Lotus Resources Ltd (ASX:LOT) recently completed a scoping study for the Kayelekera Uranium Project in Malawi, Africa, which demonstrated its capacity to be one of the first operations to globally restart uranium production to meet a growing supply shortfall.
Kayelekera’s existing infrastructure and mineral resources represent a considerable advantage, providing for a low restart capital expenditure and significant long-term production.
Boutique corporate and investment advisory firm BW Equities has reiterated its buy rating for Lotus with Lotus shares trading at a significant discount to BW’s revised 14.3 cents per share valuation.
The following is an extract from BW’s research update:
Positive Restart Scoping Study: LOT released its anticipated restart scoping study for the Kayelekera uranium project, which outlined a “high-grade ore only” scenario requiring capex of US$50m for a 1.4mtpa processing plant targeting average annual production of 2.3mlbs U3O8 over an 8 year mine life at steadystate AISC of US$40/lb. These parameters were positive relative to our expectations, most notably with regards to unit costs which were significantly below the US$48/lb estimate we had previously assumed. A more detailed comparison of the scoping study’s key parameters compared to our prior assumptions is contained in the body of this note.
Further Optimisation Opportunities: LOT will now proceed with a restart feasibility study which will provide more detail and confidence around the project parameters defined in the scoping study. We currently expect this work to be completed during the first half of CY 2021 and it’s release will mark a major derisking milestone for investor understanding in the financial and operational assumptions which lay the foundation for the future economic viability of the project. Management note that targeted exploration activities aimed at expanding the Resource base and extending mine-life are a core plank of the next steps aimed at optimising the project. Others include further investigation of operational technologies such as ore sorting, and process improvements including acid recovery and improved power supply options.
Discussions Initiated With Utilities: LOT has commenced a process of reintroducing the Kayelekera project to global utilities with the initial focus upon previous buyers of historic production from the operation. As a reminder during prior production history, the mine produced 10.9mlbs of uranium and delivered this product to customers in North America, Asia and Europe. Management commentary highlights the generally anticipated “return to the term contracting cycle in the coming years, primarily as a result of the lack of term contracting since 2013”. Recent major global uranium production outages related to COVID19, and the associated rally in spot uranium prices have served to emphasise the focus on this potential upturn in long-term utility contract volumes. However, uranium prices will have to improve much further in order to incentivise material new supply coming on stream, including potential production at Kayelekera.
September Quarter Cash Flows: During the September quarter LOT spent A$1.4m of operational cash flows primarily on care & maintenance activities (A$850k). This is materially below the A$3.1m spent in the June quarter, reflecting the transition to the new care & maintenance model which has been guided to a cost of US$1.2m/year (~A$1.7m/year). No further information has arisen regarding the potential to unlock access to the US$10m environmental bond funds (held by the Government of Malawi). Excluding these funds LOT has A$3.3m cash available, which according to quarterly report commentary, is sufficient for 2.3 quarters of ongoing funding.
Revisions, Valuation & Recommendation: LOT provides investors with exposure to a known uranium asset with a significant operating track record,short lead time and modest capex to restart. We have updated our financial model to reflect the “high-grade ore only” scenario outlined in the restart scoping study, the key change being lower unit production costs compared to our prior estimates. We also revise our valuation to be soley determined by our DCF analysis, given the improved confidence in financial modelling assumptions following the release of information in the scoping study. The shares trade at a significant discount to our revised 14.3¢/share (AUD) valuation. We reiterate our Buy rating. Key risks include the availability of funding, uranium prices, geopolitical issues and operational issues.