Lotus Resources Ltd (ASX:LOT) is confident its Kayelekera Project in Malawi is a proven option in the uranium sector at a time when the uranium market is poised for a re-rating due to an impending supply and demand imbalance.
A positive scoping study has confirmed that Kayelekera can be among the first uranium projects to recommence production as a low capital cost (US$50 million), long-life operation (14 years).
The project has a 1.4 million tonnes per annum processing facility and around US$200 million has been spent on infrastructure including an on-site acid plant and accommodation camp.
Kayelekera also has proven historical production of around 11 million pounds of uranium produced over five years.
The company has considered two production scenarios:
- Scenario 1: 8-year life of mine, producing 16.4 million pounds uranium (~900 parts per million uranium).
- Scenario 2: 14-year life of mine, producing 23.8 million pounds uranium with treatment of stockpiles from year 8 (average head grade ~680 ppm uranium).
In addition, Lotus estimates C1 cash costs of US$33/pound uranium with average annual production of 2.4 million pounds of uranium and multiple opportunities identified to further reduce costs, including:
- Upgrading of feed materials (higher uranium grades and lower acid consumption);
- Improved options around power supply;
- Acid recovery rationalisation; and
- Optimised tailings disposal options.
Top 10 brownfield care and maintenance assets that achieved commercial production.
The company is confident that the project has significant exploration upside with limited exploration undertaken during the past 20 years.
Kayelekera's existing resource is 37.5 million pounds at around 83% measured and inferred.
Following the positive outcomes of the scoping study, work has commenced on a feasibility study.
Uranium market outlook
The company believes that the uranium market is poised for a significant re-rating due to an impending supply and demand imbalance caused by sustained low pricing for the past decade which has resulted in no new developments or discoveries and minimal exploration.
Consequently, supply and demand fundamentals have significantly tightened with an estimated 30-60 million pounds uranium per annum shortfall expected by 2024 to 2028.
COVID-19 has affected the uranium industry arguably more than any other with 40 million pounds of lost production in 2020 with similar losses expected through 2021 but on the flip side, it has been one of the best-performing commodities in 2020 – with a 30% increase in spot price.
This has brought forward the impending supply deficit and a stand-off between suppliers (producers and developers) and end-users (utilities) including:
- Higher price required to restart ideal assets and a further increase for new developments;
- No substitute for end-users and stockpiles are falling;
- History has shown once utilities start buying to this will quickly increase the price as they want to ensure long term guarantee of supply;
- The world’s second-largest producer, Cameco Corp (NYSE:CCJ), is one of the largest buyers on the spot market (26.2 million pounds uranium acquired during first nine months of 2020); and
- Majors are preserving long-term value by leaving uranium in the ground and buying uranium on the spot market until pricing increases.
Supply and demand fundamentals have significantly tightened with an estimated 30 – 60 million pounds uranium per annum shortfall expected by 2024 to 2028.
Long-term contracting cycle
Nuclear utilities cover their fuelling needs through long-term contracts, which generally range between three to ten years and typically no more than 10% are bought on spot.
Notably, the market has observed decreasing utility contract coverage rates across North America, Asia and Europe.
Further to decreasing contract coverage rates, the market expectation for the next long-term procurement cycle by utilities is based on industry-specific fundamentals:
- Utilities need to ensure adequate long-term supply security to effectively generate electricity;
- Nuclear fuel production and delivery cycle requires a minimum of 1824 months; and
- Most utility nuclear fuel inventories serve as a fuel bank for strategic purposes.
Lotus has already commenced discussions with multiple global utilities regarding long-term base loading contracts.