Merger deal redefines the pecking order of ASX uranium players, just as prices are expected to take off

This wire was originally published on Market Index last Friday here.

Uranium developer Lotus Energy (ASX: LOT) last Thursday announced a merger with exploration company A-Cap Energy (ASX: ACB) via a scheme of arrangement under which Lotus will acquire 100% of the shares in A-Cap.

The market seemed to like the news, with Lotus up 11% on the day and A-Cap up almost 19%.

The merger brings together two complementary projects, provides scale benefits, improves funding opportunities, and means that the combined entity will have the third largest uranium resource of ASX-listed uranium companies – behind Paladin Energy and Deep Yellow.

Amid what was no doubt an incredibly busy day, Market Index was privileged to gain access to Lotus Resources Managing Director Keith Bowes, who shared with us the following insights.

The rationale for the merger

In talking about the rationale for the merger, Bowes acknowledged that one of the concerns of Lotus’ Kayelekera Project is that “the 10-year life mine that we put forward in our feasibility study last year, may be a little bit on the short side and I think investors and specifically utilities would like it if we had a longer life associated with the company”.

Amid those concerns, Bowes and his team started looking around late last year to see if there were any appropriate acquisition opportunities. That process identified A-Cap’s Letlhakane Project, which fits into Lotus’s profile, and is located in Botswana. Investors unfamiliar with Botswana may be surprised to hear that the country is ranked No.2 in the world (behind Nevada) in the Fraser Institutes Policy Perception Index (PPI) as a mining jurisdiction – ahead of South Australia and Western Australia.

“It gives us probably 20 to 25 years of being a uranium producer. We do know that the geology and some extent the mineralogy at Letlhakane is similar to Kayelekera, and a lot of the learnings that we have had at Kayelekera in terms of optimising that process we think will be applicable at Letlhakane”.

Bowes also emphasised the potential knowledge sharing and logistical synergies that will come out of having two Africa-based projects.

Is this a re-rate opportunity?

The combined Group will have the third largest ASX-listed uranium resource but currently trading at a substantial discount to peers (on a market cap per pound of resource basis).

When asked whether this provided an opportunity for a re-rating, Bowes was emphatic.

“I definitely think so.

One of the things I'll point out is that Kayelekera has a resource of about 50 million pounds. The market cap yesterday was around $250 million. So we are valued at about $5 per pound in the ground. When you look at Letlhakane with their 190 million pounds of resource, and a market cap of only $52 million, there's a lot of upside to how their resource will be valued”.

Bowes adds that adding the Letlhakane Project into the Lotus’ operations, where there is a dedicated team that is entirely focused on uranium, should provide a “significant opportunity for an uplift going forward”.

Higher prices will drive the economics

Whilst the merger shapes as a positive for Lotus, the company will only make a Final Investment Decision (FID) on their Malawi asset once uranium prices are a bit higher, something which Bowes fully expects in the next 6-12 months.

The current price of US$55.4/lb, Bowes believes “is still not quite high enough to be able to ensure a very profitable project moving forward”.

Bowes points to the thematic around uranium being very strong, given the structural undersupply in the uranium market already and the new demand that will come online in the next 5-10 years as more nuclear powerplants are brought online.

“When you look at new reactor constructions in China, you look at reactor life extensions in the US, new reactors in France and Eastern Europe, the demand for uranium is going to increase significantly and with that the price will increase.

And I think we're happy to wait for a little while until those prices get to a level where we know we're going to be very, very profitable”.

The uranium market

The expectation of higher uranium prices is shared by plenty in the space (see this article for example).

As well as the demand coming from new reactors being built, Bowes points to net-zero and new technology – in particular Small Modular Reactors (SMRs) – as further drivers of demand.

“Nuclear energy is effectively zero carbon emissions or very, very close to it. I think that is incentivising the construction of these new reactors. Whilst the renewable energies that everyone talks about, i.e., wind and solar, are all really great things, they are not able to provide 24/7 baseload power.

Nuclear is essential to provide 24/7 base load if you're looking for Net Zero.

Bowes adds that traditional reactors typically cost $10-14 billion to build and take around 5-10 years to be built, but that SMRs cost a fraction of that (around $1-3 billion depending on the size) and are expected to start coming online by 2028-29.

These new SMRs will obviously need uranium as well and haven’t even been factored into the demand equation.

So, how high can prices go?

Bowes sees prices in the low to mid US$60 per pound price by the end of the year “is not an unreasonable expectation”.

Looking further out, Bowes says “The market’s expectation is that, after peaking to maybe as high as US$75-85 per pound, the uranium price will settle at around $65 to $67 per pound in the long term”.

More than just Uranium

As well as the opportunity in uranium, Lotus also has an opportunity in rare earths.

According to Bowes, there is a mineralised area that was identified some time ago that sits on Lotus’ mining lease.

“We've been looking at it on and off for a couple of years now. Some really high-grade Rare Earth Oxides (REO) sitting there close to surface.

Bowes adds that there is an opportunity for Lotus to go back and do further assessment, and then work out the best way to generate value.

He points to Malawi as being region well known for significant rare earth deposits, and highlights Mkango Resources with their Songwe Hill Rare Earth Project, and new company Lindian Resources (ASX: LIN), as examples of successful rare earths projects in the area.

The merger with A-Cap also brings with it a Nickel-Cobal asset in WA, Wilconi. Wilconi is a large nickel laterite deposit (containing ~570kt Ni, ~29.5kt Co) that could potentially add further value to the company.

All that said, the focus right now remains firmly on uranium and the massive opportunity that Lotus has in front of it post the merger with A-Cap.