Zacks Small Cap Research – Fireside Chat with John Borshoff, Managing Director and CEO of Deep Yellow Ltd. – Technologist

OTC:DYLLF

Steven Ralston: Good day. This is Steven Ralston at Zacks Small Cap Research, and I’m here with John Borshoff, CEO of Deep Yellow. Hello, John. Thank you for giving us the time for the CEO chat.

John Borshoff: Thanks, Steve. Pleasure to be here.

SR: In the time we have together, I’d like to discuss Deep Yellow’s most advanced uranium projects, Tumas and Mulga Rock. First I’d like to address Tumas, which currently has a timetable for commencing production in late 2026. You have traveled this journey before, as you and your team advanced Paladin to production in the 2003-2007 timeframe, and in the same jurisdiction, very similar palaeochannel deposits. Obviously, you’re well up the learning curve in addressing the stages of development for Tumas. Could you compare and contrast the path here at Tumas with your experience at Paladin?

JB: Yes, Steven, I will do that. Before I do this, though, I just want to just give a little bit of background in terms of the how I’ve positioned Deep Yellow and the similarities of that to what I did in Paladin. In Paladin when I started to do a contrarian approach and developing a project pipeline at a time when uranium wasn’t looking hot at all. By that time, before the China phenomenon happened, I had two projects in the pipeline. Greenfield was ready for development in Langer Heinrich and Kayelekera. This type of forward planning, where we didn’t anticipate the exact timing of China’s involvement, just galvanized our positioning.

JB: We became an investment phenomena. This was a result of that positioning which nobody else in the sector had done. So, come forward now 15 years and look at where Deep Yellow is. Remarkably, we are in a similar position this time. I took a contrarian approach because I really believe the opportunity lay in the fact that the sector is suffering from a shortage of uranium mine builders. And it’s due to many reasons, where expertise disappeared and basically most companies and their projects went on standstill. So in getting Deep Yellow to where it is today, what we have got is two Greenfield projects ready for development over the next three to four years in Tumas and Mulga Rock.

JB: But in parallel with that, one of the biggest parts of asset development has been bringing the core team from Paladin, which was the only company to develop conventional uranium mines over the previous 25 years. And so the asset was Deep Yellow, which is the team we’re familiar with. It’s not just geological. It’s not just developmental or operational. It’s governance, financing, and all of the key attributes needed for uranium mining are within Deep Yellow. That’s the number one achievement we have accomplished quietly, with purpose and vision. When you look at the world today, there is a serious lack of Greenfield projects ready for development with teams that can demonstrably develop and have credibility. That’s point number one.

JB: So, one experience that I had and introduced into Deep Yellow, which I had successfully applied with Paladin, is our current approach. We aimed to marry, merge, and get a very thorough DFS out by February 2023. Then, having the fortitude and vision, we decided to re-cost that six months later, which proved to be a very good move. The reason for the re-costing was that the February 2023 DFS faced headwinds from inflation and supply chain issues. Even though about 75% of the DFS was based on tenders rather than just factoring, these headwinds added extra costs. We included them in the DFS because our purpose was not just to create a showpiece for shareholders, but to present something we knew we had to honor and develop. Our goal is to become a major producer in the sector.

JB: To eliminate any doubt about the DFS, we spent a considerable amount of money in conjunction with the project engineer and our team, which provides all the process IPs and everything. We re-examined the CapEx and OpEx, and re-costed them as an addendum to the DFS, signed off by the project engineer, making it fully auditable. As a result, we reduced the CapEx by about $20 million USD. The OpEx came in slightly higher, but it wasn’t significant enough to change things overall. This higher OpEx absorbed a 12% increase in fuel costs and a 10% increase in power costs.

JB: So in fact, our old DFS had the OpEx about right, which helped eliminate concerns or doubts that a financier might have. They might have looked at it and thought, ‘Oh, this is what they were talking about.’ This caution likely comes from our experience with Langer. We now better understand how financiers think. These financiers have been involved with us previously, so we have a track record of honoring our commitments. We’ve placed a bigger emphasis on tendering the EPCM contract, ensuring we get the best out of it. We need an EPCM contractor capable of delivering on schedule, on price, and on cost, aiming for production in 2026.

JB: So, we’ve invested a lot of effort into this. We’ve selected our detailed engineer who will handle the engineering and EPCM. This has been announced, and now we’re focusing on what they call the SP1 component, which involves feed or detailed engineering, and the SP2 component, which is the actual construction execution. We are currently enhancing the organic structure of our management approach from our side, ensuring alignment between what the engineer perceives and what we understand on our end. This prevents surprises like suddenly discovering midway through that there’s an additional $50 million in costs due to discrepancies between on-site activities and documentation.

JB: Our efforts in advancing our financing have been substantial. We’ve integrated key personnel from Paladin into our group, and we’re on the verge of announcing a mandate with a bank, which is progressing smoothly. One critical aspect we’re examining is the optimal leverage against the cost of equity. Preserving the upside potential of our contracts and offtake agreements is paramount to ensure maximum shareholder benefit. We now have a more refined owners team in place, focusing on co-managing the design approval process and integrating operational experts who will remain integral to the project’s ongoing success. I hope that clarifies things for you.

SR: Yes. And thank you for those insights on the Tumas project. We could now move to the Mulga Rock project. Earlier this year Deep Yellow released updated MRE on two deposits that are at Mulga Rock. And for the first time, it included estimates of critical minerals, namely copper, nickel, cobalt, zinc, and rare earths. It increased the estimate by 85%. I understand we should expect and revise DFS that will optimize the mining methods for the recovery of these critical minerals. What else is being planned to contribute to this revised DFS, which we expect in a little over a year from now?

JB: Right. During our due diligence on Vimy, the previous owners of Mulga Rock, we identified potential upside that we felt was not fully captured in their 2018 DFS, which serves as the core technical document. There was also a subsequent promotional refresh of the DFS that lacked authoritative backing. The landscape for uranium has evolved significantly from the post-Fukushima era of 2010-2011 through 2018 to 2022-2023. The parameters on which Vimy’s DFS was based no longer aligned with the current realities. For instance, critical and battery minerals, as well as rare earths, were not major considerations back then.

JB: So, Vimy focused primarily on addressing environmental concerns and extracting easily leachable base metals, which they intended to explore further in their subsequent bankable feasibility study. Our analysis revealed significant upside potential, both in interpreting the ore body and in how Vimy’s extensive drilling and test work could be leveraged. While their integrity in data collection was not in question, we identified additional potential in uranium. It’s worth noting that the project remains fundamentally a standalone uranium venture, a perspective we continue to uphold.

JB: And so, following the merger, we explored value addition through critical minerals and rare earths, revealing significant upside potential. Our preliminary assessments confirmed this, suggesting a transformative impact on the project’s longevity and value. Since August 2022, and ongoing, four key components are shaping our revised DFS. Firstly, the mineral resource estimates, which we conducted and found to be very favorable. This involved infilling approximately 600 to 700 drill holes across the expansive 15-kilometer ore body.

JB: So, we achieved indicated and measured resources through our extensive drilling, forming the foundation for reserve determinations, yielding excellent results. Concurrently, we focused on optimizing the leach kinetics of non-uranium minerals, as uranium recovery methods were already well-established. This effort showed promising outcomes, projecting an average recovery rate of at least 70% across all targeted metals, which will inform our revised DFS. The next critical component involves advanced resin technology, which we are currently developing. This innovation aims to sequentially extract uranium, critical minerals, and rare earths, enhancing the project’s overall processing efficiency and value.

JB: The pilot study for the advanced resin technology is slated to commence in the next quarter, marking a crucial step forward. Simultaneously, we’re conducting in-house DFS preparations, laying the groundwork for the project’s comprehensive development strategy. Additionally, due to our shift towards more non-selective mining methods, we’re carefully refining the mining schedule. This analysis will dictate equipment needs, beneficiation requirements, and operational logistics such as blending at the ROM pad or direct processing at the plant. These assessments are part of a rigorous study currently underway. As these components, two of which are already in progress, come together, we anticipate initiating the revised DFS later this year.

JB: We’ve already begun the process, and we anticipate releasing the revised DFS in the early second half of next year. This updated plan forecasts a significant extension in the project’s lifespan, expanding from the initial 15 years to approximately 23 to 24 years. Importantly, this projection excludes the Mulga Rock West deposit, known as the Emperor deposit, which could potentially add another 10 years to the mine life. With environmental approvals already secured within our operational footprint, we’re poised to proceed confidently. We’re highly satisfied with our progress thus far and optimistic about the project’s potential. We envision a robust, long-term mining operation that could commence production in late 2028.

SR: Thank you. Last and final question and it’s more of a investors overview type question. We know the driver during the past uranium cycles has been the imbalance of supply and demand, which was exacerbated by the time and money it’s required to bring new mines into production. But at the same time, there are a series of fundamental advancements in each particular uranium company. It plays an important role. And as an investor, we have to look at both, in the company and the industry. Based on your experience, would you comment on the interplay between that macro environment of the supply shortage of uranium production with the dynamics of uranium companies stages of development?

JB: So, in broad strokes, we’ve witnessed a macroeconomic landscape where, beyond the initial uranium boom driven by military applications in the ’40s and ’50s, subsequent phases were shaped by shifts in energy needs. The oil shocks of the mid-20th century prompted a surge in nuclear power adoption for electricity generation, until the Chernobyl incident dampened enthusiasm. More recently, the early 2000s saw a resurgence driven notably by China’s rapid economic growth, which reinvigorated global interest in nuclear power and uranium, largely propelled by China’s demand.

JB: Since around September 2023, we’ve entered a new phase in the uranium sector, catalyzed by findings from the World Nuclear Association Symposium. Their marketing study, though outdated at the time, highlighted a fundamental uranium shortage amidst an industry that had seen minimal development for over a decade. This revelation sparked a boom, reshaping global energy strategies. Countries worldwide are now emphatically endorsing nuclear power, recognizing renewables as only one component of a broader energy strategy. This shift mirrors the top-down policy approaches seen during previous energy crises like the oil shocks, marking a significant departure from past dynamics.

JB: Governments are endorsing nuclear power amid concerns over the risks and uncertainties associated with transitioning to renewable energy technologies, which have not been tested on an industrial scale before. This shift represents a significant departure from previous dynamics, where the focus was primarily on established nuclear reactor vendors like Westinghouse and GE, along with licensing agreements with reliable builders such as Korean firms. These firms have demonstrated their capability with successful projects in the Emirates, France, China, and Russia, achieving near-budget and on-time completion.

JB: And now, alongside these large units, there’s a growing availability of small modular reactors (SMRs), which offer a tailored approach never before seen in the industry. These SMRs won’t replace the larger reactors but provide new options. Looking ahead, there are also plans for micro reactors, anticipated to be operational in about six years, designed for industrial and corporate use at around 25 megawatts, with refueling capabilities. These developments will significantly increase demand for uranium. As existing inventories dwindle — currently around 30 million pounds alongside the annual production of 150 million pounds — projections indicate a need for 250 to 300 million pounds annually by the late 2030s to early 2040s.

JB: So, for companies like Deep Yellow, including our own, strategic positioning is crucial. In the evolving uranium market, single-mine operations are less significant unless they feature a NextGen ore deposit with substantial scale and long-term viability. Diversification, both in terms of asset size and geographic spread, is now imperative for ensuring supply security. Deep Yellow has strategically built a pipeline of projects over the past seven years, a strategy that remains relevant today. As the industry faces a shortage of Greenfield projects and increasing demand for uranium, factors like a robust DFS and successful financing play critical roles in enhancing company value. We’ve observed how companies like Boss and Paladin have seen their values soar, and we aim to leverage our resources and reserves to capture similar value appreciation.

JB: We’re focused on achieving significant milestones that will not only reflect the rising tide of uranium prices but also distinguish us through meticulous preparation, our dedicated team, and a deep understanding of market dynamics. Our goal is to deliver substantial value to shareholders by strategically positioning Deep Yellow ahead of the curve in addressing the future supply needs of the uranium market. We recognize the imperative to differentiate ourselves from the existing landscape of uranium companies, ensuring we’re not complacent but rather proactive and innovative in our approach. This forward-thinking strategy is essential as we navigate towards meeting the substantial future demand for uranium.

SR: Well, thank you John. And thanks for your time for participating in this CEO chat.

JB: It’s a pleasure, Steven.

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