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enCore Energy: Finally an Enviable Portfolio, Next up LT Production or Energy Metals 2.0 ?

Updated: May 25

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

Over the course of the last ~2 years, enCore Energy (ENCUF, EU-TSXv) 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). Once the Alta Mesa acquisition closes, enCore will be in the enviable position to state that it owns and controls 3 of the 4 fully licensed ISR uranium central processing plants (CPPs) in Texas (or 3 of the 11 licensed ISR CPPs located in the United States). Given management’s successful track record for M&A and asset sales (specifically that of Executive Chairman William Sheriff), the question remains as to specific strategy going forward:

1) Achieve a LT uranium production run-rate from the current asset base, or

2) Develop and put together an enviable project + infrastructure portfolio, then sell the company

The corporate strategy comes down to a binary choice, both of which are valid and can in their own right create shareholder value. Option 2 does need some consideration given the successful sale of Energy Metals for $1.80B back in 2007. That said, given a ~$50/lb term and spot price, we feel that option 1 at this current time would be the better alternative. Note as well that 99% of development stage mining companies (our estimate) will state that their goal is to attain eventual production. Frequent M&A however can sometimes allude to a different outcome and goal (or simply lowered confidence in the current asset base or development timeline).

For the sake of our analysis, we assume that the Alta Mesa acquisition will close. All of our estimates and projections below are predicated on that conclusion. We currently value the company using a 1.05x NAVPS multiple, generating a price objective of $3.55 per share, representing nearly 40% upside. We note that the near term drivers for a more aggressive multiple are many (including a US listing which has been 1 year+ in the making), and every operational milestone will prompt a multiple re-examination to the upside.

Though largely dormant until 2020, enCore Energy has re-emerged as a rapidly changing uranium story given the subsequent transformational acquisitions for uranium projects and infrastructure. Recall the near term company evolution and note the timeline:

Pre-September 2020: enCore Energy was a company underpinned by the legacy Crownpoint and Hosta Butte assets. With a Measured & Indicated resource of 26.6M lbs uranium, management was emphasizing that the LT value of the company was to be built by creating significant shareholder equity through production in New Mexico. That was the objective, that was the story.

September 9, 2020: enCore announced the acquisition of Westwater Resources’ (WWR) U.S based uranium assets. These assets were highlighted by two Texas based, fully licensed uranium processing plants (Rosita and Kingsville Dome, each with a 0.8M-1.0M lb per year production capacity) along with mineral leases in Texas and 180,000 acres of mineral rights located in New Mexico. Transaction details: $1.95M in enCore shares and royalties on future production from the New Mexico assets (2.0% NSR on mineral rights and a 2.5% Net profit interest from the Juan Tafoya and Cebolleta Projects) with enCore also assuming all the related reclamation liabilities and bonding obligations for the Texas properties. Rosita was supposed to underpin production from what was expected to be a strong uranium market over the next 12-24 months. That was the (updated) objective, that was the story.

September 7, 2021: An all-share ~$140M transaction was announced with enCore acquiring all the issued and outstanding shares of Azarga Uranium Corp. The asset highlight from the transaction included the advanced stage Dewey Burdock project located in South Dakota and the Gas Hills project located in Wyoming. Both are PEA level projects with significant resources and compelling economics. Dewey Burdock was seen as the key asset filling the production time gap between near term production out of Texas and longer term development from New Mexico. That was the (updated) objective, that was the story.

November 14, 2022: A $120M (50/50 cash and 2yr at 8% convertible note) transaction was announced with Energy Fuels (UUUU) whereby enCore would be acquiring the fully licensed Alta Mesa ISR processing facility (1.5M lbs per year capacity, currently on standby) along with control of a significant land package encompassing nearly 200,000 contiguous acres surrounding the processing facility. Note that Alta Mesa produced 4.6M lbs of uranium between a 2005-2013 period. Out of the updated company portfolio, Alta Mesa is now the flagship asset (rightfully so) with production anticipated for 2024. That is the current, updated story.

Despite a consistent corporate objective to attain a stable run-rate of uranium production, given all the recent M&A, the corporate portfolio, the flagship asset, the allocation of resources and the general development story has been ever-changing. If the strategy has now been solidified around this specific development cue: Rosita production, followed by Alta Mesa production and then followed by Dewey Burdock development and eventual production, then we have reason to applaud the (hopefully finalized) strategy and timeframe. A large part of the market hesitancy over the last 12+ months can be attributed to the ever-changing asset portfolio leading to an ever-changing development and asset profile. The market doesn’t like uncertainty and prefers getting comfortable around one single consistent story, consisting of known quantities. Ideally, this story is being communicated to the market and accordingly being de-risked given the passage of time. As such, investors gain a certain level of comfort and understanding knowing the plan and knowing that the assets are being de-risked in accordance to the corporate vision. Hopefully, we are finally at that point. 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. Though we currently ascribe a 1.05x NAV multiple, further de-risking and the hitting of operational production milestones will warrant a more aggressive valuation multiple on our part. Contracting commitments along with a peer valuation table to the "next producing asset" below:

Note that the recent history of enCore is vastly different from that of most ISR uranium peers who have for the last few years concentrated on the development of one specific flagship asset. Many of enCore’s peers (namely Peninsula Energy (PENMF) with Lance and Ur-Energy (URG) with Lost Creek) have spent the last few years continuing with flagship property development, undertaking extensive drilling programs while also continuing delineation activities in the interim, while production operations have been placed in a state of standby (and now on the cusp of re-start). In contrast, enCore’s approach over the same time span has been to engage in numerous and large-scale M&A activity, thus introducing new assets into the picture. Though this approach can also yield LT shareholder value, all of the M&A activity does warrant some critical thought:

1) Ample processing capacity: From the Texas assets, the 3 processing facilities (Rosita, Kingsville Dome and Alta Mesa) will provide a combined processing capacity of 3.5M+ lbs per year, all contained within a 100 mile radius of each other. That is a lot of production capacity in one concentrated area and we question whether that much capacity is even needed (specifically as the term and spot languish around the $50/lb level). We fully understand the central processing plant + satellite deposit model (hub & spoke) however to this day, the only clarity we have on Texas based production is that from Rosita which currently has an estimated production lifespan of 1.5 years.

That said, drilling is ongoing at the satellite properties (wellfield development at the Rosita Extension, exploration drilling at Rosita South and optionality with Butler Ranch and Upper Spring Creek). Note however that the total acreage encompassing the satellite properties are vastly smaller in total acreage than the near 200,000 acres as acquired via the Alta Mesa (AM) acquisition. We believe there is ample room for considerable Alta Mesa exploration upside given the sheer size (and under-exploration) of the property. We can’t quite say the same about the other Texas properties given their very limited acreage (see the map above). Given that the Rosita processing plant has recently completed an extensive refurbishment (as announced on November 1, 2022), we certainly hope that the satellite properties will provide ample feedstock for the years to come.

2) Acquire processing capacity versus expanding Rosita or Kingsville: It’s understood that as part of the $120M AM acquisition, the nearly 200,000 acres of prospective land came as a package deal combined with the 1.5M lb per year capacity, CPP. We note however that expanding an existing production license (at Rosita or Kingsville) is not that arduous a process while the needed hardware and equipment to potentially even double production capacity is relatively simple to bolt-on given modular plant designs. It is also relatively easy to amend and increase the production license, and all of this can be achieved at a very cost effective price. But here we are, post AM acquisition with 3.5M+ in combined annual production capacity all within a 100 mile radius in South Texas. This is quite a lot of production horsepower all concentrated in one small area. This begs the question as to what the future holds for the Kingsville Dome CPP. Note the reclamation and bonding requirements. Possibly best to permanently retire the asset ?

3) Energy Metals 2.0: Lastly, we have to note enCore's rapid acquisition of projects, acreage and production infrastructure spanning New Mexico, Texas, South Dakota, Wyoming etc (encompassing ~90.0M lbs uranium in the M&I category). This is eerily similar to the aggressive land and project acquisitions made by Energy Metals in the mid-2000s. Recall that William Sheriff was a co-founder of Energy Metals in 2004 and rapidly built up the company’s uranium holdings to encompass ~61.0M lbs in the M&I category, spanning Texas, New Mexico, Utah and Wyoming. The company even owned a processing facility– the Hobson CPP, located in Texas. Energy Fuels was successfully sold to SXR Uranium One for $1.80B in stock, in the summer of 2007. Can this possibly be enCore’s strategy as well ? If not for the current term/spot price, the possibility warrants some consideration in the very least. Note as well that at the time of sale to SXR Uranium One, the spot price was practically at an all-time high north of $130 per lb.

* For what it’s worth, Uranium Energy Corp (UEC) is current owner of the Hobson CPP. That plant has been on standby for almost a decade.

In terms of production, Rosita is expected to be in production later this year, however for the time being, given a 1.5 year estimated production duration we still do not have enough in terms of data points to justify a full x-year DCF for that particular operation. Next in the cure, we see initial Alta Mesa production in mid 2024, peaking at 1.5M lbs per year (at a LOM cash cost of ~$21.00/lb). We forecast initial Dewey Burdock production in late 2025, peaking at approximately 1.0M lbs from FY/2027 and onward. Note that an updated PEA is expected. Though still light on details for Alta Mesa, we currently estimate a LOM cash cost for consolidated production at $18.21/lb along with an AISC cost (likely on the light side) at $38.18/lb. Given the current visibility to date, we forecast a consolidated 26.5M lbs produced over a LOM extending until 2040.

We acknowledge that Gas Hills may provide future feedstock to Dewey Burdock however due to its still relatively long distance to production (likely the fourth development project in the current cue), we ascribe $2.50/lb for the M&I resource instead. Using a base case $70/lb LT uranium price coupled with an 8% discount rate, the pre and post-tax sensitivities per operation are forecast to be the following:

Using a 1.05x NAVPS multiple, we calculate a $3.55 price objective, equating to ~40% upside from the January 9 close. While always erring on the side of conservatism, as stated previously, positive continued project de-risking coupled with positive news flow would justify a more aggressive multiple. Management has already proved their acumen on the M&A side, the market is now waiting to see operational execution and near term production.

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