enCore Energy: Focus Now on Alta Mesa as a 30% Stake is Sold to Boss Energy

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Earlier today enCore Energy (EU-NYSE, EU-TSXV) announced that it had entered into a Master Transaction Agreement with Boss Energy Ltd (BOE-AU) which would result in the sale of a 30% stake in enCore's Alta Mesa project for a total consideration of $70M. Specifically, the deal terms are for a payment of $60M in cash to enCore along wth a private placement from Boss Energy of $10M into enCore shares at a price of $3.90 per share. Additionally, a loan of up to 200,000 lbs will be made to enCore (at a commercial 9% interest rate), sourced from Boss' strategic stockpile. Lastly, a strategic collaboration agreement will be formed on the use and joint technological advancement of enCore's proprietary PFN technology for real-time uranium analysis. The transaction is expected to close sometime in February 2024, at which point a JV on Alta Mesa will be formed with enCore holding 70% and Boss Energy holding the balance. We view the announced transaction as beneficial to both parties and agreed-upon at a fair price - we have been valuing Alta Mesa at $241M (NAV8%) which is in-line with the agreed upon 30% sale price. For context, recall that enCore acquired Alta Mesa from Energy Fuels (UUUU) for $120M in February 2023. Today's transaction is testament to management's deal making prowess.

The transaction provides enCore with the financial flexibility to significantly accelerate its uranium production profile across South Texas via additional development and exploration, while also allowing for some capital deployment at the Dewey-Burdock project, located at the Wyoming/South Dakota border and at the Gas Hills project, located in Wyoming. Also worth noting is the fact that the third and final $20M tranche of the Alta Mesa 8% convertible note will come due on February 14, 2025.

Though just last week it was announced that the Rosita South Texas Central Processing Plant successfully restarted ISR uranium recovery, owing to its currently short production profile (~1-2 years), Alta Mesa (AM) has always been seen as the critical long-lived asset needed to re-start production. AM is currently fully licensed with 1.5M lbs of annual ISR production capacity. This production figure can increase further with the installation of additional ion exchange circuits and resin processing circuits. Though the current NI43-101 resource encompasses 3.41M lbs U3O8 in the Measured & Indicated category along with 16.79M lbs U3O8 in the Inferred category, what can't be understated is the exploration potential in the largely underexplored 200,000 acre property, located entirely on private land. Exploration success can potentially greatly increased the LOM and yearly production volume. Historically, Alta Mesa produced 4.6M lbs of uranium between the 2005-2013 period.

Existing licenses, at both the Rosita and Alta Mesa Central Processing Plants (CPP), allow enCore to more than double the combined production capacity of both CPPs without further permits or license amendments. As per restart progress report at AM, work continues on the refurbishment of the processing circuits. The elution circuit has been completed while all the process pumps for startup of the ion exchange circuit have been rebuilt and replaced. Refurbishment work has already commenced on the yellowcake drying system. All the necessary equipment needed to install the pipelines to connect the wellfield (Production Authorization Area 7) to the AM CPP has been received or delivery confirmed.

The JV partnership with Boss Energy is beneficial to Boss as well - in addition to geographic and project diversification, they can now also source the needed technical expertise and know-how as they themselves aim to start their flagship Honeymoon ISR project in Australia. As per enCore production, we we see AM production ramping up over the course of 2024, reaching a peak of 1.5M lbs by 2026. We see Dewey Burdock possibly being fast-tracked and coming online in late 2025.

Though uranium recovery from Rosita has re-started, Alta Mesa, followed by Dewey Burdock represent much more of the corporate value drivers. For AM, we currently model a 10-year LOM averaging 1.10M lbs per year at an average cash cost and AISC of $21.00/lb and $38.00/lb respectively.

Given that the corporate story now remains well defined and that the flagship Alta Mesa asset is well known to management (current CEO Paul Goranson was directly involved with AM’s planning and operations when previously owned by Mestena Uranium LLC) we see the asset as advancing on time and on budget - as such, substantially de-risking. While maintaining our $80/lb LT uranium price forecast, we also maintain our 1.15x NAV multiple which leads to 12-month price objective of $4.50 (rounded) per share. Owing to the +35% performance over the last month alone, our price objective represents upside of +8% from the current quote.

The Month in U Inventory: Uranium Spot Continues Higher; Now Tops $80/lb.

DISCLAIMER: Any written content contained herein should be viewed strictly as analysis & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.

This past week EDF announced during the World Nuclear Exhibition in Paris that it has plans to build at least one large nuclear reactor per year during the 2030s. This ambitious target is a marked increase from the current one or two built per decade. Elsewhere, Belgium's PM announced his support for the doubling of the current 10-year life extensions for Doel 4 and Tihange 3 nuclear reactors. It is his hope that the next government will have his same doubling of life extension view. The need for European utilities to secure the needed uranium supply for future needs was also noted. This all comes amid the COP28 conference in the UAE which was already highlighted by the US' pledge to triple its power output from nuclear sources in order to achieve their net zero goals by 2050.

The uranium spot price continued its upward march on the month as it advanced by nearly +9.1% to reach a quote of $81.00/lb to end the month of November. This represents the latest fifteen year, post-Fukushima high. The month of November was particularly strong on the inventory front with SPUT (U.UN, U.U) adding +600,000 lbs and thus increasing its total number of purchased lbs to +3.6M lbs on a YTD basis. Since inception, total purchases have amounted to nearly ~45M lbs.

Sprott Physical Uranium Trust (U.UN-T, U.U-T): 2-Yr Performance:

Valuation: Given current pricing, SPUT's discount to NAV increased from last month's -2.0% to the current -4.8%, now trading at a 0.95x P/NAVPU relative to its intrinsic value of $27.19. Note that following a slight valuation premium from earlier in September, the valuation discount has since been maintained as of October. The discount however currently remains well off the largest YTD -15% spread from April. Given our LT $80/lb price objective for the spot and constant CAD/USD exchange rate, our 1.05x NAVPU valuation of $29.00 (rounded) remains. For context, the current -4.8% discount to NAVPU is relative to +26% premium in September 2021 and -18% discount from July 2022. At the previous spot price high of $63.88/lb on April 13 2022, units traded at a modest -5.0% discount. The corresponding sensitivities to FX and the spot price are below:

We continue to stress that a narrower discount relative to Yellow Cake's P/NAV (-4.8% compared to -12.4%) continues to be warranted, however may be overdone. In addition to higher liquidity and inventory, SPUT has much less direct exposure to uranium sourced from Kazakhstan, via option agreements with Kazatomprom (KAP). We would venture to suggest that the current relative discount spread of nearly 8% is likely stretched.

Yellow Cake PLC (YCA-L): 2-Yr Performance:

Valuation: Given the most recent spot U3O8 quote at $81.00/lb (or £63.99/lb), YCA is trading at 0.88x P/NAVPU, or at a -12.4% discount given the current 1.0x NAVPU intrinsic value of £648.11. We note that unlike SPUT's discount which increased in November, Yellow Cake's discount remained constant in the same period, going from -12.3% to the current -12.4%. Though Yellow Cake normally trades at a larger discount to intrinsic value relative to SPUT (justifiably reflecting the smaller size, liquidity and larger perceived delivery risk associated with Kazakh sourced uranium), we feel that the current relative discount remains overdone. Given our LT $80/lb price objective for the spot and a constant GBP/USD foreign exchange rate, our 0.95x NAVPU valuation of £690 (rounded) remains. The corresponding sensitivities to FX and the spot price are below:

Recall that under the Kazatomprom Framework Agreement (KFA), Yellow Cake maintains the option to purchase up to $100M of U3O8 each year for a period of nine years, starting from the company's IPO in 2018. That said, it is our view that geo-politics will continue to weigh on Kazakh sourced uranium, and in general on all companies with exposure to Kazakhstan, (despite transport routes which completely bypass Russia). Recall that in September, Kazatomprom stated plans to increase production in 2025 to 100% of subsoil agreements, thus producing a total of ~79.3M-81.9M lbs U3O8. This ambitious target represents an increase of +28M lbs compared to FY/2023 planned production between 55.3M-55.9M lbs U3O8. This production is already committed under LT contracts.

Peninsula Energy: A$60M Capital Raise Set to Finally Bring Lance Into Self-Sufficient Production

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Following a halt in trade since the pre-open on November 16, Peninsula Energy finally announced the much anticipated A$60M capital raise (equivalent to ~$39M) which will allow the company to target an initial production re-start for late 2024. The financing comprises A$50M institutional placement to issue 666.7M shares at A$0.075 per share (representing a 37.5% discount from the November 15 closing price) and a A$10M Share Purchase Plan (SPP) to issue 133.3M new shares with attaching options (exercisable at A$0.10 per option) on the same terms as the placement. The options will expire fourteen months from the date of issue.

This capital raise should come as no surprise - the funding requirements were largely telegraphed shortly after Uranium Energy Corp (UEC) unexpectedly announced a toll milling cancellation (details from our July note here), abruptly causing the end to a long standing, mutually beneficial arrangement. Coupled with the existing cash balance ($12.5M) and inventory (210,000 lbs U3O8), the announced financing will allow Peninsula to complete plant construction and the needed wellfield development. Given that Peninsula’s modified re-start plans were unveiled on August 31, fully in-sourced and self-sufficient production from Lance is now expected for late 2024. The capital raise is largely in-line with the estimated re-start budget as announced in late August. Note as well that in order to further facilitate the ramp-up, Peninsula will augment funding with other alternative sources including term debt, working capital facilities, and the potential proceeds from option exercise.

As per construction update, an engineering firm has already been contracted to complete detailed engineering and procurement work for the process plant expansion. Long lead time items for the structure have already been ordered. As per wellfield development, a significant milestone was achieved when it was announced that the installation of the 58-well monitor network in Mine unit 3 (MU3) was recently completed in the Ross production area. Recall that MU3 is expected to be the first production wellfield at Lance. It has been specifically designed for operations using low-pH ISR methods. Note as well that as part of the production re-start program, a drilling program designed to upgrade the remaining Inferred resource within the Kendrick production area has already commenced.

Recall that if not for the unexpected toll milling contract cancellation, Peninsula would have been in production by now already. Moreover, up until the contract cancellation on July 18, Peninsula Energy was in fact leading the way in terms of YTD performance as the market was starting to realize the near and long term ISR capabilities from Lance. As seen below, Peninsula Energy was leading the way in terms of performance among North American peers, ex-Cameco (CCJ):

Now that post-UEC contract cancellation and given that the financing overhang nearly behind us (close expected in early 2024), we would expect Peninsula shares to finally start trading trading in-line with the currently very positive uranium fundamentals, highlighted by a spot price nearing a fresh 15-year high of ~$80/lb. We have previously applauded the decision to fully in-house the entire production value chain and have viewed the decisions taken since contract cancellation as strategically sound for the long term. This comes however with near term pain, a period we are currently navigating through. At this point, we go back to emphasizing the fundamentals, backstopped by the Lance Project which hosts arguably the largest uranium deposit located anywhere in the US. When factoring in the recent Dagger deposit acquisition, the nearly congruent 60.6M lbs (Lance + Dagger) ranks as the second largest uranium deposit located anywhere in the US. In terms of near-term production, Lance alone at 53.8M lbs stands head and shoulders above the rest. Not only is the market still discounting the currently significant size (the current infill program will go a long way to address this concern) but exploration upside remains significant in the very large land package. Based on a combination of past exploration results combined with the currently proposed exploration plan, an exploration target between 104M-163M lbs was previously estimated.

In terms of production, our estimates remain the same as when guidance was provided on August 31. Highlighted by a small-scale production start in late 2024, we see the overall production profile extending until 2034 with a peak of ~1.8M lbs produced per year between 2030-2032. We also stress that the current production plan comprises Kendrick and Ross exclusively. The much larger Barber area, which currently hosts ~30.0M+ Inferred lbs has been completely excluded from the current production plan. We feel that the massive Barber area (representing nearly 75% of the total 8km x 37km Lance acreage) can and will provide the next large pillar of LT production growth. Recall that the Central Processing Facility (built in 2015) is currently licensed for up to 3.0M lbs of dried U3O8 per year. Our current production estimates are presented below:

Our positive thesis remains predicated on our bullish stance on US produced uranium coupled with significant factors which set Peninsula aside from domestic ISR peers – namely, low pH ISR recovery methods (as opposed to the more traditional alkaline recovery), the future resource potential from Barber, the modern CPP + licensed capacity and finally the current team and established track record. Note as well that the company currently has a uranium sales contract book of nearly 5.0M lbs (weighted un-escalated price of $55/lb) extending from now until 2033. The currently contracted lbs comprise up to 34% of the planned LOM production.

While updating for the corporate changes we maintain our 1.20x NAV8% valuation, resulting in a 12-month price objective of $0.18 per fully diluted share, equating to +161% upside from the recent close. Peninsula shares (fully diluted) currently trade at 0.46x NAV8% multiple.