DYL - Hartleys · 2019-10-30 · Hartleys Limited Deep Yellow Limited (DYL) 30 October 2019 Page 2...

of 31

Deep Yellow Limited (DYL)

Ura

niu

m: E

xp

lore

r

Brief Business Description

Hartleys Brief Investment Conclusion

Issued Capital

- fully diluted

- ITM diluted 237.8m

Market Cap

- fully diluted

- ITM diluted $65.4m

Cash - (30 Sep '19a)

Debt - (30 Sep '19a) $0.0m

EV

- fully diluted (ITM)

Projects

Reptile (Namiba) 100% U

Nova JV (Namiba) 65% U

Yellow Dune JV (Namiba) 85% U

Resource

Tonnes (mt) U3O8 (ppm) Mlb

211.2 323 149.3

Board & Management

Rudolf Brunovs - Chairman

John Borshoff - MD/CEO

Gillian Swaby - ED

Top Shareholders

Resource Capital IC 11.8%

Company Address

Author:

Aiden Bradley

Resources Analyst

Ph: +61 8 9268 2876

E: [email protected]

$15.7m

$82.6m

Uranium explorer/developer

$49.6m

237.8m

Unit 17, 100-104 Railway Rd

Subiaco WA 6008

300.3m

$65.4m

$49.6m

DYL.asx

Speculative Buy

30 Oct 2019

Proven management team which is aiming to

have development ready projects capable of

producing 5-10mlbpa at a low cost. Company

is focussing on progressing its Nambian

projects.

Share Price (last):

$0.40

$0.275

Price Target (12 months):

DEEP YELLOW LIMITED (DYL)

Have Your Cake and Eat It Too Deep Yellow Limited (‘DYL’ or the ‘Company’) is a uranium exploration

company with a dual pronged strategy to build ‘a multi-project global uranium

development platform’. The two-pronged strategy is primarily focused on

growing the existing uranium resource base in Namibia. Secondly, in

conjunction with this, DYL is looking to make counter cyclical acquisitions.

They are led by Paladin Energy (‘PDN’) founder John Borshoff along with

many of that PDN team, providing them with the skills and experience of an

independent team that has actually developed a world scale uranium mine.

The cornerstone asset is a large acreage position in Namibia, a proven

uranium mining and export jurisdiction. DYL holds four key contiguous

Exclusive Prospecting Licences (‘EPLs’) covering 1,590km2, that are located

in close proximity to the established Rössing, Husab (20km to the north) and

the Langer Heinrich (40km to the northeast) mines.

Resource base continues to grow strongly. The Tumas palaeochannel (similar to Langer Heinrich) has been the primary

exploration target. Exploration undertaken by the new management team

(appointed October 2016) has resulted in a three-fold increase in the resource

base of the Tumas palaeochannel to 86Mlb grading 310ppm U3O8. This

brings the total Mineral Resource Estimate of the calcrete mineralisation to

104Mlb. The Company is now targeting 125Mlb to 150Mlb U3O8 in

palaeochannels in the grade range 300-500ppm eU3O8. This is on top of the

45.1Mlb U3O8 at 420ppm in the Rössing/Husab style basement/alaskite

targets. DYL’s overall resource stands at 149.3Mlb U3O8 grading 323ppm

Our 12-month forward valuation is A$0.40 per share. DYL has a focused strategy and has already discovered a globally relevant

resource in Namibia. There is also significant further exploration potential

within DYL’s existing tenements. This resource is located close to both

existing processing and export capacity. Namibia has a long history of

supporting the Uranium sector and is viewed by Uranium purchasers as a

reliable source of supply. The regulatory, environmental and fiscal

environment within Namibia is also relatively supportive for Uranium mining.

DYL’s management team are also one of the most experienced in the industry

and have already successfully developed a Uranium mine in Namibia. The

second prong of their strategy is to use the current depressed Uranium market

to acquire/secure additional assets. The ultimate goal is to secure a suite of

development assets that can supply between 5-10Mlb/a.

The company continues to have a very active drilling program in Namibia and

we expect further positive results and potential resource upgrades over the

next 12 months. The company also has an active new ventures program,

which provides the potential to add further assets to its existing Namibian

portfolio. As its resource base continues to grow it is also likely that DYL

attracts attention from larger producers (and customers). We derive a 12-

month forward valuation and target price of $0.40 per share. Given this

combination of upside to our target price and active 12 months of news flow

we initiate coverage of DYL with a Speculative Buy rating.

Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000

Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the

firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision. Further information concerning Hartleys’ regulatory disclosures can be found on Hartleys

website www.hartleys.com.au

0.00

0.10

0.20

0.30

0.40

0.50

0.60

.

.1

.2

.3

.4

.5

.6

.7

.8

.9

1.

Oct-19Jun-19Feb-19Nov-18

Volume - RHS

DYL Shareprice - LHS

Sector (S&P/ASX SMALL RESOURCES) - LHS

A$ M

Deep Yellow Limited

Source: IRESS

http://www.hartleys.com.au/

Hartleys Limited Deep Yellow Limited (DYL) 30 October 2019

of 31

SUMMARY MODEL

Deep Yellow Limited Share Price Oct-19

DYL $0.275 Speculative Buy

Directors Company Details

Share Price $0.275 Rudolf Brunovs - Chairman Unit 17, 100-104 Railw ay Rd

Market Capitalisation $65.4m John Borshoff - MD/CEO Subiaco WA 6008

Cash $15.75m Gillian Sw aby - ED +61 (0)8 9286 6999

Debt $0.00m Christophe Urtel - NED

Net Cash (debt) $15.75m Mervyn Greene - NED w w w .deepyellow .com.au

Issued Capital 237.8m Justin Reid - NED

Issued Capital (fully diluted ITM options) 237.8m

Options 62.47m @ A$0.50 Top Shareholders (est) m shs %

Issued Capital (fully diluted all options) 300.7m Resource Capital IC 28.0 11.8%

EV-Ord $49.6m Collines Investments Ltd 19.7 8.3%

EV-Diluted $49.6m Paradice Investment Management 17.7 7.5%

12Mth Price Target $0.40

Projects Interest Location

Reptile (Namiba) 100% Namibia

Nova JV (Namiba) 65% Namibia

Yellow Dune JV (Namiba) 85% Namibia

Newsflow

2019 ytd 7.500m of RC drilling for 561 holes.

Nov 2019 Upgraded Mineral Resource statement

4Q2019 7,000m RC drilling for resource enhancement

4Q2019 600m DDH drilling for metallurgical w ork

4Q2019 Reptile Project - Scoping study complete

Resources M t U3O8 ppm mlb 2Q2020 Additional 11,200 RC drilling

Total (basement + calcrete) 211.2 323 149.3 2020 Further increase to Inferred Resources

2020 Convert some Inferred Resources

to the Indicated Resource (JORC, 2012) status.

2020 Planned Pre Feasibility Study - Reptile Project

Quarterly Cash Flow - Commence early 2020, complete by end CY20

A$ m 3Q 4Q 1Q 2Qe Unpaid Capital N o (M ) $ (M ) A ve P r % Ord

Cash (Beginning) 8.3 7.1 15.0 15.7

Operating Cash f low 0.0 0.0 0.0 0.0 Options

Exploration / Development -1.2 -0.6 -1.1 -1.1 1-Jun-22 62.5 31.2 0.500 26%

Corporate overheads -0.4 -0.4 -0.5 -0.5

Other 0.5 8.8 2.4 0.0 Total 62.5 31.2 0.500 26%

Cash (End) 7.1 15.0 15.7 14.1

Analyst: Aiden Bradley

Phone: +61 8 9268 2876

Sources: IRESS, Company Information, Hartleys Research

U

U

Proven management team w hich is aiming to have development

ready projects capable of producing 5-10Mlbpa at a low cost.

Company is focussing on progressing its Nambian projects, a 125km

long Tumas palaeochannel target zone.

FY19 FY20

Key Market Information

Investment Summary

Last Updated: 30/10/2019

Commodity

U


of 31

HIGHLIGHTS Deep Yellow Limited (‘DYL’ or the ‘Company’) is a uranium exploration company with

a dual pronged strategy to build ‘a multi-project global uranium development platform’

(up to a 5-10Mlb pa low cost production with multi-mine capability). The two-pronged

strategy is primarily focused on growing the existing uranium resource base in

Namibia. Secondly, in conjunction with this they are looking to make counter cyclical

acquisitions. They are led by Paladin Energy (‘PDN’) founder John Borshoff along with

many of that PDN team, providing them with the skills and experience of an

independent team that has actually developed a world scale uranium mine.

The cornerstone asset is a large acreage position in Namibia, a proven uranium

mining and export jurisdiction.

Fig. 1: Location of DYL’s acreage – Central Damara Uranium Province

Source: MME and DYL

DYL holds four key contiguous Exclusive Prospecting Licences (‘EPLs’) covering

1,590km2, that are located in close proximity to the established Rössing, Husab (20km

to the north) and the Langer Heinrich (40km to the northeast) mines.


of 31

Fig. 2: DYL Licenses

Source: DYL

The Tumas palaeochannel (similar to Langer Heinrich) has been the primary

exploration target. Exploration undertaken by the new management team (appointed

October 2016) has resulted in a three-fold increase in the resource base of the Tumas

palaeochannel to 86Mlb grading 310ppm U3O8. This brings the total Mineral Resource

Estimate of the calcrete mineralisation to 104Mlb, within the bottom end of the

Company’s former stated exploration target range of 100M to 150Mlb eU3O8. The

Company is now targeting 125Mlb to 150Mlb U3O8 in palaeochannels in the grade

range 300-500ppm eU3O8.

Fig. 3: DYL – Resource Growth vs Dollar Spend

Source: DYL.

This is on top of the 45.1Mlb U3O8 at 420ppm in the Rössing/Husab style

basement/alaskite resources.


of 31

Fig. 4: DYL – Resource Growth 2017-19

Source: DYL. *Note: Tumas Channel Resource base over Reptile Project. 73.5Mlb U308 at grade of 355ppm.

DYL’s overall Namibian resource stands at 149.3Mlb U3O8 grading 323ppm, split over

two key project areas – the Reptile Project and the Yellow Dune Project.

Fig. 5: Location of Reptile, Nova JV and Yellow Dune Prospects

Source: DYL


of 31

Currently the majority of the booked resource in within the Reptile Project, with

exploration also focused on the Nova JV Project.

Fig. 6: Namibian Resource Base

Source: DYL. XRF chemical analysis unless annotated otherwise. ♦ eU3O8 - equivalent uranium grade as

determined by downhole gamma logging. # Combined XRF Fusion Chemical Assays and eU3O8 values.

Where eU3O8 values are reported it relates to values attained from radiometrically logging boreholes.

Gamma probes were calibrated at Pelindaba, South Africa in 2007 and sensitivity checks are conducted by

periodic re-logging of attest hole to confirm operation between 2008 and 2013. During drilling, probes are

checked daily against standard source.

These two project areas are prospective for both the palaeochannel/calcrete and

basement/alaskite targets.

PROJECTS

The Reptile Project area extends for 991km2 (DYL at 100%). The

palaeochannel/calcrete resource currently stands at 104.2Mlb U3O8 @ 295ppm, with

the basement/alaskite at 45.1Mlb U3O8 @ 420ppm.

The Nova JV Project extends for 599km2 (DYL at 65%). DYL farmed out this acreage

to Japan Oil, Gas and Metals National Corporation (‘JOGMEC’), who are spending

A$4.5m over four years to earn a 39.5% interest (commenced November 2016). Both

palaeochannel (at Namaqua) and basement targets have been identified.


of 31

Reptile Project (DYL 100%, Oponona Investments (Pty) Ltd have a 5% option).

The Reptile Project includes EPLs 3496 and 3497 (along with EPL(A) 6820) covering

1,131km2. Over the last 10 years DYL has drilled in excess of 750,000m and defined

both palaeochannel/calcrete and basement/alaskite type uranium resources.

a) Palaeochannel/calcrete type target

The palaeochannels in DYL’s acreage are the target for Langer Heinrich style uranium

mineralisation and are filled by Cretaceous, Tertiary and Quaternary sediments

Fig. 7: Extensive occurring palaeochannel system

Source: DYL.

The current palaeochannel/calcrete-type uranium resource base includes the Tumas

and Tubas deposits of 73.5Mlb at 355ppm U3O8 and the overlying Red Sands

resource of 12.7Mlb at 170ppm U3O8. There is over 125km of prospective channel

systems identified (only roughly half has been explored) and DYL based on their

experience expects the the fertile paleochannels of this region to contain between

2Mlb to 12Mlb U3O8/km.

Fig. 8: Tumas 1 & 2 and 3 - Indicated, Measured and Inferred

Resources

Source: DYL. Tumas 1 & 2 and 3 - current and previous JORC 2012 MRE - Indicated, Measured and

Inferred Resources at 200ppm eU3O8 cut off.


of 31

Fig. 9: The MRE for the Tumas 1E, 1, 2 and 3 deposits using

various cut off grades

Source: DYL. Mineral Resource Estimate.

Figure 10 highlights the drill hole locations following the recent drilling program at

Tumas 1 East.

Fig. 10: Tumas 1 and Tumas 1 East - Drill Hole Locations

Source: DYL.

Figure 11 is the related North-South cross section.

Fig. 11: Tumas 1 East, Tributary 5 – Cross Section

Source: DYL.


of 31

Figure 12 is the Northwest-Southeast cross section.

Fig. 12: Tumas 1 East, Tributary 5 – NW-SE Long Section

Source: DYL.

The latest drilling targeted the Tumas 3 uranium mineralisation. The Tumas 3 West

uranium mineralisation is now more clearly defined and a diamond drilling program

commenced on Tumas 3 on the 10th of October. Drilling in the December quarter will

focus on testing the Tubas Red Sand area. The Tumas Central area is ready for

resource infill drilling in 2020. A second RC drill rig is expected to start on the 21st

October to gather the data required for the prefeasibility study planned in 2020.

b) Basement/alaskite type targets

c) Omahola Project – Ongolo, MS7 and INCA Deposits

Source: DYL


of 31

The known basement resource corridor runs for 40km through the western part of EPL

3496. Three deposits over just 10km have been discovered at Inca, Ongolo and MS7,

providing a 45.1Mlb resource at 420ppm U3O8. The region therefore offers further

exploration upside potential.

Nova JV Project (DYL currently 65%).

Fig. 13: Nova JV Prospect

Source: DYL. Nova JV prospect location map showing the location of prospects. Red triangle –

palaeochannel, orange diamond – basement.

The Nova Joint Venture (‘NJV’) covers EPLs 3669 and 3670 totalling 599km2. In 2016

the JV secured an earn-in agreement with JOGMEC. From November 2016, JOGMEC

will fund a 4 year $4.5m exploration program. Once spent, JOGMEC earn a 39.5%

interest in the project, reducing DYL’s stake to 39.5%.

The NJV area is considered prospective for basement related alaskite-associated

uranium targets (e.g. Rössing/Husab), skarn-type (e.g. Inca) and palaeochannel-

related surficial calcrete uranium targets (e.g. Langer Heinrich). Drilling on EPL 3669,

testing palaeochannels and basement rocks, completed 60 RC holes for 3,472m by

the 24th of October. Encouraging results have been recorded in the palaeochannels

at the Namaqua Prospect and basement intrusions at Barking Gecko target.

Yellow Dune JV (DYL 85%)

DYL considers EPL 3498 to be fully explored and unlikely to be economically viable

at current uranium prices. An application has been made for a Mineral Deposit

Retention Licence.

EVENTS

The 2019 drilling program aimed to increase the Inferred Resource inventory in the

Tumas 1 East area and define areas for resource drilling west of Tumas 3 West in the

Tumas Central and Tubas areas. An upgraded Mineral Resource statement is

expected to be released in early November.

The original FY19 program was for 10,800m of RC drilling. This was upgraded to

22,000m of RC drilling and 600m of diamond drilling. The schedule is to complete

10,800m of RC drilling by December 2019 along with the 600m of diamond drilling.


of 31

The remaining 11,200m of RC drilling will be completed between March to June 2020.

The objective is to further increase the Inferred Resource inventory and convert some

Inferred Resources to the Indicated Resource (JORC, 2012) status.

A scoping study on the Reptile Project is expected to be finalised by the end of 2019.

With a Pre-Feasibility Study planned to commence in the March quarter of FY20. The

DDH drilling program is required to provide sufficient sample material to complete a

metallurgical test program for the Pre-Feasibility Study. The ultimate goal is to have

the Reptile Project ready for development consideration by 2023/24.

Fig. 14: Calendar of Events

Source: DYL and Hartleys

INDUSTRY EXPOSURE DYL’s assets are currently focused on Uranium exploration in Namibia (although they

are exploring additional assets and acquisition opportunities). The management team

have extensive experience in monetising Uranium projects in Namibia (they developed

the Langer Heinrich mine while at PDN).

GEOGRAPHIC EXPOSURE DYL is currently exclusively exposed to Namibia (excluding an agreement for Uranium

rights in the NT, Australia). Namibia is considered a premier uranium mining

jurisdiction, with three of the largest open cut uranium mines worldwide.

Namibia was population of circa 2.5m and GDP per capita, PPP (current international

US$) $11,135 (2018).

globalEdge rates Namibia a ‘B’ in its Country Risk Rating (B = Acceptable Risk) and

‘A4’ in its Business Climate Rating (A4 = Acceptable Risk).

https://globaledge.msu.edu/countries/namibia/risk

Transparency International rank Namibia 52nd out of 180 countries in their 2018

Corruption Perceptions Index (level of public sector corruption), scoring 53 out of 100

(scale of 0 (highly corrupt) to 100 (very clean)). This corruption index for Namibia

averaged 48.57 points from 1998 to 2018, reaching an all-time high of 57 points in

2002 and a low of 41 points in 2004.

https://www.transparency.org/country/NAM

Other ASX listed Uranium Companies operating in Namibia include Paladin Energy

(PDN.asx), Bannerman Resources (BMN.asx), Marenica Energy (MEY.asx) and Toro

Energy (TOE.asx) has some exposure.

Calendar Year 1H19 2H19 1H20 2H20+ 2020+

7.500m of RC drilling for 561 holes.

Upgraded Mineral Resource statement

7,000m RC drilling for resource enhancement

600m DDH drilling for metallurgical w ork

Reptile Project - Scoping study complete

Additional 11,200 RC drilling

Further increase to Inferred Resources

Convert some Inferred Resources


Planned Pre Feasibility Study - Reptile Project

- Commence early 2020, complete by end CY20

60km of palaeochannel to be properly tested.

Acquisition Strategy


of 31

KEY SUPPLIERS & CUSTOMERS DYL is still a number of years away from an actual mine development (and offtake

contracts etc.). Potential future customers will however likely be interested in doing

deals with DYL ahead of a development (to aid exploration etc.), such as the farm-in

by JOGMEC. Namibia is a proven Uranium jurisdiction and established exporter.

Therefore, there is ample existing domestic expertise and equipment to explore for

and develop Uranium deposits. DYL’s management are also one of the few teams

(among independent operators) that have actually developed a Uranium mine.


of 31

MANAGEMENT, DIRECTORS AND

MAJOR SHAREHOLDERS DYL are managed by a highly experienced Uranium exploration and development

team. Board and management have circa 7.6% of the issued shares between them.

Fig. 15: Management Shareholdings

Source: DYL

Fig. 16: Management Remuneration

Source: DYL.

Since new management have taken over control in late 2016, the Company has been

well supported by key investors. There are currently three key institutions on the

register, holding a combined 27.5% of the issued equity.

The Board and Senior management have extensive experience in both the Uranium

sector and operating in Namibia.

Rudolf Brunovs – Non-Executive Chairman

Rudolf joined the DYL Board in August 2007 and was elected Non-Executive

Chairman in January 2016.

He is a former audit partner of Ernst & Young and for 12 years held the position of

Managing Partner.

John Borshoff – Managing Director

John was appointed Managing Director in October 2016.

John has more than 30 years of uranium industry experience. He spent more than a

decade at the start of his career as a senior geologist and manager of the Australian

activities of German uranium miner Uranerz. In 1993, John founded Paladin Energy

Ltd.

At PDN, John led the team that completed the drill out, feasibility studies, financing,

construction, commissioning and safe operation of the first two conventional uranium

mines built in the world for 20 years.


of 31

Gillian Swaby – Executive Director

Gillian joined the DYL Board in October 2005 as Non-executive Director. Her role

changed to that of Executive Director, on a consulting basis, effective 1 November

2016.

Gillian has spent more than 30 years working with natural resources companies in

numerous roles including Chief Financial Officer, Company Secretary, Director and

corporate advisor. Ms Swaby worked at PDN from 1993 to 2015 in the capacity as

Executive Director for 10 years and as GM – Corporate Affairs.

Christophe Urtel – Non-Executive Director

Christophe joined the Board in October 2012 and has 20 years of experience in the

natural resources sector and is currently Group Head of Corporate Development for

Anglo American.

Justin Reid - Non-Executive Director

Justin joined the DYL Board in October 2016 and is a geologist and capital markets

executive with more than 20 years of experience focused exclusively in the mineral

resources sector.

Mervyn Greene - Non-Executive Director

Mervyn was appointed to the Board in November 2006 and was Chairman from

August 2007 to August 2013.

From 1997 to 2005, Mervyn was the London-based partner of Irwin Jacobs Greene,

one of Namibia’s premier stockbroking, private equity and corporate finance advisory

firms.

Eduard Becker – Head of Exploration

Eduard was appointed as Head of Exploration in October 2016. Eduard spent the first

decade of his career at Uranerz focussed on Australian projects and close to 20 years

at Paladin Energy, until 2015. While head of exploration at PDN he oversaw organic

resource increases of over 200Mlb U3O8.

Other Senior Technical Team – All ex-PDN, include;

Dr Andy Wilde - Chief Geologist

Dr Katrin Kärner - Exploration Manager

Dr J C Corbin - Senior Geologist-Specialist


of 31

RECOMMENDATION & RISKS

INVESTMENT THESIS & RECOMMENDATION DYL has a focused strategy and has already discovered a globally relevant resource

in Namibia. There is also significant further exploration potential within DYL’s existing

tenements. This resource is located close to both existing processing and export

capacity. Namibia has a long history of supporting the Uranium sector and is viewed

by Uranium purchasers as a reliable source of supply. The regulatory, environmental

and fiscal environment within Namibia is also relatively supportive for Uranium mining.

DYL’s management team are also one of the most experienced in the industry and

have already successfully developed a Uranium mine in Namibia. The second prong

of their strategy is to use the current depressed Uranium market to acquire/secure

additional assets. The ultimate goal is to secure a suite of development assets that

can be developed in phases to supply between 5-10Mlb/a.

DYL and their management team also seem to be well supported by a number of large

institutional investors and industry partners (e.g. JOGMEC) who have supported their

capital requirements during a depressed period for Uranium prices.

The company continues to have a very active drilling program in Namibia and we

expect further positive results and potential resource upgrades over the next 12

months. The company also has an active new ventures program, which provides the

potential to add further assets to its existing Namibian portfolio. As its resource base

continues grow it is also likely that DYL attracts attention from larger producers (and

future potential customers) and this may result in potential M&A activity.

Fig. 17: Timetable of Events \

Source: Hartleys and DYL.

We value exploration assets on the basis of comparable transaction multiples (see

Appendix). DYL’s exploration assets stack up relatively well versus many of their ASX

listed peers, based on their proximity to existing mines, processing and export

facilities. Namibia is also a proven Uranium export jurisdiction, so has significantly

lower regulatory, environmental and fiscal risk than other regions (including Australia).

We rate their Project Reptile resource as a second quartile exploration asset globally.

The Yellow Dune JV we categorise as a 3rd-4th quartile resource. Over the next 12

months we expect to see further positive resource updates from both the Reptile and

Nova JV Projects and include risked values for this in our valuation. We currently value

DYL’s discovered resource at A$107m.

Calendar Year 1H19 2H19 1H20 2H20+ 2020+

7.500m of RC drilling for 561 holes.

Upgraded Mineral Resource statement

7,000m RC drilling for resource enhancement

600m DDH drilling for metallurgical w ork

Reptile Project - Scoping study complete

Additional 11,200 RC drilling

Further increase to Inferred Resources

Convert some Inferred Resources


Planned Pre Feasibility Study - Reptile Project

- Commence early 2020, complete by end CY20

60km of palaeochannel to be properly tested.

Acquisition Strategy


of 31

Fig. 18: Valuation and Price Target

\

Source: Hartleys and DYL.

We derive a 12-month forward valuation and target price of $0.40 per share when

we include the expected uplift from exploration in the next 12 months while excluding

corporate costs. Given this combination of upside to our target price and active 12

months of news flow we initiate coverage of DYL with a Speculative Buy rating.

Fig. 19: ASX Uranium Stock Performance

Source: IRESS. Date 24th October 2019

We believe successful small cap resource companies have a combination of a

focused, well thought out strategy combined with the competitive advantages

to pursue it and the right management (with incentives aligned with

shareholders) in place to implement it.

Strategy

It is our opinion that smaller resource companies are likely to be more successful if

they have a strategy focused on one particular area or play type. DYL’s two-pronged

strategy is primarily focused on growing the existing uranium resource base in

Namibia. Secondly, in conjunction with this they are looking to make counter cyclical

acquisitions. The ultimate goal is to secure a suite of development assets that can be

developed in phases to supply between 5-10Mlb/a.

Competitive Advantage

DYL currently has high percentage operatorship of a large contiguous acreage

position in Namibia which is proving to be highly prospective. The assets are located

close to existing processing and export infrastructure. The Directors and management

are very highly regarded in the Uranium sector and have extensive experience

Price Target Methodology Risking Valuation

95% $0.34

35-50% $0.08

100% -$0.02

Valuation $0.40

12 Months Price Target $0.40

Shareprice - Last $0.265

12 mth total return (% to 12mth target + dividend) 50%

Current resource value

12 month exploration upside

Corporate and Cash


of 31

operating both in Namibia and in establishing a producing world scale Uranium mine.

The decision to focus exclusively on Uranium in Namibia has allowed it to focus all

their resources on trying to replicate the success this team had previously while at

PDN. Given the teams track record they have also been well supported by early

investors who have provided the capital to execute their strategy.

Management & Alignment

DYL’s Board and Management team includes very experienced Uranium Executives,

including a number who have spent most of their careers focused on the Uranium

sector and/or operating in Namibia.

Board and management alignment with other shareholders are equally important to

us when evaluating small cap companies. The Board at DYL have material exposure

to the share price through their respective holdings.

Fig. 20: Directors’ Beneficial Interest in Shares and Options

Source: DYL

Senior Management are further rewarded if they achieve various accretive milestones.

The table below outlines current and expected outcomes for the vesting of issued Loan

Plan Shares at 30 June 2019.

Fig. 21: Loan Plan Shares Milestones

Source: DYL.

It should be noted that a consultancy connected to John Borshoff undertakes

significant work for DYL and is ‘paid accordingly’. ‘Scomac Management Services Pty

Ltd has been appointed on a non-exclusive basis to provide the Group with

management, strategic, technical and geological expertise and services through the

Consultant personnel they employ or have access to. Mr Borshoff has a financial

interest in Scomac. During the year ended 30 June 2019 Scomac billed the Company

$737,113, inclusive of GST and on-costs (2018: $707,169), for technical and

geological services (excluding Mr Borshoff) on ‘normal commercial terms and

conditions’.


of 31

Overall, we rate DYL an ‘Above Average’ (versus our coverage universe) on our

indicative measures of performance. The focused strategy on Uranium and Namibia

initially is a positive as is their prior management experience in the industry.

Management also have alignment with shareholders through their material

shareholdings.

RISKS A key risk for DYL is that Uranium contract demand and prices do not recover to

US$40/lb or above in the longer term. As a result, there may be limited appetite for

new mines or additional resources for existing plants. However, we view DYL as

relatively well positioned, given the quality of their discovered resource, location in a

pro-Uranium country and proximity to existing processing and export facilities.

History tells us that “Black Swan” events such as the Fukushima accident can have a

devastating impact on the uranium industry.

While exploration results to date have been encouraging, this is no guarantee that

results continue to be positive.

DYL is not a producer and therefore will continue to require third party capital to pursue

its exploration and new venture opportunities.

DYL operates in in an industry with high regulatory, fiscal and sovereign risks. Namibia

while supportive of the Uranium mining sector has quite high sovereign risk levels.

DYL is highly exposed to the USD, with global Uranium sales realised in USD. DYL is

also listed in Australia, so the AUD value to local shareholders will be greatly impacted

by the USDAUD level.

Fig. 22: Key assumptions and risks for valuation

Assumption Risk of not realising

assumption

Downside risk to share price if assumption is

incorrect Comment

Value of existing discovered resource and future exploration success.

Medium High DYL has trebled its resource base over the past three years, with the vast majority of the

increase coming from the paleochannel/calcrete, similar to the Langer

Heinrich deposit. DYL’s total resource of 149.3Mlbs grades at 323ppm compared to the remaining 120 Mlb at Langer Heinrich grading

445ppm. We value DYL’s Reptile Project resource at A$0.81/lb. The Company is

targeting 125Mlb to 150Mlb U3O8 in paleochannels in the grade range 300-500ppm

eU3O8. We forecast the company adds a further 85Mlbs from both the Reptile and Nova

Projects.

Funding Risk Medium High DYL looks to be well funded in the near term. The Capital requirements for new ventures is

unknown. We include no value for new ventures in our valuation.

Sovereign Risk Medium High Namibia ranks as a medium-risk country to do

business in. However, it has a long history in Uranium exploration and is a proven exporter.

Equipment Risk Low Medium Namibia has a long history of Uranium exploration and there are experienced personnel and equipment in country.

Conclusion We believe our resource and future exploration assumptions are reasonable, however DYL like

many smaller explorers is a high-risk investment.

Source: Hartleys Research


of 31

SIMPLE S.W.O.T. TABLE Strengths Extensive acreage position in a highly prospective

Uranium fairway in Namibia. Highly experienced and proven management team. Adequately funded to pursue current exploration program. Relatively low-cost exploration. Access to local service industry. Strong in country relationships built up from PDN days. Local knowledge and connections within the global Uranium and Nuclear sectors.

Weaknesses Company requires a recovery in the Uranium price which it obviously cannot control. Additional funding will be required in the medium term for additional exploration / new ventures. Key person risk.

Opportunities Acreage remains underexplored. M&A and new venture potential. Strong domestic support for the Uranium sector. Operatorship and high equity ownership provide flexibility. Ability to partner with larger producers or buyers.

Threats Medium Sovereign risk. Price of Uranium has to recover. Shifting regulatory environment.

Source: Hartleys Research


of 31

APPENDIX Mid-2019 Uranium Market Update

DYL’s strategy is to an extent based on their outlook for Uranium prices. New

management (since late 2016) have expected weak Uranium prices to continue in the

short-medium term, allowing them to build a portfolio of Uranium assets poised for

development once prices recover.

Due to the extended period of weak prices, the number of Uranium Companies has

fallen dramatically, opening the door for new companies like DYL to build quality

resource bases and become an attractive development partner for Utility buyers in the

future.

Fig. 23: Uranium Sector Rationalization

Source: DYL

Fig. 24: Uranium Sector – Market Value

Source: DYL

Langer Heinrich is a good example of a project that this team has developed that can

be globally material and cost competitive.


of 31

Fig. 25: Uranium Production Cost Study including Langer Heinrich Mine target

Source: PDN and UxC Production Cost Report 2019 – August 2019. Note 1 AISC: All in Sustaining Cost based on the results of Paladin’s

Langer Heinrich Concept Study completed in February 2019; 2 ASX Prefeasibility Study Announcement 14 October 2019

DYL expect this recovery to gather momentum post 2023-24 when contract demand

will far exceed reliable longer-term supply.

Fig. 26: Uranium Market Overview from DYL Presentation

Source: DYL

Utilities have been underbuying for a number of years, running down inventory and

helping to rebalance the market.


of 31

Fig. 27: Demand – Under Buying

Source: PDN

Suppliers have also cut production to aid the rebalance.

Fig. 28: Cumulative Supply Cuts

Source: PDN

However, while this has helped the Uranium market, prices remain subdued.


of 31

Fig. 29: Uranium Price – 5 Year Spot and Long Term

Source: Cameco

Utilities are still not contracting in large volumes. Even though President Trump

rejected s232, he instituted a Nuclear Fuel Working Group to review fuel production.

This has led to continued uncertainty among US buyers in particular and has delayed

what many few is the inevitable resurgence in US contracting.

Fig. 30: Future Contracted Coverage Rates of US & European

Utilities

Source: PDN and UxC Uranium Production Cost Study – September 2019. Note*: Euratom - European

Atomic Energy Community


of 31

Fig. 31: Historical Uranium Contracting – US versus ROW

Source: UxC

Fig. 32: UxC Uncovered Uranium Requirements Estimate, 2018-

2035

Source: UxC


of 31

Fig. 33: 2021 Uncovered ‘Requirements’ by Source

Source: TradeTech

In general, we continue to believe there will be two distinct stages in the recovery in

Uranium prices, the Pre-2025 and Post 2025 markets.

Fig. 34: Demand and Supply Scenarios – UxC Bearish Demand

Source: PDN and UxC Uranium Production Cost Study – September 2019

Based upon our base case assumption of relatively flat demand for Uranium, we

believe that the ‘call-on-production’ (new supply required) out to 2025 (of circa 45-

50mmlbs) can be largely met by existing shut in supply (Kazakhstan reductions and

mines placed on care and maintenance).

Pre-2025, this leaves very little market opportunity for new projects, although it should

be noted that some mines on care and maintenance may not necessarily be restarted.

Also, as outlined earlier, ‘uncovered’ Uranium requirements by 2025 are likely to be


of 31

closer to 90mmlbs, so it is possible (though not common, given the cost of new mine

developments) that new facilities displace an existing operating mine in meeting these

requirements (by securing these contracts).

Fig. 35: 2020-2025 Supply-Demand Gap

Source: TradeTech, Hartleys Research

Post 2025, the requirement for new production (given natural production declines and

mine closures) will likely add a further 30-40mmlb of required new developments

(again assuming relatively flat demand). This presents an opportunity for a number of

new mines to start production post 2025 to meet these requirements.

Fig. 36: Pre-development Mines – Cumulative Capacity and Full

Costs

Source: Tradetech, UxC, Hartleys Research

Given the large number of competing projects targeting this demand, we believe only

projects that are economically viable close to a US$50/lb long run price have a realistic

chance of being developed. Of course, these volume and price forecasts could prove

conservative if future demand for Nuclear Generation proves to be higher than our

(flat) base case.


of 31

Fig. 37: Uranium Price Outlook

Source: Hartleys Research and Consensus Economics

Fig. 38: Uranium Price Consensus Forecasts

Source: Consensus Economics


of 31

Valuing Exploration Assets

We value exploration assets on the basis of comparable transaction multiples (as

recently explored by BDO Corporate Finance in their Independent Experts Report on

the acquisition of SMM by PDN).

DYL’s exploration assets stack up relatively well versus many of their ASX listed peers,

based on their proximity to existing mines, processing and export facilities. Namibia is

also a proven Uranium export jurisdiction, so has significantly lower regulatory,

environmental and fiscal risk than other regions (including Australia).

Fig. 39: Summary of Uranium Project Transactions with Mineral

Resources

Source: BDO

Fig. 40: Resource Transaction Multiples – Range of Values, % of

Spot Price

Source: BDO


of 31

Fig. 41: Summary of Uranium Project Transactions with

Exploration Ground

Source: BDO


of 31

Selection of Listed Uranium Peer Companies.

Fig. 42: Uranium Peer Comparative

Source: BMN

Fig. 43: Market Cap/Resource valuations for Select Listed Comps

Source: MEY, September 2019

of 31

HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research +61 8 9268 3052

Mike Millikan Resources Analyst +61 8 9268 2805

John Macdonald Resources Analyst +61 8 9268 3020

Paul Howard Resources Analyst +61 8 9268 3045

Aiden Bradley Research Analyst +61 8 9268 2876

Oliver Stevens Research Analyst +61 8 9268 2879

Michael Scantlebury Associate Analyst +61 8 9268 2837

Janine Bell Research Assistant +61 8 9268 2831

Corporate Finance Dale Bryan Director & Head of

Corp Fin.

+61 8 9268 2829

Richard Simpson Director +61 8 9268 2824

Ben Crossing Director +61 8 9268 3047

Ben Wale Director +61 8 9268 3055

Stephen Kite Director +61 8 9268 3050

Scott Weir Director +61 8 9268 2821

Scott Stephens Associate Director +61 8 9268 2819

Rhys Simpson Associate Director +61 8 9268 2851

Michael Brown Executive +61 8 9268 2822

Registered Office

Level 6, 141 St Georges Tce Postal Address:

Perth WA 6000 GPO Box 2777

Australia Perth WA 6001

PH:+61 8 9268 2888 FX: +61 8 9268 2800

www.hartleys.com.au [email protected]

Note: personal email addresses of company employees are structured

in the following manner: [email protected]

Hartleys Recommendation Categories

Buy Share price appreciation anticipated.

Accumulate Share price appreciation anticipated but the risk/reward is

not as attractive as a “Buy”. Alternatively, for the share

price to rise it may be contingent on the outcome of an

uncertain or distant event. Analyst will often indicate a

price level at which it may become a “Buy”.

Neutral Take no action. Upside & downside risk/reward is evenly

balanced.

Reduce /

Take profits

It is anticipated to be unlikely that there will be gains over

the investment time horizon but there is a possibility of

some price weakness over that period.

Sell Significant price depreciation anticipated.

No Rating No recommendation.

Speculative

Buy

Share price could be volatile. While it is anticipated that,

on a risk/reward basis, an investment is attractive, there

is at least one identifiable risk that has a meaningful

possibility of occurring, which, if it did occur, could lead to

significant share price reduction. Consequently, the

investment is considered high risk.

Institutional Sales Carrick Ryan +61 8 9268 2864

Justin Stewart +61 8 9268 3062

Simon van den Berg +61 8 9268 2867

Digby Gilmour +61 8 9268 2814

Jayme Walsh +61 8 9268 2828

Veronika Tkacova +61 8 9268 2836

Wealth Management Nicola Bond +61 8 9268 2840

Bradley Booth +61 8 9268 2873

Adrian Brant +61 8 9268 3065

Nathan Bray +61 8 9268 2874

Sven Burrell +61 8 9268 2847

Simon Casey +61 8 9268 2875

Tony Chien +61 8 9268 2850

Tim Cottee +61 8 9268 3064

David Cross +61 8 9268 2860

Nicholas Draper +61 8 9268 2883

John Featherby +61 8 9268 2811

Ben Fleay +61 8 9268 2844

James Gatti +61 8 9268 3025

John Goodlad +61 8 9268 2890

Andrew Gribble +61 8 9268 2842

David Hainsworth +61 8 9268 3040

Murray Jacob +61 8 9268 2892

Gavin Lehmann +61 8 9268 2895

Shane Lehmann +61 8 9268 2897

Steven Loxley +61 8 9268 2857

Andrew Macnaughtan +61 8 9268 2898

Scott Metcalf +61 8 9268 2807

David Michael +61 8 9268 2835

Jamie Moullin +61 8 9268 2856

Chris Munro +61 8 9268 2858

Michael Munro +61 8 9268 2820

Ian Parker +61 8 9268 2810

Matthew Parker +61 8 9268 2826

Charlie Ransom

(CEO)

+61 8 9268 2868

Heath Ryan +61 8 9268 3053

David Smyth +61 8 9268 2839

Greg Soudure +61 8 9268 2834

Sonya Soudure +61 8 9268 2865

Dirk Vanderstruyf +61 8 9268 2855

Disclaimer/Disclosure

The author of this publication, Hartleys Limited ABN 33 104 195 057 (“Hartleys”), its Directors and their Associates from time to time may hold shares in the

security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may

earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients.

This report was prepared solely by Hartleys Limited. ASX Limited ABN 98 009 642 691 and its related bodies corporate (“ASX”) did not prepare any part of the report

and has not contributed in any way to its content. The role of ASX in relation to the preparation of the research reports is limited to funding their preparation, by Hartleys

Limited, in accordance with the ASX Equity Research Scheme. ASX does not provide financial product advice. The views expressed in this research report may not

necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, warranty or undertaking, express or implied, is made and no

responsibility or liability is accepted by ASX as to the adequacy, accuracy, completeness or reasonableness of the research reports.

Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser

to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice

(including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its

officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted

by law.

DYL - Hartleys · 2019-10-30 · Hartleys Limited Deep Yellow Limited (DYL) 30 October 2019 Page 2...

Documents

Transcript of DYL - Hartleys · 2019-10-30 · Hartleys Limited Deep Yellow Limited (DYL) 30 October 2019 Page 2...