OTCQX:DYLLF | ASX:DYL
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Deep Yellow Ltd. (OTCQX:DYLLF) (ASX:DYL) is on track to become a low-cost, Tier I uranium producer, which management defines as a multi-project producer of uranium with the capacity to deliver 5-10 million lbs. of uranium annually.
Deep Yellow is on the threshold of entering a crucial stage of the company’s lifecycle, specifically, the transition from the late-stage development phase to the mine construction phase. The recent significant equity financing provides the necessary capital to move forward to the Final Investment Decision (FID) for the Tumas Project. Management is contemplating the structure and timing of further capital raises for the construction of a new Namibian mine.
Between March and early-May, Deep Yellow raised AUD$250 million in capital through a 2-tranch private placement consisting of the issuance of a total of 179,591,836 shares at an issue price of AUD$1.225 per share. Additionally, 24,489,795 shares were issued to existing shareholders through a Share Purchase Plan, also at an issue price of AUD$1.225 per share.
In June, Ausenco Services Pty Ltd was selected as the preferred EPCM (Detailed Engineering and the Engineering, Procurement and Construction Management) contractor for the Tumas Project.
In July, Nedbank Limited was appointed the Mandated Lead Arranger and Sole Bookrunner for coordinating the financing for the Tumas Project.
In late- August, the Vanguard Group reported that it had become a significant holder of 48,506,708 ordinary shares (or 5.00%of the shares outstanding).
On September 11, 2024, Deep Yellow announced that the Tumas resource in-fill drilling campaign completed in late-June resulted in upgrading the Measured and Indicated Mineral Resource to 58.2 Mlb eU308 at 320 ppm, achieving management’s goal of a potential LOM of over 30 years.
In late- September, Jim Morgan was appointed as Head of Project Delivery, another former Paladin executive that had a critical role in construction of Langer Heinrich and Kayelekera uranium mines.
Several entities were required to file that their ownership of Deep Yellow exceeded 5% of the company’s outstanding shares, most because of participation in the private placement. In addition to the Vanguard Group, other entities were Macquarie Group Limited (March 13th), State Street Corporation (March 15th), MM Asset Management of Toronto (April 29th) and Citigroup Global Markets Australia Pty Limited (January 4th and March 25th).
Furthermore, management is progressing toward securing debt financing that will help fund construction costs of the Tumas uranium mine once the FID is made to proceed, which is expected to occur in the very near future. Typically, debt issued for mine construction is secured by the assets and/or future cash flows of the project.
MANAGEMENT’S STRATEGY
Deep Yellow Ltd. is unique among junior mining companies: the company is being positioned to provide a leveraged opportunity to participate in all phases of the expected upswing in uranium prices. Management’s Dual Pillar strategy is designed to deliver both organic and inorganic growth by advancing the company’s Namibian and Australian projects through the production stage and by acquiring additional projects as the industry consolidates. Management is focused on becoming a low-cost, Tier I uranium producer, defined as a multi-project producer of uranium with the capacity to deliver 5-10 million lbs. of uranium annually.
CEO John Borshoff and his team previously achieved the same accomplishment with Paladin Energy Ltd by acquiring, developing and advancing the Langer Heinrich deposit into production within four years (2002-2006) and the Kayelekera Mine in Malawi (production 2009 to 2013) during the last uranium up cycle.
The Langer Heinrich uranium mine is situated 30km northeast of the Tumas Project. Deep Yellow’s executive team acquired, defined, funded, developed, optimized and operated Langer Heinrich from 2002 to 2017. The geology and type of deposit mineralization in these palaeochannel systems at Langer Heinrich and Tumas are quite similar, and the mining jurisdiction is one in the same. Management is well-prepared to fast-track Tumas to production during this uranium up-cycle.
The company’s most advanced flagship project is the 95%-owned Tumas Project, which is in the same jurisdiction and shares the same palaeochannel network as Langer Heinrich mine, as does EPL 3669 (aka Tumas North) in the NOVA JV, in which Deep Yellow holds a 39.5% interest.
We expect that management will deliver on its plan of becoming a secure and reliable Tier I uranium producer with an annual operating capacity of 5-to-10 million lbs. of U308. We also expect management to pursue additional acquisitions and/or mergers as the uranium consolidates during the current upcycle.
ANNUAL REPORT
On September 27, 2024, Deep Yellow filed its Annual Report for the fiscal year ending June 30, 2024.
Tumas Project (100%) – FY 2024
Tumas 3 Drilling Campaign
On February 29, 2024, an RC and diamond core drilling campaign commenced at Tumas 3 with the objectives to both upgrade and increase the Project’s MRE, while simultaneously bolstering the company’s financing effort to bring the Tumas mine to production. The goal was to define adequate Proven Reserves within the pit locations defined within the Tumas DFS for the mine to operate for an initial six (6) years of operation.
The diamond drill spacing in parts of Tumas 3 was reduced to 50m x 50m, which was able to support the upgrading of roughly 20 Mlbs U308 from the JORC Indicated to Measured category.
A 660-hole (12,727m) RC resource drilling program also commenced at the end of February and was completed in late June. On September 11, 2024, Deep Yellow announced that the in-fill drilling program resulted in the upgrade of the Measured and Indicated Mineral Resource to 58.2 Mlb eU308 at 320 ppm, achieving management’s goal of a potential LOM of over 30 years.
As a reminder, in the previous drill program between late March and mid-August 2023, Deep Yellow completed 235 RD drill holes (8,017m) that targeted areas west of Tumas 3 East and Tumas Central. 109 holes were explored for additional resources (spaced lines between 200m to 1,000m) and 126 holes focused on expanding the current resource, along line and holes spacing of 100m. Based on the results of the drill program, the Indicated MRE increased 10.4% from 54.9 Mlbs at 320 ppm eU308 to 60.6 Mlbs at 325ppm eU308. The Inferred MRE increased 24.0% from 5.0 Mlbs at 219 ppm eU308 to 6.2 Mlbs at 170ppm eU308. The total Tumas 3 MRE increased 11% to 66.8 Mlbs at 300 ppm eU308. The total ML 237 Indicated Mineral Resource increased to 108.5 Mlbs at 265 ppm eU308.
Metallurgical Testing for the Tumas Project
Metallurgical test work for the Tumas Project continues. Optimization of the beneficiation process has resulted in a material reduction in energy requirements, which is expected to reduce operating costs. Additional test work on the membrane section has significantly improved performance over the assumptions in the DFS, particularly by increasing the permeate yield and achieving a higher selectivity, which results in higher throughput of uranium, vanadium and reagents. These performance improvements should improve the Project’s NPV.
Tumas Definitive Feasibility Study Re-Costing Study
In December 2023, the Tumas Definitive Feasibility Study Re-Costing Study was completed, which updated the base case price of uranium to US$75/lb. from US$65/lb. U308 (a conservative increase considering the spot price has exceeded US$100/lb.) and adjusted the initial cost estimates to reflect the moderating rate of inflation and an abatement of the supply chain pressures. The base case IRR increased from 19.2% to 27.0%.The Re-Costing Study continues to validate the commercial viability of the Project.
NOVA JV – FY 2024
Based on the evaluation of Barking Gecko 8-RC hole (1,558m) drill program, which was conducted between September 22, 2023 and November 10, 2023, JOGMEC (Japan Oil, Gas and Metals National Corporation) advised Deep Yellow of its intention to withdraw from the NOVA JV. After the documentation is received, the Project’s ownership will revert to Deep Yellow (65%), Toro (25%) and Sixzone (10%).
Mulga Rock Project (100%) – FY 2024
On February 26, 2024, Deep Yellow released an updated MRE for the Ambassador and Princess deposits at the Mulga Rock Project. The total Measured, Indicated & Inferred U308 Mineral Resources increased 25.6% from 56.7 Mlbs to 71.2 Mlbs with Measured increasing 15.9%, Indicated increasing 57.1%, and Inferred decreasing 30.3%, all at a 100 ppm U308 cut-off. The decrease in the Inferred resource was a result of an overall upgrade of previously lower-grade material into the Indicated category. The updated MRE included drilling results from the 656-hole (36,647m) air core drill program completed in August 2023.
In addition, the updated MRE includes estimates for critical minerals (Cu, Ni, Co, Zn & Rare Earth Oxides) as eU308. Including the critical minerals, the total updated Measured, Indicated & Inferred eU308 Mineral Resources increased 85.7% from 56.7 Mlbs to105.3 Mlbs with Measured increasing 77.8%, Indicated increasing 140.2% and Inferred decreasing 18.6%. There was also an overall upgrade of material from the Inferred into the Indicated category.
A metallurgical test work program conducted for the Mulga Rock Project (Western Australia) was completed during the third fiscal quarter. The results established the potential commercial viability of recovering critical minerals (base metals and rare earth elements) along with uranium resources.
The metallurgical test work for Mulga Rock indicates that:
• an overall uranium recovery rate above 90% is probable
• overall recoveries for base metals (copper, nickel, cobalt and zinc) and rare earth elements (neodymium, praseodymium, terbium and dysprosium) are above 70% and
The 2018 DFS had uranium recovery rates in the 85.9%-to-89.6% range with no recovery assumed for critical minerals and only around 20% for base metals.
A revised DFS that will optimize the mining method, which will potentially include the recovery of critical minerals, is being undertaken with completion date anticipated to be in the third calendar quarter of 2025.
Alligator River Project – FY 2024
Since the announcement of the 27% increase of the MRE for the Angularli Deposit at Alligator River Project in mid-2023, a heritage survey on EL5893 was conducted in the second quarter of FY2024, which resulted in conditional approval to explore areas north of Angularli. During the third fiscal quarter, desktop studies were conducted to delineate prospective corridor, including combining and merging radiometric, magnetic and gravity data in order to produce geophysical images that will help identify prospective corridors. During the second half of fiscal 2024, two geophysical surveys were planned, including a ~750-line km drone-borne high-resolution magnetic and radiometric survey commenced in June 2024. Also, RC and diamond drilling programs were being planned, and LIDAR data was acquired. A ~750-line km drone-borne high-resolution magnetic and radiometric survey commenced in June 2024.
Financial
The company is well funded with a cash balance of AUD$177.5 million as of June 30, 2024, up 335% from AUD $40.77 million on June 30, 2023. Working capital was AUD$260.5 million.
ANTICIPATED MILESTONES
Tumas Project
• Final Investment Decision (FID) is expected to be made in the very near future.
• If management’s plans continue as expected, production is anticipated to commence during the second half of calendar 2026
• The detailed engineering phase was able to begin after Ausenco Services Pty Ltd was selected as the preferred EPCM. It is anticipated that the Tumas Project will be further optimized.
• Additional resource drilling is planned for an area to the west of Tumas 3 during FY2025 with the goal of identifying an additional 30 Mlb U308 in order to achieve a 35+ year LOM.
Mulga Rock Project
• A revised DFS for the Mulga Rock Project, including base metals and rare earth elements (REE) in addition to uranium, commenced in the first quarter of FY2025 with expectations of being completed in the fourth quarter of FY2025.
Alligator River Project
• Desk top prospectivity appraisals to define priority exploration corridors during calendar 2024.
UPDATE ON THE URANIUM INDUSTRY
The momentum for uranium has been fueled by greater acceptance of electricity generated from nuclear power plants as nations around the world grapple with the challenges in the efforts to reduce the use of fossil fuels. Political ambition has been translating into political action.
The driving force has been the recognition of the tightening supply/demand structure of uranium market with the projected demand by nuclear power plants increasing and the sequestration of uranium by physical funds (such as the Sprott Physical Uranium Trust and Yellow Cake Plc) continuing. The change in sentiment of utility buyers of long-term contracted uranium has resulted in the volume of contracted volume increasing to the highest level in over a decade.
Between November 30 to December 12, 2023, around 85,000 participants gathered the COP28 (the 28th Conference of the Parties of the United Nations Framework Convention on Climate Change) aka UNFCCC) in Dubai. At the Conference, 22 countries pledged to triple the nuclear capacity by 2050. Within COP28, the 2-day Net Zero Nuclear Summit was convened.
More than 120 nuclear energy and technology companies have signed an Industry Pledge to at least triple global nuclear energy capacity by 2050. And 25 countries have also signed a pledge to triple nuclear energy capacity by 2050.
In March 2024, world leaders met in Brussels at the first Nuclear Energy Summit in order to emphasize the role of nuclear energy in reducing the use of fossil fuels and improve energy security.
The momentum is further exemplified by increased attendance at the annual World Nuclear Symposium held in early September 2024. This year, the event was one of the best attended in its history, reaching maximum 800-person venue.
Leading market research firms on the nuclear industry forecast that the deficit between primary supply (from mines) and the demand by nuclear reactors will continue to expand through 2040. In its reference scenario, the World Nuclear Association calculates that the annual primary supply deficit for uranium will exceed 140 million pounds by 2030. Furthermore, in its Base case, UxC estimates that between 2023 and 2040, the needs of operating nuclear reactors will increase by 35%. Both scenarios indicate that new primary production will be needed with the price of uranium being the key determent that will incentivize the development of new mines.
The demand for electricity continues to increase due to population growth, the modernization of emerging & developing nations, the adoption of EVs and the growing desire to attain Net-Zero Carbon Emissions targets. According to the latest International Energy Agency (IEA) report, global electricity demand continues to grow with electricity generated from fossil fuels expected to decline and electricity generated from renewables anticipated to expand.
Countries such as China, India, Spain, Finland, Sweden and the U.S. have and continue to embrace nuclear power through new power plant builds and/or life extensions. Elsewhere, there are countries in which governments are updating power policies to encompass or emphasize nuclear electrical power under the mantra of clean, renewable energy. Globally, there are 439 nuclear reactors in operation and 66 under construction with China accounting for 30 reactors under construction.
Uranium Cycle
The uranium industry is composed of many companies, from major established producers to more speculative junior exploration companies. Though larger producers tend to have greater resources to navigate periods of depressed market conditions, junior companies provide greater leverage to the rise in uranium prices.
Almost all uranium stocks should benefit from the anticipated growth of much needed primary supply driven by the expected upcoming fundamental supply deficit; however, certain groups of uranium stocks benefit differently from each stage of the up-cycle. Historically (observing the 2001-2007 up-cycle), current producers reacted well to the initial rise in prices (since their current production could immediately benefit from the increase in the price of uranium), and they significantly outperformed the price of the commodity, itself. However, extreme out-sized returns were enjoyed by junior mining companies that traded below $0.25 per share at the bottom.
Then, there was a mid-phase when the rate of increase of the spot price of uranium moderated to a single-digit rate. In this period, junior mining companies corrected in the 40%-to-50% (sometimes multiple times), while producers corrected about half that amount (around 25%).
In the current uranium cycle, the advent of physical uranium funds assisted in growing demand/supply imbalance by removing supply from the market. Their combined stockpiles now total over 100 million pounds. Currently, these uranium investment vehicles do not have formal redemption mechanisms. As uranium prices rise, there will be the potential for these funds to release supply into the market, triggering one of several expected 40%-to-50% corrections in the uranium space.
During the latter phase, when the uranium spot price surged irrationally, junior mining companies that have become producers (and the commodity) exhibited solid triple-digit returns from the consolidation low that had occurred in the mid-phase. Surprisingly, in this late phase, out-sized returns were achieved by junior mining companies which announced, at that instant, they were entering the uranium space; on the other hand, these same junior companies later experienced greater that 95% declines as the cycle eventually unwound.
INSTITUTIONAL OWNERSHIP
Institutional investors own 44.23% of the fully paid ordinary shares outstanding of Deep Yellow Limited as of the end of the latest reporting period (June 30, 2024). Paradice Investment Management Pty Limited was the largest holder with 69,789,193 shares (or 9.20% of the shares outstanding). Other major institutional holders include State Street (7.13%) and the Vanguard Group (5.00%).
VALUATION
Broadly speaking, the public uranium companies can be grouped into three segments: producers, development companies and exploration companies. Producers are actively mining and generating revenues. Exploration companies are prospecting and/or drilling to establish mineral resources. In between these two segments are the development companies that already have established resources and are advancing through the process to bring a mine in operation, generally from the point of initiating a Pre-Feasibility Study to the actual construction of a mine. The comparable companies to Deep Yellow fall into this category.
Further, the comparable companies have been narrowed through quantitative factors, particularly those with a market capitalization over $500 million and trading above $1.00 per share. This process captures a range of well-funded junior uranium development companies, which are listed in the table above. Currently, the P/B valuation range of these comparable companies is between 3.87 and 6.53. With the expectation that Deep Yellow’s stock will attain a second quartile P/B ratio of 6.0, our comparable analysis valuation price target is US$2.60.
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