Lotus Resources Ltd (ASX:LOT)’s restart definitive feasibility study (DFS) has confirmed the Kayelekera Uranium Project in Malawi as one of the lowest capital cost uranium projects globally, according to Shaw and Partners.
The broker has updated its financial model for Lotus in line with the DFS release, maintaining its hold recommendation.
Using Shaw’s base case uranium deck, and similar parameters to the Lotus DFS, the broker has modelled a post-tax NPV10 of US$186 million and IRR of 47%.
The following is an extract from the research update:
Event
Lotus Resources has completed the Definitive Feasibility Study (DFS) for the restart of the Kayelekera Uranium Project in Malawi (LOT 85%). The update incorporates the learnings from the company’s technical de-risking activities over the past several years and builds upon the 2020 Scoping Study.
The Restart DFS has confirmed Kayelekera as one of the lowest capital cost uranium projects globally whilst also having the ability to quickly recommence production (15 months development) once a Final Investment Decision has been made. The company believes it is possible for an FID to be made as early as this half, pending offtake negotiations with various nuclear energy utilities.
Highlights
- Lotus Resources is looking to re-start operations of the fully permitted Kayelekera project in Malawi. The Kayelekera project was put on care and maintenance by Paladin in 2014 after five years of operations, 10.9M lb of U3O8 production, and ~US$200m of capex. Peak production occurred in 2013 at ~3.0Mlbs U3O8.
- LOT acquired 65% equity in Kayelekera from Paladin in March 2020 and bought out partner Grant Davey (LOT Director) in August 2021 to increase its stake to 85%. LOT is currently free carrying project partner The Government of Malawi (15%). We believe The Government of Malawi will be free carried for all growth capital expenditure.
- LOT recently released a Definitive Feasibility Study, which provides low-cost development pathway for the re-start of Kayelekera. Key features of the DFS include
- Open cut mine pit requiring low total initial capital expenditure of US$88m due to Kayelekera’s existing infrastructure.
- A quick development period for refurbishment for a re-start; approximately 15 months to production from a Final Investment Decision.
- 10-year life-of-mine production of 19Mlbs U3O8 at an average head grade of 790ppm and production rate of 2.0Mlb/yr (av. LoM).
- All-in average life-of-mine sustaining costs of US$38/lb.
- Using our base case uranium deck, and similar parameters to the LOT DFS, we model a post-tax NPV10 of US$186m and IRR of 47%. Key observations include:
- A slightly longer mine life compared to the DFS, 16 years and 30Mlbs produced LOM at an average grade of ~630ppm.
- First production in FY25, approximately 15-18 months post assumed FID, mid-FY23.
- We carry a notional A$100m in ‘Exploration / Other’ in our company valuation to account for the potential uranium exploration upside at the nearby Livingstonia deposit and rare earth oxide upside at Milenje Hills. In our view exploration success at Livingstonia and potential further opportunities around the current Kayelekera resource demonstrate potential to extend the LOM past 10 years (DFS).
- The balance sheet is debt free and carries a cash balance of A$5m (Jun22q). An additional A$15m is restricted cash, an environmental performance bond.
Recommendation
We maintain our Hold recommendation. We have updated our company financial model in line with the DFS release. Our valuation reduces slightly to A$0.25ps (previously A$0.31ps) due to a larger recapitalisation than previously modelled (i.e. more dilutive given the initiation capital requirement is ~US$90m vs previously ~US$50m).
We like the company for its leverage to a uranium upcycle but note Malawi carries higher jurisdictional risks than its peers.