Rio Tinto has signed an agreement to acquire a 15% stake in ASX and AIM-listed exploration and development company Sovereign Metals for A$40.4m ($27.6m).

The deal will see the Anglo-Australian miner initially buy 83 million shares in Sovereign at A$0.486 apiece, marking a 10% premium to the stock’s 45-day volume-weighted average price.

Rio Tinto also has the option to purchase a further 34.5 million shares in the company within a year, at A$0.535 each, or another A$18.5m.

If exercised, it would increase Rio Tinto’s stake in Sovereign to 19.99%.

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By GlobalData

Sovereign will use the funds to develop its Kasiya Rutile graphite project in Malawi.

This includes supporting a definitive feasibility study, with a focus on developing a mine with a low CO₂ footprint that can supply titanium pigment, titanium metal and lithium-ion battery industries.

Located in central Malawi, Kasiya is considered to be one of the largest natural rutile deposits and also one of the largest flake graphite deposits in the world.

An expanded scoping study (ESS) was conducted last year. The company is now advancing a pre-feasibility study (PFS), which will build on the ESS. Results from the PFS will be released soon.

The parties also reached an investment agreement that enables them to negotiate funding arrangements for mine construction in the event of Sovereign raising debt finance.

Rio Tinto can also opt for Kasiya’s operatorship on commercial arm’s-length terms and will have exclusive marketing rights over 40% of annual production as long as it remains the operator.

Sovereign chairman Ben Stoikovich 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.”