Lotus Resources: Building Paladin 2.0-Plus

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Lotus Resources is hot on the heels of Paladin Energy in restarting its African uranium mine, and also boasts a larger greenfield project.

-Lotus Resources to restart Kayelekera
-Significant improvements planned
-Scoping study updated on Letlhakane
-Brokers see a re-rate ahead

By Greg Peel

Early this month, Lotus Resources ((LOT)) announced its first uranium offtake agreements ahead of the restart of the Kayelekera uranium project in Malawi. It has signed two offtake agreements for a total of 1.5mlb of uranium for 2026-2029 at an escalated fixed price.

One agreement is with Curzon Uranium, an international uranium trading business headquartered in Cyprus. The agreement with Curzon includes an agreement to buy 700klb of uranium, an unsecured loan facility of US$15m, and an option to buy a further 100klbpa from 2030 to 2032. The other is with PSEG Nuclear for the purchase of 800klb of uranium. PSEG operates three nuclear reactors in New Jersey.

Pricing was not disclosed, but Shaw and Partners assumes a fixed price at around US$80/lb escalated by the US CPI.

The Kayelekera project was put on care and maintenance by Paladin Energy ((PDN)) in 2014 in the wake of the uranium price collapse post-Fukushima after five years of operations, 10.9mlb of U3O8 production, and some -US$200m of capex. Peak production occurred in 2013 at around 3.0mlbs U3O8. Lotus acquired the project in 2020.

Lotus released a Definitive Feasibility Study in 2022 which provided a low-cost development pathway for the re-start of Kayelekera.

For Shaw and Partners, the key features of the DFS included:

-An open cut mine pit requiring low total initial capital expenditure of -US$88m due to Kayelekera’s existing infrastructure.

-A quick development period for refurbishment for a re-start; approximately 15 months to production from a Final Investment Decision.

-Ten-year life-of-mine production of 19mlbs U3O8 at an average rate of 2.4mlb per year

-Cash costs of US$29.1/lb and all-in sustaining costs of US$36.2/lb for the first seven years of production.

Lotus is planning to make significant improvements to Kayelekera which will result in significantly lower operating costs than the asset’s historical performance. The miner recently announced a Mining Development Agreement with the Government of Malawi guaranteeing a stability period of ten years during which the project will not be subject to any detrimental changes to the fiscal regime.

The investment case for Lotus Resources is similar to that of Paladin Energy from several years ago, Macquarie suggests, with Paladin now having restarted its Langer Heinrich mine in Namibia. But Lotus also has a greenfield project in the form of Letlhakane in Botswana.

Letlhakane

Lotus acquired Letlhakane after merging with A-CAP Energy last year. The company has updated the 2015 scoping study, completed by A-CAP, which highlights increased optionality with three development pathways including a base case, early wins and bulking up scenario.

At first glance, it appears to Canaccord Genuity the company maintains a number of levers that will allow it to optimise opex/capex, target different ore-zones/pit shells and adjust mine life/ production accordingly. The base case captures the highest feed grade of the three scenarios with a maximum annual production of 3.2mlbs p.a. for a total of 42.3lbs over the 15-year mine life.

This scenario has initially been selected due to its consistent production profile and reduced stockpile requirements, however, Canaccord sees scope for the company to target the more aggressive “bulking up” scenario, assuming certain costs can be optimised, such as acid consumption.

Lotus highlights scope for improving mining techniques and reducing acid consumption, contributing to a -US$6/lb reduction in forecast cash costs. While all processes suggested have the potential to add meaningful reductions to opex, the key factor will be acid consumption, Canaccord noting this accounts for more than 50% of total life-of-mine operating costs.

In another twist, Lotus has flagged favourable geology for an in-situ recovery (ISR) operation and will conduct further test work to assess the option of this low opex methodology.

The study represents a line in the sand for Lotus Resources, Petra Capital suggests, confirming the key value drivers for further optimisation studies expected to be released in December.

While the scoping study so far remains un-optimised, Bell Potter is disappointed in the outcome, primarily due to the high cost (both capital and operating) in comparison to peers. This broker had estimated capex of -US$400m (study suggests -US$465m) and all-in sustaining cost of US$38m (US$42m). Bell Potter maintains a -40% risk discount on the project.

Once Kayelekera is in production, Macquarie expects Lotus to turn its attention to building a much larger greenfield operation at Letlhakane. The grades are lower at 345 parts per million, but the resource is large at 118.2mlb U3O8 Indicated & Inferred.

Re-Rating Assumed

Macquarie is bullish on the global uranium outlook, driven by new reactor builds, a lack of supply additions and a reduced market cushion of inventories and alternative supplies. After Paladin Energy’s success, the broker sees Lotus Resources as the next logical candidate to bring an idled uranium asset back into production with relatively low capex.

While the current trading range for uranium of around US$80/lb allows for restarts of idled, previously marginal, capacities, higher prices will be needed to balance the long term outlook.

Lotus’ assets sit at the upper end of the cost curve, and will be highly leveraged to rising uranium prices, in Macquarie’s view. The Kayelekera restart is rapidly de-risking, and is not yet reflected in the share price. Re-rating should occur as Kayelekera restarts, and focus turns to the larger Letlhakane.

Macquarie initiated coverage with an Outperform rating and a 40c target.

Bell Potter’s reduction in its valuation for Letlhakane, following Scoping Study disappointment, reduces its target to 50c from 70c. This broker continues to see material upside for Lotus with the progression of Kayelekera which is due to recommence production over the coming year. Speculative Buy retained.

Canaccord Genuity also retains a Speculative Buy rating, trimming its target to 52c from 54c due to higher acid pricing.

Petra Capital retains Buy, cutting its target to 33c from 37c on the revised Letlhakane parameters.

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