Lotus Resources Ltd (ASX:LOT)’s potential implementation of ore sorting at the Kayelekera Uranium Project in Malawi represents a significant point of possible optimisation to the project relative to historical operational performance, according to stockbroker BW Equities.
BW Equities has flagged the feasibility study (commencing September 2021) results as a critical catalyst for the stock as work is progressed and a clear vision for the operational parameters are established.
Lotus was recently upgraded to a ‘Buy’ with a target price of 21 cents by the stockbroker following a busy June quarter, which saw numerous advancements at Kayelekera.
The following is an extract from BW Equities’ research update:
Second Round of Testing Complete: LOT has completed a second round of ore sorting test work at the Perth based STEINERT facility. 2 additional samples of ROM ore were processed through a commercial scale ore sorting unit, with the first sample considering a combination of sensors (colour + density), and the second looking at the effects of finer particle size. The original ore sorting test work which trialed the colour sensor only, achieved an upgrade ratio of 1.6 and 86% recovery, however the second round has shown improved recoveries to 92% using the colour + density sensors on the course sample, at a slightly less favourable upgrade ratio of 1.5. Management commentary has described the results as “further improved” indicating that the higher recovery scenario utilising a dual sensor ore sorting process is likely to be the preferred process route.
Feasibility Upside Potential: The potential implementation of ore sorting at Kaylekera represents a significant point of possible optimisation to the project relative to historical operational performance. We flag the Feasibility Study (commencing September 2021) results as a critical catalyst for the stock as work is progressed and a clear vision for the operational parameters are established.
Management Targeting 3mlbs Annual Production: The ore sorting test work results to date 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. 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. Refer to our note dated 13-July for more detailed discussion.
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$60/lb (spot = ~US$32.40/lb, long-term = ~US$33.50/lb) which is incorporated in our estimates. We apply a risk discount of 15% to our Kayelekera valuation to reflect the significant uncertainty around the potential restart and, 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.