Proactive Investors: Lotus Resources initiated by Petra Capital with BUY rating and A$0.40 target price as uranium market heats up
Lotus Resources Ltd (ASX:LOT) has been initiated by Petra Capital stockbrokers with a BUY recommendation and share price target of A$0.40 following the company’s acquisition of a major uranium asset in October, and the jump in uranium spot prices kick-started by Sprott’s plans to list its Physical Uranium Trust on the New York Stock Exchange this year.
The Kayelekera Uranium Project in Malawi, Africa, is the fourth-largest uranium asset globally by historical annual production and is currently on care and maintenance.
This project produced about 11 million pounds of uranium (U3O8) equivalent over five years between 2009 and 2014, before it was shutdown to preserve its longevity due to a sustained low uranium price.
Petra believes the term contracting market will be supported by a significant supply deficit and tailwinds from a strengthening decarbonisation effort globally, with nuclear power representing the only carbon-free baseload generation source.
The broker assumes a long-term price of US$75 per pound of uranium, which it believes is sufficient to incentivise most advanced projects into production.
The following is an edited excerpt from Petra Capital’s coverage of Lotus Resources.
Offers low risk, low-cost near-term production
- Kayelekera had a 5-year-plus production history, which allowed time to ramp up & resolve initial operating issues.
- LOT has the benefit of actual operational metrics in assessing future potential and restart plans.
- With an estimated US$50 million restart cost delivering a meaningful 2.3 million pounds per annum output from FY24, LOT can be one of the first assets to be restarted. Petra believes the project offers low capital intensity (US$29/pound), low production costs (US$27/pound) & near term, low-risk production from FY24 – giving strong leverage to this cycle.
Exploration potential ignored until now
- Kayelekera’s final resource estimate under Paladin Energy was in 2009 (44 million pounds). The project produced approximately 11 million pounds and has seen no real exploration for 15 years.
- LOT has estimated a 37.5 million pound resource and a JORC exploration target of 7-14 million pounds at a grade of 300-600 parts per million (ppm). The recently acquired Livingstonia asset hosts a JORC 2004-compliant resource of 6 million pounds with upside.
History shows the U308 (ASX:UTO) price can overshoot
- The price of fuel has little bearing on nuclear generation costs, resulting in predominantly inelastic demand. Petra expects the U3O8 price to overshoot their assumed price, as utilities seek to lock in supply over the coming years. During the last cycle U3O8 peaked at US$136/pound in 2007.
- The U3O8 price needs to be higher as new supply needs to be incentivised. Petra Capital assumes a long-term price of US$75/pound, well above current spot.
Price target and valuation
Petra’s target price at US$75/pound U3O8 is A$0.40/share. At the last cycle peak U3O8 price this would increase to A$1.06/share.
“LOT offers one of the fastest routes to proven commercial production as it leverages substantial sunk capital and operating experience. We initiate with a BUY and Price Target of A$0.40/share.”
Key dates ahead
- SPUT NYSE listing – expected 1H 2022;
- Mid CY22 – Restart feasibility study; and
- End CY22 – Final Investment Decision & financing.
About Lotus Resources
Lotus Resources) owns a 65% interest in the Kayelekera Uranium Project in Malawi, which hosts a current resource of 37.5 million pounds of uranium oxide and has historically produced 11 million pounds of uranium between 2009 and 2014.
The project has a 1.4 million tonnes per annum processing facility and the company has spent around US$200 million on infrastructure including an on-site acid plant and accommodation camp.
Lotus believes Kayelekera can support a viable long-term operation and has the potential to be one of the first uranium projects to recommence production.
Source: Proactive Investor