Following a period of explosive growth that saw its shares reach highs of 13.6p, Savannah Resources (LSE:SAV) has drifted back to 9.4p at the start of H2 2018 that is expected to be particularly busy for the firm. Since May, the company has pleased investors with numerous updates from its Mina Do Barrosa lease in Portugal, where it is hoping to establish itself as Europe’s first significant producer of the battery metal lithium. With plenty of work ongoing in Portugal and leasing progress ongoing at Savannah’s sites in Oman and Mozambique, we spoke to chief executive David Archer about where the business and wider market is heading.
Savannah’s first move towards becoming a European lithium producer came last May when it purchased a 75pc stake in nine exploration licence applications and a lease called Mina Do Barrosa in Portugal. Mina do Barrosa, which has been its primary focus so far, contains an estimated mineral resource of 14Mt at 1.1pc lithium oxide, leading Savannah to call it Western Europe’s largest new spodumene lithium discovery. It expects to increase this resource over time given that it is currently defined from just three of at least eight pegmatite deposits and is also carrying out additional exploration drilling.
Archer told us that indicators so far suggest Mina Do Barrosa could mirror successful lithium mining projects in Australia: ‘Lithium comes in many mineral forms, and our particular one here is spodumene. This makes Mina do Barrosa very similar to the spodumene lithium deposits in Australia, which have been immensely successful in terms of mine developments and very strongly supported by investors as well.
Mina do Barrosa took a significant leap forward in June when Savannah released the results of a scoping study that defined it as low-risk and economically robust. The study also gave the project an NPV(8) of $356m and an 11-year life of mine (LoM) processing 1.3Mtpa per year. Based on an average spodumene price of $685/t, LoM revenue is expected to come in at c.$1.6bn. These results, accompanied with the news that the site would now be fast-tracked towards a feasibility study, prompted a re-rate in Savannah’s share price from 8p to 13.6p in less than a week.
The next step for Mina do Barrosa came this month when Savannah to fund the site’s development up to decision to mine, which is expected by early next year ahead of targeted production by 2020. This month also saw Savannah 70-day due diligence and option agreement to acquire a three-block mining lease adjacent to Mina do Barossa’s Reservatorio prospect for an initial €350,000. Purchasing the contract will allow it to extend Reservatorio, which has a current mineral resource estimate of 3.2Mt at 1pc Lithium oxide for 23,000t, and potentially identify additional deposits already known in the area.
Archer told us he hopes the additional ground can increase Mina do Barrosa’s total mineral resource estimate, mine life, and annual processing rates, adding: ‘Any extensions and discoveries will also give us additional flexibility in terms of configuring the layout of our site infrastructure and provides an opportunity to reduce the costs of the project at the same time.’
He also told us that he believes Portugal’s solid mining credentials are likely to benefit the company going forward: ‘Portugal is a mainstream jurisdiction and a great place to invest. It has a good track record of quick payback of capital, strong cash flow generation, and it is near to numerous key battery metal markets.’
Savannah is entering the lithium market at a time when demand is multiplying due to new forms of energy storage and, in particular, the rise of electric vehicles (EVs). Batteries currently make up around 43pc of total lithium demand, but this is expected to double by the end of the decade. Indeed, a study from research firm Roskill has forecast a more-than-threefold increase in overall lithium demand by 2027. With lithium supply needing to triple to keep up with demand growth, many believe the price of the metal is going to keep rising after already increasing from c.$5,500/t in 2013 to c.$18,500/t at present.
That being said, not everyone is in agreement over this. Most notably, a group of Morgan Stanley analysts sent shares in lithium producers and explorers tumbling in February when they forecast a growing surplus in the lithium market that could see prices fall 45pc by 2021.
Regardless of the direction of lithium prices, Savannah’s focus on Portugal means it is likely to benefit from Europe’s position as one of the EV market’s largest global consumers. Indeed, European countries currently consume 24pc of worldwide battery grade supply despite importing all of the metal it uses. The EU hopes to change this by pushing to develop a regional lithium value chain and nurture lithium-ion battery producers.
Archer tells us that Savannah will enjoy first-mover advantage as this happens: ‘Europe is concerned with maintaining a competitive position in the global car industry. The most valuable part of an EV is the battery pack and that is where most of the value-add will be, so a certainty of supply is crucial. As the first major domestic supplier of lithium in Europe, we will be able to anchor the upstream part of the value chain.’
Savannah’s interests extend beyond Portugal and Mino do Barroso. In Oman, it controls the rights to two blocks (Block 4 and Block 5) in the copper-rich Semail Ophiolite Belt where it has initiated an exploration programme to focus on advancing high priority target areas. It expects this work to increase the area’s total estimated mineral resource of 1.7Mt at 2.2pc copper. , the company received letters of approval from eight government departments for a mining licence at Block 5, and it is now working to conclude the licencing process with Oman’s Public Authority of Mining.
Savannah is also developing the Mutamba Heavy Minerals Sands Project in Mozambique, which comprises three deposit areas containing 4.4Bt at 3.9pc total heavy minerals with potential to expand. The business is developing the project alongside mining giant Rio Tinto and can potentially earn-in up to 51pc provided it hits performance targets. The pair ultimately plan to use the site’s resource to supply heavy minerals like ilmenite, rutile and zircon as Titanium feedstock, which is currently in short supply globally.
A scoping study released last year gave the project a 30-year life and a mid-case LoM revenue forecast of $4.2bn and a Pre-Feasability Study (PFS) is currently well underway and slated for completion in early 2019. The two firms are also to grant a mining lease for the three deposits, with first production targeted for 2020.
Archer told us that he expects to begin generating proper value from these two sites once it has finalised licencing: ‘The Oman and Mozambique projects are in the licencing process at the moment, but once we are granted leases we can kick-start activities in those areas. The Mozambique Heavy Mineral Sands Project is one of the most globally significant resources of mineral sands. It is certainly one of Africa’s largest mineral sands projects, and it really will be a long-term source of titanium and titanium minerals.’
Thanks to operational progress made at Mina do Barosso throughout May and June, Savannah’s shares have enjoyed a particularly strong performance of late. Indeed, they rose from lows of 5.3p in April to highs of 13.6p in June before falling off in recent weeks to settle at their current 9.4p, which gives the business a current market cap of £76.5m.
As at the end of 2017, current assets (£2.9m) minus current liabilities (£1.3m) totalled £1.6m. When you add the firm’s current cash balance to this, you get c.£15.9m. Although this is a rough calculation, it suggests that the market is ascribing a decent amount of confidence in Savannah’s portfolio given its current £76.5m market cap. Archer believes this is justified given the business’s recent progress and is confident that future value triggers could see shares rise further still:
‘There has been a marked re-rating of our shares on the back of the scoping study results, which provided clarity and definition around the economics of the mine development. We believe there will be multiple value-adding catalysts throughout the rest of the year, including multiple resource upgrades. We are looking to increase the current tonnage in Portugal where there is also the potential for securing an offtake and industry strategic partnership. Also, we are expecting more news around the licencing of Oman and Mozambique. The next six months will be very rich for newsflow.’
Savannah’s management team is strong – Archer himself has more than 30 years of mining experience, for example – and they and the board have collectively invested £7.2m of their own cash into its shares. Al Marjan Limited, which is associated with two of the directors, holds a 28.1pc stake- making it the firm’s largest stakeholder by quite some margin. What’s more, it has attracted significant institutional attention, with four London institutions that invested in the most recent funding raising.While this support adds additional credence to Savannah’s plans to enter the booming lithium market, whether or not it truly piques your interest will depend on whether or not you buy into promises of explosive EV growth.
Putting this aside, Savannah looks sharp from several measures- indeed, its current work programme is fully funded, it has already caught the interest of the market, and it has a portfolio of attractive, diverse assets. With plenty of news on the horizon, it could be worth having a punt on Savannah now following a brief period of weakness before shares potentially move upwards again.
Author: Daniel Flynn
Disclosure: The author of this piece does not own shares in the company covered in this article.