DYLLF - Deep Yellow Limited Is Positioned To Become A Powerhouse For Uranium Mining

2023-10-20 11:20:57 ET

Summary

• Deep Yellow Limited is an early stage uranium miner with significant reserves in Australia and Namibia.
• The macroeconomic landscape for nuclear power is positive, with a supply/demand imbalance of 70% and improving political support for nuclear energy.
• Deep Yellow's strategy is to grow organically and through acquisitions, with current known and probable reserve base of 428Mlb of uranium.

Deep Yellow Limited ( DYLLF ) is an early stage uranium junior miner that’s in the process of building up to become a tier-1 uranium producer. As of their latest investor presentation dated September 13, 2023, Deep Yellow has roughly 428Mlb of proven and probably U ₃ O ₈ reserves across their two regions in Australia and Namibia, South Africa. Given the production assumptions management presented in their report as well as a 16% discount rate on future cash flows, we can value DYLLF shares at $1.05/share. With this, I provide DYLLF a BUY rating.

Macroeconomics

The macroeconomic landscape for Deep Yellow couldn’t be better. Nuclear power has been shunned for decades as reactor meltdowns in Chernobyl, Three Mile Island, and Fukushima have made people wary about the safety of nuclear energy production. Despite these few incidents, there are currently 438 reactors operating with 59 under construction and 104/341 reactors planned/proposed. According to the World Nuclear Association , there is currently a 74% supply/demand imbalance. By country, Namibia and Australia are the third and fourth largest producers of uranium , closely following Canada and paces behind Kazakhstan. My presumption is that these countries are comfortable with uranium mining operations and would be open to further development, benefiting Deep Yellow for future production activities.

Looking at nuclear power utilization, there has been a lot of positive movement on the political front. Earlier this year, Belgium reached an agreement with the French utility Engie to extend the life of two reactors, the Doel 4 and the Tihange 3 reactors, for 10 years.

According to an article published by World Nuclear News , the European Council has reached an agreement on a proposal to include existing nuclear plants in the EU’s electricity market design. Despite Germany’s complete phaseout of nuclear energy , France will have the ability to maintain its relationship with EDF for nuclear-based electricity. Accordingly, France generates 70% of its power using nuclear reactors and would face drastic challenges if these were forced to be decommissioned. In total, there are 168 active nuclear reactors operating across Europe.

Nuclear energy stateside is less entrenched, as the US has a more abundant supply and easier policy for the utilization of fossil fuels. According to the EIA , there are currently 54 nuclear reactors operating in the US with the newest reactor, Unit 3, at Alvin W. Vogtle Electric Generating Plant in Georgia coming online on July 31, 2023. This plant is also in the process of bringing Unit 4 online in early 2024 and would give the plant a total capacity of 4,536MW. This is the first reactor commissioned since Watts Bar 2 came online in 2016. Though the number of reactors in service has declined from a peak of 112 in 1991, capacity hasn’t declined as significantly as one would expect. In total, nuclear energy accounted for 18% of energy generated in the US in 2022.

There certainly is a lot of interest in nuclear power as newer technology is being explored, specifically for modular reactors (200-300MW) and micro reactors (5-40MW). Accordingly, the US Nuclear Regulatory Commission has issued its final rule for the first modular reactor for NuScale Power.

Strategy

The firm’s strategy is to grow both organically and inorganically by exploiting their current properties and opportunistically acquire additional uranium deposits through M&A. As of this writing, Deep Yellow owns properties in two regions, with multiple projects in each. The first is in Namibia in South Africa with the Tumas project, Aussinanis project, Tubas project, and the Omahola Basement project. The other region is in Australia, with the Mulga Rock Project and the Alligator River Project. In total, Deep Yellow has 409Mlb of U ₃ O ₈ reserves.

Deep Yellow’s properties in Namibia are located in a very strategic spot in which infrastructure is already built out.

This will allow access to roads, a class 7 port, airports, waterways, and power transmission. This should significantly improve the feasibility of mining operations in this region and allow mining operations to come online faster as approvals are granted. At the time of this writing, the Tumas Project has completed a two-phase 235-hole 8,017m RC resource and infill drill program with expected life of mine extended from 22.5 years to 30+ years and is expecting to update its resource estimates in Q4’23. Mulga Rock completed a 656-hole drill program for 36,647m and will be updating its mineral resource estimates in Q4’23. As of their Q2’23 report, Deep Yellow has delayed their FEED work until completion of mineral resource estimates. That being said, management maintained their 2026 production target.

Deep Yellow is currently in talks with NamWater and NamPower for water and power supply for their project. As of Q2’23, there have been face-to-face meetings resulting in formal applications for the supply of water and power for the project to ensure availability for when the project commences.

Deep Yellow has grown purely through equity and holds no debt on the balance sheet. At the time of this writing, Deep Yellow has a $375mm book value and a market cap of $666mm, with an enterprise value of $625mm. Deep Yellow spent $5mm to fund operations with a net loss of $16mm in FY23 and has a cash reserve of $41mm. Assuming costs remain constant and no additional cash raise, Deep Yellow can sustain at this rate for 2.5 years.

Leadership

The bench for Deep Yellow's leadership team runs deep. Chris Salisbury is their Non-executive Chair, with over 30 years of experience in senior strategic and operational roles with Rio Tinto. John Borshoff, Managing Director and CEO, has over 30 years of experience as a geologist and mining executive in the uranium industry. He founded Paladin Energy and transformed the company from a junior explorer into a multi-mine uranium producer with a global asset base. One could potentially compare Mr. Borshoff to Lourenco Goncalves, CEO of Cleveland-Cliffs ( CLF ). His background provides more than enough credibility to say that this isn't his first rodeo and should be able to make Deep Yellow's operations a success.

Valuation

Assuming projects go according to management’s production plan with an LOM of 30+ years for Tumas and 15 years for Mulga Rock and expecting to produce to depletion AND assuming a constant EBITDA margin of 42% as presented in their investor presentation at $65/lb for U ₃ O ₈ , and a discount rate of 10%, the present value of future cash flows sums to a value of $2.24/share, holding all else equal. Because this firm is in the early stages of approvals, I believe a much higher discount rate is deemed appropriate. With the same assumption at lower production rates, the present value looks more like $1.05/share. With this speculation, I provide DYLLF shares a BUY rating with a price target of $1.05/share, giving shares a 20% upside potential.

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