Lotus Resources (LOT) - Study Shows Low Cost, Large Scale Production

Lotus Resources Limited is a mineral exploration and development company. The company owns a 65% interest in the Kayelekera Uranium Project in Malawi. Lotus Resources owns 85% equity interest in Kayelekera with the remaining 15% held by the Malawi Government. Kayelekera hosts a high-grade resource with an existing open pit mine and has demonstrated excellent metallurgical recoveries (87.5%) having historically produced over 10.9Mlb of uranium between 2009 and 2014, before closing to preserve the asset longevity due to a sustained low uranium price. Kayelekera’s current MRE (Mineral Resource Estimate) is 37.5Mlb of U3O8 (Triuranium Octoxide) at 630 ppm (parts per million).

Matt Gordon caught up with Keith Bowes, Managing Director, Lotus Resources. Mr. Keith Bowes is a highly regarded mining executive with over 2 decades of experience working on project development and operations in Africa, South America, and Australia across a range of commodities and processes. Keith managed the project for the Boss Resources’ redevelopment program for the Honeymoon Uranium Mine including all study phases and commercial trials of the new processing technology. As part of the study, he led the development in the application of two new technologies (leach chemistry and IX resins) that have redefined the Honeymoon opportunity.

Company Overview

Lotus Resources is an explorer and developer with a controlling interest in the Kayelekera Uranium Mine in Malawi. Kayelekera has the potential to become one of the first uranium operations to come back online to meet an impending supply shortfall in uranium. The restart timeline aligns with industry predictions of a market under-supply of approximately 30Mlbs uranium in 2024. The company was founded in 2006 and is headquartered in Australia. Westview Resources Pty Ltd., Providence Metals Pty Ltd., and Lily Resources Pty Ltd are the company’s subsidiaries. The company is listed on the Australian Stock Exchange (ASX: LOT) and the OTC Markets (OTCQB: LTSRF).

Lotus Resources has a controlling interest in the Kayelekera Uranium Project in Malawi. The company recently released a Feasibility Study, where it was successful in meeting all its targets over the past 2 months. The results so far have been highly positive.

There were a few concerns regarding the rising costs due to inflation. Since it did not need to purchase a lot of new equipment, the company wasn’t exposed to the higher capital costs. The majority of the company’s costs are associated with labour and maintenance to fix corrosion issues, repair concrete, along with other civil work. Notably, the Malawian labour market has not experienced a cost increase due to inflation. The company did however see a significant increase in reagent costs. It is also facing logistical challenges as the first fills and inventories that need to be carried on-site are much higher than originally anticipated.

As per the DFS (Definitive Feasibility Study), the company is planning a quick restart within a 15-month time frame. Following this, the company will make an FID (Final Investment Decision). 2 months after the FID, the company will be ready to ship its product out to the customers. The operation has low capital requirements. The company has validated $50M for refurbishment along with an additional $38M that will be deployed towards ore sorting, connecting to the grid, acid recovery, and more. The total upfront capital cost is estimated at $88M at the moment.

The company has been able to effectively manage the ore sorting and various resources, enabling it to bring its ore costs below $30/lb, which is a key metric moving forward. The Kayelekera Uranium mine has a 10-year life and is expected to produce 20Mlbs of uranium over its lifetime. For the first 7 years, the company is looking to produce between 2.4Mlbs-2.5Mlbs. It has plans to treat the stockpiles at the backend of the schedule.

Material Grades

The Kayelekera mine’s current grade is at 600ppm (parts per million). The company has plans to apply the ore sorting grade to the plant feed in order to achieve up to 800ppm grades. The higher grade will enable the company to maintain the targeted 2.4Mlbs-2.5Mlbs annual production. As per the company, this is a good production target. In comparison, projects of similar scale in Australia are producing between 2Mlbs-3Mlbs per annum, while in the United States, the average production is between 1Mlbs-2Mlbs per annum. It is expected that the utilities will begin to recognize the size of the operation, which, in turn, will help the company in future negotiations.

Ongoing Operations

On a Feasibility Study level, the company is looking to demonstrate that the operation has low capital costs and good operating costs. It anticipates that the costs sit within the second quartile of cost producers at the moment. The next plan of action is to approach the utilities.

A few weeks ago, the company’s representatives visited a conference in Montreal where they spoke to a number of North American utilities. The company was able to showcase its Feasibility Study and the new DFS. The company’s representatives will be attending the WNA (World Nuclear Association) in London which is scheduled for the latter part of August. It has plans to meet a number of European and Asian utilities in order to re-introduce the Kayelekera asset with Lotus Resources as the new owner. The discussions will include the production profile and operating costs. The company seeks to sign some contracts at the conference.

The company has published its Feasibility Study in a way that makes it possible to make an FID by the end of the year. Prior to this, the company needs to sign MDA (Mine Development Agreements) with the Malawian government. The agreements are currently being negotiated. The mine development agreement will set up a fiscal regime that will define the scope within which the project will operate. This agreement will include the tax rate, duties and tariffs, royalties, and more. The company and the Malawian government are negotiating to reach an equitable position that would be mutually beneficial.

Lotus Resources owns 85% of the Kayelekera mine, while the Malawian government has 15% ownership. The government gets a share of the profits or a share of the dividends from the project. The company is looking to pay out royalties based on the uranium pricing. Additionally, the company is looking to make the project more investable by negotiating the tax rates, duties, and tariffs.

A large number of developers agree that a $65/lb uranium pricing is desirable. This price can help bring new projects online. For Lotus Resources, a uranium pricing between $65/lb-$75/lb could serve as a good midpoint. In case of a higher uranium price, the company is open to paying out higher royalties, while lower uranium pricing could lead to reduced royalties. The company is looking to be in a position to make an FID by the end of the year. It is also prioritising an MDA (Mine Development Agreement) with the Malawi government by the end of 2022. So far, the government has indicated that it won’t have a problem meeting the end-of-the-year timeline.

Pricing Considerations

Lotus Resources is looking to run the utility negotiations around the term contracts, and the debt financing discussions with banks in parallel. It is looking to understand both perspectives in order to devise a reasonable solution. The company seeks to determine the amount of debt it can comfortably take on. In a case of a 50% debt, the company wouldn’t need to contract all its production to meet the requirements.

In an ideal scenario, the company would sign contracts at $60/lb with $30/lb in cash costs. This would enable the company to put half of its production into term contracts. The remaining 50% of the production could either go into the spot market or enter short or medium-term contracts in order to get some of the upsides of the prices going forward. Once the company comes back from the WNA conference at the end of the month, it will have a better understanding of the mindset among the utilities. The company is looking to reach a safe position where its term contracts can cover the operational costs. For the remainder of its production, the company has the flexibility to either play the spot market or enter shorter-term contracts for the remainder of the production.

Operational Challenges

The Kayelekera mine has had some well-known historical issues in the industry. When Lotus Resources was working on due diligence back in late 2019, it spent a considerable time looking at the issues. The company spoke with a number of engineers and geotechnical experts in order to devise solutions. It has spent the last 18 months focused on the technical aspects of ore sorting and other mine parameters in detail. The solutions for these issues have been included in the company’s capital costs. These solutions will help further de-risk the project.

During the mining operations, the company recognized that the pit had some instability with regard to a number of benches and ramps. Mining the Kayelekera deposit had a steep learning curve. In order to remedy the instability, the company ensured that everything is built into arkose units. Notably, the Kayelekera deposit is a series of bands featuring arkose, a sandstone-like material. These bands are interspersed with mudstone between each of the arkose units. When the mudstone gets exposed to the environment, the water ingress can cause it to become a slip plane, which causes the arkose units to move slowly. As a solution, the company has ensured that all its benches are in the arkose and they do not start or stop in any of the mudstones. Furthermore, the company has built all its access ramps in the arkose units to ensure stability. In case a major fault is going through the pit, the company is working on either side of the fault.

The company has been conservative in its design. It has pushed back to the pit slope to 22 degrees in order to ensure stability. In comparison, most pits are 44-48 degrees. A steeper slope enables companies to reduce strip ratios. The average slope at the pit is 22 degrees on the high wall going backward. The company is ensuring that the high wall remains exposed for a maximum of 6 months before mining it out. This is done to ensure that a long-term high wall does not cause issues due to weathering. The company is working with geo-tech and mining personnel to create a design that reduces the associated risk. Despite the 22 degrees pit slope, the company still has a 1.8 strip ratio, which is very low for any open-pit mine.

The pre-mining operations have benefitted the company as the majority of the overburden has already been pre-stripped. According to the company, there has been a lot of misinformation regarding the tailings dam discharging water. In fact, there was a one-off event where a very small amount of water was discharged from the dams into the environment. It is important to note that the water discharge did not lead to any contamination whatsoever.

Lotus Resources assigned engineers to survey the tailings dam, collect samples and take measurements. The company has improved the safety factors under dynamic conditions, while the static conditions continue to remain safe. As the project sits in a rift valley, it is prone to earthquakes. In terms of the design, the company wants to ensure that the tailings dams are safe. Additionally, the company seeks to ensure that its operations comply with GISTM (Global Industry Standard on Tailings Management), the latest set of standards for the safe operation of tailings dams. It is looking to comply with the GISTM standards before restarting operations.

Another challenge that the Kayelekera mine faces is in regard to the terrace plant. The plant itself is located on a terrace that was cut into the side of a hill. The side of the hill was cut and the backend was filled. Following this, a relic slip was identified underneath the plant that led to some movement. As mining began and stockpiles were moved to the top of the hill, it ended up increasing the force on one side, resulting in additional movement.

In order to remedy this, the previous owners removed the waste stockpiles in order to alleviate some of the pressure. Furthermore, the previous owners also installed drainage systems to redirect the water away as the plant features arkose and mudstone units. Getting water into this region could potentially cause a slip plane. These measures helped in reducing the movement significantly. Lotus Resources has identified additional stockpiles that upon removal could further reduce the pressure on the system. Additionally, the company has decided to install a pile fence. For this installation, the company will drill some holes and put in structural steel and concrete in order to lock the terrace in place with the bedrock that sits immediately below the structure. Based on the calculations and high-end modelling, the company expects a significant movement reduction in the plant terrace.

While the asset is in a very good state in terms of the crushers, leach tanks, and precipitation soak, there has been a slight disruption to some of the foundations. This is a result of ground movement issues that are normally related to the admin building, the workshops, and the stores. Once this issue was identified, the company brought engineers on-site to determine the work needed in order to fix up the corrosion and replace some of the smaller pieces of equipment along with motor refurbishment.

The company had concerns regarding the state of the electrical equipment including the transformers and mill motor. Through close inspection, the engineers confirmed that the mill motor is in fantastic condition. As a result, the company had considerable cost savings as it had to spend significantly less on electrical equipment.

Lotus Resources is also working on a brand-new acid plant, which wasn’t included in the Scoping Study. This plant is a result of a detailed investigation that identified significant corrosion in the existing acid plant. The acid plant’s location also had some ground movement issues. In order to remedy the issues, the company has decided on a brand-new acid plant that will be installed in a different location. The new acid plant will have a modular and efficient design that will further cut down operational costs. While the new plant has added costs, the company was able to make savings in other areas.

It is important to note that the company has currently allocated $50M for plant refurbishment and an additional $38M for ore sorting. These funds will be utilised towards connecting to the national grid, achieving acid recoveries through the nano-filtration plants, and carrying out the first fills with reagents.

For the electricity supply, Lotus Resources has devised a hybrid system. Based on discussions with ESCOM (Electricity Supply Corporation of Malawi Limited), a Malawian utility, the company realised that the plant’s power requirements cannot be fulfilled from the grid alone. One of the solutions is to retrofit a stream turbine onto the acid plant. A CHP (Combined heat and power) or cogeneration system could be used to take all the heat generated from the acid plant and use it to drive the steam turbine in order to generate power. Additionally, the company is also looking at solar and battery power. This hybrid system will meet the plant’s electricity requirements. The genset will account for 40% of the power generation while 20%-25% of power would come from solar energy. The cogeneration system is expected to fulfil 20%-25% of the power requirements, leaving only 10% of the electricity shortfall that will be generated from the diesel gensets. By utilising a combination of power sources, the company was able to bring down its average power cost to $0.106 per kWh (kiloWatt hour), a highly competitive price. In comparison, when the plant was operating on diesel gensets alone, the electricity costs were around $0.34kWh - $0.36kWh for the previous operator, taking a $1.20 diesel price into consideration. Through this strategy, the company has successfully reduced its power costs by over 60%.

ESG Considerations

As per the company, the European utilities have much higher requirements when it comes to ESG (Environmental, Social, and Governance) compliance. The company is looking to gain final inputs for the ESG requirements from the WNA conference in London. The European utilities want to ensure that the company is a good corporate citizen from an ESG perspective.

Lotus Resources is currently in the process of signing a community development agreement, where 0.45% of the revenue will be reinvested into community projects. Additionally, the company’s MDA is targeted toward supporting both the company and the country. Once the mine restarts, it is looking to provide primary employment to around 600 Malawian nationals. This is also expected to generate a lot of secondary employment.

The company anticipates that the restart of the Kayelekera mine will benefit around 6,000 Malawian nationals. From a financing perspective, these measures will enable the company to gain access to ESG funds, further expanding the funding options for the Kayelekera mine.

Up to 1-2 years ago, only the uranium specialist funds had shown interest in the company. However, in recent times, a lot of generalist funds have approached the company in order to include uranium and uranium developers in their investment portfolio. This development has expanded the available financing options for funding the Kayelekera project.

Targets 2022 and Beyond

Lotus Resources anticipates that the Feasibility Study will provide some certainty around the project’s potential and the timeframe needed to get it up and running.

Utilities often seek low-risk prospects. They are looking for certainty when it comes to production rates, costs, and delivery times. Once the Feasibility Study is completed, the company will be in a position to make an FID. Following this, the company will work towards restarting production.

To find out more, go to the Lotus Resources website