READ THE FULL DYLLF RESEARCH REPORT
Deep Yellow Ltd. (OTCQX:DYLLF) (ASX:DYL) is on track to become a tier-one, multi-jurisdictional uranium producer ahead of the anticipated up-cycle. Ongoing annual supply deficits and the rationalization of capacity by the major producers, along with production cutbacks due to the pandemic, have hastened the inflection point in uranium's commodity cycle. Management is developing its Namibian uranium projects, one of which (Tumas Project) on which a DFS is being prepared. The M&A opportunity with Vimy Resources will increase the company's resources, broaden Deep Yellow's geographic diversification in terms of mining jurisdictions and add another DFS-stage uranium project, Mulga Rock in Australia.
SUMMARY OF RECENT EVENTS
Merger with Vimy Resources
On July 20, 2022, shareholders of Vimy Resources Ltd voted in favor of the Scheme of Arrangement, under which Deep Yellow will acquire 100% of the shares of Vimy Resources.
The merger should be finalized on or about August 4, 2022, subject to the approval by the Supreme Court of Western Australia. According to the Arrangement, shareholders of Vimy will receive 0.2942 shares of Deep Yellow shares for every share of Vimy Resources held. The merger will create a multi-jurisdictional uranium company with two advanced uranium projects in Namibia (Tumas Project) and Australia (Mulga Rock Project).
DFS Work Continues for Tumas Project
Workstreams for the Definitive Feasibility Study on the Tumas Project are on track for completion in by year-end of 2022. The latest work has confirmed key inputs and assumptions outlined in the PFS.
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. The mine schedule is being developed for the updated Estimated Ore Reserves (68.4Mlb U308) that are now available to the Tumas Project.
Once the merger with Vimy Resources closes, the completion of a DFS on the Mulga Rock Project will become part of Deep Yellow's developmental pipeline and should be completed in 2023.
Omahola Basement Project
On July 21, 2022, the results of Phase 1 of the follow-up drilling program at the Omahola Basement Project were announced. Phase 1 commenced on March 7, 2022 and consisted of 40 RC holes (5,252m).
The top two assay results at Inca South were OMH0254 (8m at 512ppm eU308 & 5m at 308ppm eU308) and OMH0255 (5m at 270ppm eU308). These mineralized intersections potentially indicate a 2km south westerly extension from previous positive drill results at Inca South.
Phase 1 of the follow-up drill program again confirmed the prospective nature of the broader Omahola target zone, and further exploration of Inca South, particularly deep RC drilling, is warranted. Only 16km of the 50km structural target zone has been tested by shallow drilling. Phase 2 (roughly another 5,000m) is planned for the second half of 2022.
The current Mineral Resource Estimate at the Omahola Project is 125.3Mlb at 190ppm U308 at 100ppm cut-off (JORC 2012 Code).
NOVA JV Project (Barking Gecko)
On April 7, 2022, Deep Yellow announced the assay results of the 10 RC holes, all of which intersected mineralization greater than 100ppm U308 over a least one meter However, the almost all the RC drill holes did not return the high grades or thicknesses previously encountered in the central drill line of Barking Gecko North. Nevertheless, the assay results indicate that a mineralizing system exists, though the high grade mineralization appears to be restricted laterally. Nevertheless, the potential for continuation of the mineralization at depth remains.
The NOVA Joint Venture (or NOVA JV) was created in March 2017 with JOGMEC (Japan Oil, Gas and Metal National Corporation). Currently, Deep Yellow is the manager of the NOVA JV and holds a 39.5% interest in the project. JOGMEC earned a 39.5% interest in the project through exploration and development expenditures, while NOVA Energy (a subsidiary of Toro Energy Ltd holds 15% and Sixzone Investments Pty holds a 6% carried interest.
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 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 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.
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.
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.
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.
NOVA JV PROJECT
In late-March 2017, Deep Yellow entered into a joint venture agreement with JOGMEC (Japan Oil, Gas and Metal National Corporation) regarding the NOVA Joint Venture (or NOVA JV). In August 2020, JOGMEC earned a 39.5% interest in the project through exploration and development expenditures of AUD$4.5 million. The NOVA JV encompasses 556.8 square kilometers. Deep Yellow continues to be the manager of the NOVA JV holding 39.5% interest in the project.
Deep Yellow conducted a 14-hole (3,561m) Phase 1 follow-up RC drilling program at the Barking Gecko North prospect on EPL3669 between July 12th and October 6th 2021. The Barking Gecko prospect is part of the NOVA JV project (the light blue shaded areas on the map below).
Barking Gecko is a prominent domal feature which is wrapped around by a large zone of anomalous interest (approximately 4km long and 1km wide). This prospective area was indicated by 3D inversion of high resolution airborne magnetic data, which detected a zone of easterly trending magnetism.
The drill holes were spaced 100m apart in a NW-SE orientation with TN256RC and TN258RC being 50m infill holes. All 14 holes were angled at 70 degrees and were orientated to the northwest, of which 13 holes intersected uranium mineralization more than 100ppm over one meter.
With the central drill holes delivering the better results, the drilling program identified a 700m x 200m prospective area of high grade and thick uranium mineralization. The standout hole was TN258RC, which over an 83m zone, intersected 70m (grading 503ppm eU3O8) over four intervals. TN260RC intersected 14m (grading 381ppm) while TN261RC intersected 29m (529ppm) over two intervals over a 36m zone.
A follow-up Phase 2 program commenced on November 18th and was completed on December 15th. The program consisted of 10 RC step-out holes (2,272m) flanking the previous drill line by 100m, along with one diamond core hole (TN270DDT), which was completed on December 15, 2021. In mid-January 2022, Deep Yellow announced the assay results of the diamond core hole, which intersected 118m at 352ppm eU308 within eight intersections over a 190m zone, including 9m at 954ppm eU308, 60m at 304ppm eU308 and 30m at 382ppm eU308.
On April 7, 2022, Deep Yellow announced the assay results of the 10 RC holes, all of which intersected mineralization greater than 100ppm U308 over a least one meter However, the almost all the RC drill holes did not return the high grades or thicknesses previously encountered in the central drill line of Barking Gecko North. Nevertheless, the assay results indicate that a mineralizing system exists, though the high grade mineralization appears to be restricted laterally. Nevertheless, the potential for continuation of the mineralization at depth remains.
URANIUM INDUSTRY
The uranium industry is setting up for an anticipated rise in uranium prices.
• Supply/demand imbalances in the past have created three distinct commodity cycles in the uranium industry. Each cycle has begun with an increase in the price(s) of uranium and of uranium equities (both major established producers and junior mining companies), which has culminated in a rapid, exponential 1-2 year rally in uranium stocks.
• The majority of uranium is supplied to nuclear power plants through long-term contracts which are priced at a premium to spot market. Though currently these long-term contracts allow certain uranium producers to continue selling some of their uranium production profitably, about half of the uranium producers have operating costs that are above the current spot price.
• Prior to the pandemic-related shut downs, over 53 million lbs. U308 of capacity have been mothballed since 2013 through the shutdowns of unprofitable mines or by the intentional capacity rationalization by major producers (Kazatomprom and Cameco).
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 with the deficit projected to expand after 2030.
Recent catalysts include:
On February 24, 2022, Russia invaded the 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.
Some nuclear capacity that was slated to be shut down now may remain in operation. For example, in Belgium, two nuclear reactors (Doel 4 and Tihange 3) were scheduled to be phased out by 2025; in March 2022, it was announced that the lives of these two reactors will be extended until 2035. South Korea's President Yoon Suk-yeo has publically supported resurrecting that nation's nuclear energy program. And in Japan, ten pressurized water nuclear reactors have received approvals to restart.
In addition, Western-markets are attempting to reduce their reliance on Russian uranium. The US Department of Energy is seeking to purchase domestically produced uranium. And the US National Nuclear Security Administration (NNSA) began the process to initiate a strategic uranium reserve of 1,000,000 pounds of domestically-produced U3O8. The Biden Administration supports a $4.3 billion plan to purchase enriched uranium from domestic producers. Going forward, the security of supply has become a more important factor.
In the United States, there are 93 licensed nuclear power plants that generate approximately 20% of the nation's electricity.1 Most of the uranium required by U.S. nuclear reactors is imported. In 2021, the country's nuclear reactors purchased approximately 46.7 million pounds, of which 44.3 million pounds was purchased from foreign suppliers. U.S. nuclear reactors consumed (fuel assemblies loaded) 44.4 million pounds of U308 equivalent.
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. As of the end of 2021, China had 53 nuclear power plants with total generating capacity of 55 gigawatts.
• In the United States, the 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 9, 2021 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.
• In July 2022, the European Parliament supported a European Union to classify nuclear power as "green."
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.
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 $0.35 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 3.2 and 6.1. With the expectation that Deep Yellow's stock will attain a second quartile P/B ratio of 5.6, our comparable analysis valuation price target is US$1.18.
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1. U.S. Nuclear Regulatory Agency; https://www.nrc.gov/reactors/power.html
