applications for copper mine development at both Mahab 4 and Maqail South have now been submitted. Whilst the licencing process has taken longer to complete than initially hoped, resulting in a delay to the proposed production schedule, things continue to progress well towards commencement of mining in H1 2018.
Looking at the commercial viability of the project development, in February this year we received preliminary metallurgical results for Mahab 4, which confirmed that a saleable, high grade, low contaminant copper concentrate can be produced with recoveries exceeding 88% with silver credits. There also appears to be potential to produce a zinc product but further work is required to confirm if this is possible. Chalcopyrite was identified as the sole copper bearing mineral, which is likely to lead to a simple, quick and relatively low-cost flotation process to concentrate the copper and the ore appears to be relatively soft, meaning it should require relatively low primary milling power requirements. This means that the project should enjoy favourable processing costs.
Omani copper concentrates have historically been regarded as a high-quality product and are much sought after by off-takers for blending purposes. Testament to this, I am pleased to report that we have received strong interest from off-takers and this could form part of the financing element for the mine development.
Additional metallurgical test work is now underway to refine our processing model and to try and further improve the already high recoveries and overall copper concentrate grades. Alongside this we are developing a detailed mine design and production plan for the two mines and preparing an Economic Study to gain further clarity on the revenue potential. We therefore remain highly active whilst we await the granting of our mining licences, in order to ensure the timely development of Mahab 4 and Maqail South. We believe these mines will come online at an opportune time given the current strong copper price and the solid market demand.
Mozambique: Mutamba Mineral Sands Project
Located in a world-class mineral sands province in Mozambique, Mutamba is a tier one deposit that is well placed to provide a long-term, reliable supply of ilmenite, zircon and rutile for global markets. We are delighted to be advancing this asset into production as part of a Consortium Agreement with industry major Rio Tinto, and we believe that the unification of our skill set and resources strongly positions us to meet a production target of 2020.
The project boasts a significant Indicated and Inferred Mineral Resource Estimate of 4.4 billion tonnes at 3.9% THM, which currently covers three of four target areas identified in the Mutamba Project (being Jangamo, Dongane, Ravene and Chilubane). We established this resource level following a notable expansion during the period as a result of drilling conducted at Ravene, which resulted in a 26% increase in resource size and an 8% increase in THM grade. This increase clearly highlights the potential scope of Mutamba as a globally significant producer of titanium feedstocks and has been achieved at a time of significant global growth which is driving demand. Thanks to its significant size and quality, Mutamba is one of the few significant deposits that has the potential to be brought into production in order to meet this growing market demand.
Aside from the Mineral Resource Estimate increase, the drilling at Ravene led to the definition of a high-grade zone of 92Mt at 6.2% THM, which was a key, high grade element for the Scoping Study that was completed in May 2017. The results of this study were very encouraging and concluded that there is potential for a financially robust, long life mineral sands project that is anticipated to provide excellent financial returns with relatively modest capital requirements.
Incorporating well known, conventional dry mining and processing techniques, the study was based on a conceptual mine plan which centred around a resource of 451Mt at 6.0% THM (utilising 33% Indicated Mineral Resource Estimate and 67% Inferred Mineral Resource Estimate). The study concluded that average annual production (following ramp-up to a 15Mtpa mining rate) of 456,000t of roasted ilmenite and 118,000t of non-magnetic concentrate (rutile and zircon) could be achieved over an initial life of mine (‘LOM’) of 30 years. To bring the mine into this state of production, pre-production capital expenditure is expected to be US$152 million, with US$74 million to be held for contingency, EPCM (Engineering, Procurement, Construction Management) and spares. A number of opportunities have, however, already been identified that may reduce this cost. Indeed, Mutamba benefits from a range of established infrastructure, comprising local roads, power, telecommunications, an international airport and the nearby port of Inhambane, in addition to Rio Tinto’s existing camp and equipment, which positively impacts capex.
Based on these production rates and costs, potential revenues and returns for the Company were modelled in the Scoping Study on three ilmenite pricing scenarios – a base case of US$185/t; Management Case One with a +10% increase in product price to US$204/t; and Management Case Two with a +20% increase in product price to US$222/t. Taking the base case scenario, LOM revenue of US$3.53 billion and LOM cash operating costs of US$2.16 billion were forecast, with an IRR of 19% and pre-tax NPV of US$154 million. In comparison, Management Case Two could result in LOM revenues of US$4.23 billion, with LOM cash operating costs of US$2.18 billion and an IRR of 27%, and pre-tax NPV of US$335 million. In either case, both scenarios have the potential to generate significant financial returns for our Company.
We are now focused on making the Scoping Study forecasts a reality, with first production targeted for 2020. In support of this, Stage One of the Preliminary Feasibility Study (‘PFS’) commenced post-period end, in August 2017. Mineral sands expert TZMI has been appointed to complete this phase of the work, which will define the scope of the PFS, and support project planning and budget finalisation for Stage Two of the PFS. In parallel, in June 2017, construction of a 20 tonne per hour pilot plant commenced. The pilot plant is expected to be constructed and commissioned by the end of 2017, and once operational will be used to produce bulk samples of concentrate for metallurgical and product test work. This will help us refine our final production model whilst also supporting test marketing to be undertaken by our partner Rio Tinto (or its affiliate), which has an offtake agreement on commercial terms for the purchase of 100% of heavy mineral concentrate produced at Mutamba.
I am pleased to report that we are currently seeing prices for titanium feedstocks such as ilmenite and rutile rise, which suggests that this is an ideal time to be developing this project. We look forward to establishing Mutamba as a globally significant ilmenite producer in conjunction with Rio Tinto.
Portugal: C-100, Mina do Barroso, Lithium Project
In May this year we entered into an agreement with a consortium of vendors led by Slipstream Resources Investments Pty Ltd to acquire a 75% interest in a series of highly prospective lithium projects spread over four project areas covering approximately 1,024km(2) in the north of Portugal. Within this project area there are pending applications over 348km(2) , which are on track for government approval, and 670km(2) of the licence area is currently subject to overlapping exploration licence applications from third parties. Crucially, our most significant element of the Portuguese projects is the highly strategic ‘Mina do Barroso’ Project which covers an area of 5.4km(2) . With an approved Mining Plan, Environmental Impact Assessment and 19 years of its 30-year Mining Licence remaining, which may be extended by a further 20 years subject to the agreement of the Portuguese state, we believe Mina do Barroso offers a near term mining opportunity. We are now focused on defining a JORC compliant Mineral Resource Estimate as a precursor to making a development decision, which could be made by the end of 2018. In support of this, drilling commenced in July 2017 with positive results reported to date.
Work at Mina do Barroso previously focused on producing a product for ceramics, however, having identified significant anomalous lithium mineralisation, which appears amenable to producing a high-grade (over 6% lithium oxide (‘Li(2) O’)), clean, low iron, lithium concentrate product. Based on the advanced nature of the asset, and results received to date, we believe the project has the potential to become Europe’s first lithium mine. This is a highly strategic opportunity for Savannah because Europe, as an early proponent of Electric Vehicles (‘EVs’) and battery storage solutions, is one of biggest drivers in lithium demand. However, despite strong demand prospects, no European country currently produces battery grade LCE products, meaning that European manufacturers currently import 100% of their requirements. These European manufacturers consume approximately 24% of global battery grade lithium (second only to China) and with more countries pledging their commitment to EVs by phasing out petrol and diesel cars we expect Li(2) O demand to rise dramatically, making this an undoubtedly exciting commodity to be in.
Having acquired our Portuguese assets, we have quickly commenced work and completed geological mapping across three primary target areas at Mina do Barroso – Grandao, Reservatorio and NOA – which have been shown to have relatively high grades of Li(2) O with drill results up to 1.67% Li(2) O over significant widths. I am pleased to report that this mapping successfully extended the surface expressions of all three of these major lithium bearing pegmatites, which reinforces our confidence in this asset’s resource potential. Furthermore, the results laid the foundations for the drilling programme currently underway.
Drilling commenced post period end in July 2017, less than two months after acquisition, which highlights our fast-paced development approach. This targeted drill programme is ultimately focused on defining a JORC compliant Mineral Resource Estimate and I am pleased to report that results received to date are highly encouraging. In August 2017, we completed phase 1 of the drilling, with 16 Reverse Circulation (‘RC’) holes drilled at the Reservatorio and Grandao deposits. All of these holes intersected massive pegmatite and successfully extended the strike and depth extents of the known pegmatites. At Reservatorio, drilling confirmed mineralisation over a 200m strike length together with good down dip extensions of at least 80m; results include 36m at 1.26% Li(2) O from 29m, 33m at 1.15% Li(2) O from 16m and 25m at 1.01% Li(2) O from 36m. At Grandao, drilling confirmed mineralisation over a 200m strike length in a large, near surface, sub horizontal pegmatite body; results include 18m at 1.27% Li(2) O from 1m, 17m at 1.24% Li(2) O from 16m and 15m at 1.08% Li(2) O from 39m. Crucially, both deposits remain open along strike and down dip, leaving excellent upside potential for both deposits. We hope to extend upon these results through phase 2 of the drill programme, which commenced in September 2017. This second round of RC drilling is targeting potential extensions to the significant zones of mineralisation identified at Grandao and Reservatorio and is also testing the third NOA deposit. I look forward to providing the Company’s shareholders with the results of this drilling in due course.
Of course, further upside remains outside of this current drill programme. Accordingly, further mapping is being undertaken at Mina do Barroso to assist in precisely defining other already identified lithium bearing pegmatites within the larger project area. This work is expected to be completed shortly and we look forward to sharing the results when available. Additional upside also remains within the wider 1,024km(2) land package but our current focus is on Mina do Barroso as we believe this offers the Company the most near-term value potential.
Finland: Somero and Erajarvi Lithium Projects
Complementary to our newly acquired Portuguese lithium licences is our Finnish portfolio of lithium assets. Somero and Erajarvi cover an area of 159km(2) of highly prospective lithium terrain in Finland. Reconnaissance rock chip sampling has returned anomalous lithium mineralisation across both projects, leading to the discovery of seven lithium bearing pegmatites – two on Somero and five on Erajarvi. With assays of up to 4.47% Li(2) O and key lithium minerals petalite, spodumene and lepidolite all identified in hand specimens the results are very encouraging.
Now that realising nearer term value opportunities in Portugal is our primary lithium focus in Europe, we have sought expressions of interest from a number of groups with an energy metals focus.
Financials
As might be expected for an active exploration and pre-production resource development group, the Group is reporting a loss for the period of GBP1.53m (30 June 2016: GBP0.76m) (31 December 2016: GBP1.76m). The increase compared to the prior period reflects the increased tempo of resource development activities and the expansion of the Company’s portfolio (GBP0.1m), and also includes non-cash costs relating to share options issued as long-term incentives (GBP0.28m). Net assets have increased to GBP9.26m (30 June 2016: GBP4.61m) (31 December 2016: GBP6.07m) predominantly due to the acquisition in May of the highly prospective lithium project portfolio with near-term production potential in the north of Portugal and the increase in project development activity during the year (see Note 2).
The cash placing and subscription for GBP3.25m cash (before expenses) in March 2017 contributed towards the ongoing development of the Company’s projects in Mozambique, Oman, Portugal and Finland. The cash subscription of GBP1.32m (before expenses) in July 2017 after the reporting date will further contribute towards the development of the Company’s projects, with the Oman project in particular heading towards production in the short term.
Outlook
The natural resources sector is experiencing increasing impetus thanks to technology/industry developments. The strong rise of EVs is garnering much market and media attention and the demand on critical energy metals such as lithium and copper is increasing, which is in turn driving price and market demand. With exposure to both of these commodities, and crucially the ability to advance these into production in the near-term, we believe Savannah has a strong and attractive portfolio.
Accordingly, our focus is now on converting our near-term production potential into a reality. In Oman, this means finalising our production and processing plans whilst we await the grant of the mining licences so that we can commence mining in H1 2018. In Portugal, we look forward to completing our current drill programme and defining a JORC resource.
Alongside these developments, in Mozambique we continue to make excellent progress in advancing our Mutamba heavy mineral sands project towards a production target, which is targeted to commence in 2020 with average annual production of 456,000t of roasted ilmenite and 118,000t of non-magnetic concentrate (rutile and zircon).
With a highly strategic portfolio of assets and defined routes to production, the coming months will be a very active period for Savannah. We have carefully structured our portfolio and operational team to best position our Company and assets for growth so that we can build real value for shareholders.
Finally, I extend thanks to our shareholders for their continued support and to our multi-national team for their consistent hard work and I look forward to the achievement of the development milestones that lie in front of us.
Chairman
Matthew King
