By Steven Ralston, CFA

OTCQX:DYLLF | ASX:DYL

READ THE FULL DYLLF RESEARCH REPORT

With the merger of Vimy Resources having closed, Deep Yellow Ltd. (OTCQX:DYLLF) (ASX:DYL) has been transformed Deep Yellow into a multi-jurisdictional junior uranium company. Deep Yellow now holds and is advancing two near-production-ready uranium projects, one in Namibia and the other in Australia. The Russian invasion of Ukraine has added further impetus toward reaching the inflection point in uranium’s commodity upcycle. The DFS on the Tumas Project in Namibia is being finalized for its anticipated completion this year, and there are plans to update the 2020 DFS on Mulga Rock.

SUMMARY OF RECENT EVENTS

• The merger with Vimy Resources merger has transformed Deep Yellow into a multi-jurisdictional uranium company with Tier 1 assets:

o two advanced projects (Tumas and Mulga Rock) with a DFS and a revised DFS (respectively) expected in short order

o three exploratory projects (primarily Alligator River and Omahola) with ongoing drilling programs, along with Barking Gecko

• Management continues to look for M&A opportunities, already having reviewed of over 200 mining projects around the world

• Exploration update for Omahola Project where halfway-completed Phase 2 drilling program has discovered a new prospective area that extends the fertile zones by 2km. Also, at the Ongolo deposit, resource definition deep drilling (271m-332m) intersected mineralization, confirming the continuity of mineralization at depth and better defining the resource.

• Update on the uranium industry

Deep Yellow Post Merger with Vimy Resources

Management has succeeded in achieving another milestone in executing its Dual Pillar strategy: the transformation of Deep Yellow into a multi-jurisdictional uranium company with two advanced uranium projects (Tumas and Mulga Rock) in separate Tier-1 miningjurisdictions (Australia and Namibia). Also, Deep Yellow has a highly prospective portfolio of exploration projects that provide a pipeline for organic growth. These early stage projects include Omahola in Namibia and the Alligator River in the Northern Territory. With this expanded project portfolio with both advanced and exploratory projects, investor interest is expected to increase.



Management’s strategic goal is to become a safe, reliable, long-term supplier of uranium. The merger brings Deep Yellow one step closer to management’s objective of attaining annual production capacity of over 10.0Mlbs.

Now, not only does the Deep Yellow have a clearer path to production with its two advanced projects, but also will have increased scale in many aspects, including in terms of management’s industry, project development and operating experience and importantly, financial flexibility (with over AUD$100 million and no debt). In terms of MRE (389Mlb U308), Deep Yellow has become more prominent over other juniors.

With advanced (near-development-ready) projects in Namibia (Tumas) and Australia (Mulga Rock), the company is well positioned to achieve production of uranium in the 2025 timeframe. Both of these projects also have the potential to expand organically by expanding the existing asset base through the further definition of resources.

A Definitive Feasibility Study (DFS) is expected to be completed on the Tumas Project by the end of calendar 2022. Management anticipates that the Tumas DFS will support a potential annual production rate of 3.0 million pounds U308 with an expected LOM (Life-Of Mine) of 25.75 years. Only 60% of the 125km highly prospective Tumas paleochannel system has been tested, and management believes that the remaining 40% will add to the LOM. A Project Mining License Application (MLA 237) was filed with the Namibian Ministry of Mines and Energy (MME) in July 2021. The approval process has been expected to require 18 months to complete.

A DFS was completed on the Mulga Rock Project in January 2018 and subsequently updated in August 2020. The refreshed Mulga Rock DFS indicates that an open pit mining operation would support a potential annual production rate of 3.5 million pounds U308 for 15 years with an expected 31% IRR and payback period of 2.4 years. Deep Yellow’s management plans to update the Mulga Rock DFS by including polymetallic (base metal) recovery optimization work, by adding further drilling work to better define the resource and by conducting additional mining studies. The geological setting at Mulga Rock is an ancient drainage system where uranium mineralization was precipitated and became concentrated in peat swamp now situated subsurface.

In addition, two highly prospective projects (the Alligator River Project in Australia’s Northern Territory and the Omahola Basement Project in Namibia) provide management with the options to develop additional uranium assets through exploratory efforts that are expected to deliver supplementary production post-2025, provided the price of uranium provides an adequate incentive to further ramp up production. An Inferred Mineral Resource for the Angularli deposit at the Alligator River Project was estimated to be 26 million pounds U308 in March 2018. Geologically, the Alligator River Project is a Ranger-like unconformity-related uranium deposit occurring in metamorphic basement rocks. The current Mineral Resource Estimate for the Ongolo, MS& & Inca alaskite deposits at the Omahola Project is 125.3Mlb at 190ppm U308.

The merger with Vimy Resources has created geographically diversified junior uranium company in two Tier-1 mining jurisdictions. The project portfolio consists of both advanced and exploratory projects, which is expected to expand through management’s disciplined M&A strategy to facilitate further consolidation in the uranium mining industry. Management has completed a comprehensive review of over 200 mining projects around the world, categorizing each deposit based on quality, geography and various other metrics.

Importantly, management and technical team are experienced having successfully developed and operated uranium projects in the past uranium cycle. Management is highly sensitive to the price of uranium in regard to the decision-making process in determining when to initiate production.

OMAHOLA BASEMENT PROJECT - UPDATE

On October 21, 2022, Deep Yellow provided an update on Phase 2 (roughly another 5,000m) follow-up drilling program at the Omahola Basement Project. The drilling is focused on the southern side of the prospective corridor lying between MS7 & Inca and an area with a tight fold structure west of Ongolo South. The strike length of the entire prospective zone extends for approximately 50km.

The Phase 2 drilling program includes continued shallow RC drilling over additional prospective ground as well as deep core drilling of previously identified anomalies. Of the 73 planned holes, 43 holes (2,950m) have been completed.

Two mineralized drillholes (OMH0298 & OMH0299) have opened a new prospective area, which is situated 2km north of Inca and west of MS7. The significance of this discovery is that it extends the fertile zones of the Omahola Project by 2km. The specific intersections were:

• OMH0298: 29m at 189ppm eU308 from 33m

• OMH0299: 28m at 190ppm eU308 from 36m

At the Ongolo deposit, resource definition drilling at depth consisted of three holes (one RC hole and two diamond core holes) were drilled (271m-332m). All three drillholes intersected mineralization, which confirmed the continuity of mineralization at depth and will help define the resource.

Typical grades varied over multiple intersections ranging between 103ppm and 398ppm eU308. The best intersections were:

• OMH0277 (diamond): 14m at 381ppm eU308 from 204m to 218m

• OMH0282 (RC): 36m at 172ppm eU308 from 61m to 97m

• OMH0282 (RC): 27m at 175ppm eU308 from 146m to 173m

The remaining part of the Phase 2 drilling program continues with the objective to test 3km of untested strike length between MS7 and Inca with shallow RC drill holes.

On July 21, 2022, the results of Phase 1 of the follow-up drilling program at the Omahola Basement Project were announced. Phase 1 commenced on March 7, 2022 and consisted of 40 RC holes (5,252m).

The top two assay results at Inca South were OMH0254 (8m at 512ppm eU308 & 5m at 308ppm eU308) and OMH0255 (5m at 270ppm eU308). These mineralized intersections potentially indicate a 2km south westerly extension from previous positive drill results at Inca South.

Phase 1 of the follow-up drill program again confirmed the prospective nature of the broader Omahola target zone, and further exploration of Inca South, particularly deep RC drilling, is warranted. Only 16km of the 50km structural target zone has been tested by shallow drilling.

The current Mineral Resource Estimate at the Omahola Project (Ongolo, MS& & Inca deposits) is 125.3Mlb at 190ppm U308 at 100ppm cut-off (JORC 2012 Code).

The Mineral Resource Estimate at the Omahola Project was upgraded from a Measured, Indicated and Inferred Resourcebase of 45Mlb at 420ppm eU308 at a cut-off of 250ppm (JORC 2004 Code) to 125.3Mlb at 190ppm U308 at 100ppm cut-off (JORC 2012 Code). The upgrade occurred through a thorough review of the underlying data of the three resource deposits. In late 2021, a 200-hole (7,426m) shallow RC drill program commenced in order to identify new mineralized areas beyond the known deposits. 34 of the 200 holes returned assay results greater than 100ppm U308 and 104 holes returned results greater than 50ppm U308 over 1 meter.

Located on EPL 3496, the Omahola Project currently consists of three distinct deposits (Ongolo, MS7 and Inca), which were identified between 2009 and 2013. These shallow deposits, which occur at a depth of 20m to 250m, are a second type of uranium mineralization at the Reptile Project described as basement or alaskite. Usually referred to as uraniferous leucogranites, alaskite (a local term) dyke-like formations were formed by molten granite intruding into sedimentary rock. It is postulated elevated uranium grades occur when high-grade metamorphism causes a partial melting of basement rocks, which enhances the transportation and enrichment of uranium ore, such as at Rössing South.

Alaskite Alley, a north-south trending zone of occurrences of uraniferous leucogranite, currently supports two mines (Rössing and Husab), where the primary mineralization of the ore bodies is usually found in sheets of uranium-rich, granite-hosted alaskite (pegmatitic alkali-leucogranite). Rössing and Husab are almost due north of the Reptile Project, and Alaskite Alley appears to cut through the western part of Deep Yellow’s EPL 3496 tenement, in which Deep Yellow has discovered these three uranium deposits.

URANIUM INDUSTRY UPDATE

The global efforts to reduce the use of fossil fuels to produce energy are very positive for the long-term outlook for uranium. Nuclear power is expected to become an integral part of meeting net-zero emission targets that many countries have adopted through the Paris Accord.

Over the last few months, the Ukraine conflict has become a catalyst for a global change of view by governments toward nuclear energy in terms of being a part of a diverse portfolio of electricity generation, and in some cases, a reduction of dependence on Russa as a source of energy resources. In addition to the stream of new builds of nuclear units in the pipeline (55 reactors are currently under construction according to the WNA), several nations have reversed plans to shutter nuclear facilities and are now on the path to build or re-start nuclear units: France, Japan and South Korea to name a few. Also, the U.K., Belgium and Sweden are in the process of revising their nuclear strategies

Lastly, the pathway to the looming shortage of U308 has being shortened by two other events:

• The trend toward overfeeding, which not only is a sign that enrichment demand is greater than supply, but also is a process that reduces the amount of available secondary supply.

• The recent decision by Kazatomprom’s management to reduce the production target for 2023

Prospects for Uranium Market Remain Very Positive

Recent developments in the uranium industry have accelerated the pace toward the impending supply-demand imbalance expected to occur in the 2023-2025 timeframe with the deficit projected to expand after 2030. Several catalysts stimulated four major increases in the price of uranium in the spot market: the first from $18 per pound to the mid-$20 range, the second from $22 to the $28-$34 range, a third leg up to $45-$50 range and a fourth driving the price to the $60 range. Most recently, the spot market price corrected down to around $48 and has currently rallied to $52. These catalysts have increased the visibility of the structural supply deficit to both utilities and investors, highlighting the transparency of the true incentive price needed to economically bring sufficient capacity on-line.

The catalysts include:

Production Rationalization by the major producers of uranium (Kazatomprom and Cameco)

• Starting in 2016 and continuing today, the rationally planned curtailments of production by the two major producers of uranium (Kazatomprom and Cameco) have resulted in a shrinkage of secondary supplies, which stabilized and initially reset the price of U308 in the transaction market.

o Between 2017 and 2020, Kazatomprom reduced uranium production from 24,600t U308 in 2016 to 19,477t U308 in 2020, which includes approximately 3,300t U308 due to the impact of the COVID-19 pandemic. In 2021, production increased slightly to 21,800t U308, but in August 2022, Kazatomprom’s management has extended the production discipline through 2023 with expected production targets of 21.5t in 2022 and 22.8t in 2023.

o Cameco halted production at Rabbit Lake in 2016 and at McArthur River in 2018. Subsequently, Cameco had to purchase material in the spot market in order to meet the company’s delivery commitments. After being dormant for over three years, McArthur River reopened in 2022 with forecasted production of only 1.4 million lbs.

COVID-19 prompted the shutdown of several uranium mines in Canada, Australia and Africa, which accelerated the inventory drawdown of secondary supplies.

Sequestered Uranium Vehicles Reducing Secondary Supply: The launch of the Sprott Physical Uranium Trust significantly impacted the availability of secondary supply and also brought greater transparency to the sequestering process.

• Sprott created the Sprott Physical Uranium Trust (SPUT) through the acquisition of Uranium Participation Corporation (UPC) in April 2021 and its subsequent restructuring into a purchaser and stockpiler of U308. SPUT was formally launched on August 17, 2021 and it immediately commenced to purchase uranium in a program funded by an initial $300 million at-the-market (ATM) financing. Through subsequent ATM financings, SPUT now holds 58.87 million pounds of U308 as of October 21, 2022. Though other entities have sequestered uranium (e.g. Yellowcake plc, Energy Fuels and Uranium Energy), the Sprott Physical Uranium Trust has added significant scale to the sequestering market mechanism and accelerated the rundown of secondary supply.

Energy Policies Addressing Initiatives for Carbon-Free Clean Energy: The changing views in concert with the Paris Agreement Under the United Nations Framework Convention on Climate Change (aka the Paris Accord), which was adopted in December 2015, more than 190 countries have committed to reduce the emission of greenhouse gases (carbon dioxide , methane, nitrous oxide several fluorinated gases) in order to limit the global warming process to a temperature increase of 1.5°C above pre-industrial levels. Globally, the largest emitters are China (26.1% of global emissions), Europe Union (17.5%) and the U.S. (12.7%) and India (7.1%). In July 2022, the European Parliament supported a European Union to classify nuclear power as “green.”

Policy commitments by major countries are attempting to reduce carbon emissions in an effort to thwart global warming. Governments and individuals are coming to realize that nuclear power can provide green electrical energy with an extremely low carbon footprint. Future demand for uranium is expected to increase due to the new builds of nuclear reactors.

Invasion of Ukraine: On February 24, 2022, Russia invaded Ukraine. The ensuing disruptions in the energy space (particularly pertaining to the supply of oil, gas and uranium) have sparked rallies in the energy fuel complex. Furthermore, energy policy decision-makers have become more concerned over energy security, not only fossil fuel-related energy sources, but also uranium. Globally, Russia supplies roughly 39% of enriched uranium, 27% of conversion supply and 14% of mined uranium concentrates. Nuclear utilities, particularly in the U.S. and Europe, are pivoting from the high level of supply dependence on enriched uranium from Russia.

Western countries are attempting to reduce their reliance on Russian uranium. The US Department of Energy is seeking to purchase domestically produced uranium. And the US National Nuclear Security Administration (NNSA) began the process to initiate a strategic uranium reserve of 1,000,000 pounds of domestically-produced U3O8. The Biden Administration supports a $4.3 billion plan to purchase enriched uranium from domestic producers. Going forward, the security of supply has become a more important factor.

Uranium Demand Increase Related in Enrichment Process: Uranium enrichers, particularly those in the West, are turning from underfeeding to overfeeding, which is a sign that enrichment demand is greater than supply. By overfeeding (feeding extra UF6 during the enrichment process), enrichment time is reduced, but also more UF6 feed is required. As a result, the demand for U308 (the feedstock for the conversion process to UF6) is increasing, exacerbating the expected supply deficit of mined uranium.

In the United States, there are 93 licensed nuclear power plants that generate approximately 20% of the nation’s electricity. As of mid-2022, two nuclear power plants are under construction. Most of the uranium required by U.S. nuclear reactors is imported. In 2021, the country’s nuclear reactors purchased approximately 46.7 million pounds, of which 44.3 million pounds was purchased from foreign suppliers. U.S. nuclear reactors consumed 44.4 million pounds of U308 equivalent.

Enacted in November 2021, the $1.2 trillion Infrastructure Investment and Jobs Act allocates $6 billion (Civil Nuclear Credit Program through the DOE) to prevent premature retirement of existing reactors and $2.5 billion to develop advanced reactors. As part of the funding allocated through the Inflation Reduction Act, the Office of Nuclear Energy of the Department of Energy (DOE) hosted an Industry Day in October 2022 in order to seek information and sources for the potential project of purchasing enriched uranium in the form of HALEU (High-Assay, Low-Enriched Uranium).

China: Approximately 69% of mainland China's electricity is produced from fossil fuels, chiefly from coal; however, under its 14th Five-Year Plan, the government is planning for nuclear energy to provide 70GW by 2025, up from 52.15GW currently. Consequently, China is planning to build 150 new nuclear reactors over the next 15 years. As of mid-2022, China has 54 operating nuclear power plants with another 22 under construction.

France: Approximately 70% of France’s electricity is generated through 56 operating nuclear reactors. In 2014, the government set out to reduce that market share to 50%; however, later on November 9, 2021 and under a new administration, President Emmanuel Macron announced that France will pursue the construction of new nuclear reactors in order to help reduce the country’s reliance on fossil fuels and ultimately make France carbon neutral by 2050. In February 2022, President Macron announced that France will construct at least six new nuclear reactors and possibly build another eight.

United Kingdom: About 16% of the UK’s electricity is produced by nine operating nuclear reactors, down from 25% in the late 1990s. Starting with the passage of the 2008 Climate Change Act, the UKs energy policy has been driven by reducing carbon dioxide emissions rather than cost or security of supply. Old nuclear power plants were shut down as they aged, and there were plans to import power from France, Belgium and the Netherlands.

In November 2020, “The Ten Point Plan for a Green Industrial Revolution” was published, which announced funding and support for green power initiatives, including “delivering new and advanced nuclear power.” In April, 2022, the country’s Energy Security Strategy was released, which included an accelerated nuclear energy effort with a goal of construction up to 24GW of new nuclear capacity by 2050. This is expected to account for roughly 25% of the UK's projected electricity demand. Currently, the first of a new generation of nuclear plants is under construction.

Germany: On October 19, 2022, the German federal cabinet approved Chancellor Olaf Scholz’s executive decision to allow the three remaining nuclear power plants in Germany (Emsland, Isar 2 & Neckarwestheim 2) to continue operating beyond the December 31, 2022 nuclear phase-out date until 15 April 2023.

Sweden: The incoming center-right coalition government (Christian Democrats, the Liberals, the Moderates and the Sweden Democrats) favors the use of nuclear energy. On October 14, 2022, the coalition issued the Tidö Agreement, which changed the energy policy’s goal “from 100% renewable to 100% fossil-free." The Agreement calls for the removal of Sweden's ban on restarting closed reactors as well as for Vattenfall (the state-owned energy company) to conduct an investigation on the possible restart Ringhals Units 1 & 2. The Agreement also is laying the groundwork for the construction of new reactors by changing the Environmental Code to allow more than ten reactors in operation at the same time in Sweden.

Belgium: With six nuclear reactors generating about 39% of the country’s electricity, in March 2022, the government delayed its plans to close all nuclear power plants by 2025. The country's newest reactors (Doel 4 and Tihange 3) would remain in operation to 2035 in order to strengthen Belgium’s “independence from fossil fuels in a turbulent geopolitical environment.”

Japan: Prior to the Fukushima nuclear accident in March 2011, nuclear reactors generated approximately 30% of Japan’s electricity supply. After the accident, the percentage was reduced to 6% due to public protests despite having 33 operatable reactors. Two reactors restarted in August and October 2015 (Sendai 1 and Sendai 2, respectively). Also, another eight restarted thereafter (bringing the total to 10 in operation) with 16 other operable reactors at various stages in the restart approval process.

In view of the Ukraine invasion by Russia, in July 2022, Japan’s Prime Minister, Fumio Kishida, announced that the restart of nine reactors would be accelerated to the winter 2022, while another seven units would be operating by the summer of 2023. Moreover, the government is contemplating extending the operational limit of nuclear power plants from 40 to 60 years

South Korea: Formally reversing the prior policy of phasing out nuclear power, MOTIE (Ministry of Trade, Industry and Energy) has drafted the 10th Basic Plan for Electricity Supply and Demand (a 15-year plan), under which the proportion of nuclear power will increase from 27.4% to 32.8% of the country's total energy mix by 2030. The increase estimates future electricity demand, confirms the continued operation of 12 existing reactors and incorporates the startup of six new reactors (Shin Hanul units 1-4 and Shin Kori units 5 & 6) by 2033.

Philippines: On February 28, 2022, President Rodrigo Duterte signed Executive Order No.164, which mandates that the Department of Energy develop and implement a Nuclear Energy Program as part of the Philippine Energy Plan, thereby formally including nuclear power in the Philippines' energy mix.

These catalysts are rebalancing the uranium market, positioning it to achieve the incentive price required to economically develop and bring online sufficient new uranium mine production capacity in order to satisfy the structural supply deficit in the out-years.

Traditionally, nuclear electric utilities have tended to negotiate and enter into uranium term supply contracts in the fall, after the World Nuclear Association conference in early September. At the conference, all the major industry players meet and share information in order to gauge the current status on the nuclear energy industry. Equipped with this knowledge, representatives of nuclear electric are better prepared to make more informed decisions concerning the procurement of nuclear fuel.

MISCELLANEOUS

Workstreams for the Definitive Feasibility Study on the Tumas Project are in the final stages, and the DFS is on track for completion in by year-end of 2022. The latest work has confirmed key inputs and assumptions outlined in the PFS. As a reminder, the assay results from a 2021 infill drilling program helped increase the LOM to 25.75 years from 11.5 years in the PFS.

Effective September 19th, Deep Yellow Limited was added to the S&P/ASX 300 Index. Some professional portfolio managers and mutual funds benchmark to this index. Consequently, awareness of Deep Yellow among investors (both retail and institutional) should expand, and the shareholder base of Deep Yellow should broaden.

VALUATION

Broadly speaking, the public uranium companies can be grouped into three segments: producers, development companies and exploration companies. Producers are actively mining and generating revenues. Exploration companies are prospecting and/or drilling to establish mineral resources. In between these two segments are the development companies that already have established resources and are advancing through the process to bring a mine in operation, generally from the point of initiating a Pre-Feasibility Study to the actual construction of a mine. The comparable companies to Deep Yellow fall into this category.

Further, the comparable companies have been narrowed through quantitative factors, particularly those with a market capitalization over $200 million and trading above $0.35 per share. This process captures a range of well-funded junior uranium development companies, which are listed in the table above. Currently, the P/B valuation range of these comparable companies is between 3.5 and 7.6. With the expectation that Deep Yellow’s stock will attain a first quartile P/B ratio of 7.3, our comparable analysis valuation price target is US$1.00

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