READ THE FULL DYLLF RESEARCH REPORT
The goal of Deep Yellow's (ASX:DYL.AX) (OTCQX:DYLLF) management is for the company to become a Tier I multi-jurisdictional uranium producer during the current uranium up-cycle. Under a Dual-Pillar growth strategy, management also plans to become a multi-jurisdictional producer by diversifying the company's uranium portfolio through M&A (Mergers & Acquisitions) in order to create a multi-jurisdictional portfolio of uranium projects that mitigate operational, geographic and political risks. Management is pursuing activities that will support the completion of a DFS on the Tumas Project, along with exploration programs at the Omahola and Barking Gecko Basement Projects. In addition, management made an initial salvo into becoming a multi-jurisdictional producer with its pursuit of a merger with Vimy Resources (ASX:VMY).
Proposed merger with Vimy Resources
On March 31, 2022, Deep Yellow and Vimy Resources agreed to merge by a Scheme of Arrangement under which Vimy shareholders will receive 0.294 Deep Yellow shares for every Vimy share held on the record date. Upon implementation, Deep Yellow shareholders will hold 53% of the Merged Group. The record and implementation dates are expected to be in July 2022.
The merger will create a new global junior uranium company with two advanced uranium projects (Tumas and Mulga Rock) in separate Tier-1 mining jurisdictions (Australia and Namibia). Each advanced project has the expected production capacity potential of at least 3.0Mlbs annually and a total annual capacity of roughly 6.5Mlbs. This is one step closer to Deep Yellow's stated goal of attaining annual production capacity of over 10.0Mlbs
Not only does the Merged Group have a clearer path to production with its two advanced projects, but also will have increased scale in many aspects, including in terms of management's industry, project development and operating experience and importantly, financial flexibility (with over AUD$100 million and no debt).
In terms of MRE (389Mlb U308), the Merged Group will become more prominent over many other juniors.
The Merged Group also has a highly prospective portfolio of exploration and early-stage projects that provide a pipeline for organic growth. Early stage projects include Omahola U308 in Namibia and Alligator River in the Northern Territory, where a Scoping Study has been completed on high-grade, unconformity, Athabasca-style uranium-gold deposits. With this expanded project portfolio, investor interest is expected to increase.
Significant milestones achieved by Deep Yellow over the last six months
Tumas Project
The 1,473-hole (24,942m) multi-phase infill drilling program at Tumas 1 East and Tumas 3 provided sufficient evidence to upgrade the MRE (Mineral Resource Estimate) and Probable Ore Reserve such that an over 20 year LOM (up from the 11 ½ years in the PFS) can be achieved in the upcoming DFS (Definitive Feasibility Study). The current Measured & Indicated Resource at Tumas 1, 2, 3 and 1 East is 98.7Mlb U308, grading at 266ppm uranium, up 87% from the pre-2021 drilling program estimate of 52.7 million lbs. U308.
The Probable Ore Reserve Estimate at Tumas increased 121% to 68.40Mlb U308, up from 31.0 million lbs. in the Maiden Reserve estimated in the February 2021 PFS. The DFS is on schedule for completion during the second half of calendar 2022.
Omahola Basement Project
The Mineral Resource Estimate at the Omahola Project was upgraded from a Measured, Indicated and Inferred Resource base of 45Mlb at 420ppm eU308 at a cut-off of 250ppm (JORC 2004 Code) to 125.3Mlb at 190ppm U308 at 100ppm cut-off (JORC 2012 Code). The upgrade occurred through a thorough review of the underlying data of the three resource deposits. In early October 2021, a 200-hole (7,100m) shallow RC drill program commenced in order to identifying new mineralized areas beyond the known deposits. 34 of the 200 holes returned assay results greater than 100ppm U308.
Located on EPL 3496, the Omahola Project currently consists of three distinct deposits (Ongolo, MS7 and Inca), which were identified between 2009 and 2013. These shallow deposits, which occur at a depth of 20m to 250m, are a second type of uranium mineralization at the Reptile Project described as basement or alaskite. Usually referred to as uraniferous leucogranites, alaskite (a local term) dyke-like formations were formed by molten granite intruding into sedimentary rock. It is postulated elevated uranium grades occur when high-grade metamorphism causes a partial melting of basement rocks, which enhances the transportation and enrichment of uranium ore, such as at Rössing South.
Alaskite Alley, a north-south trending zone of occurrences of uraniferous leucogranite, currently supports two mines (Rössing and Husab), where the primary mineralization of the ore bodies is usually found in sheets of uranium-rich, granite-hosted alaskite (pegmatitic alkali-leucogranite). Rössing and Husab are almost due north of the Reptile Project, and Alaskite Alley appears to cut through the western part of Deep Yellow's EPL 3496 tenement, in which Deep Yellow has discovered these three uranium deposits.
Barking Gecko Basement Project
Only 35% of the prospective basement zone at Barking Gecko has been tested.
A Phase 1 (14-hole 3,561m) RC drilling program at the Barking Gecko North prospect was completed on October 6, 2021. Results were encouraging with 13 of 14 holes intersecting uranium mineralization. The highlighted hole was TN258RC, which contained 70m at 503ppm eU308 over four intersections over an 83m zone.
A follow-up Phase 2 program commenced on November 18th and was completed on December 15th. The highlighted hole is N270DDT, which contained 118m at 352ppm eU308 over eight intersections over a 190m zone.
Financing
As of December 31, 2021, Deep Yellow had AUD$71.98 million of cash and cash equivalents on its balance sheet. Working capital had increased to AUD$71.6 million from AUD$52.1 million as of fiscal year-end (June 30, 2021). The influx of capital came as a result of the exercise of options due to expire October 29, 2021. Proceeds from the exercise of options totaled AUD$25.044 million during the first half of fiscal 2022.
Definitive Feasibility Study (DFS)
The Definitive Feasibility Study (DFS) for the Tumas Project is progressing as work continues on the project's economic feasibility. The assay results from a 2021 infill drilling program helped increased the LOM to 25.75 years from 11.5 years in the PFS. The rejection rate of the beneficiation process has increased from 35% in the PFS to 55%. Also, power supply cost reductions have been identified.
Environmental Impact Assessment (EIA)
Baseline studies on groundwater, radiological, air quality, and flora & fauna conditions were completed for the Environmental Impact Assessment (EIA) during the first half of 2021. Thereafter, the EIA Scoping Report for the Tumas Project was delivered to the relevant agencies of the Namibian Government on July 15, 2021. The submission (and approval) of an EIA is required before the Environmental Commissioner can issue an Environmental Clearance Certificate (ECC), which is a requirement for a Mining License.
Mining License (MLA)
On July 21, 2021, Deep Yellow filed a Project Mining License Application was filed with the Namibian Ministry of Mines and Energy (MME) for the Tumas Project area. As part of the process, the MME will require submission of the DFS on the Tumas Project, an Environmental Impact Assessment (EIA) and an Environmental Management Plan (EMP). Once an Environmental Clearance Certificate (ECC) is granted by the Ministry of Environment, Forestry and Tourism, Mining License (MLA 237) can be granted by the MME. The process is expected to require 18 months to complete.
Equity Developments
On January 29, 2021, Deep Yellow achieved the recognition of being ranked in the OTCQX Best 50 (#47), a ranking formulated by being among the 50 best performing stocks out of the 462 companies traded on OTCQX Best Market, along with such quality standards as complying with financial standards and exhibiting average daily dollar volume growth.
On January 29, 2022, Deep Yellow again achieved the recognition of being ranked in the OTCQX Best 50 (#21).
Prospects for Uranium Market Remain Very Positive
Recent developments in the uranium industry have accelerated the pace toward the impending supply-demand imbalance expected to occur in the 2023-2025 timeframe. Several catalysts have stimulated four major increases in the price of uranium in the spot market: the first from $18 per pound to the mid-$20 range, the second from $22 to the $28-$34 range, a third leg up to $45-$50 range and a fourth driving the price to the $60 range. These catalysts have increased the visibility of the structural supply deficit to both utilities and investors, highlighting the transparency of the true incentive price needed to economically bring sufficient capacity on-line.
The catalysts include:
Production Rationalization by the major producers of uranium (Kazatomprom and Cameco)
• Starting in 2016 and continuing today, the rationally planned curtailments of production by the two major producers of uranium (Kazatomprom and Cameco) has resulted in a shrinkage of secondary supplies, which stabilized and initially reset the price of U308 in the transaction market.
◦ Between 2017 and 2020, Kazatomprom reduced uranium production from 26,600 t U308 in 2016 to 19,477 t U308, which includes approximately 3,300 t U308 due to the impact of the COVID-19 pandemic.
◦ Cameco halted production at Rabbit Lake in 2016 and at McArthur River in 2018. Subsequently, Cameco had to purchase material in the spot market in order to meet the company's delivery commitments.
COVID-19 prompted the shutdown of several uranium mines in Canada, Australia and Africa, which accelerated the inventory drawdown of secondary supplies.
The launch of the Sprott Physical Uranium Trust has significantly impacted the availability of secondary supply and also has brought greater transparency to the sequestering process.
• Sprott created the Sprott Physical Uranium Trust (SPUT) through the acquisition of Uranium Participation Corporation (UPC) in April 2021 and its subsequent restructuring into a purchaser and stockpiler of U308. SPUT was formally launched on August 17, 2021 and it immediately commenced to purchase uranium purchase in a program funded by an initial $300 million at-the-market (ATM) financing. Through the initial and subsequent ATM financings, SPUT has raised just under $1.0 billion (under the current $1.2 billion authorization) and purchased & stacked 21 million pounds of U308. Though other entities have sequestered uranium (e.g. Yellowcake plc, Energy Fuels and Uranium Energy), the Sprott Physical Uranium Trust has added significant scale to the sequestering market mechanism and accelerated the rundown of secondary supply.
On February 24, 2022, Russia invaded Ukraine. The ensuing disruptions in the energy space (particularly pertaining to the supply of oil, gas and uranium) have sparked rallies in the energy fuel complex. Furthermore, energy policy decision-makers have become more concerned over energy security. Going forward, the diversity of supply has become a more important factor.
Policy commitments by major countries are attempting to reduce carbon emissions in an effort to thwart global warming. Governments and individuals are coming to realize that nuclear power can provide green electrical energy with an extremely low carbon footprint
• China is planning for nuclear energy to provide 70GW by 2025 under its 14th 5-year plan, up from 51GW currently. Furthermore, China is planning to build 150 new nuclear reactors over the next 15 years.
• In the United States, the recently enacted Infrastructure Bill allocates $6 billion to prevent premature retirement of existing reactors and $2.5 billion to develop advanced reactors.
• In France, President Emmanuel Macron announced on November 9th that France will pursue the construction of new nuclear reactors in order to reduce carbon emissions.
• Japan is planning for nuclear power to provide 20%-22% of the country's energy by 2023.
These catalysts are rebalancing the uranium market, positioning it to achieve the incentive price required to economically develop and bring online sufficient new uranium mine production capacity in order to satisfy the structural supply deficit in the out-years.
With growing long-term demand for uranium fuel, the gap between future demand and supply is widening. Higher uranium prices are necessary for existing mines to return to production and for new mines to be developed.
Traditionally, nuclear electric utilities have tended to negotiate and enter into uranium term supply contracts in the fall, after the World Nuclear Association conference in early September. At the conference, all the major industry players meet and share information in order to gauge the current status on the nuclear energy industry. Equipped with this knowledge, representatives of nuclear electric are better prepared to make more informed decisions concerning the procurement of nuclear fuel.
For example, subsequently, on November 12, 2021, Kazatomprom signed two term contracts with China, i.e. with China National Uranium Company Ltd. (CNNC) and State Nuclear Uranium Resources (NPTC).
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 $200 million and trading above $0.40 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 3.3 and 7.5. With the expectation that Deep Yellow's stock will attain a mid-second quartile P/B ratio of 5.9, our comparable analysis valuation price target is US$1.36.
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