Lotus Resources (LOT) - Uranium Developer Nears Production Decision
Lotus Resources is a mineral exploration and development company. It owns 65% interest in the Kayelekera Uranium Project in Malawi, Southeast Africa. This project hosts a high-grade resource with an existing open pit mine and has demonstrated excellent metallurgical recoveries (87.5%) with historic production of 10.9Mlb uranium between 2009 and 2014.
Matt Gordon caught up with Keith Bowes, Managing Director, Lotus Resources. Keith has over 2 decades of project development and operations experience in Africa, South America, and Australia across a range of commodities and processes. He was responsible for managing the redevelopment program at Boss Resources' Honeymoon Uranium Mine that included study phases and commercial trials of two new technologies, namely leach chemistry and IX resins.
Lotus Resources is a mineral exploration company with major assets in Malawi, Africa. The company was founded in 2006 and is headquartered in Australia. The company is listed on the Australian Stock Exchange (ASX: LOT). Westview Resources Pty. Ltd., Providence Metals Pty. Ltd, and Lily Resources Pty. Ltd. are the company's subsidiaries.
Lotus Resources owns the Kayelekera Uranium Project in Malawi that was acquired from Paladin Energy in March 2020. This asset is a proven producer with a historic supply of 11Mlbs between 2009 and 2014.
The Uranium Market
Following the establishment of the Sprott Physical Uranium Trust (SPUT), the spot price of uranium has seen a significant price appreciation. Over a course of 3-4 weeks, the spot price jumped from $30/lb to $51/lb leading to a renewed interest in the utility market.
Lotus Resources as a future developer and producer is focused on the term price for uranium. The company is planning to release a Feasibility Study on the Kayelekera project in mid-2022. Following the price jump, the company is looking to accelerate the refurbishment of the facility to bring it into production earlier than planned.
It is expected that SPUT might offload its physical uranium supply in the market to reap profits, leading to a drop in uranium spot prices. Another reason for the drop can be due to the offloading of supply from Japanese companies.
Lotus Resources anticipates that the uranium pricing will hover around the upper 40s by the end of 2021 and will observe an increase next year. As per the company, the market movements following the SPUT announcement is a short-term run and in the near future, the uranium pricing is likely to increase on a consistent basis.
The company has entered several discussions with utility providers and has appointed a US-based sales and marketing executive to build relationships with buyers prior to entering negotiations for pricing and delivery. The company is looking to enter contracts with buyers in 2022. The company is looking to enter multiple medium-term contracts within a 3-5 year timeframe with varied quantities of supply with a major focus on operating cost recovery.
Lotus Resources plans to sign term contracts to ensure fixed pricing for supply. This will allow it to cover costs as the projects move forward. The production numbers within the term contracts will be determined by the company's operating costs. Following this, the company is looking to offload its production supply into the spot market to ensure profitability.
Scoping Study Results
Lotus Resources published the results of its Scoping Study in October 2020. As per the study, the Kayelekera asset generated a production profile of 2.4Mlbs/annum uranium with a C1 (Net Direct Cash Cost) of $33/lb along with an all-in sustaining cost of $39/lb-$50/lb. This data was collected using real-time operating data from the plant, instilling additional confidence in the production numbers.
The Scoping Study was done to identify the key cost and value drivers for the project. These drivers include ore sorting and power costs. The company is looking to reduce its electricity costs which are currently being powered by diesel gensets. This can be achieved by gaining power grid access and utilizing renewables including retrofitting steam turbines for power recovery.
Additionally, the company is also looking at acid recovery techniques along with tailings to further bring down operating costs. These changes can lead to a 15% reduction in C1 costs, bringing it to a sub-$30 mark.
Lotus Resources is planning to construct a second tailings dam by year 5 of operation. It is important to note that the construction of the tailings dam is highly cost-intensive and the company is also considering input disposal as an alternative. These developments have the potential to bring the company's all-in sustaining costs down to a $34/lb-$35/lb range. These cost considerations will facilitate contract acquisitions, profitability, and value creation for shareholders.
Lotus Resources is looking to gain funding through equity, debt, or a combination of both. As per the scoping study, the refurbishment cost for its facility is around $50M. Once the Feasibility Study is concluded in mid-2022, the company will look at cost optimizations to further reduce overheads. This will lead to an increase in the required funding to $70M-$80M.
Lotus Resources has a current market cap of $230M and anticipates that a capital raise will be a non-issue. These funds could be raised from an Australian or an African bank to facilitate its ESG (Environmental, Social, and Governance) component. The company has previously operated 2 projects in Africa and has been approached by South African banks for funding.
The company is working on the refurbishment plans for its facility for the past 6 months and has considered stable uranium pricing over the next year. Post the Feasibility Study, it is looking to finalize the production rates and costs of the operation. This will enable the company to negotiate capital and contracts by the end of 2022 before making an FID (Final Investment Decision).
Based on the Scoping Study, the refurbishment of the plant will take around 12-15 months to conclude. The company is looking to enter uranium production by Q1 2024.
Following the pandemic, there have been significant slowdowns in the global logistics and supply chain, leading to higher shipping prices and transport delays. Lotus Resources believes that this issue will be resolved within the next 12 months. The company is looking to carry out a separate logistics study. As Malawi is a landlocked country, Walvis Bay appears as the ideal shipping port. Nailing down a sustainable shipping strategy will enable the company to further de-risk its project.
The Kayelekera Uranium Project is a large Brownfields asset that featured a 37.5Mlbs supply upon acquisition. This supply was the basis of the company's Scoping Study.
Lotus Resources has been analyzing the historical resources, geological models, and block models to identify mineralization extensions outside the existing whittle pit optimizations. The expansion has the potential to push the pit holes back, leading to an increase in supply that can be fed into production.
In 2021, Lotus Resources concluded a small exploration program featuring 5,000m RC drilling at the Kayelekera deposit. This program was the first of its kind at the asset in the last 15 years. The company is currently awaiting the results of the program, which is expected within the coming months. Based on initial observations, the company has discovered strong intercepts and is looking to demonstrate the growth potential of the asset.
The company is looking to put out a new resource that would be a part of the upcoming Feasibility Study. The company is also focusing on the Greenfield potential of the project. As a part of the Kayelekera acquisition, the company also gained access to exploration licenses. It has studied the historical data on the project and plans to drill on the existing exploration leases to develop a pit within these areas.
Since the exploration leases are located incredibly close to the existing mining licenses, trucking the material across is a viable option. This will further facilitate the company in achieving growth in resources.
As of June 2021, Lotus Resources has a cash flow of AUS$28M. The company spent $0.5M on the initial phase of the 5,000m RC drill program. Once the results are in, the company is looking to drill 2 more holes and expand the operation. The company has spent a major part of the cash flow towards the Feasibility Study and technical work to ensure timely delivery.
The company received an additional $1M through the full divestiture of its Hylea Cobalt Project. The company also acquired shares in Sunrise Metals, the company responsible for acquiring the Hylea Cobalt Project. Additionally, the company executed an off-market deal to acquire the shares through a third party. These shares are evaluated at $1.3M.
The company also has multiple options in the market with an exercise price of $0.04. These options have allowed the company to fund its overheads for the past 3 quarters. The options are expected to come in within the next year. Lotus Resources currently has the financial resources to carry out operations until 2022 end. This includes the Feasibility Costs along with corporate overheads and plant maintenance costs.
The Milenje Hills Project
Located 2km north of the Kayelekera pit, Milenje Hills is a part of Lotus Resources' existing mining license. The presence of rare earth anomalies at this asset was identified by Paladin Energy, the previous owner as a part of its regional exploration program.
Lotus Resources has since carried out mapping, and geophysics at the asset. The company also placed multiple trenches at the site, connecting 1m composite samples that were then sent for assays. The company has collected 70 samples so far, out of which 22 were found to be mineralized, with an average REO (Rare Earth Oxides) grade of 8%. Some samples also had a 16% REO grade. These samples also featured the presence of critical rare earth elements within a 1.5%-3.5% range.
The company discovered the presence of Neodymium and Praseodymium along with Terbium and Dysprosium, the elements crucial to the permanent magnet industry. These elements collectively account for 90% of the permanent magnet market.
Lotus Resources' 5000m exploration program at Kayelekera consisted of 1000m drilling at Milenje Hills with a focus on rare earth. The program is currently underway and is expected to conclude within the next 2 weeks. The company has carried out additional trenching and mapping at this site.
The company is focused on gaining an insight into the size and depth of the mineralization at Milenje Hills. This would allow it to determine the value generation prospects of the asset. Once it gains a fair idea of the mineralization following the assay results, it is looking to either develop the project on its own or carry out operations through a JV (Joint Venture) with other rare earth companies.