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Date : 09/08/2022

Deep Yellow Limited

ASX :

DYL

Market Cap : $570.74 Million

Buy

52 Week Range : $0.550 - $1.370

Share Price : $0.795

DYL/VMY merger positions Deep Yellow to become one of the world’s largest uranium producers. Through this merger, the Company is also significantly de-risking by adding VMY’s Australian assets to its portfolio. We recommend a speculative long-term “Buy”.

Company Analysis

Deep Yellow (ASX: DYL) is being developed to become a tier-one uranium producer of Uranium ahead of the anticipated upcycle. The Company is progressing its development by advancing its existing assets and expanding its opportunities for diversified growth through sector consolidation.

Deep Yellow is on track to becoming a Global Tier-1 Uranium Producer

Deep Yellow is led by a standout uranium team with a track record of successfully developing projects. Over recent years, the Company has shown its ability to progress rapidly with its dual-pillar strategy to establish a multi-mine company with the capacity to produce 10+Mlbs annually.

The Company has also acquired and developed a portfolio of diverse exploration and early-stage uranium projects, providing a strong development pipeline and significant growth optionality through expansion of its current uranium resource base by adding uranium “pounds in the ground”.

The only ASX-listed Company with two advanced uranium projects

We believe Deep Yellow has a key competitive advantage. Thus, it is the only ASX-listed Company with two advanced projects, Tumas and Mulga Rock, in development. Both projects are at an advanced Definitive Feasibility Stage (DFS), located in Tier-1 uranium jurisdictions, the Tumas in Namibia and the Mulga Rock in Western Australia. The Tumas Project has a production capacity of 3Mlbpa, while the Mulga Rock Project can produce 3.5Mlbpa. Additionally, DYL has a potential 25+ year Life of Mine (LoM) at Tumas and 15+ year LoM at Mulga Rock.

We are confident that Deep Yellow is well positioned for continued organic growth through developing its highly prospective exploration portfolio comprising the Omahola Project in Namibia and the Alligator River Project in the Northern Territory.

Also, in our view, the Company is well-placed to develop its inorganic growth by further consolidating its targeted, high-quality uranium assets. We are confident that Deep Yellow can successfully execute its growth strategy aligned with long-term supply requirements in a growing uranium market.

Deep Yellow and Vimy merger: DYL’s first step to becoming a global uranium player

With the merger and acquisition of Vimy Resources (former ASX: VMY), Deep Yellow now expands to two advanced uranium projects at the feasibility stage located both in Namibia and Australia, with the potential for production starting in the next two to three years. In addition, with the Company’s expanded exploration portfolio, opportunities for a substantial increase of its uranium resource base also exist. Deep Yellow aims to build a significant global, geographically diversified project pipeline.

Deep Yellow/Vimy Resources Merger in a nutshell:

  • Deep Yellow has completed its merger with ASX-listed Vimy Resources, former ASX: VMY.
  • The transaction, announced on March 31, will bring the two uranium projects, the Tumas project in Namibia and the Mulga Rock project in Western Australia, under one high-potential portfolio.
  • We expect DYL to deliver its production target post-2025.
  • The next step is Deep Yellow’s team integration to improve the efficiency of development work on the two flagship projects

Merger deal: Vimy Resources’ Shareholders are receiving 0.294 DYL shares for every VMY share held

Under the merger deal, Vimy shareholders will receive 0.294 DYL shares for every VMY share held. Deep Yellow shareholders will hold 53% of the merged Group, while Vimy shareholders will hold 47%. Along the merger deal, Deep Yellow also informed that it is expected to deliver its production target post-2025 thanks to its multi-asset exposure. We believe with production from both mines, Deep Yellow is on-track to potentially become the largest pure-play uranium producer on the ASX. In our opinion, this merger propels DYL directly into one of the world’s top uranium producers and certainly brings the Company a serious competitive advantage. With two high-potential uranium projects in two different countries, Deep Yellow could bring long-term substantial shareholder value.

Moreover, the Company now has one of the latest uranium resource inventories of junior uranium mining companies globally and combined experienced management and technical team, which we believe is the cornerstone to developing and bringing these uranium projects to success.

Vimy Resources Executive Director Steven Michael and Non-Executive Director Wayne Bramwell will join the Board of Deep Yellow as part of the merger deal.

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Post-merger, Deep Yellow is now focused on integrating DYL/VMY teams to efficiently continue its development work on the two flagship projects. At the time of writing, shares in Deep Yellow are changing hands for 79.5 cents, up 15.22% over the last twelve months. DYL’s price action continues to exhibit strong momentum and has recently accelerated, adding an impressive 25% gain since last month.

Two advanced projects are now in DYL’s portfolio: Production expected for 2025 onward

The merger deal combines two advanced, geographically diverse uranium projects. This places Deep Yellow’s portfolio in a unique position as one of the few uranium companies globally with multi-asset exposure and development optionality to deliver an incentive-driven production target post-2025. Furthermore, the completion of the merger has also consolidated DYL’s world-class exploration portfolio across two Tier-1 mining jurisdictions, particularly the highly prospective Alligator Project, which can support the Company’s ambitious strategy of establishing a +10Mlbs production per annum. Deep Yellow now emerges as the only ASX-listed Company with two advanced, near development-ready uranium operations.

Tumas Project in Namibia

Deep Yellow owns the Tumas Project, which is located in Namibia. DYL expects to complete its Definitive Feasibility Study (DFS) by the end of CY22 with the potential to produce 3Mlb U3O8 annually.

Mulga Rock Project in Western Australia

Via the recent merger with VMY, Deep Yellow now owns the Mulga Rock Project, located in Western Australia. Vimy has completed a DFS, and the Company plans to revise and update this study to include base metal recovery optimisation work, detailed resource definition drilling work and mining studies with the potential to produce 3.5Mlb U3O8 per annum.

With production from both these mines, Deep Yellow now has the potential to become the largest pure-play uranium producer on the ASX. We believe the Company is now uniquely positioned to benefit from a rapidly expanding nuclear sector and contribute to the global decarbonisation efforts.

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We are confident that the merger unlocks several key value drivers for the Company:

  • Deep Yellow has a standout and proven uranium team who understands how to develop uranium operations across the mining lifecycle.
  • The merger positions Deep Yellow as a pure-play uranium company with one of the world’s largest geographically diversified Uranium portfolios.
  • Deep Yellow is now in a unique position as one of a limited number of global companies with credible multi-mine uranium exposure.
  • The Company now has two Projects in Tier-1 mining jurisdictions.
  • DYL can now increase its scale with a stronger financial profile and expand its project pipeline through an M&A strategy to further consolidate targeted, high-quality uranium assets.

Company Updates

Namibian Tumas Project Definitive Feasibility Study (DFS) is progressing and is expected for completion in Q4 CY22

The month of June saw the Team at Deep Yellow reach a significant milestone with the completion of the plant layout at the Tumas Project as the basis of the DFS. This milestone allows the Company to generate material take-offs for concrete and structural steel, which will be used for the in-country request for quotation packages, which will then be issued to preferred contractors. We have also been pleased that all major procurement packages have been issued to the market for DFS level pricing enquires, followed by a tender evaluation and recommendation process. Deep Yellow concluded the remaining Hazard Identification (HAZID) workshops, collated the findings, and assigned the appropriate HAZID rankings.

Production of the DFS report continues and is advancing as planned, with various aspects of the DFS completed. Deep Yellow also made material progress on its mine pit development. The Company has progressed well over the reporting period, with an updated mining plan finalised and used as the basis of the DFS to generate the sequence of operation and tailings disposal design. In addition, the Company also set out enquiry packages to suitable and potential contractors for the Project mining contract. Along with these signs of progress, a full document pack has been developed for the mining contract.

Deep Yellow also continued its earthworks design for the main access road with the aid of a flood assessment of the proposed route, which will determine the configurations for certain sections.

Deep Yellow’s Project Team is now focused on the remaining aspects and the various inputs of the DFS report. We believe the Company will gain a stronger focus in the coming months to meet its targeted completion date of the DFS before the end of 2022.

Nova Joint Venture and approved FY23 work program in Namibia

Deep Yellow reported its results from the Phase 2 RC drilling at the Barking Gecko North prospect on EPL3669. The lateral size of the prospective area, including high-grade and thick uranium mineralisation, appears to be restricted laterally. However, results indicated the potential for continuing mineralisation at depth. Further evaluation of Project data showed possible extension of the mineralisation to the east of Barking Gecko and to the North at the Iguana prospect.

The Nova Joint Venture equity partners approved the FY23 work program to follow up on targets identified from the previous drilling associated with a cluster of anomalies surrounding the Barking Gecko prospect. These targets include a south-eastern extension of the Iguana prospect located North of Barking Gecko and a possible eastern extension of the Barking Gecko prospect itself. At Turtle’s Neck, located south of Barking Gecko, drilling is planned to follow up on the positive results from the 2020 drilling program.

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Source: DYL

Drilling is scheduled to commence in September following a short program of detailed mapping and local ground surveys to establish the siting of the targeted drill holes. The approved budget for FY23 is $756,369, with each JV partner contributing pro rata according to respective equity holding in the Nova JV. Deep Yellow is holding 39.5% interest in this JV.

DYL now holds interest in two promising projects in Australia from its DYL/VMY merger

Mulga Rock Project

Vimy’s Mulga Rock Project is one of Australia’s largest undeveloped uranium resources and will produce 3.5 million pounds of Uranium annually. It lies in the Great Victoria Desert in Western Australia, 290 kilometres by road from Kalgoorlie. The Project comprises four mining areas: Ambassador and Princess, which form the Mulga Rock East Mining Centre, and Shogun and Emperor, which comprise the Mulga Rock West Mining Centre, approximately 20 kilometres away.

The Mulga Rock Project is now the only uranium project in Western Australia to have all the approvals for further development. Vimy released the Mulga Rock Definitive Feasibility Study in 2018, which confirmed robust financials and a simple, low-cost uranium mining and recovery process. The 2018 DFS positioned Vimy as Australia’s largest near-term uranium producer. In FY21, Vimy announced the updated Definitive Feasibility Study on the Mulga Rock Project, demonstrating that the Project will generate even stronger financial returns than previously forecast.

Alligator River Project

Vimy’s 100%-owned Alligator River Project is the largest granted uranium exploration package in the world-class Alligator River uranium district in the Northern Territory. The Alligator River Project is an important part of Vimy’s long-term strategy as it will provide the certainty of long-term supply that offtake customers require. The potential of the Alligator River Project is demonstrated by the proven track record of the nearby Jabiluka and Ranger deposits providing over 750Mlbs of U3O8 in a mineral endowment which is the current mined resource. Mulga Rock has an economic life of fifteen years with the potential for adding another five. Moreover, the Alligator River Project has the potential for another ten years. Since August last year, Vimy has held 100% of the Alligator River Project by settling the acquisition of Rio Tinto’s 20.89% interest in the Wellington Range and King River Joint Venture.

Industry Analysis

Uranium futures edged below $49 per pound, easing from the three-week high of $49.5 in July amid concerns of lower demand. Central banks pledged to fight inflation as economic data points to an already slowing economy that pressured energy markets sharply at the start of August. Also, Europe’s largest nuclear power producer EDF informed that it is set to continue to cut production as heat waves dry rivers that cool power plants. Moreover, the retreat was capped as the ongoing energy crisis spurred governments to reconsider bets on nuclear power. Germany pivoted from its usual stance against nuclear energy and signalled it may prolong the life of online plants, while Japan could restart reactors to avert a power crunch ahead of the winter and double its current operating fleet.

In the meantime, the market continues to monitor supplies of enriched Uranium from Russia, as the US said it will subsidise Uranium from western producers to utilities. Canada banned exports from Russia.

In March, uranium prices surged to their highest level since the nuclear disaster in Japan’s Fukushima plant in 2011. Uranium price rose after the US said it was considering sanctioning Rosatom, Russia’s state-owned atomic energy company, as part of its broader sanctions against the country. The ongoing conflict between Russia and Ukraine continues to raise concerns about supply disruptions for energies and commodities, including Uranium used in power plants to generate electricity. This comes as countries worldwide are considering utilising nuclear power plants to reduce their reliance on fossil fuels such as oil, gas and coal.

Uranium Price Outlook

The price of Uranium has reached its highest level since 2014, driven by numerous external factors. As a key component of nuclear energy, investors continue to bet on the increasing demand for Uranium as the world looks toward alternative energies. By 2021, the Uranium spot price rose from around $30 to more than $42 a pound, an increase of about 40%. The recent price movement in Uranium spot can be attributed primarily to a consistent decrease in production below market demand for Uranium over recent years, combined with a supply deficit that reached a new record in 2020. We expect the supply deficit to continue, despite speculative interest in Uranium driven by a strong nuclear energy push. We believe the constrained supply in the sector, already battling headwinds before the onset of COVID-19 in 2019-2020, will likely lead to more uranium price upside onward 2023. Additionally, despite a steadily increasing global demand for Uranium, supply may continue to shrink by at least 15% by 2025. The gap between increasing demand and insufficient supply levels could lead to an inflated price.

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Investment Thesis

Demand for clean energy will lead to a massive demand for Uranium by 2025

The demand for cleaner fuel alternatives is on the rise. As one of the world’s most abundant metals, Uranium appears to be a popular choice. To put things in perspective, a single pellet of Uranium produces the same amount of electricity as, One ton of coal, three barrels of oil, and more than 481 cubic metres of natural gas. Needless to say, Uranium is highly efficient for power generation.

Just two years ago, the US government began to invest heavily in uranium mining, contributing to an uptick in the stock market. Uranium fuels nuclear power, representing approximately 20% of the United States energy and 10% of the world’s electricity. The use of Uranium is also growing consistently. Hence, about 55 new reactors are under construction worldwide, including in China, India, Russia, and the United Arab Emirates. That does not account for pending construction in Ukraine, Japan, Brazil and elsewhere.

About 440 nuclear power reactors are operating in 32 countries, 100 are planned or on order, and 300 more are proposed, mainly in Asian nations, where electricity demand is increasing rapidly.

While the US and the UK are currently leading the way in nuclear energy, China is projected to be the largest market in the world for Uranium. Thus, the Chinese government set an ambitious goal to have nuclear energy contribute 10% to the country’s overall energy by 2030.

The increase in electricity demand will inevitably fuel the demand for Uranium

That said, we expect the demand for Uranium to increase substantially and become the main element to fuel electricity.

Deep Yellow is taking over Vimy Resources to become one of the largest uranium producers in the world

The completion of the merger between Deep Yellow and Vimy Resources represents the combination of two world-class, advanced Uranium projects with solid exploration portfolios. We believe this transaction will allow Deep Yellow to leverage its objective to become a leading, reliable, long-term uranium supplier in a nascent market. Moreover, this merger allows the Company to emerge as a geographically diversified platform in line with Deep Yellow’s long-term growth strategy. This also allows the Company to unlock major competitive advantages. Deep Yellow has become one of the few global uranium companies with geographically diverse and multi-asset uranium production potential.

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Four reasons why this merger makes a lot of sense

DYL/VMY merger exhibits strong rationale

We believe the merger of Deep Yellow and Vimy Resources is done right on time for potential strong recovery of uranium prices. Hence, the Company is adding two advanced uranium assets to its portfolio, with an annual production capacity of approximately 3Mlbs and 3.5Mlbs for Deep Yellow and Vimy Resources, respectively. Furthermore, this acquisition de-risks the Project through geographic diversification, thus differentiating DYL from other single asset Uranium juniors.

As Deep Yellow is becoming a single entity with Vimy Resources, the Group is now a Company with a substantial Mineral Resource base of 389Mlbs, one of the largest in the world, with a combined portfolio of complementary uranium assets in Tier-1 uranium jurisdictions in Australia and Namibia.

DYL is expanding substantially with increased scale and capital markets profile

The Merged Group is estimated to have a Pro-Forma Market Capitalisation of approximately $658 million, cash and cash equivalents of about $106 million, with no balance sheet debt as of the first half of FY22. Furthermore, this led to DYL securing enhanced financial strength and financing flexibility, which could support the Company to achieve fast-tracking funding and accelerate its development timelines once uranium prices reach incentive levels. We are confident that the combination of DYL and VMY creates a leading independent uranium platform in Tier-1 uranium jurisdictions. This positions the Company to become a supplier of choice to major utilities.

DYL and VMY form a highly credentialled, proven uranium team

The combined Board and management team of Deep Yellow and Vimy Resources have a track record of successfully financing and developing uranium projects. The joining force of DYL and VMY substantially leverage the Company’s deep experience in uranium marketing, contracting and sales. Moreover, the merger also strengthens the firm’s technical team with proven expertise across a broad range of uranium deposits, processing technologies, and environmental and regulatory environments. This enables DYL to accelerate its development and optimise its processing routes.

DYL is enabling significant growth optionality through explorationThe Merged Group will have a highly prospective portfolio of exploration opportunities. We believe this will provide a pipeline for organic growth, including the Alligator River in Australia and the Omahola in Namibia. Furthermore, the combined exploration team will form one of the most experienced teams for a Uranium Company on the ASX. We are convinced this will open the door for significant growth optionality through “pounds in the ground” across DYL and VMY’s existing project portfolio.

Source: DYL

De-risking through geographic diversification

Although the existing Projects from Deep Yellow are high-potential Namibian Tier-1 uranium jurisdictions, the exposure in a single country is a considerable risk. With the recent merger, DYL is not only becoming one of the world’s largest players in the uranium sector but also is reducing its risk exposure by adding VMY’s Australian assets. Hence, Australia is a Tier-1 mining jurisdiction of choice. Our country is economically developed and a regulated region, representing a low supply risk for uranium fuel buyers. Moreover, Australia is known for its uranium resources as the world’s largest, almost one-third of the globally produced Uranium with ~7,800 tonnes of U3O8 in 2019. Australia is the third largest producing country, just behind Kazakhstan and Canada.

VMY’s assets exhibit strong project economics as per the first half of FY22:

  • NPV8 pre-tax US$393 million, a 14% increase
  • IRR 31%, a 23% increase
  • A capital cost of US$255 million, a 20% reduction
  • Payback period of 2.4 years, which is reduced by 8 months
  • Free cash flow of US$61 million per annum, a 22% increase

VMY’s assets also demonstrate strong operating costs management during H1FY22 with:

  • Cash operating cost of US$23.33 of U3O8 over the first five years, an 8% decrease
  • Cash operating cost of US$26.02 over the Life-Of-Mine, a 7% decrease
  • AISC of US$28.09 over the first five years and US$31.22 over the Life-Of-Mine, both an 8% decrease

Merger Peer Comparison

Source: DYL

Recommendation

Deep Yellow has the potential for significant upside, which could be driven by two key catalysts. The first one is the rising uranium price due to producers buying physical volumes to cover production outages along with US Utilities re-entering the term market. The second one is the production at the Mulga Rock deposit expected onward FY25. The current DYL/VMY merger positions Deep Yellow to become one of the world’s largest uranium producers. Through this merger, the Company is also significantly de-risking by adding VMY’s Australian assets to its portfolio. We recommend a speculative long-term “Buy”.

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