Lotus Resources upgraded to BUY rating off the back of Hylea sale: BW Equities

Lotus Resources Ltd’s (ASX:LOT) recent sale of its Hylea Cobalt Project in NSW to Sunrise Energy Metals (ASX:SRL) has secured the company a BUY rating from BW Equities analyst Daniel Seeney. The company will divest its 100% interest in the Hylea Project for $1.0 million in cash and $1.5 million in Sunrise shares. Seeney said: “We view this as a positive step in order to focus management attention on the company’s primary asset at Kayelekera, as well as providing additional cash to underpin the ongoing development program. “The shares are again trading at a reasonable discount to our valuation and as such we upgrade our rating to Buy.” Retaining exposure The Hylea Project is in the Fifield district of NSW and consists of a cobalt, platinum, nickel and scandium exploration target. This project was acquired by LOT in Feb 2018 and between April and May 2018, a maiden 54 hole drilling program was completed after which the strategy was to seek additional funding and progress the Tigers Creek prospect as well as undertake further work more widely across the tenement package which includes two exploration licences. However, with the acquisition of Kayelekera in Malawi the corporate focus shifted to this asset and Hylea has had little in the way of investment since. The analyst said: “We think it makes sense for LOT to divest the asset where it can be given greater resources and management focus, as well as retain exposure by way of shares in SRL.” Solid funding position At December 31, the company has $6.6 million of cash (excluding the US$10 million restricted cash tied up with the environmental bond), and subsequently completed a $12.5 million placement in February 2021. The report stated: “We expect cash burn of ~A$1.5 million/quarter. “As such at the end of the March quarter we estimate a strong cash position of ~A$17 million, which will be supplemented by the $1.0 million cash receipts from the sale of Hylea during the June quarter. “We regard LOT as well funded to continue to progress its strategy of works at Kayelekera aimed at positioning the asset for a quick restart should uranium prices shift favourably and underpin favourable project economics." Project restart potential  BW Equities noted that the company provided investors exposure to a known uranium asset with a significant operating track record, short lead time and modest capex to restart of US$50 million. “We assume that for the project to obtain adequate funding to restart production, uranium prices need to increase to ~US$75/pound (spot = ~US$31/pound, long-term = ~US$34/pound) which we incorporate into our estimates. “We apply a risk discount of 50% to our Kayelekera valuation to reflect the significant uncertainty around the potential restart, primarily uranium price uncertainty.  “Key risks include the availability of funding, uranium prices, geopolitical issues and operational issues.”