Transcript: Lotus Resources (LOT) - Uranium Developer Nears Production Decision

Morgan Leighton
October 13, 2021

Lotus Resources Limited is an Australia-based exploration company. The company is engaged in the development of interests in exploration and projects in the resource industry in Australia and Malawi. Lotus Resources owns the Kayelekera Uranium Project located in northern Malawi. The Kayelekera project is a proven producer which operated from 2009-2014 and produced about 11M lbs of uranium during that period.

Since we last spoke in June, the uranium market has considerably changed with the SPUT deal in August resulting in an increase in the uranium spot price to around $50/lb. Lotus acquired the Kayelekera asset last year and is aiming to release the feasibility study in June/July 2022. With the latest increase in uranium price, Lotus may try to accelerate the refurbishment of the facility to enable the company to start production sooner than originally planned.

Lotus has started discussions with utilities and is looking to negotiate contracts in 2022 to get surety of price to cover costs going forward. The company will consider signing medium term contracts with an opportunity to extend. The company is also keen to sign contracts with multiple utilities detailing different quantities, time frames and price mechanisms.

Lotus has announced a scoping study which generated a production profile and this study identified the key cost drivers and key value drivers for the project.

The Kayelekera project is already a big uranium asset but Lotus plans to continue to expand the resource by extending the mineralisation further. Lotus initiated a 5000m drill programme and has just finished with assay results due out in the next few months which will go towards a new resource to be used in the feasibility study. There is also greenfield potential with exploration licenses and Lotus plans exploration of these sites during 2022.

Lotus had A$28M at the end of June which should cover all costs until the end of 2022. Lotus has the optionality and the cash to move the project forward.

It has been an interesting few weeks for the uranium market with the price increase which has been followed by a recent price drop but Lotus expects the uranium price will increase further through the end of this year into the early part of 2022. In the medium and long term it is likely that the uranium price will consistently rise for the foreseeable future.

We Discuss:

0:00 – Company Overview

1:11 – Highlights Since January, Affect of Last 2 Month Market Action

3:38 – Production Acceleration, Contract, Pricing, Progress & Scoping Study

10:25 – African Market Funding, Generating Cashflows for African Economy

13:02 – Refurbishment, Cost, Prices Coming Down

15:47 – Uranium Component: Expansion, Drilling, Pace, Cash Allocation

19:23 – Financial: Current Liquid Cash & Financial Situation

20:24 – Rare Earth Anomalies, Critical Mineral Hubs, Selling in Europe, Chinese Money

24:59 – Market, Expectations & News for Investors

27:56 – Outro

Keith Bowes: Hi, I am Keith Bowes and I'm the Managing Director of Lotus Resources. Lotus Resources owns the Kayelekera asset, which is a Uranium mine located in Malawi. We acquired it off Paladin Energy in March of last year. Kayelekera carries itself a proven producer, it operated between 2009 and 2014 and produced something in the order of 11Mlbs of Uranium during that period.

Matthew Gordon: Hello Keith, actually, we saw you last week, didn't we? I was gonna say we haven't spoken since June. But we actually spoke to you last week as part of a Uranium panel, it was a quite a good session actually, I thought.

Keith Bowes: A very good session, it was very, very enjoyable. It was nice to get the views of everyone else as well. So yeah, I really enjoyed that discussion.

Matthew Gordon: And yeah, in fact you CEOs because we got an illustrious panel together, people who actually have been there done it before and you guys actually, you're talking to each other was the interesting bit. We'll put a link to that below but we'll also put a link to our previous conversation back in June below to get a catch up on some of the topics and things that we discussed then. Let's talk about what you've been up to since June, it's been a kind of exciting market, hasn't it? Sprott has surfaced and got people excited about it since we spoke in June, what's your take on what's happening there?

Keith Bowes:  I think it's been really exciting. I think we've always had this expectation that the Uranium market itself is a relatively small market. And even one player coming in aggressively can have a significant impact on what we're seeing in the price and that's exactly what's happened with Sprott coming in. I mean, they came in in the middle of August, the spot price at that point in time was sitting around $30/lb, within a period of about 3 or 4-weeks for some really aggressive buying on the spot market, they were able to get that price up to $50, $51/lb, spent an excess of $300M mopping up all the spot there. So one player has a significant impact on it and that's what we've noted over the past cycles within Uranium as well. So it's been really, really good. I think, as we've mentioned in the panel, the other day as well that obviously the spot price is what everybody looks at and that's really, really good. But as a company and as a future developer and producer, what we're looking for is the term price and that's what we are having to look at now. That's what we're trying to get an idea of what the term prices are going to be.

Matthew Gordon: As a former producing asset, under Paladin previously, you guys have been heard a lot of infrastructure, you're working your way through, just starting, I think you just announced the Feasibility kicking off, and we'll talk about it in a second. Does the action in the market of the last couple of months, does that change the way that you think about how you move your project forward? Does it advance anything or is it just the stick with the plan?

Keith Bowes: At the moment it’s stick with the plan, we've always since effectively, we acquired the asset last year, we've been talking about a Feasibility Study coming out in 2022. And as you said, we've recently announced one it's targeted to come out to the market in June or July of next year. So we're keeping to the same strategy and the same timeline as we originally thought about. The one thing where we may end up accelerating things if the price really increases next year, is not so much around the study work, but perhaps try and accelerate the refurbishment of the facility to allow us to come online a little bit quicker than we originally thought. That's where we'll probably be able to make up some time if required.

Matthew Gordon: Is anyone still poking around our utilities picking up the phone or going hey, we know you're going to get into production, you've given us an indication of the timing of that but we're seeing a tightening in the market, can you give us updates as to how you're going to be able to accelerate it if indeed you make that decision?

Keith Bowes: We've initiated the conversations with a few of the utilities. And I think I mentioned previously as well, we appointed a sales and marketing executive who's actually based over in the US, and on our behalf, he started to have these discussions. We haven't got into any details yet we do recognise that the Uranium market is one where you need to build up relationships, build up the friendships and the confidence with the utilities prior to entering into any serious negotiations about delivery and prices and all that and that's what we're doing at the moment. We don't have any intentions of signing any contracts this year. We certainly don't plan on doing that. We would be looking at going into or signing contracts or at least negotiating contracts next year is sort of our timeframe on that.

Matthew Gordon: Right, and how do you go about that because last week, he's always been quite good explaining how contracting happens, how these term contracts get signed, and especially I know the asset has produced in the past, but you as a company have not produced yet. Is the way that utilities view you guys, they will give you slightly off something small, you prove consistency of product and ability to deliver into that contract, then they give you a little bit more, etc, etc. So how are you guys viewing in terms of the pricing, which you want to try and achieve, because obviously, showing that you can get product and deliver into market is the first step, it gives confidence to the market, give confidence to all utilities. So give us your thinking on that?

Keith Bowes: Well, I mean, for one thing, we’re pretty, I mean, our idea is we want to sign term contracts, I think that's important for us. And the reason why we want to do that is obviously to get surety of price. So we are confident we can cover our costs moving forward. Now the amount of production we put into term contracts will depend on our own operating costs, as well as the price of the term contracts we get with I suppose theoretically, the opportunity being that we make sure that our term contracts cover our operating costs. We're absolutely clear that we have got all the money coming in to cover our operating costs, and then maybe consider the remainder of production going into the spot market, we will move with the swings in the market for our profitability. So that's one of the things we're thinking about. The other one we recognise it and you're 100%, right, when we start negotiating with the utilities, we're going to start off relatively low pounds, maybe we may not end up signing a long-term contract and a long-term contract, we normally will consider it to be 10-years. But maybe it's a medium-term contract that is in the 3 to 5-years sort of timeframe with smaller amounts associated with it. But hopefully the opportunity to extend that contract assuming that we're successful, and to delivering it as required, we would also see us entering into multiple contracts, we want to layer our contracts. So we're not just going to one utility and with the expectation, we're going to sell all of the product to that one utility, we'll have a number of utilities out there that we're working with. And we may end up with 8, we may end up with 9, 10, 12 contracts that we end up signing, that will have different quantities, different timeframes associated with it. And they may even have different pricing or different pricing mechanisms associated with it as well. So we're looking at trying to make the best of what we have and we want to make sure that we're going to cover our costs moving forward. So that's our primary focus with the way we're going to be running our marketing.

Matthew Gordon: Okay. And one of the things you always are going to determine is what is the price that is economic for you to start and I appreciate you can probably, you know, start some of those smaller contracts or term contracts at lower prices, then let's see where the market takes things. To do that you're going to get through some technical studies, I noticed that you've actually you've initiated some and you were specifically ore sorting, you're getting seems to be getting good recoveries, I mean, how are things going there, how much more work has to be done?

Keith Bowes: So one of the things that we did when we announced the Scoping Study in October of last year, and that's these are the numbers that we've been talking to the market about. So our Scoping Study generated a production profile that delivered 2.4Mlbs per annum at C1 cost of $33/lb, and an all in sustaining cost of around $39- 50/lb. Now, that gave us a solid base case moving forward and we were very happy with those numbers. We were very confident in them because they use the actual real operating data from the plant. So we have a high level of confidence in both those production rates and in those numbers. But what we used to study for was to identify what were the key cost drivers and what were the key value drivers for the project and we identified 4 things. One of them was the ore sorting you've mentioned. The other one is the power costs or power supply. The existing facility runs off diesel gensets, which we know is expensive. It is an opportunity for us to connect to the grid, look at putting some renewables in or even retrofitting steam turbines on top as supplies to recover power. We had a look at some tailings and we had a look at some acid recovery techniques as well. And we based on the results we've seen so far from those studies are confident that we can reduce the C1 costs. And at the moment, we're talking maybe a 15% reduction in our C1 costs. So that would bring us below the $30 mark. That obviously carries through to the all-in sustaining costs but we're doing a lot of work around sustaining capital as well and specifically tailings dams. Tailings dams are very, very expensive pieces of infrastructure to put in place. And we're required according to our current schedule to construct a second tailings dam on site in about year 5. We're looking at some opportunities like input disposal to see whether we could actually do that instead, which should be cheaper. That will drive our all-in sustaining cost down so maybe we might end up with a 34 or $35 all- in sustaining costs. Once we have recognised those figures, obviously, it's a lot easier for us to get a contract, and to work out what is actually the number that we need in our pricing to be able to not only be profitable, money back to our shareholders, pay for capitals and all those types of things. So there's a little bit of work to do, but we've got some, we've got a high level of confidence in terms of where we could end up.

Matthew Gordon: Okay, so you've obviously done a lot of work till today, and that will feed into Feasibility Study, you're aiming for that to be published when?

Keith Bowes: June or July next year.

Matthew Gordon: Okay, not too far away. So you're actually not that far away from being able to have conversations around, well I’m just trying to understand what the funding costs, could be. Conversation we've seen a lot in West Africa and Africa more broadly, where you are down at Malawi, is getting African funding in place, rather than going to the international markets, is that something as part of your ESG? Or is that something that you would are more likely to consider?

Keith Bowes: From the funding perspective, I think one of the benefits that we have as a project is our actual funding requirements are relatively low. So if you have a look at our Scoping Study, and our Scoping Study, all we have to do is refurbish the plant. We have no intention of increasing production rates or anything like that and so our refurbishment costs are around US$50M. Probably by the time you finish the Feasibility Study, if we're considering connecting to the National Grid, and ore sorting and all that stuff, we would expect those costs to go up a little bit, but we're not talking hundreds of millions of dollars, we're talking $70M or $80M. If you compare that to our current market cap, so we set in US dollars, around $230M, we don't see any issue raising that sort of capital, whether that be through equity or through debt or a combination of both, raising capital for us, I don't think is going to be an issue at all. And whether we do it through traditional methods here in Australia or whether as you mentioned, maybe we go to someone like the African Bank or look at one of those funds that are focused very much on development in Africa and use those and use that as a source of fund, that could well be an option for us but for us capital is not a risk, we don't think.

Matthew Gordon: No and I don't think it is actually. We’ve obviously had a look at you, I don't think it is, just in the context of this kind of ESG narrative out there, you know mining companies, upping the game, trying to do things the right way. African projects getting funded by African Banks, and then that feeding into African economies, it seems like de rigueur the right thing to do. And I just wondered where your head was at and obviously, your background too.

Keith Bowes: Yeah, I mean, we've done a couple of projects in Africa. And we have approached the predominantly South African Banks that we've gone to for funding. And I mean, that would certainly be part of the mix. I think you're right, this idea of having an African Bank fund an African project that's going to generate wealth for the African countries and all that kind of stuff. That's a really good idea and it fits exactly in with the ESG profile that we're doing. We certainly would consider those options as well moving forward.

Matthew Gordon: Right, okay. And just in terms of the refurbishment component, so you obviously decided to do that, when can you press the button on that and how long is it going to take and what is the actual cost you think?

Keith Bowes: So that the way that we're looking at things now, and this is, you know, this is what we've been working on for the last 6-months or so. So it doesn't take into account any significant movement in the Uranium price over the next year or so. But if we get into a position where we finish our Feasibility Study in the middle of next year and we get a really good result out of it, we have a high level of confidence in terms of production rates, and costs and all that, we would expect to spend the next 6-months negotiating capital and negotiating contracts, such that by the end of next year, we will be in a position where we could make a final investment decision. Now based on the work we did in the Scoping Study, it would appear that the refurbishment of the plant will cost somewhere which also will take somewhere between 12 and 15-months to complete. So assuming that still valid, we would then be able to start producing Uranium from the asset in the first quarter of 2024. So that's sort of the timeline that we're working to at the moment.

Matthew Gordon: It's kind of interesting to see what's going on the market, we've had this kind of period of increasing costs in terms of from shipping in materials and across the board costs are going up and you must be looking at the Scope Study and going Crikey, we might have to have a look at this, but it's coming back off again, the prices are coming down again.

Keith Bowes: Yeah, maybe I mean, obviously COVID in some ways impacted a lot of the shipping costs and all those types of things. We're hoping that in a year's time or so, you know, the globe will be back a little bit to normal again and perhaps the shipping routes will be open and all these containers sitting in the wrong ports and all that maybe would have corrected by then and going to see some of the costs coming down. Logistics is one of the things that we have recognised as being an issue. And we're specifically asked within our Feasibility Study that are independent and separate logistics study be carried out for us. So we can actually understand what the issues are. Because we're a landlocked country, or because Malawi is a landlocked country, obviously, when we're going to be bringing stuff in from internationally, what's the best way to bring it in? Do we bring it through Dar es Salaam, do we bring it in through Mozambique and whether that be Maputo or do we bring it from South Africa? Or the other alternative is because we know when we're actually operating, we're going to be shipping out of Walvis Bay at the moment. Do we on the backswing, bring stuff in from Walvis Bay would be one of the other questions. So there's quite a bit of work that needs to be done around there and I do recognise that has been an important key to de-risking the project.

Matthew Gordon: Okay, so I do you want to talk about Cobalt, I do want to talk about rare earths, but just kind of finish and focus on the Uranium component. Exploration, it's already a big large Brownfield Uranium asset that you've acquired there, you've already got quite a few pounds, but are you going to continue through the drill bit to expand that resource, that Uranium resource out?

Keith Bowes: Yes, we are. So we've got the 37.5Mlbs at the moment, which is what the Scoping Study was based on. But really on the back of looking through the historical resource, looking at the geological models, looking at the block models and all that, we did identify that with the actual Kayelekera resource that looked like there are extensions to the mineralization that are outside of our current whittle pit optimizations. So really, on the back of that, we saw there could be some easy wins there, that if we were able to extend that mineralization out further and able to push the pit holes back, so the holes back in our optimization where we could obviously collect more material within our pit holes, which then feed into our production schedules. So really on the back of that we made a decision to do a small exploration programme this year. So it's a 5000m RC drill programme, it's probably the first drill programme that's actually been done at Kayelekera for something like 15-years, I would think. So we've just finished that programme, just finished the Uranium portion of it, I'll talk about that. We're waiting for the results to come back from that, from the guys on site that tell me they've seen in some encouraging intercepts. So hopefully we'll be able to report back on that as well in the next few months. And then we'll do an update to our resource model. To be honest, I don't think we're talking leaps and bounds in terms of the increase of that resource, but it'd be nice to show that there is growth still associated with it. And we'll come up with a new resource that we'll use in the Feasibility Study. But the other important thing, the thing I want to talk about is our Greenfield potential as well. So we have just focused on our Brownfield effectively around the pit. But when we acquired the asset of Paladin, we also got a number of exploration licences. We've spent the last couple of months looking through that historical data as well. And it looks like some really interesting stuff on there. And our expectations of next year, we'll probably go and do some drilling on these exploration leases, to see whether there's an opportunity for us to develop a pit in those areas. Now, some of those exploration leases are very, very close to our existing mining licence. So we could easily truck the material across. Some of them were a bit further afield so obviously, we do need to understand how we can all fit that together. But that's part of the work that we're doing at the moment.  So our intention is not to be just comfortable with what we have at the moment. But we want to work continuously in terms of growing that resource.

Matthew Gordon: Okay, and I guess you've got to choose the pace at which you move because you don't want to be burning through cash when you've got the size get this thing in production by 2024. So how much how much money are you allocating to that, in fact how much cash have you got today?

Keith Bowes: So this 5000m RC drill programme, the initial phase of it has cost us $0.5M so it hasn't been an excessive amount of dollars. Once we've had a look at the results, we might do a couple of more drill holes and we might expand that and do. It'll be less than a million dollars we're going to spend on drilling this year is my expectation. The majority of the dollars has been spent on the Feasibility Study and all the technical work associated with that to be able to deliver to the market next year the Feasibility Study which I think is a key document the market is waiting for.

Matthew Gordon: Right and you got another $1M then by the full divestiture of the Cobalt asset, I guess that pays for that but just the question, how much cash are you sitting on now?

Keith Bowes: At the end of June, we had AUS$28M.

Matthew Gordon: Right, does that take you through the end of the Feasibility or not?

Keith Bowes: It will take us through into the end of next year actually. So it'll cover our exploration costs, even the expanded exploration, will cover our Feasibility Study. It covers all care and maintenance costs on the plant and it covers our corporate overheads as well. So you're right there with the Hylea divestment. We've got a million dollars in cash, but we also received a number of shares in Sunrise Metals which was the company that acquired the asset of us. And we have actually done an off-market deal for someone to acquire those shares of us as well. So we're getting about another $1.3M from the sale of those shares as well. We still have a number of options out there in the market that are sitting at about $0.04 exercise price, those have been continuously coming in for quite a while and we expect to see the rest of them coming in within the next year as well and those options have almost funded our overheads for the last three quarters.

Matthew Gordon: Wow, okay. That's interesting. Shall we talk about rare earths? How do you pronounce that Milenje?

Keith Bowes: Milenje. So this has been a real interesting one for us. So Milenje Hills themselves, they sit about 2km to the north of the Kayelekera pit, so they're still within our existing mining licence. So we're not going into any new ground or anything like that. It's on our. Now, Paladin Energy identified these rare earth anomalies when they were doing their regional exploration programme. They did a little bit of work around them, showed something interesting and we went back there last year, we did some of our own mapping, we did some of our own geophysics, and we did some of our own trenching as well. We put a number of trenches in there and from those trenches, we connected some 1m composite samples, which we sent off for assay. Now we collected about 70 samples, 22 of them came back as being mineralized samples, I'm talking about rare earth mineralization. And the average total REO grade in those 22 samples was 8%. And we were having grades as high as 16% in some of those samples. So looked like really high-grade stuff. When we went and had a look in a bit more detail about and of course, we worry about the assemblage, what are the different rare earth elements you have there, and we were averaging about 1.5 to maybe 1.6, 1.7% of the critical rare earth elements, and a maximum I think was 3.5%. When we dived in a little bit deeper, we saw that the 2 elements Neodymium and Praseodymium which together with Terbium, and Dysprosium are the main elements that you use in the permanent magnet industry. We had a significant amount of Neodymium Praseodymium in our material. And we know that those minerals as I said, along with the other ones in the permanent magnet industry make up about 90% of the value of market. So it looks like there’s some really interesting there for us on the back of those results. And when we designed our exploration programme, we initially set up the 5000m circa 4000 goes into Uranium, and we'll put 1000m into the Milenje Hills to have a look at the rare earths. So the drill rig is up in Milenje Hills at the moment, it's about halfway through that programme. We expect to complete the programme in the next couple of weeks. We also did some more trenching and a bit more mapping as well, we'll go through the same thing, we'll send some samples off our assay and have a look at them. And once we understand the size of the footprint and also the depth of this mineralization, I think we'll then be in a good position to understand what we have over here, what we have, and how best we can generate value for the company from it. Is it something we would look at developing ourselves, maybe we go into a JV with someone, there's a number of other rare earth companies around in Tanzania and also down in the southern part of Malawi as well. Or we could actually spin it out into another company. So some really interesting stuff there. We need a bit more time to actually really work on what we have before we can enter in any discussions.

Matthew Gordon: Yeah, you're going to need to work out enough of what you've got, you don't need to spend too much time and effort on it. It's very topical at the moment. Obviously, we've been looking at the kind of critical minerals hubs in the US trying to be independent of any China supply. And yeah, there are a few players in Angola and Tanzania as well. And it’ll be interesting sort of see how Africa comes out this, can it can it create its own critical minerals hub or is it going to be totally reliant on selling into Europe or the US or indeed, do you do what you're normally do and take Chinese money? And any thoughts on that?

Keith Bowes: Yeah, it's gonna be interesting to watch. I mean, obviously, our project, our rare earths project is still very much in the infancy. But in Tanzania, you've got Peak Resources. And down in the southern part of Malawi, you've got Mkango Resources, and both of them have got projects and Peak has been around for quite a while and has Mkango and both of them have got Definitive Feasibility Studies out at the moment. So it’d be interesting to see how they plan on doing it. I know just from conversations and what I'm hearing Mkango is going to produce the concentrate in Malawi and ship it overseas and whether that be to the UK or to Poland. And I think Peak has also got the same sort of idea. They're going to be producing a fairly high-level product which they can then send off for separation and all that. Now whether we can participate with them in something I'm not sure, but I'll be really interested to see how they're planning on, you know what their final decision is in terms of their production plans?

Matthew Gordon: Yeah, I think interesting space, we'll be watching closely with that, but you've got optionality and you've got the cash to actually move that forward for a bit. And maybe let's wrap it up here, because it's clear that the market is getting a little bit heated now, with Uranium between now and the end of the year, what's your expectations with regards to what we're going to be hearing about or do you think that you, you'd rather just keep your head down and let people do the talking?

Keith Bowes: Yeah, it's been an interesting couple of weeks, hasn't it? We mentioned at the beginning of the talk about Sprott coming in, and the prices going up to the $50, $51, they've obviously drifted down over the last week or so. The Uranium market itself is quite opaque. So you can never get a real answer for anything when you ask questions about it. But I mean, that does seem to be maybe some traders have come on and maybe bought up prior to the Sprott investment fund coming on, and now they're looking at taking some profits. And maybe that might be the reason for the drop. You've heard some other things about maybe some of the Japanese companies are starting to unload some of their inventory into the market, which has perhaps resulted in this drop off. So it's been a couple of things out there. My expectation is that the Uranium price always goes up and down. I mean, if you look over any historical timeframe, there's always ups and downs. And my expectation is that it will continue to rise within a specific in an envelope. I would hope that by the end of the year, we're in the upper 40s, maybe I would have thought sort of my thing, and I expect them to increase next year as well as you move on. I think the medium-term and long-term thematic or catalyst behind the Uranium price haven't changed. The presence of Sprott has obviously impacted on the short- term stuff but the medium and long-term catalysts are still there, and I think they're still sound and I still think we're going to see a consistent increase in the Uranium price over the coming future so I’m full of confidence in the Uranium price.

Matthew Gordon: For sure, that's an interesting thing people trying to front run the Sprott Physical Uranium Trust there, that's interesting. It always feels like playing chess but you can only see half the board.

Keith Bowes: I think you might see if you see half to be honest, I think you see a 10th of the board.

Matthew Gordon: That's like a good day at the office. Well, let's see how this thing plays out. But for you guys, staying the course FS by mid next year at some point, getting all the pieces in place, sounds like you got the money to do it as well. So let's stay in touch let us know how you get on Keith, obviously really enjoy conversation with you guys.

Keith Bowes: Great, thanks very much, it was good to see you again.

To find out more, go to the Lotus Resources website