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enCore Energy: The De-Risking of Alta Mesa Continues, Production in Early 2024; Increasing Target

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.

Earlier today, enCore Energy (EU-NYSE, EU-TSXV) provided an update concerning developments with the Alta Mesa ISR production restart. Ultimately, the bottom line is that the plant processing upgrades and refurbishments are progressing ahead of schedule and just as importantly, under budget. Following the March 15, 2023 formal production re-start decision, management has re-iterated its target to attain production in early 2024. Given the continued de-risking efforts at Alta-Mesa, coupled with the reaffirmed production restart timeline, we maintain our outlook on the stock while increasing our target NAV multiple from a previous 1.05x (target $3.55) to the current 1.10x, resulting in a new 12-month target of $3.70 per share. This represents upside of +72% from this afternoon’s intra-day quote. With a string of asset acquisitions now well in the past, the enCore Energy story is no longer driven by ever-evolving asset acquisitions but is now characterized as a focused story with a clear pathway to production over a well defined timeframe.

As per progress report, the specific work underway at Alta Mesa includes minor renovations, equipment upgrades and refurbishments. It has been estimated 90% of the piping and valves remain operational with minimal maintenance required. Of the 40 pumps and motors needed for operation, 30 are being rebuilt and refurbished on site (as opposed to placing brand new order which would surely trigger supply chain risks and timing delays for delivery). Given a current global resource of just over 20.1M lbs U3O8 (of which 3.4M lbs are exclusively in the Measured & Indicated category and the balance in the Inferred category), 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. Recall that the Alta Mesa Central Processing Plant (CPP) is currently licensed for an annual production capacity of 1.50M lbs per year. In addition to the Dewey Burdock Project, our company wide production estimates remain as follows:

A large part of our positive inclination towards the Alta Mesa project is due to the fact that the CPP is located on 200,000+ acres of private land in South Texas. As opposed to the other Texas properties (Rosita South, Butler Ranch and Upper Spring Creek), we continue to believe that there is ample room for considerable Alta Mesa exploration upside given the sheer size and under-exploration of the property. Exploration drilling will be undertaken in due time as targets have already been identified. As part of the announced progress report, it was specified that there are currently 6 drill rigs currently on site at Alta Mesa, with a 7th drill rig expected to be added shortly. The drilling program has uncovered significant grades in the Middle C unit underlying Production Authorization Area 7 (PAA7). With 81 drill holes drilled to date, some of the new highlight results delineating PAA7 include:

Note that as uncovered from the recent drilling, the Middle C unit was not previously known to contain any uranium mineralization. There will be some additional focus in that area going forward. Elsewhere, a total of 14 drill holes are being cased as injection wells and 14 as recovery wells as the delineation program continues to refine the exact pattern for injection and recovery wells in order to maximize production efficiency.

Though Rosita production is expected by late 2023, Alta Mesa with its estimated 10 year LOM followed by Dewey Burdock (located in South Dakota, estimated to commence production in 2025) represent much more of the corporate value drivers. Our largest concerns with the enCore Energy story have been with the ever-changing production asset base and time frames, given the fast paced level of acquisitions since 2020 (Westwater Resources, Azarga, Alta Mesa). For context, we highlighted these acquisitions and concerns in our previous note from January (link here).

Given that the corporate story is now 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 pace and on budget, and as such, substantially de-risking. While maintaining our $70/lb LT uranium price forecast, we now ascribe a higher NAV multiple for enCore Energy, increasing from 1.05x to 1.10x which bumps our 12-month target higher to $3.70 per share.

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