Sigma Lithium, Japan’s Mitsui form strategic alliance

In 2012, A10, a leading Brazilian M&A and private equity firm, used its personal capital and partners’ funds to back Sigma Lithium Resources (TSXV: SGMA; US-OTC: SGMLF) and its hard-rock lithium project.

A10 took the company public and raised its stake from 72% before the initial public offering to 75%, the regulatory cap under Brazilian law.

“We actually bought more stock since we took it public, and we haven’t sold a single share,” says Ana Cabral-Gardner, A10’s managing partner and co-founder. “We’re putting our money where our mouths are. We think this is going to fly.”

Mitsui & Co. thinks so, too, recently signing a binding offtake and financing agreement with the company for up to 55,000 tonnes a year of battery-grade lithium concentrate for a six-year period, extendable for five years.

Sigma Lithium has received US$3 million of the US$30-million contract, and part of the funds will help build a production plant at its Grota do Cirilo lithium project near Aracuai, a city of 40,000 people in the northeastern region of Minas Gerais state.

Under the agreement, Mitsui — one of the world’s largest trading companies — has the right to buy 25,000 tonnes a year over six years at prevailing market prices. Mitsui has also agreed to disburse up to US$7 million for Sigma to acquire long-lead items for construction of the production plant.

The two companies have also committed to continue discussions about more funding for exploration and development of Sigma’s mineral properties.

Grota do Cirilo is a brownfield project with 10 high-grade, hard-rock lithium pegmatites, nine of which were past-producing lithium mines. Sigma is focused on building its first industrial-scale lithium mine at the historic Xuxa mine.

Sigma started producing battery-grade lithium on a pilot scale last year, and shipped bulk samples to potential customers from its 12,000-tonne-per-year, first-phase production plant.

A definitive feasibility study that’s near completion is evaluating a concentration plant that will have an initial processing capacity of 1.5 million tonnes of spodumene per year. The plant design would have a capacity of 220,000 tonnes of battery-grade spodumene concentrate annually.

The study is based on one pegmatite body on the property — Xuxa — but Sigma plans to undertake a second feasibility study to bring its Barreiro pegmatite deposit into production later, and boost the project’s production capacity to 440,000 tonnes per year.

A10’s Cabral, who is also Sigma’s chief strategy officer, notes that Sigma has been working with Mitsui since August 2018, and that the Japanese trading giant has done “a very thorough due diligence” that included hiring SRK and doing six months of work auditing the company’s mineral resources. Essentially, she adds, Mitsui “has been involved in the reviewing of the feasibility study, and they’re very comfortable with what they’ve seen so far.”

“The deal is a tremendous validation of the area and the measured and indicated resource we have,” she says in a telephone interview from Brazil. “That’s why it received equity-like treatment, because ultimately the settlement is not in ore, it’s in spodumene concentrate that comes out of our plant.”

Cabral says the production pre-payment is a hybrid financing instrument that strengthens Sigma’s capital structure and doesn’t impact on the company’s leverage ratios, or dilute shareholders.

Cabral highlights that Sigma is taking a sequenced approach to developing the project, tackling each pegmatite separately, at least for the time being, because the property is so large. “We’re taking a staggered approach on bringing the company into production,” she says. “The feasibility study is on one of the deposits, and essentially that’s the deposit that has the most homogenous pegmatite position.

Processed product grading 6% lithium oxide. Credit: Sigma Lithium Resources.

“We’re being very clinical about it,” she continues. “We’re focused on timing. Instead of drilling the entire property and then moving into construction, we decided to just develop the mineral resource to the level of measured and indicated, and to the extent that it would allow us to achieve a certain production profile.”

Xuxa, on which the current feasibility study is based, has measured and indicated resources of 17.41 million tonnes grading 1.55% lithium oxide (LiO₂) and inferred resources of 3.80 million tonnes grading 1.58% LiO₂.

The second pegmatite, Barreiro, has measured and indicated resources of 20.49 million tonnes grading 1.43% LiO₂ and inferred resources of 1.91 million tonnes grading 1.44% LiO₂.

Xuxa and Barreiro remain open on surface — Xuxa to the south and Barreiro to the north — and both are open at depth.

The Xuxa pegmatite is 1.7 km long and 16 metres wide, while the Barreiro pegmatite is 500 metres long and 400 metres wide. Both contain large crystals of spodumene that are visible in the drill core.

Sigma has resource estimates on two other pegmatites: Murial and Lavra do Meio.

Murial, which is 700 metres long and 20 metres wide, has measured and indicated resources of 6.65 million tonnes averaging 1.14% LiO₂ and inferred resources of 669,000 tonnes at an average of 1.06% LiO₂.

Lavra do Meio, 200 metres long and 20 metres wide, contains measured and indicated resources of 2.28 million tonnes grading 1.09% LiO₂ and inferred resources of 261,000 tonnes averaging 0.87% LiO₂.

Murial is open at surface to the north and at depth, and Lavra do Meio remains open at depth.

“There are more than 200 orebodies on our property, which is 188 sq. km, so it’s a significant size,” Cabral says. “Like mining in Brazil, everything is in superlatives, so we had to take a targeted approach to exploration. We went through the property and narrowed down the 200 orebodies to 33. We then narrowed the 33 down to 11 targets, nine of which were former artisanal mines, and drilled four of them to get measured and indicated resources. We still have another five to drill.”

Drilling on the other five pegmatites that were previously mined, and two other pegmatites from the original 11 selected, will begin in the second half of this year.

Cabral notes that the artisanal mines were very small scale, typically producing between 500 and 1,000 tonnes per month.

“There was never any question about whether the mineralization was there or not. It was: ‘What is the size?’” Cabral says. “So we can get surprises. In some cases, we get it right, and in some cases, we don’t. Xuxa turned out to be much bigger than we thought, and some others were smaller than we thought.”

At Barreiro, for instance, they expected size and not grade, but were pleasantly surprised about the grade.

When Sigma sent out its 100- to 200-kilogram samples of coarse spodumene to potential customers last year, Cabral says, they could see it was high purity and high grade.

“They can increase their recoveries by up to 8% when the product is converted into hydroxide, so that creates a strategic advantage,” she says. “This industrial mineral is not a commoditized product. The degree of impurities and specifications vary from deposit to deposit, but the homogeneity of what we’ve been shipping them from Xuxa is extremely homogeneous. The material is coarse — it’s extremely high grade — so it creates a lot of excitement.”

The project intends to use dry stack tailings and recycle 90% of its process water, presenting more advantages.

The company is eligible for tax breaks because of the project’s location. “We are in the second-poorest municipality in the country measured by the Index of Human Development,” she says. “It’s semi-arid and in the north of Minas Gerais … so there is a substantial federal tax break for companies who do business in that region.”

The main tax benefits under the program include a 75% corporate income tax reduction for 10 years after the company reaches more than 20% of its annual production capacity. It also receives incentivized accelerated depreciation of assets.

Cabral — who before co-founding A10, spent 25 years as a senior banker at global investment banks in New York, London and Sao Paulo, including heading up Latin American capital markets for Goldman Sachs and working on deals such as the privatization of Vale in 1996, and Vale’s acquisition of Inco in 2006 — says Sigma has been one of the most exciting projects she has worked on during her career, and that the deal with Mitsui is a validation of the work her team has done.

“It’s a phenomenal alliance, and we’re very pleased to work with Mitsui,” she says. “They are extremely knowledgeable about battery materials, so it’s an honour, really. It speaks volumes about the company and the work we’ve been diligently executing here since 2012.”