Deep Yellow Limited

Company Overview: Deep Yellow Limited (DYL) is an Australia-based company, listed in 1985 on ASX. It operates at an advanced stage in uranium exploration and development. DYL manages Deep Yellow Namibian project portfolio through its subsidiary Reptile Mineral Resources and Exploration (Pty) Ltd (RMR), which comprises of Reptile Project, Nova joint venture (JV) and Yellow Dune JV. The company’s segments include Australia and Namibia.

DYL Details

Uranium Industry Overview: As per the Resources & Energy Quarterly Report - Australian Government (OCE – Office of the Chief Economist), as of 31^st December 2021, the Uranium prices is expected to show an upward momentum in the near term. The uranium prices are forecasted to rise from ~US$30 a pound in 2020 to ~US$47 a pound by 2023. The exploration spending for Uranium Australia increased to ~$5 million in September 2021 from ~$1.8 million reported in the prior corresponding period, indicating prices and supply shortages are boosting interests in new deposits. Where the uranium earnings were expected to fall by ~13% in 2021-22, it is anticipated to recover and revised up by ~$80 million in 2022-23. Moreover, export volumes are expected to rise by ~13% in 2022-23.

Australia’s Uranium Export – (f means forecast) (Source: Analysis by Kalkine Group)

Tumas Project Updates: Definitive Feasibility Study metallurgical test work completed at the mineral resource Tumas (part of The Reptile Project), which reflected the following improved Forecasts & updates:

• Pre-Feasibility Study (PFS) financial model remained fit for purpose and valid.
• Cost reduction was identified through a power supply study due to the usage of solar and grid power.
• Life of Mine was increased from 11.5 years to 25.75 years.
• Operating Margin (EBITDA) forecast is up by ~114%, from ~US$1,035 million to ~US$2,215 million.
• Project NPV (Net Present Value) increases from ~US$207 million to ~US$412 million.
• Project IRR (Internal Rate of Return) rises from ~21% to ~23%.
• All-in sustaining costs (AISC) reduced from ~US$30.69/lb to ~US$30.37 for the first 20 years of production.
• The DFS is expected to be completed in the second half of CY22.

1QFY22 Highlights: The company is moving towards an optimistic future with cash enhancement:

• As per its second quarterly updates released on 21^st January 2022, the company shows nil cash receipts from customers and ~$316k as a cash outflow from operating activities, mainly owing to the administration and corporates costs.
• Barking Gecko: The excellent intersections results of 118m at 352ppm were extracted from diamond drill hole TN270DDT, and the next stage of phase II of the drilling program was supposed to be commenced on 24^th January 2022, including 10 RC (Reverse Circulation) holes for ~2,500m.
• Omahola Basement Project: Its first pass shallow drilling program of 7,259m (tested 10km out of 35km) outlined three highly prospective targets. Also, the company upgraded its MRE resources to JORC by using a 150ppm cut-off, where MRE stands at 83Mlb grading 269ppm U₃O₈.
• Solidifying Liquidity: The company closed its second quarter accounts with a substantial increase in its cash balance from ~$52.35 Mn as of 30^th June 2021 to ~$71.98 Mn as of 31^st December 2021.

Top-line and Bottom-line Performance in FY21:

• Revenue & Operational Expenditures: The receipts from customers decreased from ~$77.19k in FY20 to ~$56.12k in FY21, leading a total revenue of ~$0.28 million in FY21. Major chunks of expenditure were incurred in administrative and employee expenses, which was reported as ~$1.93 million and ~$2.61 million, respectively.
• Comprehensive Loss: Even with the increasing operating expenses, the company decreased its total comprehensive loss after tax from negative ~$3.39 million in FY20 to negative ~$0.21 million in FY21.
  

Top 10 Shareholders: The top 10 shareholders together form around 33.61% of the total shareholding, while the top 4 constitute the maximum holding. Paradice Investment Management Pty. Ltd.  and Collines Investments Ltd. are holding a maximum stake in the company at ~7.88% and ~7.48%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  During FY21, the company recorded a current ratio of 48.15x as compared to 19.41x in FY20. On the leverage side, the company recorded a debt-to-equity ratio of 0.01x in FY21 as compared to the industry median of 0.49x.

Liquidity Profile & Debt Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

1. Commodities Price Risks: The commodity market is highly volatile, and its price is dependent on the external demand and supply of the commodities.
2. Technology Risk: The business is quite dependent on the technology it applies for exploration and hence, failure of using the right technology might affects its efficiency.
3. Licences Risk: The company’s operations and mining results and activities are susceptible to the licenses issues by regulatory bodies and thus affect its work.
4. COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company might get affected by the lockdown regulations and restrictions, which might affect its sales and operations.
5. Labour Market: The business’s operations might get affected by the availability of labour and its costs.

Outlook: The acknowledged uranium supply shortages in the near term, is expected to increase uranium prices in late 2022- mid 2023 and implies a substantial support to augment new developments. As also mentioned in the “Uranium Industry Overview” above, with the positive outlook on Uranium market, bullishness on the global uranium prices and company’s project updates, DYL is positive on progressing its Tumas Project towards its development stage, with DFS to be completed in December quarter 2022, The company also targets a minimum 20-years old LOM (Life of Mine) at an annual production rate of 3Mlb per annum. On the other hand, the follow-up drilling is also scheduled for 2022 at Omahola Project.

Technical Analysis: On the daily chart, DYL prices have recently shown a breakout at ~$0.845 and have surpassed the trend-following indicators 21-period SMA and 50-period SMA, which may act as a support zone. Moreover, the momentum oscillator RSI (14-period) is gaining momentum from the lower levels and trading at ~59.654 supported by decent rising volumes. All together indicates a positive stance and anticipates an upward movement in near future. An important support level for the stock, is placed at $0.780 while the key resistance level is placed at ~$1.020.

Stock Recommendation: The stock of DYL has given a positive return of ~13.29% and corrected by ~8.67% in the past nine months and three months, respectively. Its current market price is trading below the average of its 52-week low and 52-week high of ~$0.585 to ~$1.370. In addition, the stock is trading at a P/BV multiple of 3.2x as compared to the industry median (Uranium) of 6.5x on a TTM basis. Thus, it seems that the stock is undervalued at the current trading levels. Considering the indicative valuation on a TTM basis, its current price due to correction, supporting volumes, anticipation of rise in uranium prices, increased forecasts of Tumas Resource, capital raising, reduction in total debt, strong liquidity position, rising uranium prices and its expected exponential demand in future, current trading levels on technical analysis grounds, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.880 as of 1 March 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

DYL Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

The Green colour line reflects the 21-period moving average. SMA helps to identify existing price trend. If the prices are trading above the 21-period, then it shows prices are currently trading in a bullish trend, (Vice – Versa).

The Blue colour line reflects the 50-period moving average. SMA helps to identify existing price trend. If the prices are trading above the 50-period, then it shows prices are currently trading in a bullish trend, (Vice – Versa).

The Yellow colour line reflects the Trendline, which shows whether the direction of the scrip is upwards or downwards.

The Purple colour line in the chart’s lower segment reflects the Relative Strength Index (14-Period) which indicates price momentum and signals momentum in trend. A reading of 70 or above suggests overbought status while a reading of 30 or below suggests an oversold status.

Disclaimer

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