Lotus Resources Ltd (ASX:LOT) provides investors exposure to a known uranium asset with a significant operating track record, short lead time and modest capex to restart of US$53 million, according to boutique corporate and investment advisory firm BW Equities.
BW Equities recently increased its valuation for Lotus to 21.5 cents per share (current share price: 16 cents) and has revised its rating to Buy.
The following is an extract from BW Equities’ research update:
Ore Sorting Early Success: LOT has completed preliminary ore sorting testwork on a single sample type (~500kg of ore) which has provided results better than management's expectations. The results have shown a grade uplift of "as much as 100%" relative to the feed grade, using a Perth based commercial scale ore sorting unit. Two separate tests were conducted with different sensors, one using colour and the other using density. Both sensors provided good results with colour sorting providing a higher recovery and upgrade ratio, however indications are that density sensors will result in a higher-grade product. Further testwork will now be undertaken using sensors in combination and on varying grade of material and different rock types. This testing is scheduled to take place this month with results anticipated to be released during the current quarter.
Management Now Confident On 3mlbs Annual Production: The preliminary ore sorting testwork results have provided management with the confidence to provide clear public statements indicating the Feasibility Study will refocus the Kayelekera mine-plan on a scenario producing ~3mlbs per annum on average over a mine-life of ~10 years. This represents a ~25% uplift in annual average uranium production compared to the 2.3-2.4mlbs per annum high- grade scenario as considered in the Restart Scoping Study. It is predicated on a higher-grade feed material driven by the inclusion of ore sorting infrastructure, which has a modest estimated capital cost of US$2-3m.
Lower Unit Cost Profile Should Follow: With a higher-grade, higher average annual production Feasibility Study scenario in focus, corresponding lower unit costs relative to the Restart Scoping Study should follow. Other potential areas of further cost optimisation are also under consideration via studies regarding potential grid/solar power supply options and acid recovery optimisation.
Revised Estimates: We have incorporated a 10 year, 3mlbs per annum production scenario into our financial model predicated on 1.5mtpa throughput at 1050ppm head grade and 86% recovery reflecting LOT's commentary following the recent ore sorting testwork. We include an additional US$3m capex to reflect LOT's estimate of capex associated with the ore sorting infrastructure. As a result our C1 unit production cost estimates decline to US$32/lb. Our valuation for LOT increases to 21.5C/share.
Valuation & Recommendation: LOT provides investors exposure to a known uranium asset with a significant operating track record, short lead time and modest capex to restart of US$53m. We assume that for the project to obtain adequate funding to restart production, uranium prices need to increase to ~US$75/lb (spot = ~US$31/lb, long-term= ~US$34/lb) which is incorporated in our estimates. We apply a risk discount of 50% to our Kayelekera valuation to reflect the significant uncertainty around the potential restart, primarily uranium price uncertainty. The shares are trading at a reasonable discount to our revised valuation and as such we revise our rating to Buy. Key risks include the availability of funding, uranium prices, geopolitical issues and operational issues.