Lotus Resources Poised for Production With Flagship Kayelekera Uranium Project

• Lotus Resources owns the Kayelekera uranium mine which operated from 2009 to 2014 and produced approximately 11 million pounds of uranium. Lotus acquired this asset from Paladin Energy in 2020.
• The mine is presently under care & maintenance, but Lotus has been working on the necessary requirements to restart it, aiming to capitalize on the improving uranium market.
• Their final investment decision (FID) is contingent on the uranium price. The current uranium price in the spot market is between $53 and $54 per pound, but Lotus hopes for a higher price before restarting operations.
• In discussions with the Malawian government, Lotus is looking to finalize a Mine Development Agreement (MDA) and an agreement with the Malawian electricity utility for a connection to the National Grid.

Lotus Resources' Managing Director Keith Bowes laid out the company's strategy and outlook in a recent interview, highlighting Kayelekera as a low-cost, near-term production asset with expansion potential. With uranium prices recovering and key milestones on the horizon, Lotus offers investors exposure to an undervalued commodity through a seasoned management team advancing a past-producing project.

Fast Track to Production at Flagship Kayelekera Mine

Kayelekera is a previously producing uranium mine located in northern Malawi which was operated successfully by Paladin Energy between 2009-2014, producing around 11 million pounds of uranium. Lotus Resources acquired the project in early 2020 and has set about updating studies and securing agreements to facilitate a rapid restart.

A definitive feasibility study was completed in 2021 outlining average life-of-mine C1 cash costs of just $29.30/lb, placing Kayelekera in the lowest quartile of the global uranium cost curve. Total capital costs to refurbish and restart operations are estimated at $100 million, made up of $88 million in pre-production capital and $12 million in working capital.

Based on a 15 month schedule, the company could be producing again as soon as 2024 once a final investment decision is made. Lotus is targeting an annual production rate of 2.7 million pounds, which would make Kayelekera one of the top 10 uranium mines globally. A 10 year initial life of mine is planned, with potential to extend through exploration.

Interview with Managing Director, Keith Bowes

Optimizing Project Economics

Several key factors point to Kayelekera being an economically robust project, according to Bowes.

Firstly, the hybrid power solution incorporating grid power, onsite generation and solar will reduce power costs to around 10 c/kWh, compared to 35 c/kWh previously. This will lower operating costs by around $7/lb. Additionally, more favorable reagent pricing and lower freight costs mean there is scope to further reduce operating costs below the $29.30/lb estimated in the DFS.

However, Lotus is cautious about committing to project development too soon. The company is holding off on a final investment decision until the uranium price reaches US$60-65/lb, compared to the current spot price of US$53-54/lb. This will ensure positive economics over the life of mine rather than risk losing money early on.

Building Supportive Agreements With Government

Successfully bringing Kayelekera back into production hinges on finalizing a number of agreements with the Government of Malawi.

When Paladin operated the mine between 2009-2014, a 10-year development agreement was in place governing items like tax rates and royalties. With a new government now in power, negotiations have commenced on a renewed development agreement. Lotus Resources is targeting similar fiscal terms to what Paladin secured previously, including a reduced royalty rate and lower income tax rate. This will be critical in ensuring the project is economically viable. The company is comparing Malawi's mining code with regional peers to benchmark taxation regimes and attract investment.

According to Bowes, the negotiations are progressing well, with non-binding terms agreed. Completion of a binding development agreement is targeted for early 2023.

In parallel, Lotus is in discussions with Malawi power utility ESCOM regarding supply of grid power to Kayelekera and associated infrastructure upgrades. An agreement on commercial terms is targeted by Q4 2022.

Funding Kayelekera Through Strategic Partnerships

Lotus has indicated the $100 million capital cost to restart Kayelekera could be funded through a combination of equity and debt.

However, Bowes highlighted that strategic partnerships, prepayments or streaming deals are also being evaluated. The company sees advantages in locking down off-take agreements in order to secure sales volumes and de-risk future cashflows.

In return for guaranteed future supply, traders or utilities may offer upfront payments that could fund a portion of capital costs. This would minimize dilution for existing shareholders.

Project financing discussions are already underway and will ramp up over the coming months in anticipation of a Final Investment Decision.

Management Track Record in Malawi

Lotus Resources has an extensive track record of successfully developing projects in Africa through its management team.

Bowes himself previously worked for Paladin Energy and oversaw the construction and operation of Kayelekera Uranium Mine in northern Malawi. This direct experience gives him valuable relationships and insights to advance Kayelekera. Additionally, Lotus Resources Chief Geologist Alan Fryer was formerly Exploration Manager at Paladin and involved in much of the exploration that defined Kayelekera. The company therefore has unique knowledge operating in Malawi.

This experience de-risks execution substantially compared with a junior developer entering the country for the first time. Lotus can benefit from its team's established relationships to efficiently advance permitting, contracting and project development.

Unlocking Future Growth

Looking beyond the initial Kayelekera development, Lotus is actively exploring ways to expand production and extend mine life. This will enhance the project's strategic value and economics.

Management sees potential to organically increase resources through exploration around the mining lease, citing promising drill results at the Chulumba prospect. Regional consolidation is also being considered, with known uranium prospects elsewhere in Malawi. This could provide incremental ounces to grow Kayelekera beyond the planned 10 years to a potential 15+ year life of mine. Longer mine life will be key in securing utility contracts.

Additionally, the company may look to acquisitions or mergers with other developers to gain further African assets. Lotus is well placed for new opportunities as the market turns given its strong cash balance.

Upswing in Uranium Market Underway

Lotus is looking to take advantage of a cyclical recovery that appears underway in the uranium market. The uranium price has already rebounded nearly 40% off its lows to over $50/lb. However, it remains well below the $65/lb level required to incentivize new production.

With supply cuts in recent years and inventory drawdowns, an enduring deficit is expected over the coming decade. Nuclear power demand continues to rise despite headwinds in some countries, and requires substantially more uranium than is currently being produced. This sets the scene for much higher prices that should enable Kayelekera to generate strong margins. Paladin proved large profits could be made during the last cycle, when the uranium price peaked around $135/lb.

Key Milestones Ahead

With its low-cost Kayelekera project and experienced team, Lotus Resources appears undervalued at its current ~A$300 million market capitalization. As uranium sentiment improves, the following catalysts could drive significant share price upside in 2023:

• Finalization of Power Agreement with ESCOM
• Completion of Off-take Agreements
• Conclusion of Development Agreement with GoM
• Project Financing Arrangements
• Final Investment Decision on Kayelekera
• Front End Engineering and Design works
• Long term utility contracting

Lotus offers a unique opportunity to gain exposure to an advanced uranium asset on the cusp of development. The company has laid the groundwork to bring Kayelekera into production within two years. As Malawi's first new uranium mine in over a decade, Kayelekera is poised to generate strong cash flows for shareholders during the next uranium bull run.

The Investment Thesis for Lotus Resources and the Kalakira project

Low-Cost Production

With estimated cash costs of $29.30/lb, Kalakira is positioned in the lowest quartile of the global uranium cost curve. This gives the project resilience to withstand periods of depressed uranium prices while remaining profitable. When prices eventually trend higher in the cycle, Kalakira will be able to generate large operating margins and cashflows for investors.

Near-Term Catalysts

As outlined in the milestones, Lotus has several potential catalysts over the next 12-18 months that could drive substantial share price appreciation. Positive news around offtake deals, project financing and FID would derisk Kalakira and underscore its viability amid a recovering uranium market.

Takeover Target

Given its advanced status and low costs, Lotus could emerge as an attractive takeover target for a larger company looking to add low-cost pounds to its portfolio. As one of the only shovel-ready projects that could reach production within two years, Kalakira ticks many boxes for a potential acquirer.

Proven Team

Lotus' management has a demonstrated track record of successfully developing projects in Africa. Their experience specifically in Malawi de-risks execution and makes securing permits, licenses and agreements much smoother. This depth of expertise reduces the chances of delays or cost overruns.

Commodity Upswing

The uranium market appears to be turning a corner after years in the doldrums. Key supply cuts and inventory drawdowns point to large impending deficits. Nuclear power demand continues to rise globally. Kayelekera is perfectly positioned to take advantage of the next uranium bull run as prices recover towards incentive levels.

Summary

Lotus Resources offers a low-cost, near-term production opportunity at an attractive valuation, with a proven team set to benefit from a commodity upcycle. This unique combination of factors makes Lotus Resources a compelling investment case in the uranium sector.