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Anemic FY/2022 Domestic Uranium Production. Who's Leading the Re-Start Race for 2023 and beyond?

DISCLAIMER: Any written content contained herein should be viewed strictly as analysis, observation & 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

The US Energy Information Administration (EIA) late last week released the Q4/2022 domestic uranium production figures. Totaling 174,712 lbs, Q4/2022 represented the highest quarter for uranium production since Q4/2018. Though still at anemic levels, the big bump to production was courtesy of the resumption of production from the White Mesa mill (Energy Fuels). Following numerous quarters of shut-in production, White Mesa contributed 161,934 lbs of conventional uranium production this past quarter. This comes along with 6,663 lbs from Smith Ranch-Highland, 5,916 lbs from Crowe Butte (Both Cameco) and minimal values from both Ross (Peninsula Energy) and Nichols Ranch (Energy Fuels).

Looking to finally rebound from the anemic, sub-200,000 lb annual production levels since FY/2019, the drivers for increased domestic production have been many over the past 18 months. Lead by the establishment of a strategic U.S. uranium reserve ($75.0M already allocated for approximately 1.0M lbs, and eventually growing to an expected $1.50B in inventory, spread over 10 years of expected purchases) additional drivers have been the ongoing themes of energy and supply chain independence, passage of the IRA which has prompted numerous nuclear power plant life extensions, the emergence of the SMR and finally the recently seen self sanctioning of Russian uranium. As the uranium spot price has gradually increased to presently hover near the $50.0/lb level (rising from the long lived, post-Fukushima lows which declined to the low $20s in 2017), numerous US based producers have been vocal with raising capital and vowing to re-start uranium mining operations which have long been mothballed. Leading the charge to get back into production, we highlight three pure-play US uranium producers who have communicated detailed plans to ramp up uranium production. These three are Peninsula Energy (PENMF), Ur-Energy (URG) and enCore Energy (EU). It is important to note that though there are additional U.S. based uranium companies (namely Energy Fuels (UUUU) and Uranium Energy Corp (UEC)), neither of those two have provided details as to which specific asset would be the focus for a uranium re-start. Moreover, Uranium Energy Corp. has recently showed more interest in expanding into potential conventional development/production assets in the Athabasca Basin (via acquisition of UEX Corp. last summer) while Energy Fuels has more recently demonstrated an exit from various uranium assets (Alta Mesa sale to enCore Energy as announced last November and the sale of a portfolio of conventional uranium assets to Consolidated Uranium (CUR) in July 2021). Moreover, Energy Fuels has more recently been prioritizing and positioning for the production of rare earth elements (REEs) given the recent acquisition of the Bahia project and various REE related strategic partnerships with Neo Performance Materials (NEO) and a MOU with Nanoscale Powders LLC. That said, uranium production from the White Mesa mill will be difficult to ascertain given that the production preference is now on REEs and vanadium. Lastly, though Cameco (CCJ) has displayed production from both Crowe Butte and Smith Ranch-Highland (for a combined 12,579 lbs in Q4/2022), the company will continue to focus on its tier-1, Athabasca Basin assets and not on the U.S. ISR operations. This outlook was reiterated during last week’s quarterly results call. We don’t view Cameco’s US production becoming significant anytime soon.

Looking solely at Peninsula Energy, Ur-Energy and enCore Energy (assuming the Alta Mesa transaction closes before February 15 as previously stated), the combined production may contribute to a meaningful 2.0M lbs in FY/2024. This may be followed by a ramp to just over 6.0M lbs coming by FY/2027 (our projections). If all three companies are able to execute on their timelines and on their production volumes, the resulting production would be meaningful in context of the last 20+ years of domestic production. Total historic US production along with the average yearly spot price since FY/2012, followed by our projected ramp up period starting in FY/2023 is depicted below:

Peninsula Energy (PENMF): remains our top pick of the three near term U.S. producers. Peninsula will be the first out of the gate with meaningful production given that it was the first company to announce a production re-start decision, back in November 2022. Following a $25.0M equity raise announced concurrently in November, the company has sufficient cash in treasury to commence restart operations and attain production in Q1/2023. Moreover, with 510,000 lbs of uranium inventory, the company is well positioned to delivery into the 300,000 lb Department of Energy (DOE) contract it signed earlier this year. Coupled with the ramp-up schedule, the company is well positioned to attract additional DOE contracting volumes over the expected 10-year purchase period. We forecast ~250,000 lbs produced in FY/2023, increasing to ~700,000 lbs in FY/2024. We forecast an expected stage-2 ramp would push production closer to a 2.0M lb annual run-rate beginning in 2027. Proving production reliability will be key as it will lead to negotiating leverage which in turn will lead to LT opportunity. Recall that the Ross Central Processing Plant (CPP) was refurbished in 2015 and has the current capability to produce 800,000 lbs per year. Note however that the licensed and approved capacity is 3.0M lbs per year which can be achieved following the necessary plant capital and needed wellfield expansions. In terms of size and scale, only the production facilities at Smith Ranch-Highland (5.5M lbs annual capacity) and Hobson (4.0M lbs annual capacity) can produce more. Note as well that given the process chemistry using a low pH extraction method (as opposed to most other ISR projects using an alkaline based method), it is expected that the low pH method will generate a higher overall resource recovery factor while also being accomplished at a faster pace (more uranium extracted over less time). A field trial and demonstration has already been accomplished as part of de-risking the asset.

What is often overlooked is the fact that in terms of potential resource upside, Peninsula has by far the highest single asset resource base among all domestic peers. The current Lance resource stands at 21.8M lbs M&I along with 37.8M lbs in the Inferred category. What is important to note here is that the DFS applied a very conservative 65.8% recovery figure (many ISR operations have rates as high as in the 90s%) to the M&I resource alone, thus calculating only 14.3M lbs of recoverable uranium over LOM. The entire 37.8M lb Inferred resource from the Barber Zone (in green below) was entirely excluded from the economic analysis. No other US ISR uranium property has this much unused Inferred conversion upside.

In addition to the current 510,000 lbs in inventory, the contract book remains best in class with up to 4.85M lbs (at prices ranging between $45-$80/lb) extending until 2030. Coupled with some expected corporate finance manoeuvres and some much needed re-branding which will make the stock more appealing to the North American and/or European investor, the accomplished management team has already proven successful with getting ISR assets into production in the past. At current valuations (0.54x P/NAV), all these factors together give Peninsula Energy (in our opinion at least) the most compelling risk/reward dynamics among US ISR peers.

Using our base LT uranium price forecast of $70/lb, we maintain our $0.25 per share target while applying a 1.30x NAV8% multiple. We see many more drivers (both operationally and on the corporate front as well) coming in the near term. Additional details can be found from our November 21, 2022 note. Link here:

Ur-Energy (URG): Having originally started ISR uranium production in 2013, Ur-Energy’s Wyoming based Lost Creek ISR operation is on the verge of a meaningful restart following a December 19, 2022 decision to ramp up Lost Creek ISR production. This ramp up in production has been a long time coming seeing as the company reached peak production of nearly ~800,000 lbs in FY/2015, before a strategic decision to curtail production was made. We expect just over ~100,000 lbs to be produced in FY/2023 followed by an increase to ~700,000 lbs in FY/2024 and 1.3M+ lbs come FY/2025 when Shirley Basin starts to meaningfully contribute to the production profile.

The current mineral resource at Lost Creek stands at 11.9M lbs grading 0.046% U3O8 in the Measured & Indicated category, along with an additional 6.6M lbs grading 0.044% U3O8 in the Inferred category. Since initial production in 2013, recoveries have averaged ~90% with all the resources pipelined to the existing Lost Creek plant. The Shirley Basin project has a resource totaling 8.8M lbs grading 0.23% U3O8 in the Measured & Indicated category. Note that Shirley Basin already has all the required permits and licenses to construct a 1.0M lb per year production facility. Shirley Basin is located approximately 30 miles to the north of Lost Creek. Incorporating both projects, we currently envision a LOM extending to 2036. The company fundamentals are robust given the 600,000 lbs currently under contract beginning in 2024. The company also receive an initial DOE contract for 100,000 lbs, as announced in January. The current uranium inventory stands at 324,000 lbs.

Using our base LT uranium price forecast of $70/lb, we tweak our target slightly higher to $1.75 per share target while applying a 1.20x NAV8% multiple. Operational success on the road to steady-state production will be the overlying drivers in the near term. Additional details can be found from our December 12, 2022 note. Link here:

enCore Energy (EU): Over the course of the last ~2 years, enCore Energy has quietly via M&A acquired some of the most coveted US uranium ISR acreage and production infrastructure contained primarily in Texas but reaching as far as the Four Corners states and Wyoming. Today, the company boasts quality assets highlighted by the advanced stage Dewey Burdock ISR property in South Dakota along with the Alta Mesa ISR property in Texas (acquisition expected to close by February 15, 2023).Though Rosita is expected to begin with limited production later this year, the big production boost will come via Alta Mesa and Dewey Burdock. We see meaningful production from Alta Mesa at ~600,000 lbs for FY/2024 with full production ramping to ~2.4M lbs in FY/2027 given the full ramp at Dewey Burdock. We see Alta Mesa producing an average of ~1.0M lbs over a 11 year LOM followed by Dewy Burdock producing at a slightly lower annual clip, spread over a ~15 year LOM.

In terms of company fundamentals, the company currently has commitments for 600,000 lbs commencing in 2025, along with a 100,000 lb contract as supplied by the DOE.

Though management skill has already been demonstrated on the M&A front, incremental development progress on the operational front will gradually warrant an increasing valuation multiple.

Using our base LT uranium price forecast of $70/lb, we maintain our target of $3.55 per share target while applying a 1.05x NAV8% multiple. While always erring on the side of conservatism, as stated previously, positive continued project de-risking coupled with positive production news flow would justify a more aggressive multiple. Additional details can be found from our January 9, 2023 note. Link here:


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