Lotus Resources Ltd (ASX:LOT) provides exposure to value behind the low-cost restart of a large, fully permitted, low risk, past-producing uranium mine, according to Canada-based Red Cloud Securities Inc.
Red Cloud sees opportunity for investors to benefit from an expected share price re-rating as the Kayelekera Uranium Project in Malawi is further de-risked and costs lowered as feasibility study and production nears.
The following is an extract from Red Cloud’s initiation report:
LOTs to Happen; Lowering Costs at Low-Risk U Restart
We are initiating coverage on Lotus Resources Ltd (ASX:LOT). (ASX:LOT) with a BUY rating and a target price of A$0.22/sh. Lotus is advancing its 65%-owned (assuming 85% pending positive shareholder vote) Kayelekera project in Malawi. Facilities include open pit mine, 1.4Mtpa processing plant, tailings facility, acid plant, camp and existing ore and ROM stockpiles. An investment in Lotus provides exposure to value behind the low-cost restart of a large, fully permitted, low risk, past-producing uranium mine (pending adequate U3O8 prices). We see opportunity for investors to benefit from an expected share price re-rating as Kayelekera is further de-risked and costs lowered as Feasibility Study and production nears.
- 2020 PEA confirms quick, low capital restart. The study contemplates just US$50M (low US$21/lb capital intensity) to return to production with US$200M already sunk. Two scenarios consider open pit mining, and perhaps low-grade stockpile production. Costs were based on historical.
- Successful production history didn’t tap resources. Past production of 11M lb (2009-2014) ceased only due to lower post-Fukushima U3O8 prices. Resources were updated to 37.5M lb at 650 ppm (83% M&I).
- Significant savings potential. FS due in H1/22 may incorporate material saving or improvements to Capex, Opex and production optimization. These include: 1) ore sorting potential; 2) power supply alternatives such as grid connection, solar/alternative, or acid plant steam retrofit; 3) acid recovery and leach optimization; and 4) tailings disposal options.
- Ore sorting and power options are game changers. Ore sorting has doubled potential head grades through bench scale testwork. This already shows enough promise that we incorporate higher head grades, production rates and longer LOM with 10-20% lower costs in our model. Removing the mine from running on diesel is also important.
- We anticipate production by FY2024. While the PEA suggested 2.5M lb pa at C1 costs of US$33/lb, we are modelling up to 3M lb pa at C1 costs of US$26.99 over 11 years, given that we believe ore sorting will help improve head grades, increase production towards plant capacity, extend mine life and lower Opex, we estimate by as much as 20%.
- Considerable exploration upside. The first drilling in the last 15 years is underway with a goal to find 7-14M lb U3O8 within 3km of the plant.
- Hot uranium market and commodity diversification. Near term U3O8 production potential and a rare earth oxide discover provides exposure to two hot, supply constrained commodities for investors.
We are initiating coverage on Lotus Resources Ltd. (ASX:LOT) with a BUY and target price of A$0.22/sh. Our target is derived using a DCF valuation with an 8% discount rate, adding back value for cash, debt, equity interests, non-mined resources, and exploration upside. Upcoming Catalysts: 1) shareholder approval to increase Kayelekera ownership; 2) initial drill program results; 3) additional ore sorting testwork; 4) other technical study updates; and 5) Milenje Hills REO discovery exploration results. Mining/exploration is inherently risky and Lotus is subject to various geopolitical, technical, corporate, or financial risks (including the pending purchase of an additional 20% interest). We have visited site three times.