Buy Date: 26 July 2023
Stock Note:
9th December 2023 | Share Price $0.28
Up 27% on original investment, share price has run on the back of uranium price increasing from US$53.0 a pound to US$83.0 a pound in CY2023. Expecting their Kayelekera Uranium mine in Malawi, Africa to reopen in FY25. Current $0.45 share valuation no longer applies due to A-Cap merger now making LOT the third largest uranium stock on the ASX, based on MRE size.
LOT Share Price on the Move!
14 September 2023
Their share price is on the up as the Uranium price has hit US$62.00 a pound, which according to LOT is the key level required for them to restart their Kayelekera mine in Malawi, with a FID decision for the mine reopening expected later this year. They are also in the process of a merger with A-Cap Energy (ASX:ACB) which has uranium deposit in Botswana and if the merger is successful will increase their uranium resource. The Botswana despot is not as advanced as Kayelekera and will require significant investment to develop it into a producing mine. LOT are hoping to use some of the cashflow from Kayelekera once it is operating and producing to help fund the development of the Botswana deposit.
Lotus resources (ASX:LOT) Post A-Cap Merger
21 March 2024
Prior to merging with A-Cap Energy in 2023, LOT comprised or their Kayelekera uranium mine based in Malawi, Africa. Which has an MRE of 42.5 mt @ 500 ppm for 46Mlbs U3 O3. After merging with A-Cap Energy LOT now has a MRE of 318.3 mt @ 344 ppm for 241.5Mlbs U3 O3.
LOT have undertaken a $30m share placement in FY24 which is aimed at advancing the restart of their Kayelekara mine and development of the Leathakane mine in Botswana (A-Cap merger). LOT are targeting a restart of Kayelekera mine by late 2025. Which according to LOT will require $88.0m of upfront capital to restart the mine. Which they intend to fund via debt and have appointed a debt advisor to assist with this process. Further announcements are expected in FY24.
The Kayelekera mine has a 10-year LOM with planed production of 19.3Mlbs U3 O3 at up to 2.4Mlbs pa. LOT are planning to update the scoping study at their Leathakane mine in FY25. In which LOT are planning to improve on the previous economics and resource grade of the mine.
Once in production, LOT are planning to use some of the proceeds from the Kayelekera mine to help fund the development of the Leathakane mine and thereby increasing the overall production profile of the company beyond the10-years or the Kayelekera mine.
LOT have the potential to be a long-term low-cost uranium producer but there is a lot of work and capital to be done and spent before this occurs. For the rest of FY24, I am happy to buy another parcel of shares on any weakness in LOT’s share price, based on the current circa 40c share price. Then I will wait for the restart of Kayelekera and the updated scoping study for Leathakane in CY2025, before deploying more capital.
Boss Energy V Lotus Resources
12th June 2023
Introduction:
This is a method I use to help with valuations and as a bit of a reality check when looking at mining companies. Especially when they are nearing production and investors can get carried away with the hype and constant flow of news and market updates.
There is a strong belief that uranium is entering a long-term bull market as more and more countries look to use nuclear as a clean energy source and help meet their emission reduction targets moving forward. Two uranium stocks on the ASX that are nearing production are Boss Energy (BOE) and Lotus Resources (LOT). This is a quick overview of their operations:
| BOE | LOT | |
| Mine | Honeymoon | Kayelekera |
| Country | SA, Australia | Malawi, Africa |
| Ore Body size | 52.4 Mt | 46.3Mt |
| Ave Garde (ppm) | 620 | 550 |
| Extraction Method | ISR | Open Pit |
| LOM | 11 years | 10 years |
| Annual Production | 2.4MIb | 2.3MIb |
| AISC (US$) | 24.6 | 37.7 |
| Shares on Issue (m) | 352 | 1327 |
| Market Cap (m) | 1100 | 249 |
| Share Price (AU$) | 3.12 | 0.185 |
This basic analysis tells us that BOE on face value has the higher quality, margin, and more profitable mine. Other things to consider here are the two very different mining jurisdictions the companies operate in, with Aus considered a more friendly and stable country to operate in (but one does wander about this at times). BOE is expecting first production in the December quarter of 2023, while LOT is still waiting for the uranium price to push above its current US$55Ib before they make a FID, with production expected 15-months after the FID is made. BOE state an average long-term uranium price of US$60 Ib as their minimum price required to mine and LOT requires an average uranium price of US$65 Ib, showing again BOE are the better placed of the two. LOT are in the final stages of negotiating funding, mining and electricity agreements, and conducting their FEED process. Finally, an investor needs to consider, the Malawi Government has a 15% interest in the Kayelekera mine.
*Valuation:
With all the above considered, we now move on to conducting a share price valuation based on free cash flow using AISC, with the results as followed:
Boss Energy:
| BOE | |||
| AISC per Ib | LOM Yrs. | Shares on Issue (m) | Production p.a. Mlbs |
| 24 | 11 | 350 | 2.4 |
| Cash Flow Multiple | Price Per Ib (USD) | ||
| 1 | Current Spot Price | Best | Likely |
| 55 | 100 | 65 | |
| 1-Year Production (USD Million) | Base | Best | Likely |
| Revenue ($m) | 132 | 240 | 156 |
| AISC ($) | 58 | 58 | 58 |
| FCF ($m) | 74 | 182 | 98 |
| CFPS ($) | 0.21 | 0.52 | 0.28 |
| Share Price ($) | 0.21 | 0.52 | 0.28 |
| 11-Year LOM (USD Million) | Base | Best | Likely |
| LOM FCF ($m) | 818 | 2006 | 1082 |
| CFPS ($) | 2.34 | 5.73 | 3.09 |
| USD Share Price ($) | 2.34 | 5.73 | 3.09 |
| AUD/USD 70c | |||
| AUD Share Price | 3.34 | 8.19 | 4.42 |
Lotus Resources:
| LOT | |||
| AISC per Ib ($) | LOM Yrs. | Shares on Issue (m) | Production p.a. Mlbs |
| 37 | 10 | 1327 | 2.3 |
| Cash Flow Multiple | Price Per Ib (USD) | ||
| 1 | Current Spot Price | Best | Likely |
| 55 | 100 | 65 | |
| 1-Year Production (USD Million) | Base | Best | Likely |
| Revenue ($m) | 127 | 230 | 150 |
| AISC ($) | 85 | 85 | 85 |
| FCF ($m) | 41 | 145 | 64 |
| CFPS ($) | 0.03 | 0.11 | 0.05 |
| Share Price ($) | 0.03 | 0.11 | 0.05 |
| 10-Year LOM (USD Million) | Base | Best | Likely |
| LOM FCF ($m) | 414 | 1449 | 644 |
| CFPS ($) | 0.31 | 1.09 | 0.49 |
| USD Share Price ($) | 0.31 | 1.09 | 0.49 |
| AUD/USD 70c | |||
| AUD Share Price | 0.45 | 1.56 | 0.69 |
Conclusion:
As we can see from the above valuation for BOE of $3.34 investors have been happy to pay for the quality of BOE’s mine up front at $3.12 per share as they are further down the development/production road and all things being equal are the higher margin miner and are considered to have less risk associated with them. As where, LOT’s valuation of $0.45 per share compared to their current share price of $0.18 has more risk attached to their share price. As they still have a bit of work to do before they get to the production phase, but by buying them now an investor may be rewarded for taking on this risk. But either way you look at it, both are positioned well to benefit from the long-term structural changes the industry is experiencing and should perform well in the coming years.
*Valuation Note:
The LOT valuation is based on 100% ownership of their mine and does not include any perceived discount that might be attached to their shares. For example, mining companies operating in PNG are often referred to as having a PNG discount built into their share price. Other things to consider, I have used a cash flow multiple of 1 as I don’t consider the uranium market to have the same hype or supply/demand dynamics round it, as for example lithium doses currently. But the industry is forecasting this to occur over the next decade. Both miners have the potential to increase their LOM production and have plans to conduct further drilling and exploration. I find this type of analysis not to be the final outcome or to be taken as gospel; but does work well to create a price range and potential buy and sell points.
KEY
AISC All in sustainable costs
FCF Free cash flow
CFPS Cash flow per share
LOM Life of mine
Mlbs Pounds per year
Ib Pound
FID Final Investment Decision
FEED Front End Engineering Design
Lotus Recourses Ltd (LOT)
The story goes, around the world there are currently some 57 nuclear reactors for power generation being built, with a proposed 321 to be built in the next decade. This is on top of the currently 442 already in operation, spread across 30 countries. There supposedly will be a minimum uranium supply shortfall of 30MIbs in 2024 and by 2028 this could be 60MIbs. Add to this equation, the rush for many countries to meet their net-zero or zero emissions targets and you can see a perfect storm brewing for uranium prices. The spot price of uranium has increased by some 42% over the last year, rising from US$35lb to US$50Ib at the time of writing. With some chatter about that prices could triple if things really get going. Traditionally, utility companies buy uranium based on long-term off-take agreements/contracts with the spot price used as a metric in determining the price, and most uranium miners/producers need a price above US$50Ib to US$60Ib for their mines to be profitable.
This brings us to Lotus Resources Ltd (LOT) and their Kayelekera Uranium Project in Malawi, Africa, which is the fourth largest uranium asset globally by historical annual production and is currently on care and maintenance. The Project produced 11MIbs U3O8 equivalent over five-years between 2009-2014, before the asset was shutdown to preserve its longevity due to a sustained low uranium price. The Project has a mining licence and its environmental permits, access to a skilled local workforce who worked at the asset previously, as well as strong government support (who are also 15% owners of the Project). LOT completed their mine Restart DFS in 2022, the DFS found that Kayelekera is one of the lowest capital costs uranium mines in the world. Requiring only 15-months and US$88m initial capital to take the mine out of care and maintenance and return it to a producing asset, once the final investment decision (FID) has been made. The mine will produce 2.4MIbs U3O8 equivalent a year for the first 7-years before lower grade stockpiles will be used, with life of mine (LOM) of 10-years and all in sustainable costs (AISC) of US$37Ib. LOT have commenced further drilling campaigns and have other tenements in the area that they believe will increase the LOM and current recourse of 51.1MIbs of U3O8. LOT completed a capital raising in FY2022 too, and currently is sitting on $25m, which they say is enough to keep them operating until 2024. LOT believe they are in a prime position to start signing off-take agreements with utility companies, as they have a mine with a track record of production. Which offers utility companies more certainty over supply and grade, when compared to other miners and mines that have not previously produced uranium before.
LOT will have to raise more capital in order to meet the restart requirements and take the mine out of care and maintenance. They will most likely do this via taping shareholders and through singing off-take agreements. Project finance is an option given $88m is not a large sum in mining terms, but less likely I would think, given they should be able to raise this cash through shareholders and off-take agreements, if market conditions are in their favour. LOT have started to de-risk the project by raising capital and completing the restart DFS, but for me I would like to see some off-take agreement and FID talk to see how they plan to take the mine from care and maintenance to production. Additionally, the biggest risk in buying now is the project does not produce at the rate indicated in the restart DFS; due to increased efficacies from new equipment and being able to connect to gird power not materialising and the mine is not as profitable as first forecasted. But this is also where the most upside is, and buying now might get you first crack at buying more shares through any capital raisings and allow you to build a sizable position in LOT along the way. A cautionary note here, LOT did raise $25m through institutional investors and ordinary shareholders did not get a look in, this could be the case going forward too. There is still a lot of water to flow under the bridge from here, but if the planets align for LOT and countries like the US, China, India, France, England, and South Korea to name a few (who already use nuclear energy), see nuclear as a way to meet their energy needs now and into the future. Then at $0.22 LOT would appear to be cheap, and as the old saying goes, FILL YA BOOTS SON!
Disclaimer: Rational Share Investing With Ratios does not hold an AFSL and information on this site should not be considered financial advice, personal or general, and represents the views of the author.
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