Deep Yellow (ASX: DYL) - World Nuclear Association (WNA) Fireside Chat

Deep Yellow Limited is advancing a dual-pillar growth strategy to establish a multi-mine, 5Mlbs-10Mlbs per annum, low-cost uranium producer. The company’s strategy is focused on organic growth through the development of the existing asset base in Namibia with a Definitive Feasibility Study (DFS) in progress on the Tumas Project and inorganic growth through targeted M&A (Mergers and Acquisitions).

Matt Gordon caught up with John Borshoff, Managing Director and CEO, Deep Yellow. Mr. Borshoff is an experienced mining executive and geologist with more than 40 years of experience in the uranium industry. At the start of his career, Mr. Borshoff spent 17 years as a senior geologist and manager of the Australian activities of German uranium miner Uranerz. Following the withdrawal of Uranerz from Australia in 1993, Mr. Borshoff founded Paladin Energy Ltd. He built the company from a junior explorer into a multi-mine uranium producer with a global asset base and valuation of more than $5Bn at its peak. Mr. Borshoff is recognized as a global uranium industry expert and has a vast international network across the uranium and nuclear industries, as well as the mining investment market. His educational credentials include a Bachelor of Science (Geology) degree from the University of Western Australia. He is a Fellow of both the Australian Institute of Company Directors and the Australasian Institute of Mining and Metallurgy. He is a member of the Uranium Forum with the Minerals Council of Australia (where he also served as a former Board member) and sits on the Council of the Namibian Chamber of Mines.

Company Overview

Deep Yellow Limited is aspiring to become a tier-one uranium producer. The company was founded in 1985 and is headquartered in Australia. Reptile Mineral Resources and Exploration Pty Ltd, Superior Uranium Pty. Ltd, Shiyela Iron (Pty) Ltd, Inca Mining (Pty) Ltd, Reptile Uranium Namibia Pty Ltd, Trs Mining Namibia (Pty) Ltd, Deep Yellow Namibia (Pty) Ltd, Nova Energy (Namibia) (Pty) Ltd, and Omahola Uranium (Pty) Ltd, are the company’s subsidiaries. It is listed on the Australian Stock Exchange (ASX: DYL), the OTC Markets (OTCQX: DYLLF), and the Namibian Stock Exchange (NSX: DYL).

Deep Yellow has projects in Namibia and Western Australia. The company recently merged with Vimy Resources Limited, becoming one of the up-and-coming potential producers of the world. The company’s representatives attended the World Nuclear Association (WNA) in London. This has been the first in-person conference held since 2019.

Market Landscape

According to Deep Yellow, this year’s WNA conference has the same market fundamentals as 2019. The company anticipates that net zero emission is an issue that will require the most pain and adjustment. A model that can attain zero emissions is yet to be devised.

There have been a lot of top-down decisions from politicians which are comparable to the oil shock of the 1970s, that led to the acceleration in the development of nuclear reactors. The industry was formed on a base of 4-5 nuclear reactors worldwide. All major world economies, including the UK, France, Japan, Korea, and the US are taking top-down decisions to promote an increase in nuclear power generation.

SMRs (Small Modular Reactors) have also gained a lot of attention in recent times. There have been significant developments on both the technical front for SMRs. At the same time, the general population is becoming aware of SMRs.

The UK has taken major steps towards redefining the financing of nuclear reactors. The changes made by the government can potentially serve as a model for many countries. There is a need for 4-5 Korean vendors and builders with proven performance. Multiple projects need to be built in parallel in order to achieve a significant reduction in carbon emissions.

Deep Yellow anticipates that Elon Musk may participate in the SMR end of nuclear power generation. There are currently a limited number of companies building SMRs including Rolls-Royce and New Scale. The UN (United Nations) continues to push renewable energy sources as a savior, while simultaneously pushing back nuclear energy. The public is now realizing that renewables alone cannot solve the growing energy crisis. In order to cater to the increasing demand and reduce carbon emissions, there needs to be a combination of renewable sources and nuclear energy.

The WNA Conference

The engineers’ recommendations are now being heard on the policy side. They are making inroads into the need for building nuclear reactors and the construction pace.

There isn’t a set number of target reactors or a timeline that would help in working toward a goal. An in-depth assessment is needed for the number of nuclear reactors required within a defined timeline so that the impact in terms of climate change, energy security, and its function in conjunction with renewable energy sources can be determined. Skillsets need to be built in order to establish and meet set targets. For instance, China is looking to build 10 reactors a year. There needs to be a 15-20 year timeline where a set number of reactors are built and brought into operation.

At the conference, there wasn’t any conversation taking into account the poor population. There needs to be a discussion about providing energy security to a population of 2 billion people. One solution is to install rooftop solar panels. As developed countries are investing more in nuclear, it can free up a credit line for coal that can be used to provide energy for people in poorer countries.

There needs to be a balance when it comes to solving the world’s energy problems. It should also address the ongoing supply chain issues across the globe. Korea and the Emirates have fared well in this regard. Both had announced plans to build 4 reactors and 8 years after the announcement, they are almost there.

As complaints surrounding energy security continue to grow, governments would be forced to act. Politicians might start losing if they can’t get the system moving. In the UK, the government is now guaranteeing investors that they are underwritten. While the underwriting is less likely to be utilised, it does serve as a paramount safety factor that would significantly reduce the cost within the system. The alternative to this would be the dependence on coal and energy insecurity. The company anticipates that politicians need to take firm decisions or they risk losing the public’s favour and votes.

Germany invested trillions to get renewables and it ended up having a much larger emission rate than before. Had the country invested in both nuclear and renewable energy, it would have achieved a 47% reduction in carbon emissions by now.

Ongoing Operations

Deep Yellow’s story is about a consistent vision that the company has adhered to for the past 5 years. Through its existing projects and deposits, the company has identified a number of additional projects. The Tumas project in Namibia is in the Final Feasibility Study phase. This project is expected to provide a much-needed sector consolidation to the industry.

As a result of the Fukushima nuclear disaster in Japan, a lot of projects were stranded and companies were unable to raise capital. There are a lot of single projects out there without any consolidation. While the demand has doubled, the supply wouldn’t come from individual companies. There needs to be coordination among companies with bigger pipelines. A lot of the projects will need to be suspended within that pipeline. Some projects need to be suspended and brought online again in 10 or 20 years' time in order to balance the demand and supply.

Deep Yellow’s team and management have been training extensively to gear up for the new vista that’s out there. As per the company, the doubling in demand isn’t because of the Russia-Ukraine conflict. It is due to the doubling of the need.

The company has plans to develop both projects. It has the capability and the resources to do so. The company is currently optimising the Mulga Rock project in Western Australia. This project is expected to bring in more than the announced value. In terms of funding, the company isn’t looking to start these projects until the uranium pricing reaches the desired threshold.

Uranium Pricing and Market Dynamics

As per Deep Yellow, a lot of companies are using inflation as an excuse to cover up mistakes. While the effects of inflation and supply chain issues cannot be denied, a $60/lb-$63/lb pricing may end up fixing the issue. Companies need to be careful about building projects and bringing them online.

Some countries are facing labour inflation, a situation that is worsened by foreign exchange rates. The demand is expected to drive the uranium market pricing. Project funding could be acquired through signed contracts.

Notably, uranium pricing jumped from $20/lb to $50/lb in a few months. Deep Yellow is looking at a $55/lb uranium pricing to commence producing. While uranium companies can try commanding a higher price, they should be kind to utilities and help them along.

One such example is lithium producers selling spodumene at $5,000/t, which is 10 times the regular price. It is important to note that when uranium prices were at $20/lb, the utilities continued buying. As a result, the producers aren’t inclined towards offering discounts for utilities.

There’s an ongoing uranium shortage in the market. These shortages also extend to uranium conversion and enrichment, making the supply chain as a whole much more complicated. The primary uranium that feeds the stock will end up being the determining factor. The problem can either be fixed by the government putting a price cap in place or letting the market forces determine the pricing. This problem can also be fixed by investing more in the supply side, especially in uranium exploration.

As per the utilities, there isn’t a uranium shortage in the market. However, the shortage is bound to happen and producers will end up investing money and taking a risk. In reality, the spot market has dried up and the utilities appear to be holding back. According to Deep Yellow, the others will follow suit as soon as one of the utilities starts buying.

Currently, the uranium supply market is highly competitive and companies are looking to sign contracts for the supply while taking into consideration the potential price increases.

The uranium pricing is expected to adjust to meet the market’s needs. As long as there’s an upside, the product will be available to the market. It is important to note that if the supply increases to a point where it surpasses the demand for uranium, prices will likely fall. If not, the prices will continue to rise.

According to Deep Yellow. Once companies start producing, their evaluation would be based on the project’s NPV (Net Present Value) as opposed to a speculative number. The companies that invest in projects and start producing are looking at a mixed reward. The companies that are evaluated based on the NPV are least likely to be overvalued.

Companies that are looking to establish a resource base in the Athabasca basin over a 5-15 year period will benefit from the long-term price increases. The capital that is spent on exploration will have a positive impact on an industry that is known to invest a large portion of the raised capital into the ground.

One of the bigger problems for companies is the lack of real skillsets during early production.  While the Athabasca basin is known to have really high material grades, companies need to make major investments in order to develop a sizable resource base. Deep Yellow anticipates that the Athabasca Basin outside the southeast area, particularly in the Fission-NexGen area is less likely to have a third or fourth infrastructure.

There’s a congestion of little deposits that are expected to come out of the Athabasca Basin. These deposits will be a part of the production sustainability out of a single region that will be a major uranium supplier in the near future. However, it is unlikely that people would be reliant on a single area for uranium supply.

There are certain parts of the uranium production process that come with their own set of costs. These costs are expected to be within the $15/lb-$20/lb range. For the lower-grade areas, these costs are estimated between $25/lb and $35/lb.

In Europe, there are 4-5 uranium deposits that have been sterilised. These deposits were a part of the equation 5-6 years back, however, this is no longer the case. A lot of people are interested in mines from Europe and South America. Interestingly, people aren’t showing a lot of interest in African projects. While Africa has a lot of other difficulties, one of the major problems is the lack of uranium mining experience.

Targets 2022 and Beyond

Deep Yellow attended the WNA conference in order to re-establish old friendships. The company isn’t looking to sell at this time. By the end of 2023, the company is looking to have the project ready for a development decision. As per the company, the WNA conference is a land of opportunity for suppliers. The company is devising a strategy for its existing projects. Its’ acquisitions are deliberately focused on new production.

The Mulga Rock asset has a 90Mlb project. Deep Yellow also has the Alligator asset in its portfolio, which is considered the Athabasca of Australia. The project has exceptional potential. The company continues to develop its existing projects while simultaneously looking at other opportunities. The Vimy acquisition isn’t the endpoint, it reflects the strategic side of the company.

The company’s opportunity base is currently restricted. It has various ways to take the expansion through to acquisition. In the current environment, there are 15-20 companies that collectively have 160 prospects. Back in the Halcyon days, there were around 400 companies. The company anticipates that a lot of the companies will seed off the other companies, leading to the generation of a different sort of business. These businesses will invest additional capital into individual projects that don’t usually get investments from the general population. This has the potential to open up the exploration play.

A lot of companies with larger portfolios are unable to manage multiple projects. This is because each asset ends up getting limited investment, which ends up servicing the tenement costs and commitments.

According to Deep Yellow, exploration efforts will enable companies to achieve growth. Companies need to fill the requirements for 2035-2050. Most companies are currently focused on harvesting the pre-earnable deposits, NexGen and Fission being the exceptions in this case. There’s a growing need for new discoveries as most of the current uranium projects were found a long time back. Reserves and resources build up over time. There is enough competition in the producing industry to spend, explore and develop.

The company is looking to move its assets forward. This strategy also encompasses Vimy’s asset portfolio. The company is currently waiting for favourable uranium pricing in order to commence operations. The company anticipates that the right pricing will come along within the next 2 years, while opportunities and incentive pricing will start showing up by late 2023.

In terms of project feasibility, design, and organising finances, the company is moving at the right pace. Deep Yellow is likely the only group outside of the majors that have delivered from a product perspective. The company’s current model is focused on investing in teams across the board and building up. Following the Vimy acquisition, the company is looking to incorporate the new team members into the existing teams in a meaningful way. The company wants both teams to function as equals so that technical issues can be ironed out.

As per the company, there is a lack of government guarantees within the nuclear energy sector. Renewables and other industries are provided with up to 9% in tax incentives, while the nuclear companies are getting around 2%-3%.

To find out more, go to the Deep Yellow website